What tax implications should be considered when paying a non-resident?

If a Latvian company makes payment to a non resident in respect of goods, it will qualify as import and 18% rate will apply, unless the goods are exempt. The company will have to calculate the VAT charge and pay it to the tax authorities as part of the customs clearance procedure.

There are special rules for the import of fixed assets. If fixed assets are imported for use in business, no VAT is charged at the moment of import. If the company sells or rents out the fixed asset within one year of the import, VAT at 18% of the customs value when imported must be paid, which is then fully recoverable. The rules change from 1 April 2001, when an 18% penalty will be applied to fixed assets subsequently sold. This penalty paid is not recoverable.

Different rules apply to leasing companies.

If a Latvian company is paying for services provided by a foreign company, it is important to establish where the service is deemed to have taken place. In most cases it will be the legal address of the provider of services, and VAT will not be charged as the transaction has taken place outside Latvia. However there are exceptions when the service is deemed to be provided in Latvia, which then qualify as import of services. To find out more information refer to section on "Import of services".

If the company has paid VAT on import, it becomes recoverable in the month that the payment is made.

Payments made to non-resident companies or individuals are tax deductible, provided they are acquired for business purposes and the transaction is properly documented.

Payments to related parties should be considered with great care. If the payment is considered higher than the market value, the difference between transaction value and market value will not be treated as tax deductible. The consequence of such an adjustment could be that the difference becomes taxable in Latvia, as well as in the country of the recipient, in addition to penalties assessed by the Latvian tax authorities. There are various methods to assess market value. For more information on payments to related parties refer to section "Transactions with related parties"

Many payments are subject to withholding tax as described under withholding tax implications for this transaction.

Withholding tax applies to payments made by Latvian companies to non-residents. For summary of types of payments and rates click here.

It is important to distinguish between two categories of non-residents:

Failure to withhold tax on payments to non-residents as required will result in the entire expense being disallowed for the corporation tax purposes. In order to minimise tax liability correctly worded documentation and agreements are very important.

If a Latvian company makes a payment to a non-resident individual, the Latvian company has to withhold 25% of the payment. The exceptions are:

Failure to withhold tax will result in the company owing the tax authorities 25% of the payment, as well as 100% penalty and interest.