TAX CONSIDERATIONS OF  DOING BUSINESS  IN THE BALTIC STATES Jānis Taukačs 16 April 2010 Baltic Spark, Riga
Contents <ul><ul><li>Tax environment in the Baltic States </li></ul></ul><ul><ul><ul><ul><li>Comparison of   the  general ...
WHICH “BRIDE” FROM THREE TO CHOOSE?
Business tax environment Baltic States, % CIT VAT Real  Estate  Tax RE Transfer  Duty + Notary Fee PIT SSC Estonia  0, 21 ...
Opening up abroad <ul><li>No presence  </li></ul><ul><li>Representative office  </li></ul><ul><li>Licinse, franchise, IP <...
SMEs – LAT <ul><li>Fixed PIT:  </li></ul><ul><ul><ul><ul><li>No employees </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Tur...
SMEs – LIT <ul><li>CIT 5%, if: </li></ul><ul><ul><ul><ul><li>Income lower than EUR ~ 144,500, and </li></ul></ul></ul></ul...
SMEs – Estonia <ul><li>Self-employed:  </li></ul><ul><ul><ul><ul><li>21% PIT </li></ul></ul></ul></ul><ul><ul><ul><ul><li>...
Salary of EUR 1,000 gross a month Tax: State:  PIT SSC  Employer’s  cost Non-taxable Net Salary Estonia 21 37.2 (34.4/2.8)...
Incentives to invest – LAT <ul><li>Deemed interest deduction on retained earnings </li></ul><ul><li>No CIT on capital gain...
Incentives to invest – LIT <ul><li>Tax treaty with Russia (in LAT & EST – no) </li></ul><ul><li>2 FEZ: no CIT for 6 years,...
Incentives to invest – EST <ul><li>0% CIT; 21% on: </li></ul><ul><ul><ul><ul><li>distribution of profit, gifts, fringe ben...
Withholding tax on  dividends To: From:  EU/EEA Tax Treaty State  Listed  „ offshore ” State Default  rate Estonia 0 0   0...
Withholding on  interest State EU/EEA (%) Tax Treaty  State (%) Listed  „ Offshore” State (%) Default Rate  (%) Estonia 0 ...
DEBT   or EQUITY financing? Estonia Latvia Lithuania Withholding tax on interest 0 0  Unrelated recipient 10  5, 10 Relate...
DEBT or  EQUITY  financing? Estonia Latvia Lithuania Withholding / distribution tax on dividends 0 WHT 21 CIT 0 EU/EEA sta...
Other withholdings – LAT <ul><li>Royalties: 15% literature & art; 5% - other </li></ul><ul><li>Management & consulting:10%...
Other withholdings – LIT <ul><li>Royalties: 10% </li></ul><ul><li>Sale & lease of real estate: 15% </li></ul><ul><li>Perfo...
Other withholdings - EST <ul><li>Royalties: 10% </li></ul><ul><li>Sale & lease of real estate: 21% </li></ul><ul><li>Perfo...
Financing with hybrid instrument : LAT
Financing with hybrid instrument :  EST
VAT <ul><li>Registration general thresholds: </li></ul><ul><ul><ul><ul><li>LAT – EUR ~14,300 </li></ul></ul></ul></ul><ul>...
Summary <ul><li>EST  – good for debt-financed co’s (no annual CIT, no WHT on %, no Thin Cap.) </li></ul><ul><li>LAT   & LI...
Story of John <ul><li>Setting up an on-line store </li></ul><ul><li>Where is the lowest tax jurisdiction to set up? </li><...
Tax planning examples <ul><li>Double dip lease </li></ul><ul><li>Tax haven companies </li></ul><ul><li>Treaty shopping </l...
What is useful on  www.sorainen.com <ul><li>Tax blogs and articles   </li></ul><ul><li>Tax  newsflashes (may subscribe for...
Thank You! <ul><li>Jānis Taukačs </li></ul><ul><li>Partner, Regional Head of the Tax Team   </li></ul><ul><li>phone  +37 1...
