VAT Registration – just like the Morse Code. Myth or truth?

Although it is possible to apply for the value added tax (VAT) taxpayer status at the time of submitting company registration documents to the Company Register, in practice such registration is impossible.

This is due to the rather aggressive practice of the State Revenue Service (SRS) which recently has been scrutinising any company wishing to obtain a VAT taxpayer status. This is, of course, a good thing. However, is it appropriate for the SRS to rely on its internal instructions which the taxpayers don't have access to? Namely, it is impossible to predict what documents the SRS will require to verify that a company is willing to carry out the declared business. When requesting whether a taxpayer can prepare in advance and understand what information the SRS will require, the SRS answers that it cannot share information regarding its internal instructions or methodologies.

The SRS is making a considerable and significant effort to fight the shadow economy and VAT fraud. However, the SRS does not classify companies by their business specifics, which makes it very difficult for foreign investors to operate in Latvia. It appears that the SRS has chosen to act on the assumption that all taxpayers are fraudsters.

A typical example

Let's say a foreign investor wants to buy a Latvian company or some assets in a Latvian company. In most cases, tax and/or legal due diligence is carried out during the negotiation process. Given that the length of the negotiations cannot be predicted, it is clear that the foreign investor will want to make sure the transfer of the company or its assets is as quick and smooth as possible. In order to transfer the assets of an existing Latvian company, a new company is typically established in Latvia. Taking into account that the value of these transactions is several million euros, it is clear that VAT registration is necessary and even mandatory. Therefore, in order to ensure that the transfer of assets is carried out as quickly as possible, foreign investors timely establish new companies in Latvia.

It is only logical that a newly established company does not yet have an active business, especially when it comes to registering the company as a VAT taxpayer at the time of its establishment. However, this does not discourage the SRS from refusing to register a newly established company as a VAT taxpayer in case it is unable to provide the following information:

  • An agreement with an external accounting service provider;
  • An agreement with a bank on the opening of a permanent bank account (it should also be noted that Latvian banks have become very cautious and the verification process of a newly established company is relatively long);
  • Agreements with customers and suppliers;
  • A signed loan agreement with a bank if the company registration documents indicate that the company will apply for a bank loan.
  • As far as we understand, this is not the complete list of information required by the SRS. The SRS may require additional information, but their internal instructions are not publicly available.

Considering the above, foreign investors are no longer able to ensure that they will be able to start smooth operations right after finalising the purchase transaction and making investments into the share capital of newly established companies, e.g. real estate, due to the fact that they will first need to provide the SRS with all agreements they have concluded with their customers and suppliers. Namely, the essence has been lost, and in practice a VAT identification number cannot be obtained at the moment of establishing a company.

In addition, the SRS often decides to invite the foreign board members of newly established companies to meetings. Of course, these foreign nationals visit Latvia relatively often during the purchase-sale negotiations, but they are not always able to find time during these negotiations in Latvia and in other countries to visit the SRS just to prove that they are the right persons to do business in Latvia. Furthermore, the SRS sets inadequately short deadlines (by sending a warning to participate in a meeting 1 week before it takes place) and makes it hard for the foreign investors to free up a day (or two – in order to fly to Latvia and back to their home countries) to visit the noble SRS’s building.

If a new company with the same management board is established, the SRS will repeatedly want to carry out a full inspection, even though the entire procedure has previously already been carried out (all documents have been submitted and a board member has visited the offices of the SRS).

In view of the above, despite the fact that an entrepreneur has the option to submit an application to be included in the VAT register at the time of registering a company, in practice this option no longer exists due to the views and practice of the SRS.

Therefore, there are currently two ways to obtain a VAT identification number:

  1. By submitting an application for inclusion in the VAT register after the business activities have started and not at the moment of registering the company; or
  2. By timely preparing the above-mentioned agreements, as the SRS will definitely ask for them.
by Viktorija Kristholde-Lūse, Tax Expert, Latvia

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