Latvia

toc On July 9, 2013 European finance ministers gave Latvia the acceptance to join the common currency union in 2014. On January 1, 2014 Latvia will become the 18th member of the Eurozone. Latvia has developed its economy forward, by imposing new tax laws, encouraged investments and also fulfilled the Maastricht’s criteria. Despite this, some fear, due to the existing tax benefits for holding companies, that there is a risk of Latvia becoming the new tax paradise of the Eurozone. Tax planning and tax paradise are therefore, two concepts that are combined with Latvia’s entry in the Eurozone.

In 2010 a new law was introduced, which made it possible for non-residents to receive five-year residency permits if they bought properties worth more than 140,000 euros. Since then, non-residents have invested over 377 million euros in Latvian properties. Another change happened in January 2013, when significant changes were made to the income tax. This change has made Latvia an attractive location for establishing holding companies. The new law has benefits for income tax payers, with the exception for dividends paid out by residents to non-residents, and vice-versa. In addition, Latvian holding companies will no longer be taxed on interest and royalties paid to foreign companies. This will lead to Latvia becoming even more attractive to foreign investors who set up holding companies there.
 * Changes in Latvia’s taxation system **

**Latvia – the Eurozone’s new tax haven?**
Holding companies have several benefits in Latvia. As mentioned in the earlier paragraph, the foreign profits earned via dividends and stock sales have been tax free since the beginning of 2013. Transfering profits out of the country are not taxed either. Furthermore, Latvian holding companies do not have to pay taxes on interest and licensing fees they pay to foreign companies. Such structures allow foreigners to not only park their money in Latvia, but also to take advantage of the situation by transfering money at low cost from Europe to tax havens. The Latvian law will even introduce less limitations and lower fees for such transfers that already exist in countries like Malta, Netherlands and Cyprus. Latvia has also had an increase of new investors. This gain started after the crisis in Cyprus, which indicates that the money that was placed in Cyprus is now moving towards the Baltic region. Moreover, the number of bank clients and new bank accounts have also increased.

**Concerns regarding the stability of the financial system in Latvia**
Latvia's corporate tax rate is only15 percent, which is a lot lower than the average in EU of 23.5 percent. Only Ireland and Cyprus have lower rates ( each at 12.5 percent). In both these countries the banking systems have collapsed and the countries have been forced to seek help from EU bailout funds. Lower tax rates might have an impact on the financial stability. According to Markus Meinzer, an analyst with the Tax Justice Network, Latvia's share of fees paid by offshore havens has increased rapidly the last years and the trend is most likely to continue. Furhtermore, there are some concerns that Latvia will try to attract Russian money, by selling real estates to Russian and other nations via third countries. This will lead to Latvia heading toward the same instability as Cyprus if they do not find a way to reach industrial growth in their basic industries and provide a more stable ground for their economy. The EU, however, wrote in its Convergence Report on Latvia (June 2013), that the country's financial system is stable.Latvian Prime Minister Valdis Dombrovskis is also confident about Latvia and the new membership in the Eurozone. Dombrovskis is convinced that Latvia will not turn into a new tax paradise. The new laws were long discussed by politicans and business people and have been debated over a long period of time. Because of this, Dombrovski does not expect that the tax policy will have any negative fiscal effects. Natalya Tkachenko, deputy board chair at the Baltic International Bank in Riga, supports Dombrokskis' opinion. Since has not been a sudden rush on Latvian banks or significant increases in foreign resident's deposits,, there are no critical stability risk in Latvia's financial system. Around 313 million euros deposited in the bank at the end of February, and in July there were 322 million euros. This means an increase of 3 percent, which is totally normal.