LatviaLatvia

Legal ReferenceCorporate income tax law, Section 4, Paragraph 2, Subparagraph 2e)

Legal ReferenceRules on application of the Corporate income tax law (Cabinet of Ministers Regulation No. 677, adopted 14 November 2017, valid from 1 January 2018), Section 19

The OECD Transfer Pricing Guidelines are used as best practices and recommendations on dealing with the following transfer pricing issues: - How to apply transfer pricing methods; - How to make a functional analysis and comparable benchmark; - To promote the cooperation between taxpayers and tax administrations and to avoid double taxation; - To justify certain controlled transactions or commercial relations

Legal ReferenceLaw “On Tax and Fees” Section 1, Point 18 Corporate income tax law, Section 4, Paragraph 10

Related persons - two or more natural or legal persons (except for capital companies the relation of which constitutes capital shares or stocks that are directly owned by the State or a local government) or a group of such persons related under a contract, or representatives of such persons or group, provided that at least one of the following conditions has been met: a) they are parent and subsidiary commercial companies or co-operative societies; b) the share of holding of one commercial company or co-operative society in the other company is between 20 to 50 per cent... c) more than 50 per cent of the share capital or the value of the shares... is held or a decisive influence is ensured... by one and the same person and the kin of this person to the third degree or the spouse... d) more than 50 per cent... is held... by several, however, not more than 10 one and the same persons; e) more than 50 per cent... is held... by a commercial company or co-operative society in which a natural person... hold more than 50 per cent... f) one and the same person or one and the same persons have a majority of votes on the boards of directors... g) ...these persons have entered into an agreement... providing for any additional remuneration... or... engage in other forms of coordinated activities with a view to reducing their taxes; h) a natural person... directly or indirectly owns more than 50 per cent of the value of the equity capital or shares... Upon calculating the conditionally distributed profits of the taxpayers, a transaction with a person who is located, set up or established in a low-tax or tax-free jurisdiction shall be considered a transaction with a related person.

Legal ReferenceRules on application of the Corporate Income Tax Law (Cabinet of Ministers Regulation No. 677, adopted 14 November 2017, valid from 1 January 2018), Section 9, 13-17

The price of transactions is determined by using economic analyses techniques.

• CUP (provided)
• Resale Price (provided)
• Cost Plus (provided)
• TNMM (provided)
• Profit Split (provided)
• Other (provided)

Legal ReferenceRules on application of the Corporate Income Tax Law (Cabinet of Ministers Regulation No. 677, adopted 14 November 2017, valid from 1 January 2018), Section 8

The most appropriate method is chosen taking into account the functions and risks, available trustworthy information and level of comparable transaction or unrelated person’s financial information including comparability adjustments.

• Hierarchy of methods (not selected)
• Most appropriate method (selected)
• Other (not selected)

Legal ReferenceRules on application of the Corporate Income Tax Law (Cabinet of Ministers Regulation No. 677, adopted 14 November 2017, valid from 1 January 2018), Section 13 point 13.1.

In general, domestic legislation does not empower to apply commodity quoted prices as arm’s length prices. The commodity quoted prices cannot be used as arm’s length prices because there is no evidence of transactions being concluded.

Legal ReferenceRules on application of the Corporate Income Tax Law (Cabinet of Ministers Regulation No. 677, adopted 14 November 2017, valid from 1 January 2018), Section 11,12 and 19

The guidance in Chapter III of the TPG can be used for purpose of application of transfer pricing method.

Legal ReferenceRules on application of the Corporate Income Tax Law (Cabinet of Ministers Regulation No. 677, adopted 14 November 2017, valid from 1 January 2018), Section 11 point 11.1.

Domestic comparables, if appropriate to the controlled transaction, reflect closer the geographic market comparability factors and are more reliable.

Guidance in paragraph 3.55-3.62 of the TPG is widely used.

Legal ReferenceRules on application of the Corporate Income Tax Law (Cabinet of Ministers Regulation No. 677, adopted 14 November 2017, valid from 1 January 2018), Section 8.3. and section 12.3.2.

Comparability adjustments are required if the selected unrelated party or transaction have comparability issues with the tested party or transactions.

Legal ReferenceRules on application of the Corporate Income Tax Law (Cabinet of Ministers Regulation No. 677, adopted 14 November 2017, valid from 1 January 2018), Section 19

Latvian domestic legislation does not contain specific guidance on the pricing of controlled transactions involving intangibles and tends to rely on the OECD TPG.

