Corporate income tax in real estate deals
Share transfers are generally corporate income tax neutral. However, asset deals (and sometimes also share transfers) could become subject of corporate income tax basis.
Non-resident companies are taxed on their Latvia-source income through permanent establishment at the standard corporate income tax rate. If no permanent establishment is created, non-residents may be taxed with 3.75% withholding tax (WHT) for qualifying payments.
Acquisition of real estate
Real estate transfer tax is applied and the standard rate amounts to 3.75% of the purchase price, or the cadastral value of the property, or valuation for mortgage purposes, whichever is higher.
If a real estate is invested in the share capital of a company, state fee is 1% of the investment value. Please note that if a company acquires the title to the real estate as a result of reorganisation, the company is exempt from paying the state fee.
Sale of real estate
Several taxes may apply and those are:
(1) Value Added Tax (VAT) – sale of a new building is subject to VAT of 21%. A building is not considered new, if at least a year has passed since the respective building has been put into an operation and the building has been used. In addition, in Latvia alternative VAT treatment exists, the so-called “option to tax”.
(2) WHT – WHT rate of 3.75% is applicable in case a Latvian resident company purchases real estate in Latvia or shares in a real estate company from a non-resident. Tax return is possible.
(3) Personal income tax (PIT) – individuals, sellers of the shares, may also be taxed at the rate of 20 per cent on capital gains.
(4) Transfer pricing (TP) rules are applicable in case if transactions (sale, loans) are between related parties. A transfer price must be arm’s length. That means it must match the market price that two independent entities would apply in a similar transaction under the same or similar (comparable) conditions. Failure to do so might lead not only to tax surcharge but also penalties.
Real estate tax
Real estate tax is payable for all land and buildings in Latvia, owned both by individuals and companies. The local authorities in Latvian regions and towns are free to set tax rates on real estate in their area from 0.2% to 3% of its cadastral value, otherwise tax rates defined by state apply. A tax rate exceeding 1.5% of cadastral value may be charged only if the real estate is improperly maintained.
Tax due diligence
It is always advisable to carry out a tax due diligence of the target company prior to closing of the transaction. If the accounting of the target company has been inaccurate in any aspect, then there is a high risk that the Latvian tax authority will spot these inaccuracies during its audit and will impose a substantial fine on the target company.
To summarize the above, the Latvian real estate market is a traditional market and purchase of assets (business) and purchase of shares are the most common methods of structuring real estate deals in Latvia. Our experience in real estate is leading edge. VILGERTS lawyers and tax experts can cover all aspects of transactions, tax and disputes.