Pillar 2 Dashboard: Latvia

On June 20, 2024, the Latvian global minimum tax law was published in the Official Gazette.

On June 6, 2024 the Latvian Parliament adopted in its final reading the “Law on ensuring the global minimum tax level of large groups of companies”, which implements the EU Global Minimum Tax Directive.

However, as Latvia intends to delay the application of the GloBE rules under Article 50 of the EU directive, the draft law is not comprehensive and only covers limited aspects of the GloBE rules (as required for the application of Article 50).

On January 30, 2024, a draft law to implement the EU Minimum Tax Directive was approved by the Cabinet of Ministers. On June 20, 2024, this was included in Latvia’s Official Gazette as Law No. 119 of 2024 (‘the law’)

However, as Latvia intends to delay the application of the GloBE rules under Article 50 of the EU Minimum Tax Directive, the law is not comprehensive and only covers limited aspects of the GloBE rules (as required for the application of Article 50).

Article 50 of the EU Minimum Tax Directive provides that EU Member States in which no more than 12 UPEs of in-scope MNEs are located may elect not to apply the Income Inclusion Rule (IIR) and the Under-Taxed Profits Rule (UTPR) for up to six consecutive fiscal years beginning from December 31, 2023 (ie until December 31, 2023).

Member states that have postponed the application of these rules must incorporate part of the provisions of the EU Minimum Tax Directive into national law in such a way as to ensure the operation of the GloBE rules in the EU, as established by the EU Minimum Tax Directive.

In particular, even though the application of the GloBE rules in Latvia is to be delayed, Latvia is required to implement domestic law which ensures that a group filing entity located in another Member State is provided with the necessary information to enable it to complete a GloBE Information Return.

The Latvian law, therefore, only transposes the necessary aspects of the EU Minimum Tax Directive. The issue of the law follows the EU Commission issuing infringement proceedings against Latvia (and 8 other EU members) on January 25, 2024 for not enacting domestic law to implement the EU Minimum Tax Directive by December 31, 2023.

Article 50(2) of the EU Minimum Tax Directive provides that where a UPE is located in a Member State that has elected to apply the deferral, other member states are to ensure that the constituent entities of that MNE group are subject (in the Member State in which they are located), to the UTPR top-up tax amount from December 31, 2023.

The election for deferral under Article 50 of the EU Minimum Tax Directive applies to EU Member States in which no more than 12 UPEs of in-scope MNEs are located.

According to Ministry of Finance data, the number of in-scope UPEs in Latvia, will not exceed 3 (with around 300 subsidiaries and PEs that could fall within the scope of the GloBE rules registered in Latvia).

GLOBE APPLICATION

General

Scope of application

Article 2 of the law provides that it applies to entities located in Latvia included in a group (both an MNE group or a domestic group), whose annual net sales income in the consolidated financial statements of its UPE is at least 750 million in at least 2 of the 4 financial years immediately preceding the relevant financial year.

Provisions of the EU Minimum Tax Directive/GloBE rules that apply to determining revenue in the case of short or long accounting periods are also included, as well as the exclusion of excluded entities (and the excluded entity election). This transposes Article 2 of the EU Minimum Tax Directive.

Definitions

A number of definitions are provided in Article 1 of the law which are necessary to comply with the information provision rules in Article 4.

These definitions tie into the EU Minimum Tax Directive and include:

-Non-profit organization;

-Significant distortion of competition;

-Partially-owned parent company;

-Fiscally transparent entity;

-Fiscal year;

-Ultimate parent company;

-Group;

-Investment fund;

-Investment entity;

-Constituent entity;

-Ownership;

-Excluded entity;

-Consolidated financial statements;

-Controlling interest;

-Parent company;

-Intermediary parent entity;

-Minimum tax;

-Real estate investment vehicle;

-Permanent establishment;

-Pension fund;

-Pension services entity;

-Acceptable Financial Accounting Standard;

-MNE group;

-Entity; and

-Top-up tax.

Location of entities

Article 3 of the law includes rules to determine the location of an entity/PE that is part of a group, which is important for determining which EU member state or third country they will be treated as being located in for Pillar 2 purposes (and for the information provision rules).

Article 3 of the law transposes the relevant content of Articles 4(1)-4(7) of the EU Minimum Tax Directive.

Administrative Guidance

The Latvian law does not include any aspects of the OECD Administrative Guidance.

Safe Harbour and Penalty Relief Guidance

Not applicable, as Latvia is opting for the Article 50 postponement of the EU Minimum Tax Directive.

ELECTIONS

Elections in the OECD Model Rules

As Latvia is opting for the Article 50 postponement of the EU Minimum Tax Directive, GloBE elections are not relevant. No GloBE elections are included in the law.

Elections in the Administrative Guidance

No elections from the OECD Model Rules are included in the law.

New Elections

There are no new elections in the law.

DEVIATIONS FROM THE OECD MODEL RULES/EU GLOBAL MINIMUM TAX DIRECTIVE

As Latvia intends to delay the application of the GloBE rules under Article 50 of the EU Minimum Tax Directive, the law is not comprehensive and only covers limited aspects of the GloBE rules (as required for the application of Article 50).

Member states that have postponed the application of these rules must incorporate part of the provisions of the EU Minimum Tax Directive into national law in such a way as to ensure the operation of the GloBE rules in the EU, as established by the EU Minimum Tax Directive.

In particular, even though the application of the GloBE rules in Latvia is to be delayed, Latvia is required to implement domestic law which ensures that a group filing entity located in another Member State is provided with the necessary information to enable it to complete a GloBE Information Return.

Whilst the law transposes relevant aspects of the EU Minimum Tax Directive, it does not reflect relevant aspects of the OECD Administrative Guidance.

Most of the aspects of the GloBE rules, included the detailed calculation rules and operation of the IIR and UTPR are not included in the law given the postponement of the rules in Latvia.

The Ministry of Finance has confirmed that during the six-year postponement period, Latvia will continue to work on the full transposition of the Directive which are expected to be transposed into national law by the first half (June 30) of 2029.

DOMESTIC MINIMUM TAX

General

Latvia is not implementing a QDMTT.

QDMTT Design Features

Latvia is not implementing a QDMTT.

Registration

Not provided in the Law.

Filing

Article 4 of the law provides for two key information provision rules:

1) The UPE of an MNE group, located in Latvia, must appoint another MNE group entity located in another member state (or in certain cases, in a third country) to submit a top-up tax information declaration to the tax authority of that country on behalf of the MNE group; and

2) The group entities located in Latvia must submit the data required to fill out this declaration to the designated group filing entity within 12 months after the last day of the fiscal year.

Payment

Not provided in the law.

Penalties

Not provided in the law.

None issued.

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