Legal ReferenceRules for the Application of the Law “On Annual Reports and Consolidated Annual Reports” (Cabinet of Ministers Regulation No. 775, adopted 15 December 2015, valid from 1 January 2016), Chapter 9

Criteria for recognising and measuring of all intangibles, independently to their involvement in controlled transactions, are set out by international accounting standard IAS 38... Accounting and valuation methods of all the assets, including intangibles, and the procedure for indicating the costs and changes in value related to them in the financial statement, are set out by the Rules for the Application of the Law “On Annual Report and Consolidated Annual Reports.”

Legal ReferenceRules on application of the Corporate Income Tax Law (Cabinet of Ministers Regulation No. 677, adopted 14 November 2017, valid from 1 January 2018), Section 19.1.

Legal ReferenceRules on application of the Corporate Income Tax Law (Cabinet of Ministers Regulation No. 677, adopted 14 November 2017, valid from 1 January 2018), Section 18¹ to 18⁹ Transfer Pricing Documentation and Procedures for Concluding an Advance Agreement Between a Taxpayer and Tax Administration on Determination of the Armʼs Length Price (Value) for a Transaction or Type of Transactions (Cabinet of Ministers Regulation No. 802, adopted 18 December 2018, valid from 21 December 2018), Section 4

Latvian domestic legislation contains guidance specific for low value-adding intra-group services in line with the OECD TPG.

Legal ReferenceSee Legal Reference in question 23.

Simplified determination of transfer prices and simplified transfer pricing documentation is in line with the OECD TPG.

Legal ReferenceCorporate income tax law, Section 5 Paragraph 1 Subparagraph 1

Withholding tax (20%) are imposed on management and consultation services.

Legal ReferenceMethodological material “Transfer pricing documentation” in Latvian

The State Revenue Service of the Republic of Latvia has created methodological material for taxpayers to use for the creation of the transfer pricing documentation in line with the OECD Guidance on Financial Transactions.

Legal ReferenceCorporate income tax law, Section 10

Latvia has rules concerning thin capitalisation.

Legal ReferenceRules on application of the Corporate Income Tax Law (Cabinet of Ministers Regulation No. 677, adopted 14 November 2017, valid from 1 January 2018), Section 19

Latvian domestic legislation does not contain specific guidance on Cost Contribution Agreements and tends to rely on the OECD TPG.

Legal ReferenceLaw “On Tax and Fees”, Section 15² “Transfer Pricing Documentation and Procedures for Concluding an Advance Agreement Between a Taxpayer and Tax Administration on Determination of the Armʼs Length Price (Value) for a Transaction or Type of Transactions” (Cabinet of Ministers Regulation No. 802, adopted 18 December 2018, valid from 21 December 2018) Regulations Regarding Country-by-Country Report of Multinational Enterprise Group (Cabinet of Ministers Regulation No. 397, adopted 4 July 2017, valid from 14 July 2017)

• Master file consistent with Annex I to Chapter V of the TPG (selected)
• Local file consistent with Annex II to Chapter V of the TPG (selected)
• Country-by-country report consistent with Annex III to Chapter V of the TPG (selected)
• Specific transfer pricing returns (separate or annexed to the tax return) (not selected)
• Other (specify) (not selected)

Legal ReferenceLaw “On Tax and Fees”, Section 15²

The threshold for submission of the local file is EUR 5 000 000 transaction value with foreign related companies. The threshold for the master file is EUR 15 000 000 transaction value with foreign related companies or EUR 5 000 000 transaction value with foreign related companies and a turnover of EUR 50 000 000. If the company reaches or exceeds these thresholds, they are obliged to submit the local file or local file and master file within 12 months after the end of the relevant reporting year. In addition, the taxpayers shall... draw up within 12 months... and, if required... submit the local file within a month after the request if the transaction is between EUR 250 000 to EUR 5 000 000. The global documentation (Master file and CbCR) and local file must be drawn up in Latvian or English. The tax administration has the right to request a translation into Latvian.

Legal ReferenceLaw “On Tax and Duties”, Section 15², Paragraph 14, Section 325 Paragraph 2

The tax administration has the right to impose a fine on the taxpayer of up to one percent of the amount corresponding with the controlled transaction... but not more than EUR 100 000 if the taxpayer has failed to comply with the deadline... or has seriously violated the requirements... The tax administration has the right to impose a fine... of up to one per cent of the annual turnover... but of not more than EUR 3200, if the taxpayer has failed to submit the country-by-country report.

