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USE OF SPVS IN LOW-

TAX JURISDICTIONS IN

EUROPE SUCH AS LATVIA

Janis Zelmenis, Attorney at Law,

Managing Partner, Law Firm VARUL

2

GDP of Baltic States

17,36

13,96 13,76

16,17 15,95

24,58

18,89 17,53

20,79 20,71

34,49

26,90 26,51

31,30 30,84

0,00

5,00

10,00

15,00

20,00

25,00

30,00

35,00

40,00

2008 2009 2010 2011 2012

GDP, billions of EUR

Estonia Latvia Lithuania

M&A transactions forecast

Source: Doing the deal 2013. A NetJets Europe study of European M&A and IPO

Which

country/region

do you believe will

be the principal

markets with which

your country

will conduct cross-

border M&A over

the next year?

And over the next

five years?

Largest M&A transactions in Latvia in 2013 Buyer Seller Price

Tella Capital SIA Baltcom TV SIA Contaq Latvia Cable

Holding S.a.r.l.

undisclosed

MG Capital AS (GE Money

Latvia)

Marginalen AB GE Capital Corporation undisclosed

SIA Douglas Baltic (49%) Douglas Holding AG Fragrances

International UAB

undisclosed

SIA Lielzeltiņi, AS

putnufabrika Ķekava, SIA

Broileks, SIA Cerova

Linas Agro Group AB undisclosed EUR 12’500’000

Latvijas Biznesa Banka Andrejs Vdovins Andrejs Molčanovs undisclosed

AS Ceļu Pārvalde (88,7%) AS Rīgas sanitārā

treansporta autobāze

Riga municipality Object

SIA Rigas Universālais

Termināls

Portek International

Limited

undisclosed EUR 21’000’000

AS Rīgas Dzirnavnieks Malsen Plius AB Lantmannen AB undisclosed

AB Holding (66,6%) Bislan

Abdulmuslimov

undisclosed undisclosed

SIA Plus Punkts SIA Plus Punkts

Holding Ltd

Ibofa Establushment

AG

EUR 6’500’000

Source: Unofficial data published by Dienas Bizness

Business

considerations

• Planning to retire

• Planning to invest

in a new project

• Moving/ changing

location

• Poor performance

• New challenges

• Reached goals

WHY TO SELL

• Valuable company

• Target market is already

known

• Operating systems are in

place

• Experienced employees,

executives

• Recognizable brand

• Possibility to get better terms

on taking a loan in a bank

• Immediate cash flow, return

on investment is certain

WHY TO BUY

Legal considerations

• Identification of potential

buyers

• Information memorandum

about the company

• Adequate confidentiality

agreements

• Negotiations

• Letter of Intent (LOI)

• Due Dilligence by the buyer

• Reaching the agreement

• Closing the transaction,

transferring the ownership

WHEN SELLING

• Research of the potential

market, analysis

• Valuation of the company

• Confidential Business

Review (CBR)

• Identifying influence of

other potential buyers

• Negotiations

• Letter of Intent (LOI)

• Due Diligence

• Reaching the agreement

• Closing the transaction,

transferring the ownership

WHEN BUYING

Tax considerations

• Structure of sale

• Profit repatriation

• Future plans

- asset protection

- new business

development

- financing

- family planning

WHEN SELLING WHEN BUYING

• Tax due diligence

• Elimination of tax risks

• Structure for purchase

• Attraction of financing

• Optimisation of business

activity

Tax Aspects

8

TAX AUDITS IN BALTIC STATES

9

976

614 362

TAX AUDITS IN LATVIA

I and II quarter of 2013

TAX AUDITS PERFORMED

Legal entities Private individuals

Successful – 953 (98%)

10

ADDITIONAL TAX AMOUNT, LVL

73,5

m

69,1

m 4,4

m

94% 6%



Legal entities Private individuals

11

DIVISION OF TAXES

VAT (37,9 m LVL)

CIP (5,6 m LVL)

PIT (2,9 m LVL)

Others (27,1 m LVL)

52%

4%

8%

36%



12

4 186

TAX AUDITS AND AUDITED PERSONS AMOUNT

Amount of completed Tax Audits Amount of audited persons

2 927

TAX AUDITS IN ESTONIA


13

CALCULATED AND COLLECTED TAX REVENUES

AS A RESULT OF TAX AUDITS, EUR

19,2

m

Calculated Revenues Collected Revenues

17,3

m

TAX AUDITS IN ESTONIA


14

TAX AUDITS IN LITHUANIA


OUTCOME OF TAX CASES IN THE SECOND

INSTANCE COURT:

15

6% 73%

For benefit of the

tax authority

For benefit of tax

payers

Sent to first

instance court for

rehearing Returned to tax

dispute commission

to rehearing

Other

6%

8%

7%

TAX AUDITS IN LITHUANIA


16

40%

5% 5% 25%

15% 10%

THE MOST COMMON BREACHES IN CASES WERE:

VAT deductions Shadow income 0% VAT applicability

Wrong usage of

Charity or

purpose funding

Purchases from

the natural

persons

Other

HOLDING REGIMES IN EU Corporate Income Tax Comparison in 2013

Holding regime

jurisdiction

in EU

Standard CIT rate

Holding regime

jurisdiction

in EU

Standard CIT rate

Austria 25% Latvia 15%

Belgium 33,99% Luxemburg 29,22%

Cyprus 12,50% Malta 35%

Denmark 25% Netherlands 25%

Germany 15,83% Spain 30%

Ireland 12,50% Sweden 22%

Italy 31,40% United Kingdom 20%

17

LOW-CORPORATE INCOME TAX

JURISDICTIONS IN EU

Bulgaria 10%

Cyprus* 12,50%

Ireland* 12,50%

Latvia* 15%

Lithuania 15%

18

*Cyprus, Ireland and Latvia are Holding Regime Jurisdictions

Latvia has successfully overcome the economic recession,

economic situation is continuously improving (GBP – 6,9%; budget

deficit 3,5%; decrease of inflation);

Latvia is a stable economic platform for external investments

(increase 39%);

Banks in Latvia – safety, reliability, confidentiality

(capital adequacy ratio – 17,25%; liquidity ratio – 59%; credits -

60,4%);

Availability of information in English

(knowledge of English language 95% of young population);

WHY LATVIA?

19

Convenient geographical situation, developed infrastructure;

Wide network of international treaties

(on avoidance of double taxation; on mutual protection of

investments, on legal assistance in civil, family and criminal

proceedings);

Low expenses on company registration and maintenance;

Company registration procedure 1-5 days;

In Latvia on the basis of the company registration it is possible

to obtain a temporary residence permit for up to 5 years

allowing unlimited travelling to the Schengen zone countries

WHY LATVIA?

20

Latvia has quite an extensive DTT network with former “East

Block” countries; the withholding tax on dividends is usually

reduced to 5%.

It benefits from all EU Directives;

Latvia has 55 effective tax treaties for the avoidance of double

taxation and the prevention of fiscal evasion;

The Corporate Income Tax rate is one of the lowest in Europe:

15%;

General Transfer Pricing rules, but documentation required.

21

WHY LATVIA?

Holding

Subsidiary

or Corporate

shareholder

Dividends

0% WHT

Dividends: 0% CIT

Alienation of shares: 0% CIT

Dividends - 0% WHT*

Interest/royalty 0% WHT*

LATVIA – A NEW HOLDING REGIME

Dividends - 10% WHT*

* Except payment s to offshore companies

22

TAXATION – CORPORATE INCOME TAX HOLDING REGIME IN LATVIA

DIVIDENDS DISTRIBUTED

Dividends paid by a subsidiary to its corporate shareholder are free of

withholding tax (exception – offshore – 15%)

Dividends distributed by subsidiary to an individual – 10%

DIVIDENDS RECEIVED Dividends received by holding are free of CIT

(exception – offshore – 15%)

CAPITAL GAINS ON

ALIENATION OF SHARES

Capital gains are tax exempt


INTEREST 0% paid to a related / non related* EU company

ROYALTY 0% paid to a related / non related * EU company

* In force as from 1 January 2014 also for non EU companies


Standard rate 15%

Tax incentive

Economic zones and free ports, Special

regions, Donations, Tonnage tax, Substantial

long-term investment

23

TAXATION – PERSONAL INCOME TAX

RATE

(standard) DIVIDENDS

INTERST

INCOME

SSC -

employee

SSC -

employer

Latvia 24% 10% 10%

10,50%

23,59%

Lithuania 15% 15% 15% 9% (3%+6%)

30,98%

Estonia 21% 0% 21% 4% (2%+2%)

34% (33%+1%)

24

Annual

gross

salary

Salary

costs for

employer

Non-taxable

minimum SSC PIT

Net

salary

Latvia 10 000 € 12 359 € 900 € 1 050 € 1932 € 7018 €

Lithuania 10 000 € 13 980 € 676 € 900 € 1264 € 7836 €

Estonia 10 000 € 13 400 € 1 728 € 400 € 1653 € 7947 €

TAXATION – PERSONAL INCOME TAX

25

TAXATION – VALUE ADDED TAX

STANDARD RATE REDUCED RATE

Latvia 21% 12% medication, medical equipment, books, hotels

Lithuania 21%

9% heating power, periodical and non-periodical

publications, public transport

5% supply of medicines and medical equipment,

technical aid and the repair services for the

disabled

Estonia 20% 9%

books and workbooks used as learning

materials, medicines, periodic publications, hotels

26

Founding of a company

27

FOUNDING OF A COMPANY

MAIN TYPES OF

COMPANIES

MINIMUM SHARE

CAPITAL

KEY CORPORATE

DOCUMENTS

CORPORATE

GOVERNANCE

Private limited

liability company

(SIA)

EUR 2’800 (or

less)

Articles of

Association

One-tier structure

with an option to

have a two-tier

structure

Public limited

liability company

(AS)

EUR 35’000 Shareholders

Agreement

Mandatory two-tier

structure

Company registration procedure 1-5 days

28

OBTAINING PERMITS

SELECTED FIELDS OF ACTIVITIES WHERE PERMITS ARE REQUIRED:

• Banking & Finance

• Pharmacy & Medicine

• Transport

• Energy • Alcohol & Tobacco

29

Jānis Zelmenis

Attorney at Law, Partner

Law firm VARUL

Alberta street 1-2

Riga, Latvia

[email protected]

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