STRUCTURE
Latvian company – is a private or public body corporate. The most frequently used legal forms – a limited liability company (SIA) or a joint stock company (AS).
The share capital of the company is formed by the contributions of its shareholders (cash or material contribution). The minimum paid-up share capital is 2000 LVL (~ 2850EUR).
The company is liable for its own liabilities ensured by its all assets as well as assets received from the shareholders (contributed to the share capital). Shareholders are not liable for the company’s liabilities and the company is not liable for the shareholders’ liabilities.
LATVIA – TAX EFFICIENT JURISDICTION FOR INTERNATIONAL BUSINESS AND CAPITAL
Starting from January 1st 2013, Latvia became an ideal jurisdiction for holding companies offering a 0% tax on received dividends. Trading companies are subject to 15% corporate tax only – it is one of the lowest corporate taxes in Europe. The advanced and easy banking industry allows clients to open bank accounts and to manage them remotely.
Finally, any foreign investor may obtain an investor visa allowing him to travel and live in Europe without any limitations. This visa can be extend to all his family members.
HOLDING ACTIVITY
- Favorable tax regime for international holding, financial companies and companies holding intellectual property.
- No corporate tax on sale of shares and dividends received from subsidiaries
- No witholding tax on dividends paid to foreign companies
- Starting from 2014 interests and royalties paid to foreign companies are exempted from withholding tax. Even now in certain cases these payments are exempted.
- No stamp duties on share capital payment and shares transfer.
- No controlled foreign corporations rules for legal entities.
TRADING ACTIVITY
Corporate income tax rate – 15% – one of the lowest in Europe.
Only margin, i.e. net profit after deduction of all business related expenses is subject to taxation. Thus effective tax rate may be reduced through expenses or using agency structure provided that transfer pricing rules are reasonably complied with. In case of operations within EU requiring European VAT registration, the company may easily register for VAT in Latvia.
Transactions on the territory of Latvia are subject to VAT at a rate of 21%. Transactions between different EU countries generally are VAT exempt.
The only restriction in trading activity is that payments to companies from tax-free countries included in socalled “black list” of the Cabinet of Ministers are subject to withholding tax 15%.
European funds are accessible for setting up and development of production and services business.
LATVIAN COMPANY REGISTRATION AND ANNUAL ADMINISTRATION FEES
Director
Director may be the client himself or his authorized representative, natural person of any residence. Latvian company’s director is personally liable for all the company’s activities.
Shareholder
Shareholder may be the client himself, his authorized representative or his company.
Share capital
Minimum paid-up share capital 2 000 LVL (together with bank commissions -2930 EUR, or equivalent in other currency at the exchange rate of the Bank of Latvia) should be paid by shareholder to the company’s temporary account before registration with the Register of Enterprises. In our company incorporation methodology, the incorporation can be made without the ned to pay the share capital.
Main features
- a Dutch HoldCo benefits from the extensive Dutch DTT network and EC directives;
- income from subsidiaries is tax exempt under the Dutch participation exemption;
- no minimum capital if incorporated as a Dutch BV (limited liability company);
- virtually no statutory audit;
- a Dutch HoldCo can obtain advance tax rulings from the Dutch tax authorities;
- its annual accounts and tax return can be reported in other currency than euro (‘functional currency ruling’).
When to use it
- as a holding vehicle to optimize profit repatriation by reducing (foreign) withholding taxes;
- can also be used in combination with financing and/or licensing activities.
Taxation of a Dutch HoldCo
- income from qualifying participations is tax exempt under the Dutch participation exemption regime;
- profit distributions (dividends) are subject to 15% Dutch dividend withholding tax but this rate is often reduced under a tax treaty or the EC Parent Subsidiary Directive;
- profits are subject to 20% Dutch corporate income tax; profits exceeding € 200,000 are taxed at a rate of 25%;
- no capital tax / stamp duty.
1. General
The favorable tax regime for holding companies in the Netherlands is well known. An important tax advantage in the Netherlands is that qualifying dividends and capital gains are exempt from corporate income tax under the Dutch participation exemption. By using the extensive tax treaty network, the typical Dutch holding structure allows for a reduction of foreign withholding taxes on outbound dividends and capital gains by channeling these flows through a Dutch holding company (“Dutch HoldCo”).
The subsequent repatriation of the retained earnings by the Dutch HoldCo to its foreign corporate shareholder may trigger Dutch dividend withholding tax at a rate of 15%. However, this rate is often reduced on the basis of a double tax treaty or the EC Parent Subsidiary Directive
2. Set-up
Based on Dutch corporate law, several types of legal entities can serve as a Dutch HoldCo. The most commonly used type is the Dutch BV. A Dutch BV is a limited liability company of which the capital is divided into shares. As of October 1, 2012, there is no minimum capital requirement for Dutch BVs. Furthermore, a Dutch BV has legal personality under Dutch corporate law. Its counterpart, the public limited liability company, is the so-called NV.