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Tax considerations of doing business in the Baltic States [Jānis Taukačs] on Baltic Spark

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Tax considerations of doing business in the Baltic States [Jānis Taukačs] on Baltic Spark

  1. 1. TAX CONSIDERATIONS OF DOING BUSINESS IN THE BALTIC STATES Jānis Taukačs 16 April 2010 Baltic Spark, Riga
  2. 2. Contents <ul><ul><li>Tax environment in the Baltic States </li></ul></ul><ul><ul><ul><ul><li>Comparison of the general tax environment </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Comparison of the withholding tax structu re </li></ul></ul></ul></ul><ul><ul><li>Choice of the best Baltic State from taxation perspective for </li></ul></ul><ul><ul><ul><ul><li>Debt-financed acquisitions and operations </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Equity-financed acquisitions and operations </li></ul></ul></ul></ul><ul><ul><li>Story of John </li></ul></ul><ul><ul><li>Tax planning examples </li></ul></ul><ul><ul><li>Planning example of a holding structure </li></ul></ul>
  3. 3. WHICH “BRIDE” FROM THREE TO CHOOSE?
  4. 4. Business tax environment Baltic States, % CIT VAT Real Estate Tax RE Transfer Duty + Notary Fee PIT SSC Estonia 0, 21 0, 9, 20 0.1-2.5 land 0.5 21 37.2 (34.4/2.8) Latvia 15 0, 10, 21 1.5 / 0.1-0.3 residential 1-2 26 15 10 33.09 (24.09/9) Lithuania 5, 15 0, 5, 9, 21 0.3-1 business / 1.5 land 0.45 15 20 39.98 (30.98/9)
  5. 5. Opening up abroad <ul><li>No presence </li></ul><ul><li>Representative office </li></ul><ul><li>Licinse, franchise, IP </li></ul><ul><li>Agent </li></ul><ul><li>Dealer </li></ul><ul><li>Partnership </li></ul><ul><li>Self-employed </li></ul><ul><li>Branch, pernanent establishment </li></ul><ul><li>Company </li></ul><ul><li>Less presence = less tax to be paid in the foreign country </li></ul>
  6. 6. SMEs – LAT <ul><li>Fixed PIT: </li></ul><ul><ul><ul><ul><li>No employees </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Turnover – up to EUR ~14,300 a year </li></ul></ul></ul></ul><ul><ul><ul><ul><li>PIT lamp sum – EUR ~35 up to 700 (+7%) a year </li></ul></ul></ul></ul><ul><li>‘ Patent/Licence fee’: </li></ul><ul><ul><ul><ul><li>EUR 50-100/month; </li></ul></ul></ul></ul><ul><ul><ul><ul><li>narrow scope of activities (who normally don’t pay PIT at all) </li></ul></ul></ul></ul><ul><li>Proposed Micro-company tax: </li></ul><ul><ul><ul><ul><li>20% on turnover; </li></ul></ul></ul></ul><ul><ul><ul><ul><li>up to EUR ~100,000 a year </li></ul></ul></ul></ul><ul><li>Self-employed: </li></ul><ul><ul><ul><ul><li>26% PIT + </li></ul></ul></ul></ul><ul><ul><ul><ul><li>SSC on self-chosen amount (not less than EUR ~70 a month) </li></ul></ul></ul></ul><ul><li>SIA: </li></ul><ul><ul><ul><ul><li>CIT 15% + 10% PIT on dividends </li></ul></ul></ul></ul>
  7. 7. SMEs – LIT <ul><li>CIT 5%, if: </li></ul><ul><ul><ul><ul><li>Income lower than EUR ~ 144,500, and </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Less than 10 employees </li></ul></ul></ul></ul><ul><li>Self-employed: </li></ul><ul><ul><ul><ul><li>15% PIT </li></ul></ul></ul></ul><ul><ul><ul><ul><li>37.5% SSC from 50% of the taxable income - up to EUR 1350 </li></ul></ul></ul></ul><ul><li>UAB: CIT 15% + 20% PIT on dividends </li></ul>
