Legislation in LATVIA
1. Description of Electric Supply Latvia achieved its independence in 1991 during the fall of the old Soviet Union. The recently formed Government immediately began to enact a complete package of reforms including price and trade liberalisation, reduced-scale privatisation and macroeconomic stabilisation. Many of these initiatives were successful and in the latter half of that decade, Latvia enjoyed great economic development, single-digit unemployment and an increasingly stable government (Latvia's credit rating grew through 2000 reaching the rating of “investment” by agencies such as Standard & Poors, Fitch IBCA, Moody´s). The efforts Latvia made regarding privatisation and economic reform led to being invited to the EU Summit in Helsinki in 2000 where negotiations began to accept its membership in the European Union. Latvia's energy supply is based on a combination of the balance of energy sources and renewable energy sources in 2002 represented 34 per cent of the distribution of primary energy. In terms of renewable energy for the production of electricity from renewable energy sources, Latvia boasts the highest percentage amongst the ten new member states of the EU. The state-owned electric company, Latvenergo, owns 97 per cent of Latvia’s generation capacity. The primary source of electricity is the hydroelectric dam on the Daugava River, recently modernised and renovated. Additional electricity and urban heating is generated by two large thermal energy plants and several smaller privately owned facilities. The transport of electricity within Latvia is handled by seven regional transmission grids, all belonging to Latvenergo. In 1998 companies from Latvia, Lithuania, Estonia and other neighbouring countries set up the “Baltic Ring Electricity Cooperation” (BALTREL) with the goal of interconnecting individual markets with regional exchange, improving production and transmission systems in the region.
2. Energy Policy: Barriers and Incentives The indicator objectives established within the framework of EU Directive 2001/77/CE for Latvia in 2010 is to reach 49.3 per cent of electricity generated by renewable energies, compared to the 42.4 per cent existing in 1997. The 1997 National Energy Programme, reviewed in successive years, defines activities for reliable strengthening of energy resources in the country until 2020. The programme establishes that energy supply must comply with quality and quantity requirements set by
consumers, at the lowest possible cost and with the least environmental impact. The increase of local sources of energy production from renewable energies (“FER”) is key to the programme.
The main goal of the Energy Policy in the electric sector is to promote the development of the sector according to balanced and sustainable development of the national economy. Promoting the use of renewable energy resources as well as coordinating protection of the environment and energy production, transport costs and consumption are amongst the tools used to achieve the goals proposed for the electricity sector. Energy policy in the electricity sector sets the goal of promoting the use of renewable and national energy resources, which correspond to approximately 6 per cent of renewable energies (not counting the large hydroelectric plants) in the balance of total electric consumption. Complete liberalisation of the Latvian electricity market occurred in 2007.
3. Wind Power Latvia has very good potential for the development of wind power. The total wind-power capacity installed in Latvia in March 2007 reached close to 27 MW. This represents an increase of 8% over the figures at the end of 2005. There is great potential for development and several projects are now on the drawing-board and taking shape. According to data taken from the Renewable Energy programme, the technical potential of the production of wind power has been estimated to be around 1,277 GWh, however, the practical potential is estimated at 1,000 GWh/per year and represents close to 2,000 MW of economic/technical wind-power potential. The places adequate for wind-power facilities are the west coast and the eastern area of the Gulf of Riga (close to the city of Ainazi). A broad atlas describing wind-power within the country, in which several areas are identified, is available showing yearly averages of wind speeds of 6 m/s at heights of 30 m. The Physical Energy Institute seems to be the main institution involved with wind-power. The minimum sales price for renewable energies stands at around 96.4 €/MWh. The current sales price, with the obligatory purchase of electricity from renewable energy sources at 50 MW, is 106.80 €/MWh. This rate is valid for the first ten years of operation. After the tenth year, the price will be reduced by 40% (64.08 €/MWh for 50MW).
