Latvia

From January 1, 2018, the Latvian Government reformed the Law on Taxes and Fees, becoming them into force. Due to such amendments, Latvia adopted the Organization for Economic Co-operation and Development (OECD) format of the Transfer Pricing Documentation, which consists of a Master File and a Local Report.

The Latvian parliament adopted a bill on Transfer Pricing on October 25, 2018, coming into force on January 1, 2019, and effective for the tax period of 2018.

Arm’s Length Principle.

Latvian law requires that related party transactions be performed under the Arm’s Length conditions, i.e., the conditions established or imposed between two related companies in their business or financial relationships must not differ from those agreed between independent companies engaged in similar transactions under similar circumstances.

Related Parties

Any transaction between related foreign companies (20% and more ownership) or Latvian companies belonging to the same group of companies (at least 90% ownership or voting rights) must comply with the Arm’s Length Principle.

According to the CIT Law, the Arm’s Length Principle is not only applicable to transactions entered into by the Latvian taxpayer with related foreign companies but also to:

Related domestic companies with which the taxpayer forms a corporate group for Corporate Income Tax (CIT) purposes;
Related domestic companies exempt from CIT or enjoying any CIT relief;
Related persons;
Corporations and individuals located or established in tax haven countries or territories.

Transfer Pricing Methods

Rule No. 667 prescribes five methods for determining appropriate Transfer Pricing between related companies. The following methods may be employed:

Comparable Uncontrolled Price Method.
Cost Plus Method.
Resale Price Method.
Profit Split Method.
Transactional Net Margin Method.

Transfer Pricing Documentation

According to the Law on Taxes and Fees, Latvian taxpayers with a net turnover exceeding € 1 430 000 and related party transactions totaling more than € 14 300 per year must comply with the Arm’s Length Principle and evidence it through the Transfer Pricing documentation filing.

Latvia introduced the OECD format, which consists of a Master File and a Local Report. These latter must be annually and mandatorily prepared within 12 months after the end of the specific fiscal year and filed within 1 month upon request by the Latvian tax authority if:

Master File, when the total value of related party transactions in the specific year exceeds € 5 million.
Local Report, when the total value of related party transactions in the specific year exceeds € 250 thousand.

These must be annually and mandatorily filed to the Latvian tax authority within 12 months after the end of the specific fiscal year if:

Master File, when (i) the annual turnover in the specific year exceeds € 50 million and the total value of related party transactions exceeds € 5 million or (ii) the total value of related party transactions in the specific year exceeds € 15 million.
Local Report, when related party transactions exceed € 5 million.

Country-by-Country Report

It provides an overview of the financial results of each jurisdiction in which the group operates. It requires an invoicing of € 750 million for the previous fiscal year for its filing to be mandatory.

Penalties

The tax administration is entitled to apply a penalty of up to 1% of the related transaction, but not exceeding € 100 000, if the taxpayer has not complied with the filing deadline for the documentation and if the taxpayer has substantially violated the preparation requirements for the Transfer Pricing documentation.

Source: State Revenue Service of the Republic of Latvia

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