For more detailed information about Dutch BVs and NVs, we refer to our memorandum titled ‘Legal aspects of Dutch BVs and NVs’.
3. Taxation of Dutch HoldCo
In general, the income of a Dutch HoldCo is subject to corporate income tax at a rate of 20%. Profits exceeding € 200,000 are taxed at a rate of 25%. However, income derived from qualifying participations, such as dividend income and capital gains, are fully tax exempt under the Dutch participation exemption. The main criteria to qualify for the participation exemption are listed in Annex I.
If set up as a BV, NV or other legal entity, the Dutch HoldCo will have access to the extensive tax treaty network of the Netherlands as well as the EC Parent Subsidiary Directive, resulting in tax treaty protection and reduced withholding tax rates on dividends received and paid by the Dutch HoldCo. Consequently, structuring international holding activities via a Dutch HoldCo can result in substantial tax savings.
Example
In a situation where the shares in a Russian company would be held directly by one or more shareholders residing in the EU, dividends will in many cases be subject to 15% Russian dividend withholding tax (unless reduced under a double tax treaty). This Russian dividend withholding tax can be reduced substantially by interposing a Dutch HoldCo.
In the event a Dutch HoldCo is interposed between the Russian company and its EU shareholders, the Russian company will distribute dividends to the Dutch HoldCo instead of to its foreign shareholders. Subsequently, the Dutch HoldCo will distribute dividends to the foreign shareholders. Dividend distributions from the Russian company to a Dutch HoldCo are subject to 5% Russian dividend withholding tax, whereas dividend distributions from a Dutch HoldCo to the EU shareholders are not subject to Dutch dividend withholding tax. Consequently, interposing a Dutch HoldCo would result in a saving of 10% Russian dividend withholding tax.
Suppose the dividend payment to the EU shareholder(s) amounts to 100,000 Rubbles. In that case, an amount of 15,000 Rubbles1 of Russian dividend withholding tax would be due if the dividends would be paid directly to the EU shareholder(s). However, if the holding activities are structured via a Dutch HoldCo, only 5% Russian dividend withholding tax will be due.
Consequently, by interposing a Dutch HoldCo, the Russian company will save 10,000 Rubbles of Russian dividend withholding tax for each dividend payment in the amount of 100,000 Rubbles. Please note that a saving between 5% and 10% may possibly also be achieved if the shareholder(s) would be resident of a country with which the Netherlands has concluded a tax treaty.
4. Corporate income tax return
The Dutch HoldCo must file an annual corporate income tax return. This tax return is normally prepared in euros. The taxpayer however has the possibility to file its return in another currency. This could be attractive if the Dutch HoldCo is part of an international group which reports in a foreign currency or prepares its administration in a foreign currency. By applying this currency as well, foreign exchange results will be eliminated at the level of HoldCo.
5. Public filing in the Netherlands
Registration in the trade register of the Dutch Chamber of Commerce is mandatory and the Dutch HoldCo is required to prepare annual accounts in conformity with Dutch civil law. A summarized version of its annual accounts needs to be filed with the Dutch Chamber of Commerce on an annual basis.
Annex I – Dutch participation exemption
If a subsidiary qualifies for the Dutch participation exemption, any income derived from the participation (dividend income and capital gains) is tax exempt in the Netherlands. Hereinafter we will describe the conditions in order to qualify for the Dutch participation exemption.
Main rule
In general, the Dutch participation exemption applies if the following conditions are met:
- the subsidiary has a capital divided into shares and the Dutch HoldCo has an interest of at least 5% (‘ownership test’)2; and
- the subsidiary is not held as a portfolio investment (‘intention test’). If the subsidiary is not held with the intention of obtaining a normal return on investment, the intention test is met. This is the case if there is a business or management link between the Dutch company or its (indirect) parent company and the subsidiary.
If both the ownership test and the intention test are positive, it can usually be concluded that the participation exemption is applicable.
Exception
Notwithstanding the outcome of the intention test, however, a participation is deemed to be held as a portfolio investment if the function of the subsidiary – together with its lower tier partici-pations – consist for more than 50% of passive intra-group financing/licensing/leasing activities.
Escape – subject to tax test
If the intention test is not met or if the above exception applies, the participation exemption will still be applicable if the subsidiary is subject to a taxation that is in accordance with Dutch tax standards. If the subsidiary is subject to corporate income tax at a rate of at least 10% and the tax basis in that country is comparable to the Netherlands, the subsidiary is considered adequately taxed (‘subject to tax test’) and the participation exemption will still be applicable.
Real estate company
Finally, please note that if the subsidiary’s direct or indirect assets comprise at least 50% real estate, the participation exemption will also be applicable at all times.
Summary
United Kingdom and London is one of the major international business centres with the most developed banking, investment and professional infrastructures in the world and a complete legal and regulatory system.
