Latvia Issues Draft Pillar Two Law & Confirms Postponement

On January 30, 2024, a draft law to implement the EU Minimum Tax Directive was approved by the Cabinet of Ministers.

However, as Latvia intends to delay the application of the GloBE rules under Article 50 of the EU Minimum Tax Directive, the draft 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 IIR and the UTPR for up to six consecutive fiscal years beginning from 31 December 2023 (ie until January 1, 2030).

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 draft law, therefore, only transposes the necessary aspects of the EU Minimum Tax Directive. The issue of the draft 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).