Corporate income tax or CIT is the direct tax that is basically paid from company profit. Application of the tax is regulated by CIT law, which has been subject to significant changes comparatively recently.

Who are CIT payers?

The tax is paid by domestic companies, state or municipal budget funded institutions, if their income from economic activity has not been provided for by the budget, permanent representative offices and foreign commercial companies, as well as other foreign entities that generate income in Latvia. The tax is also paid by individual merchants that draw up their annual statements in accordance with the Law on Annual Financial Statements and Consolidated Financial Statements.

The tax is not paid by natural persons, associations and foundations, religious organisations, trade unions, political parties, as well as private pension funds, investment funds, alternative investment funds, etc.

Must be paid later

In comparison with the previous payment procedures of CIT, a conceptually new payment procedure of CIT has been determined now. The law provides that the payment of tax is delayed until the moment when the profit is divided or otherwise diverted for costs that do not ensure the further development of the taxpayer. This means that the application of the tax is transferred from the moment of profit generation to the moment of profit division. Thus, the tax will only have to be paid if the taxpayer divides the profit into dividends or equivalent disbursements, pays expenses that are not related to economic activity, performs increased interest payments, provides loans to associated persons, etc.

Divided and conditionally divided profit

The taxable base consists of divided and conditional profit Divided profit is the calculated dividends (including extraordinary dividends), disbursements that are equivalent to dividends and conditional dividends.

Meanwhile taxable conditionally divided profit includes costs that are not associated with economic activity, doubtful debts of debtors, increased interest payments, loans to associated parties, income that a taxpayer would generate or expenditure that a taxpayer would not incur, if commercial and financial relations were developed or established on the basis of the terms and conditions that are valid between two independent parties, and if the value of such transactions concluded between two associated parties conformed to market price that is calculated in accordance with the methods determined by the Cabinet of Ministers, benefits that are granted by non-residents to their employees or board members.