Further more, UK Companies are considered highly reputable as a result of the high respectability of the country of incorporation and the fact that Britain has the largest number of double tax treaties in the world.
None the less, if the company is tax resident of the UK, it is then taxed at a rather high tax rate, ranging from 21%-35%. As an alternative, the UK Company can be tax residents of Cyprus where it can be benefited a lot more.
Country
The UK is being under a constitutional monarchy with Queen Elisabeth II being the chief of the state as well as of other Commonwealth empires. It has a very stable political and legal environment.
The UK is one of the leading economies in trading and in the financial sector, the latest comprising of the biggest contribution in the country’s GDP.
The UK has an excellent infrastructure on communication systems, internet, land lines and mobile lines. The country has approximately 518 airports, railways total to 16,454 Km and ports amount to 10.
Types of Companies
Non resident company
Non resident company is a company incorporated in the United Kingdom, while its management and control body and its business operations are outside Great Britain. Location of the management and control body of the company is the place where managerial decisions are made, where contracts are signed and where the company’s management are physically located, including the people who manage the company’s bank accounts.
The fact that the British Company does not have the status of a UK tax resident doesn’t allow the company to use double taxation treaties between Great Britain and other countries.
However it is tax efficient to use non-resident companies as tax residents of low tax countries such as Cyprus.
Therefore, a British non-resident company, which is managed from Cyprus, in compliance with Article 4 of the Treaty between Cyprus and Great Britain, is considered to be a Cyprus tax resident.
The advantages are obvious:
Britain remains the country of incorporation, which makes the company highly respectable;
1. The income tax, paid in Cyprus, is the lowest in Europe (10%)
2. The company enjoys all benefits of the double taxation treaties between Cyprus and other countries. However, under the protocol, to the Russian Cyprus DTT, the UK Holding Company which is tax resident of Cyprus can no longer take advantage of the benefits of the DTT.
Holding Company
A holding company is frequently used for investment activity. A British holding company, in case it falls under the requirements of tax residency in the United Kingdom, may take advantage of the British double taxation treaties and pay taxes according to the British legislation.
The tax on dividends, received by the British holding company from its foreign subsidiary can be zero under certain conditions.
It is important to keep in mind that British legislation allows to considerably reduce dividend taxes, even to a point where the tax on dividends is “zero”, by using tax credits. The system of tax credits allows the taxes paid by the subsidiary-part of the holding in its country to be calculated against taxes paid in Great Britain. However, please note that not all taxes can be calculated against British taxes, but only some, for example: taxes deducted at source which are paid when dividends are transferred to the holding company, and income taxes. If the subsidiary is located in a country with high taxes (Russia included), Britain may even allow complete exemption from taxation on British soil. The holding company which wants to obtain a tax credit, must own at least 10% of the shares of its subsidiaries.
Besides the tax credit is never grated automatically. The tax payer must approve his/her right for such tax credit to the British Tax Services by applying to Her Majesty’s Tax Service and submitting the relevant documentation, confirming that taxes have been paid by its subsidiary. The tax service reviews these documents and then either allows calculation of these taxes against taxes accumulated in Britain or refuses it.
One of the greatest advantages of basing the holding company in Great Britain is the absence of withholding tax on dividends, paid by the British Company to its shareholders. Almost all continental holding jurisdictions do not approve of transferring “clean” profits to offshore companies. This is why withholding taxes on dividends, transferred to low tax / tax free zones are, as rules, very high. For example, in Denmark, the withholding tax is 28%, in Luxembourg 20% and in Switzerland 35%. Great Britain is an exception. Dividends may be transferred tax-free, even if the shareholder is an offshore company. Besides Britain, the only other country that allows this in the EU is Cyprus.
Limited Liability Partnership (LLP)
It is a legal entity (it has a certificate of incorporation and like any other limited liability company it has to submit annual financial reports, the liability of partners is limited). For taxation purposes LLP is “transparent”, i.e. the financial liability is borne by the partners of the company. In order to be exempt from taxation in the United Kingdom, the directors must not reside in the country, contracts must not be signed in the United Kingdom and profits must not be made in the United Kingdom.
Important things to remember are:
- LLP and each of the partners receive a tax number
- LLP submits financial reports to the registrar
- LLP may apply to be relieved from the obligation to submit tax reports if it does not receive profits from UK sources
- The partner submit “zero” annual tax reports for non-residents
Private Limited Company (LTD)
Formation
A UK company needs by the end of its financial year (which can be determined on any date within the calendar year) to file its accounts. This procedure includes:
- The signed by the Director Balance Sheet of the company
- The profit and Loss account or Income and Expenditure account
- The notes to the accounts
- The group accounts if it is necessary
In some cases, when a company is considered to be small/medium size company (1≥50 employees) and its annual turnover is less than £5,600,000 and has a Balance Sheet total of less than £2.8m, it may then be audit exempt. If this is the case, the director/s must self certify the accounts and they do not need to file them independently.
