Double taxation agreement suspended

On May 16, 2022, the Saeima of Latvia adopted a decision to suspend the agreement (convention) on the avoidance of double taxation and the prevention of tax evasion with respect to income and capital taxes, which was concluded in 2010 (ratified in 2012) between the government of the Republic of Latvia and the government of the Russian Federation.

The signing of this agreement at one time served the following purposes:

1. promoting the development of Latvian-Russian trade in goods and services by eliminating the taxation by both countries of the same income or capital, and
2. creation of a legal basis for cooperation between the tax authorities of Latvia and Russia.

Based on this agreement, the following principles of tax legal relations were in effect:

1. the provisions of the treaty cannot cancel or limit the tax benefits provided by the national tax legal acts of the contracting states, that is, the application of the treaty can only reduce the tax burden on the taxpayer, but in no case increase it;
2. if the taxpayer has made a choice in favor of applying the norms of the treaty, then the tax authorities are obliged to apply the norms of the treaty if they differ from the norms of national tax legal acts;
3. the taxpayer is not obliged to apply the provisions of the treaty, i.e. the taxpayer has the right to choose between applying the norms of national legal acts or the norms of the treaty;
4. types of income not specified in the agreement are taxed only in the state of which the recipient of income is a resident.

The agreement provided for the types of income that were subject to double taxation:

1. income from immovable property in another Contracting State
2. income from the alienation of immovable property in another contracting state
3. income from the alienation of shares, more than 50% of the value of which is connected with immovable property located in another contracting state
4. dividends
5. interest
6. royalties (remuneration for the right to use intellectual property)
7. salary for employment in another Contracting State
8. remuneration of directors (boards) of a company resident of another contracting state
9. theater artist income, film, radio or television artist, musician, athlete from personal activities carried out in another contracting state.

If such double taxation occurs, the parties agree to eliminate it as follows:

• if a tax resident of Russia receives income or has capital that is taxed in Latvia, then the Latvian tax is deducted from the tax collected in Russia;
• if a tax resident of Latvia receives income or has capital that is taxed in Latvia, then Latvia deducts Russian tax from the tax collected in Latvia.

The main thing to understand is that there is a big difference between the concepts of “citizen of the country” and “tax resident of the country”. The main principle is to determine the place where a person actually lives.

Ideally, he lives with his family. In general, a person becomes a tax resident of Latvia in two cases:

• if he has declared his permanent place of residence in Latvia to the Office of Citizenship and Migration Affairs, or
• if he stays in Latvia for more than 183 days during the year.

What exactly has changed since May 16?

Now the State Revenue Service of Latvia, when determining the obligation to pay taxes and calculating the amount of taxes, is guided by national tax legal acts, in particular, the Law “On Personal Income Tax”. This law establishes that the income of residents of Latvia permanently residing in the Republic of Latvia is taxed in the Republic of Latvia. At the same time, the tax calculated in Latvia is reduced by an amount equal to the tax paid abroad. This payment of taxes abroad must be supported by documents approved by the foreign tax authority, which indicate the taxable income and the amount of tax paid abroad.

The cancellation of the convention does not mean that the same income will be taxed in full in both countries (the country of receipt of income and the country of tax residence), the Latvian State Revenue Service will deduct the tax paid in the country of receipt of income when calculating the amount of tax, if the taxpayer will provide the above document.

In fact, the cancellation of the convention means that it is impossible to choose the country of tax residence, and also complicates the proof of payment of tax on income in the country of receipt of income, since simultaneously with the denunciation of the treaty, cooperation with the tax administration of Russia and the exchange of information are limited.