In a couple of months changes in Latvian legislation, providing the most favorable regime for international holdings will become effective. Amid positive expectations, pessimistic views of a number of “experts” arise on perspectives of transformation of Latvia in the “new Cyprus” and on stability of new tax policy. One other thing is true: Latvia will have a chance of attracting thousands of investors – the way Cyprus, Malta, Luxembourg and other European neighbors have already done.
Tatjana Lutinska, Head of International Tax Planning and Business Structuring at Prime Consulting, Latvian based legal company Amendments to Law On Enterprise Income Tax, coming into effect from January 1, introduce a favorable tax regime for international holdings. Thanks to them Latvia, which already in the early 90's gained the status of the regional banking center for post-Soviet territory, has all the chances to make another leap forward in developing export of financial services.
As a bonus to the amended legislation, the double tax agreement with Russia, the most important economic partner of Latvia in the CIS, has been finally ratified: in early October president Putin signed the law passed by the Russian Duma. This agreement provides reduced or zero withholding tax rates on dividend, interest, royalty and payments for international transportation services made from Russia to Latvia. Possibility to set off in Russia tax already paid in Latvia is specified, as well as a number of other benefits.
Protection from claims and antidote for corruption Latvian Ministry of Finance clearly declared attracting of foreign business for establishing international holding, management, financial and intellectual property centers as the target of the tax legislation reform. And the significance of the changes made with this respect is undeniable.
Normally holding company is set up to arrange possession of assets, it becomes an intermediary between an individual (or a company from a tax-free jurisdiction) and all other operating companies of the group. It is able not only to own shares of the group companies and receive dividend, but also provide financing and receive interest income, hold intellectual property and receive royalty for the transfer of rights of using it. In addition to tax optimization, holding structure provides many other benefits for the operating companies and the ultimate shareholder, including arrangement of the assets ownership, cash flow optimization, possibility to attract foreign investments at more favorable conditions, as well as protection of entire structure from claims and creditors of the private person.
In countries like Russia and Ukraine, where tradition of property rights protection is frankly lagging behind, fiscal burden is very high, and indices of corruption are extremely over-the-top, foreign and local businessmen prefer to own assets indirectly and register them on foreign company. Behind statistics of foreign investments in Russia money of the Russian origin is hidden, that is clearly demonstrated by the structure of the foreign investors: 80% direct and 70% indirect investments are coming in Russia from offshores.
Ignorant skeptics against “the Latvian new course” Favorable tax regime for holding companies assumes dividend and sale of shares not being subject to taxation, as well as no withholding tax for payments of dividend, interest and royalty out of the country. Additionally, it is the network of effective double tax agreements. Exactly this concept is implemented in Cyprus, Malta, the Netherlands, Luxembourg. Now Latvia is joining the list.
Attraction of foreign capital and subsequently foreign business to the country for establishing holding, financial and other operations centers was the main target of Latvian legislator in 2010 while starting with liberalization of the immigration law, and now - with tax law amendments. This policy is clearly logical, constructive and consistent. By the way, Latvian President Andris Berzins openly declared in a press interview recently that the country’s focus is Luxembourg, Singapore and Switzerland.
With this respect, the negative attitude of critics of such course - from deep skepticism to the Latvia’s potential as an international financial center to the doubts in stability of the new tax regime - is genuinely surprising. Fears of certain local exponents about the country turning into “dirty offshore” seem also strange. But the weirdest is the bravery of some foreign “experts” that do not hesitate to qualify Latvian perspectives on the international capital markets as doubtful, having no proper competence in the matter.
Money laundering is no longer relevant It’s obvious to anyone even slightly familiar with the subject that offshore is not synonymous with laundering of money acquired by criminal means, absolute property privacy, and complete absence of taxation, financial reporting and government regulation.
Yes, there are Cook Islands and Costa Rica, included in the black list of the Organisation for Economic Co-operation and Development, the territories which are thretened by international organizations with deprivation of the international aid, the territories which money transfers are stopped by the U.S. banks. On the other hand there is the Netherlands with a huge transit port of Rotterdam, the country which has been the largest buyer of Russian goods since 2005, leaving behind such major trading partners of Russia as China, Germany and Italy. There is also Luxembourg - the country-founder of the EU.
Numbered bank accounts and tax exemption for foreign business in the same Cyprus is the bygone times story. Nowadays, on British Virgin Islands, even within a non-governmental investigation a competent lawyer can unlock information on the beneficial owner of the lawbreaker company in two weeks. And long ago there is no such country in the world where it is possible to establish a company or open a bank account without disclosing the beneficial owner.
So modern offshore in most cases is not a haven for criminal capital, but jurisdiction chosen by the capital or the business for location and development due to tax and regulatory incentives and other benefits. And not only because of these reasons.