4. Taxation For corporations, the tax regime foresees a tax on profits and a tax on Real-Estate property. Regarding indirect taxation, in 1995 a VAT system was introduced, based on the most relevant principles of EU Community legislation. Corporate Tax (Uznemumu ienakuma nodoklis) assesses income obtained from the development of an economic activity within Latvia as well as abroad, on corporations, religious enterprises and public institutions. The most common corporation types are the Public Liability Company (akciju sabiedribas) and the Limited Liability Company (sabiedribas ar ierobezotu atbildibu). Civil organizations are, on the other hand, transparent for taxation purposes and all income is attributed to the partners. All companies incorporated and registered in Latvia are considered to be resident corporations. The starting point for determining the tax base is the accounting result of the corporation. In general, all profits are taxable, although certain adjustments are foreseen, since some income is tax-exempt, there are non-deductible amounts and amortisation. Regarding exemptions, the main one is applicable to dividends from resident corporations. Expenses directly related to the earning of taxable income are deductible; however, the Law expressly states what is not deductible. Expenses not directly related to the company's economic activity. Expenses related to courtesy gifts to company employees, if they are not directly related to the corporate activity. There is also a restriction on the deduction of expenses for interest payments that operate on a ratio of subcapitalisation. The limit is the same amount as the total of company funds at the beginning of the tax period, multiplied by the last short-term interest rate for credit institutions. In the event that this limit is exceeded, the excess shall be deductible in the following tax years. This restriction is not applicable to interest payments to Latvian credit institutions or Latvian branches of foreign banks with which Latvia has signed a treaty to prevent international double taxation. Capital gains are treated like any other profit, although those derived from the sale of marketable securities are tax-exempt. Corporate negative tax bases are compensated by profits during the following 5 tax years, unless the company should change partner, in which case limits shall be applied to this compensation. If the company should merge, the negative tax bases of the merged company may be compensated by the merging company. In the case of a split, the resulting companies may
compensate their tax bases, but only if they are controlled by the same persons that controlled the split corporation. Capital losses derived from the sale of securities may only be compensated with earnings from the sale of assets of the same type, during the same tax year or the following five. Any other type of capital losses are deductible from ordinary corporate profit. With regards to the tax rate, it is currently set at 15%. Payments made to companies resident in Latvia are not, in general, subject to withholding. However, if the receiver is tax exempt or enjoys tax benefits granted to foreign investors or for corporations established in the special economic zones or free-ports, between 2% and 15%, must be withheld, depending on the type of payment involved. Tax Incentives Economic Zones and Free Ports Latvia has set up two special economic zones, in the port of Liepaja and its surroundings and in Rezekne. There are two Free Ports: Reiga and Ventspils. Investors who wish to set up operations in those zones must incorporate a special company to do so and the tax advantages offered are the following: The Corporate Tax rate is reduced by 80%; Amounts invested in infrastructure located in these zones and belonging o the State and local government are deductible from taxable income; Property Rates are reduced by 80%. In addition, municipal governments may grant a further 20% reduction, resulting in a full exemption; Withholding applicable to payments made to non-resident entities is reduced by 80%, except for payments to residents in tax havens; Regarding VAT, a tax rate of 0% is applied to certain operations.
Special Regions Corporations operating in certain regions can benefit from accelerated amortisation and may compensate their negative taxable income during the ten years following earning it. Resident companies may also deduct 40% from invested amounts that comply with the following criteria: That they exceed the amount of 10 million Lats (15,435,485 Euros).
That it be a fixed-asset investment, such as buildings, technology or equipment used for carrying out business related activities. The investment must be completed within a three year period.
Consolidated Tax Regime
Companies affiliated within the same group may compensate any losses amongst themselves. Groups of companies are understood to be corporations that are subsidiaries of the same parent company, resident in Latvia or in a country with which Latvia has signed a treaty to avoid international double taxation, and its subsidiaries, which must be residents and belong at least by 90% to the parent company, by another subsidiary or a combination of both.