The exemption of submitting local and master files exists for those taxpayers that do not meet the threshold in the transaction value with foreign related companies and net turnover threshold mentioned in the response to Question 30.

Legal Reference“Transfer Pricing Documentation and Procedures for Concluding an Advance Agreement Between a Taxpayer and Tax Administration on Determination of the Armʼs Length Price (Value) for a Transaction or Type of Transactions” (Cabinet of Ministers Regulation No. 802, adopted 18 December 2018, valid from 21 December 2018) Law “On Tax and Fees”, Section 119, 120 and 133 Methodological material “On Elimination of Double Taxation to Profits and Capital of Enterprises, and Mutual Agreement Procedures (MAP)” Methodological material “On Dispute Resolution under a Mutual Agreement Procedure with Non-EU Countries” Latvia’s MAP Profile Administrative Procedure Law, Chapter 9 Statement on One's Rights;

The taxpayers can request the tax administration to issue a binding ruling... According to the regulation, the taxpayer is able to apply for an APA. The duration of an APA can be up to 5 years. Taxpayers are allowed a rollback for up to 5 years. Bilateral or multilateral APAs can be started in Latvia... MAP is regulated by the Law “On Taxes and Fees”.

• Rulings (selected)
• Enhanced engagement or cooperative compliance programmes (not selected)
• Advance Pricing Agreements (APA) (selected)
• International Compliance Assurance Programme (ICAP) (not selected)
• Mutual Agreement Procedures (selected)
• Other (please specify) (not selected)

As long as there is a signed agreement between the competent authority of Latvia and another country regarding application of Pilar I, Amount B, that has entered into force.

Legal ReferenceRules on application of the Corporate Income Tax Law (Cabinet of Ministers Regulation No. 677, adopted 14 November 2017, valid from 1 January 2018), Section 18.¹ Law “On Tax and Fees”, Section 15²

There is a regulation regarding the low value-added intra-group services which regulates the classification of those services and what mark-up should be used for these services. There is one safe harbour regarding the taxpayer that does not have the duty to automatically submit local transfer pricing documentation but who has the duty to prepare local transfer pricing documentation. This taxpayer... has the right to review local transfer pricing documentation every three years.

Legal ReferenceLaw “On Tax and Fees”, Section 120, Paragraph 5 Methodological material “On Dispute Resolution under a Mutual Agreement Procedure with Non-EU Countries”

In cases of disputes with the competent authorities of European Union member states... The State Revenue Service shall also be entitled... to take a decision on the resolution of the dispute issue unilaterally, without involving the other competent authorities... if the taxpayer agrees to such a decision.

Legal ReferenceCorporate income tax law, Section 4, Paragraph 2, Clause 2, sub-paragraph e), Section 17

Latvia does not have specific regulation on year-end-adjustments but allows them in accordance with the general rules on the arm’s length principle. Taxpayer is obliged to perform an upward adjustment of taxable base... if the actual value of the transactions is below the market price. Upward or downward price adjustments, without being reported in the CIT return, may be made until the approval of the Annual Report. After approval of the Annual Report, only upward adjustments of CIT taxable base are allowed.

Legal ReferenceLatvian tax treaties

Article 7 as it read before 2010.

• Article 7 as it read before 2010. (selected)
• Article 7 as it reads after 2010. (not selected)
• Other (please provide additional details) (not selected)

Latvia has reserved the right to use the previous version of Article 7, i.e. the version that was included in the Model Tax Convention immediately before the 2010 update of the Model Tax Convention, subject to its positions on that version.

Legal ReferenceRules on application of the Corporate Income Tax Law (Cabinet of Ministers Regulation No. 677, adopted 14 November 2017, valid from 1 January 2018), Sections 22, 24 – 26; Methodological material “Application of corporate income tax to a permanent establishment registered in Latvia” in Latvian;

Permanent establishment of a non-resident shall, for the enterprise income tax purposes, account for the revenue and expenditure associated with its activity and assets and liabilities respectively, separately from a non-resident whose permanent establishment it is. In determining the profits... there shall be allowed as deductions expenses which are disbursed in transactions between a non-resident... and other persons... which is directly related to the economic activity of the permanent establishment.