Transactions with Russia in a spotlight

published on 4 September 2023 | reading time approx. 2 minute

The Cabinet of Ministers has updated the list of low-tax or tax-free countries and territories on 27 June 2023 by adopting Regulations No. 333. By updating the list of low-tax or tax-free countries and territories, the Russian Federation was also included in it. The new regulations enter into force as from the 1 July 2023.

Inclusion of the Russian Federation in the list is a serious step by the Cabinet of Ministers and gives rise to several important factors affecting taxation of transactions with subjects from the Russian Federation in future. Accordingly, the following should be considered in performing transactions with legal entities and private individuals of the Russian Federation after the 1 July 2023:

Withholding tax for payments to Russia

The Corporate Income Tax, by applying the rate of 20 percent, should be withheld from all payments made by the residents or permanent representations of non-residents of Latvia to legal entities, private individuals and other persons located, established or incorporated in the Russian Federation.
 
The above regulation is not applicable to payments made for deliveries of goods (based on market prices).
 
The above means that the residents of Latvia should bear in mind that in cooperation with persons from the Russian Federation, they might be obliged to withhold the Corporate Income Tax from any made payments by applying the rate of 20 percent in some cases.

Dividends

A resident of Latvia has the right to reduce the amount of dividends included in the taxable base subject to the Corporate Income Tax in the relevant taxation period only by the amount of the dividends received by a resident of Latvia from a payer of the dividends who is the Corporate Income Taxpayer in its residence country or the amount of dividends for which the tax was withheld in the country of payment thereof.
 
However, the above regulation no longer applies to dividends received from a person located, established or incorporated in the Russian Federation.

Therefore, any dividends received from the Russian Federation will be taxable also in Latvia (at the moment of their payment in Latvia) although they had been taxed in the Russian Federation.

Income from the sale of shares

A resident of Latvia has the right to reduce the amount of dividends included in the taxable base subject to the Corporate Income Tax in the relevant taxation period by the amount of income gained by the resident of Latvia in the relevant taxation period from alienation of shares held for minimum 36 months at the moment of their alienation.
 
The above is no longer applicable to the shares of a person located, established or incorporated in the Russian Federation.

Transfer pricing aspects

Transactions with undertakings or other persons located, established or incorporated in low-tax or tax-free countries and territories are considered a transactions of related parties. This means that the same transfer pricing aspects as applicable to transactions of related parties should be applied in further transactions with undertakings or other persons in the Russian Federation. Thus, transfer pricing has to be analysed and one should be able to justify that transactions were performed based on the market price principles, even if there are no other characteristics of related parties.
 
It should be taken into account that as soon as the total amount of transactions of related parties (including any transactions with undertakings or other persons in the Russian Federation) exceeds the threshold of 250,000 euros, a transfer pricing file must be prepared describing in detail the above referred analysis of transfer pricing.  The conditions of preparing and submitting the transfer pricing file are even more strict when the amounts of transactions are higher. If the transfer pricing file is not submitted in due time or is not prepared according to the requirements of laws and regulations, the Latvian tax administration may impose a fine amounting up to 1 percent of the total transaction amount not exceeding 100,000 euros.