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

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Baltic Spark, http://www.balticspark.org, 2010.04.16

Baltic Spark, http://www.balticspark.org, 2010.04.16

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  • 1. TAX CONSIDERATIONS OF DOING BUSINESS IN THE BALTIC STATES Jānis Taukačs 16 April 2010 Baltic Spark, Riga
  • 2. Contents
      • Tax environment in the Baltic States
          • Comparison of the general tax environment
          • Comparison of the withholding tax structu re
      • Choice of the best Baltic State from taxation perspective for
          • Debt-financed acquisitions and operations
          • Equity-financed acquisitions and operations
      • Story of John
      • Tax planning examples
      • Planning example of a holding structure
  • 3. WHICH “BRIDE” FROM THREE TO CHOOSE?
  • 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. Opening up abroad
    • No presence
    • Representative office
    • Licinse, franchise, IP
    • Agent
    • Dealer
    • Partnership
    • Self-employed
    • Branch, pernanent establishment
    • Company
    • Less presence = less tax to be paid in the foreign country
  • 6. SMEs – LAT
    • Fixed PIT:
          • No employees
          • Turnover – up to EUR ~14,300 a year
          • PIT lamp sum – EUR ~35 up to 700 (+7%) a year
    • ‘ Patent/Licence fee’:
          • EUR 50-100/month;
          • narrow scope of activities (who normally don’t pay PIT at all)
    • Proposed Micro-company tax:
          • 20% on turnover;
          • up to EUR ~100,000 a year
    • Self-employed:
          • 26% PIT +
          • SSC on self-chosen amount (not less than EUR ~70 a month)
    • SIA:
          • CIT 15% + 10% PIT on dividends
  • 7. SMEs – LIT
    • CIT 5%, if:
          • Income lower than EUR ~ 144,500, and
          • Less than 10 employees
    • Self-employed:
          • 15% PIT
          • 37.5% SSC from 50% of the taxable income - up to EUR 1350
    • UAB: CIT 15% + 20% PIT on dividends
  • 8. SMEs – Estonia
    • Self-employed:
          • 21% PIT
          • 33% SSC applies on the whole income, but between EUR 275 and 4,125 a quarter .
    • OU:
          • 21% on distribution
  • 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. Incentives to invest – LAT
    • Deemed interest deduction on retained earnings
    • No CIT on capital gains, if sold fixed assets are replaced within a year
    • Accelerated depreciation (10-70%), declining balance; IP – straight line (5-10 y.),
    • Patents, trade marks, new production equipment - cost base increased 1.5 times
    • 2 SEZs & 2 FPs: property tax (80-100% off); CIT (5%)
    • Tonnage tax & tax concessions for sailors
  • 11. Incentives to invest – LIT
    • Tax treaty with Russia (in LAT & EST – no)
    • 2 FEZ: no CIT for 6 years, 50% off for next 10 y.
        • Investments of at least EUR 1m
        • State aid restrictions – investor responsible
    • On investment projects – CIT may be reduced by 50%
    • Patents, trade marks - cost base increased 3 times for purposes of depreciation
  • 12. Incentives to invest – EST
    • 0% CIT; 21% on:
          • distribution of profit, gifts, fringe benefits, non-business costs, excess capital reductions, liquidation quota
          • capital gains on sale of RE or RE companies
    • No thin capitalisation restrictions
    • Unlimited depreciation for tax
  • 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. 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. 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. 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. Other withholdings – LAT
    • Royalties: 15% literature & art; 5% - other
    • Management & consulting:10%
    • Use of property in Latvia: 5%
    • Sale of real estate or shares in RE companies: 2%
    • Most payments to “Black list” offshores: 15%
    • Any payments to Lithuania : 0%
  • 18. Other withholdings – LIT
    • Royalties: 10%
    • Sale & lease of real estate: 15%
    • Performing & sports fees: 15%
    • Bonuses to supervisory board: 15%
    • Any payments to Latvia: 0%
  • 19. Other withholdings - EST
    • Royalties: 10%
    • Sale & lease of real estate: 21%
    • Performing & sports fees: 10%
  • 20. Financing with hybrid instrument : LAT
  • 21. Financing with hybrid instrument : EST
  • 22. VAT
    • Registration general thresholds:
          • LAT – EUR ~14,300
          • LIT – EUR ~29,000
          • EST – EUR ~16,000
    • In LIT (and possibly – also in LAT) – no reduced rates as of 1.1.2011
    • 2010 VAT Package implemented
    • LAT as of 1.12.2009:
          • VAT grouping
          • No VAT on imports
          • VAT reclaim on bad debts
  • 23. Summary
    • EST – good for debt-financed co’s (no annual CIT, no WHT on %, no Thin Cap.)
    • LAT & LIT – good for equity-financed co’s (low CIT effective rate, no WHT on dividends if paid to EU)
    • LAT & LIT - free ports & special economic zones
    • LAT & EST - Dutch DTT avoids transfer tax on sale of real estate companies
    • LIT – 5% CIT for SMEs
    • LAT - Notional interest deduction on retained earnings
    • LAT - Gains on sale of fixed assets not taxed, if substituted by new ones within 1 y.
    • LAT, EST – Advance rulings possible, no APAs
    • The Baltics - cross-border mergers now a ‘hot’ cost saving tool
    • The Baltics - certain instability because of rapid changes in tax systems
  • 24. Story of John
    • Setting up an on-line store
    • Where is the lowest tax jurisdiction to set up?
    • Permanent establishment in Latvia
        • Fixed place of business
        • Dependent agent concludes contracts
    • Fixed PIT, micro-company tax, SIA, self-employed?
  • 25. Tax planning examples
    • Double dip lease
    • Tax haven companies
    • Treaty shopping
  • 26. What is useful on www.sorainen.com
    • Tax blogs and articles
    • Tax newsflashes (may subscribe for)
    • www.twitter.com/Sorainen_tax - quick tax news
    • Other publications in tax:
          • T ax C ard
          • Country tax profiles
          • T ransfer pricing guide
          • T hin capitalization guide
          • Real estate taxation in CEE guide, etc.
  • 27. Thank You!
    • Jānis Taukačs
    • Partner, Regional Head of the Tax Team
    • phone +37 1 67 365 000
    • mobile +37 1 29 139 300
    • janis.taukacs @sorainen.com
    Contacts