  8. 8. SMEs – Estonia <ul><li>Self-employed: </li></ul><ul><ul><ul><ul><li>21% PIT </li></ul></ul></ul></ul><ul><ul><ul><ul><li>33% SSC applies on the whole income, but between EUR 275 and 4,125 a quarter . </li></ul></ul></ul></ul><ul><li>OU: </li></ul><ul><ul><ul><ul><li>21% on distribution </li></ul></ul></ul></ul>
  9. 9. Salary of EUR 1,000 gross a month Tax: State: PIT SSC Employer’s cost Non-taxable Net Salary Estonia 21 37.2 (34.4/2.8) 1,344 160 802 Latvia 26 33.09 (24.09+9) 1,241 50 686 Lithuania 15 39.98 (30.98+9) 1,310 0 760
  10. 10. Incentives to invest – LAT <ul><li>Deemed interest deduction on retained earnings </li></ul><ul><li>No CIT on capital gains, if sold fixed assets are replaced within a year </li></ul><ul><li>Accelerated depreciation (10-70%), declining balance; IP – straight line (5-10 y.), </li></ul><ul><li>Patents, trade marks, new production equipment - cost base increased 1.5 times </li></ul><ul><li>2 SEZs & 2 FPs: property tax (80-100% off); CIT (5%) </li></ul><ul><li>Tonnage tax & tax concessions for sailors </li></ul>
  11. 11. Incentives to invest – LIT <ul><li>Tax treaty with Russia (in LAT & EST – no) </li></ul><ul><li>2 FEZ: no CIT for 6 years, 50% off for next 10 y. </li></ul><ul><ul><ul><li>Investments of at least EUR 1m </li></ul></ul></ul><ul><ul><ul><li>State aid restrictions – investor responsible </li></ul></ul></ul><ul><li>On investment projects – CIT may be reduced by 50% </li></ul><ul><li>Patents, trade marks - cost base increased 3 times for purposes of depreciation </li></ul>
  12. 12. Incentives to invest – EST <ul><li>0% CIT; 21% on: </li></ul><ul><ul><ul><ul><li>distribution of profit, gifts, fringe benefits, non-business costs, excess capital reductions, liquidation quota </li></ul></ul></ul></ul><ul><ul><ul><ul><li>capital gains on sale of RE or RE companies </li></ul></ul></ul></ul><ul><li>No thin capitalisation restrictions </li></ul><ul><li>Unlimited depreciation for tax </li></ul>
  13. 13. Withholding tax on dividends To: From: EU/EEA Tax Treaty State Listed „ offshore ” State Default rate Estonia 0 0 0 0 Latvia 0 5, 10 10 10 Lithuania 0 5 - 15 15 15
  14. 14. Withholding on interest State EU/EEA (%) Tax Treaty State (%) Listed „ Offshore” State (%) Default Rate (%) Estonia 0 0 21 0 Latvia 5 – if paid to related parties 0 – July 2013 5, 10 0 – to Lithuania 15 0 Unrelated recipient 5 Related Bank 10 Related recipient Lithuania 0 0 to Latvia 10 0, 10 0/ 10 Other states
  15. 15. DEBT or EQUITY financing? Estonia Latvia Lithuania Withholding tax on interest 0 0 Unrelated recipient 10 5, 10 Related recipient Thin capitalization rules None 4:1 D/E ratio 4:1 D/E ratio 7.9 (LVL) 4.3 (EUR) 6.7 (USD) 5 (others) interest rate x1.2 – –
  16. 16. DEBT or EQUITY financing? Estonia Latvia Lithuania Withholding / distribution tax on dividends 0 WHT 21 CIT 0 EU/EEA state 0 EU/EEA state 5, 10 Treaty state 5, 15 Treaty state 10 Default rate 15 Default rate Annual c orporate income tax 0 15 15
  17. 17. Other withholdings – LAT <ul><li>Royalties: 15% literature & art; 5% - other </li></ul><ul><li>Management & consulting:10% </li></ul><ul><li>Use of property in Latvia: 5% </li></ul><ul><li>Sale of real estate or shares in RE companies: 2% </li></ul><ul><li>Most payments to “Black list” offshores: 15% </li></ul><ul><li>Any payments to Lithuania : 0% </li></ul>