Distribution of Profits The distribution of dividends by resident companies is not subject to withholding or later taxation in the headquarters of the partner, except in those cases where the corporation distributing the dividends benefits from tax incentives foreseen for Special Economic Zones and Free Ports. In this case, the receiver must pay taxes on that income and can later claim deductions to avoid double taxation. Dividends from abroad are not included as taxable income, as long as the company the shares are owned in is not located in a tax haven and the receiver owns at least 25% of the shares in it. When said requirements are not met, a deduction system for international double taxation is foreseen, by which it is possible to deduct the amounts withheld by the other country at the time the income was distributed, limited to the amount that should have been paid in Latvia for that same income, calculated before applying the deduction. If the company in which shares are owned is located in a country with which Latvia has signed a treaty to avoid international double taxation and that foresees a system more beneficial than what is applicable in the internal regulations, the treaty is applicable. Non-Resident Taxation Non-resident companies that have set up permanent establishment in Latvia are subject to Corporate Tax for income attributable to said establishment, whether earned in Latvia or abroad. When there is no permanent establishment, the non-resident shall only be taxed for certain income, paid by a resident in Latvia. Dividends distributed by a company resident in Latvia to a foreign resident corporation are subject to the withholding of 10% of the gross amount. Interest paid to foreign persons or entities connected to the Latvian payer must pay a withholding tax of 10%. Should the payment correspond to royalties the amount withheld will vary between 5% and 15%.
The amounts withheld may be reduced if the country of residence of the receiver has signed a treaty with Latvia. Spain has not signed such a treat, therefore the tax rates applicable will be the ones mentioned above. For payments made to residents of territories classified by the Latvian government as tax havens, the payer must withhold and deposit an amount equivalent to 25% of the amount paid. The Administration will exempt the obligation to withhold, if the payer can prove that the operation was not carried out for a business purpose and that there was no intention of reducing taxes paid in Latvia. Property Rates This is a local tax applied to Real-Estate property located in Latvia, no matter which country the Owner resides in. There are exemptions foreseen for those plots on which the Law forbids economic activities being carried out, properties declared to be cultural monuments, sports stadiums and forests. Buildings the construction or refurbishing of which was completed before January 2001 are exempt for the first year after their being put to use. The tax rate applicable is 1.5% and is applied to the Cadastral value of the property. Local Authorities may grant deductions of up to 90% of the quota. It is important to point out that property rates paid are deductible from Corporate Tax, as long as the property is being used for corporate purposes.
Indirect Taxes In general, commercial transactions are subject to VAT, except for certain imports under specific conditions. The general tax rate is 21%, although there is a reduced rate of 10% applicable to certain operations. EMISSIONS TRADING Latvia, as a signatory of the Kyoto Protocol may benefit from the Joint Implementation Mechanism since it is included in Annex B (the Parties included in Annex I are listed in Annex B of the Kyoto Protocol), regulated in Article 6 of the Kyoto Protocol, which permits that a country listed in Annex I of the Convention (developed countries and countries transitioning to a market economy) may invest in projects aimed at reducing emissions of man-made greenhouse gases in another country listed on Annex I. This type of project will permit a reduction in emissions by sources and removal by sinks of all greenhouse gases. The investing country shall obtain Emission Reduction Unit allowances (URE) which are discounted from the emission allowance units assigned to the receiving country and in this manner the country financing the project will earn UREs at a lesser price that what it would
have cost in the original country and the receiving country will benefit from the investment made in it. As a member state of the European Union, Latvia participates in the “EU Emissions Trading Scheme� (EU ETS), which is the main pillar of Climate Policy in the European Union. This Scheme began in January of 2005 with an initial phase from 2005 to 2007 and a second phase that will reach from 2008 to 2012 (this Scheme has been defined in European Directive 2003/87/EC).