Holdings as a way of economic development Above-mentioned Netherlands and Luxembourg have been the biggest investors of the world for decades. According to IMF statistics, 18% of the world's direct investment goes through the Netherlands today (1st place in the world), 9% through Luxembourg (third place behind the U.S., with 17%). Netherlands appear in the list of five main sources of foreign direct investments in 60% of the world countries. Luxembourg – in 25%. The Netherlands take the second place with this indicator for Russia with 16%, Luxembourg – the third with 11%.
Power of the financial sector directly affects the welfare of the country. In terms of GDP per capita, Luxembourg and the Netherlands are the European leaders with respectively 274% and 131% of the EU average. Of course, these countries take such positions not only because of the holding tax regime, but also because of the overall situation in the economy, political and economic stability, excellent reputation, the highest credit rating and the ancient traditions of property protection. However, the „offshore component” also affects their economy favorably.
Let us take Malta, the largest direct investor in many European countries, including the UK Spain, and North Africa. A tiny island with a population of 450 thousand people, which economy is based on the financial sector and servicing foreign capital, has a level of welfare close to the EU average.
And finally Cyprus, the main “financier” for Russia, Belarus, Armenia, Ukraine, Serbia and Moldova. As for the amount of the accumulated direct foreign investments in Russia, Cyprus is an unconditional and longstanding leader, accounting for 21% of the more than $ 300 billion. Russia is a core business for Cyprus, relations with Russia are even closer than with the neighboring Greece. Cyprus first entered the market in the early 90's meeting the demand of entrepreneurs from the former Soviet states for the establishment of foreign holding structures. Twenty years ago Cyprus was the only offshore country having double tax agreement with Russia, and besides with unique conditions. In addition visa-free entry, residence permits, low administration costs, developed banking system ... What has it brought to Cyprus? Even now, when southern Europe severely suffers from the crisis, the island with a population of 800 000 has the welfare level of 92% of the EU average. Thousands of lawyers and accountants are employed in financial services sector for non-residents.
Latvia is not Cyprus, but even better! In response to the skepticism like “Latvia will never become Cyprus” we may note that in fact Latvia doesn’t need to become Cyprus - with all similarities of holding legislation there are other obvious advantages.
About 20,000 new companies are being registered in Cyprus each year; a decade ago there were only 100,000 entities in the Register, now more than 260 thousand. Most of them represent foreign business. Whereas the real economy sector is quite weak, thus raising well-known threats because of the Greek crisis. Sure, the scenario where another 20,000 companies will be added next year to the 40,000 active Latvian companies seems unlikely. But please, let Latvia start.
Besides Latvia has its own “charm”. In comparison with the countries of old Europe our advantage is easy and inexpensive registration and administration procedures and personal approach at the same time. In comparison with Cyprus and Malta list of strengths, especially those that attract business from the former Soviet Union, is even longer. It is first of all the stability, reliability and confidentiality of the Latvian banking system (by the way, on October 9, Moody's again downgraded the credit ratings of the three largest Cypriot banks: Hellenic Bank to the level B3, which is six levels into junk territory, Bank of Cyprus and Cyprus Popular Bank - to Caa1, which is seven levels into junk territory, all three with a negative outlook).
Reputation of the country also plays a significant role. Because of the recent past, which they have already left behind, Cyprus and Malta are still considered offshores on the post-Soviet territory and still stay in the tax-free countries “black list” in Russia, Kazakhstan, Uzbekistan. And credit ratings of Cyprus are in a zone of high risk with a negative outlook. Finally, the big advantage of Latvia is financial services in Russian, historical and mental relationship with people from the CIS countries. Another plus compared with Malta is double tax agreements with all major post-Soviet countries (Malta has only one - with Georgia).
The finishing stroke in the camp of skeptics In conclusion a few facts shall be pointed out. Even before favorable holding legislation came into force in Latvia it had already been selected by a number of international groups as a location for their shared service and operational centers, including finance, IT, back-office and of course export-import units.
The biggest Latvian company with a turnover of over 1 billion euros is a subsidiary of the Russian chemical giant URALCHEM, set up in 2009 for export operations from Russia to EU, America and Africa. Latvia has been chosen because of advantage of its ports and warehouses, proximity to Russia, transport connection and Russian-speaking community.
A lot of other such examples are listed in Top-500 of Latvian companies. It is worth mentioning that the tax reform reduces tax burden also for operating activities. International trading and services companies will also be able to pay out dividend, royalty and interest without any loss.
Latvia has many real benefits. And there is every reason to believe that excellent legislative initiatives will be supported by state officials in practice.
Eleonora Gailisha Mass Media and Public Relations
Phone: +371-67020506
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egailisha@rietumu.lv