  18. 18. Other withholdings – LIT <ul><li>Royalties: 10% </li></ul><ul><li>Sale & lease of real estate: 15% </li></ul><ul><li>Performing & sports fees: 15% </li></ul><ul><li>Bonuses to supervisory board: 15% </li></ul><ul><li>Any payments to Latvia: 0% </li></ul>
  19. 19. Other withholdings - EST <ul><li>Royalties: 10% </li></ul><ul><li>Sale & lease of real estate: 21% </li></ul><ul><li>Performing & sports fees: 10% </li></ul>
  20. 20. Financing with hybrid instrument : LAT
  21. 21. Financing with hybrid instrument : EST
  22. 22. VAT <ul><li>Registration general thresholds: </li></ul><ul><ul><ul><ul><li>LAT – EUR ~14,300 </li></ul></ul></ul></ul><ul><ul><ul><ul><li>LIT – EUR ~29,000 </li></ul></ul></ul></ul><ul><ul><ul><ul><li>EST – EUR ~16,000 </li></ul></ul></ul></ul><ul><li>In LIT (and possibly – also in LAT) – no reduced rates as of 1.1.2011 </li></ul><ul><li>2010 VAT Package implemented </li></ul><ul><li>LAT as of 1.12.2009: </li></ul><ul><ul><ul><ul><li>VAT grouping </li></ul></ul></ul></ul><ul><ul><ul><ul><li>No VAT on imports </li></ul></ul></ul></ul><ul><ul><ul><ul><li>VAT reclaim on bad debts </li></ul></ul></ul></ul>
  23. 23. Summary <ul><li>EST – good for debt-financed co’s (no annual CIT, no WHT on %, no Thin Cap.) </li></ul><ul><li>LAT & LIT – good for equity-financed co’s (low CIT effective rate, no WHT on dividends if paid to EU) </li></ul><ul><li>LAT & LIT - free ports & special economic zones </li></ul><ul><li>LAT & EST - Dutch DTT avoids transfer tax on sale of real estate companies </li></ul><ul><li>LIT – 5% CIT for SMEs </li></ul><ul><li>LAT - Notional interest deduction on retained earnings </li></ul><ul><li>LAT - Gains on sale of fixed assets not taxed, if substituted by new ones within 1 y. </li></ul><ul><li>LAT, EST – Advance rulings possible, no APAs </li></ul><ul><li>The Baltics - cross-border mergers now a ‘hot’ cost saving tool </li></ul><ul><li>The Baltics - certain instability because of rapid changes in tax systems </li></ul>
  24. 24. Story of John <ul><li>Setting up an on-line store </li></ul><ul><li>Where is the lowest tax jurisdiction to set up? </li></ul><ul><li>Permanent establishment in Latvia </li></ul><ul><ul><ul><li>Fixed place of business </li></ul></ul></ul><ul><ul><ul><li>Dependent agent concludes contracts </li></ul></ul></ul><ul><li>Fixed PIT, micro-company tax, SIA, self-employed? </li></ul>
  25. 25. Tax planning examples <ul><li>Double dip lease </li></ul><ul><li>Tax haven companies </li></ul><ul><li>Treaty shopping </li></ul>
  26. 26. What is useful on www.sorainen.com <ul><li>Tax blogs and articles </li></ul><ul><li>Tax newsflashes (may subscribe for) </li></ul><ul><li>www.twitter.com/Sorainen_tax - quick tax news </li></ul><ul><li>Other publications in tax: </li></ul><ul><ul><ul><ul><li>T ax C ard </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Country tax profiles </li></ul></ul></ul></ul><ul><ul><ul><ul><li>T ransfer pricing guide </li></ul></ul></ul></ul><ul><ul><ul><ul><li>T hin capitalization guide </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Real estate taxation in CEE guide, etc. </li></ul></ul></ul></ul>
  27. 27. Thank You! <ul><li>Jānis Taukačs </li></ul><ul><li>Partner, Regional Head of the Tax Team </li></ul><ul><li>phone +37 1 67 365 000 </li></ul><ul><li>mobile +37 1 29 139 300 </li></ul><ul><li>janis.taukacs @sorainen.com </li></ul>Contacts

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