Latvia has published in the Official Gazette the Law of 30 January 2020 on Amendments to the Corporate Income Tax Act.
One of the key aspects of the Law is the implementation of the hybrid mismatch measures of the EU Anti-Tax Avoidance Directive as amended (ATAD2). This includes measures to address double deduction and deduction without inclusion mismatch outcomes between affiliated undertakings, a company and its permanent establishment outside Latvia, between two or more permanent establishments of the same entity, or in the framework of a structured arrangement. For this purpose, affiliated generally means where an entity has at least 50% direct or indirect ownership of capital, voting rights, or rights to profit in another, and certain other specified cases. In general, a hybrid mismatch is addressed by either denying a deduction or requiring an inclusion of income. However, a deduction will be allowed in the event of dual inclusion income accruing in the current or subsequent fiscal period.
In addition to the hybrid mismatch rules, the Law also includes amendments for the implementation of the exit tax rules of the EU Anti-Tax Avoidance Directive (ATAD1). This includes an expansion of items included in the tax base to include the value of assets transferred in the course of a reorganization, the value of assets transferred to a permanent establishment (PE) abroad, and the value of assets transferred from a PE to its head office abroad or another PE. Such transfers are to be included in the taxable base of the last taxation period of the accounting year. Also provided is the exemption where assets are transferred for a period not exceeding 12 months if transferred for securities financing, collateral, meeting capital adequacy (prudential capital) requirements, or liquidity management.
Lastly, an amendment is made to the interest restriction rules to provide an exemption for loans received for financing a long-term public infrastructure project of national importance in Latvia. The exemption applies for both the 30% of EBITDA restriction and the 4:1 debt-equity ratio restriction.
The law entered into force on 12 February 2020, although as per the Directive, the measures should generally apply from 1 January 2020. Further details will be published once available.
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