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Tuesday 17.07.2018 | Name days: Aleksejs, Aleksis

Economic diary. Investors are more than welcome

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Аuthor: PantherMedia/SCANPIXThe Latvian government seems to have adopted a clear course for attracting foreign businessmen. The adoption of a holdings regime and the issue of residence permits is not enough now. This is why the special working group has begun to reconstruct the Immigration Law once again.

There is no limit to perfection

This time amendments are being developed to regulations that provide for the issue of residence permits in exchange for capital investments. The currently popular way of obtaining residence permits in Latvia is purchasing real estate property. There is also an option to invest in subordinated bank capital for no less than 200 thousand LVL and different investments in a company’s share capital.

Representatives of Unity believe: in spite of the achieved results (more than 201.3 million LVL invested in housing in three years) the system can be improved further. It would prove to be more effective if the minimum transaction amount is linked to the average cadastral value of real estate in specific regions. This would allow for an equal approach for investors across the whole of Latvia’s territory. Current regulations allow for the situation when the cadastral value of an apartment in the outskirts of Jekabpils is 5 thousand LVL on average. But no one would purchase 10 apartments there in exchange for a residence permit. Riga’s real estate prices, on the other hand, are higher than the cap set by regulations. Therefore, demand is higher as well.

The Reform Party (RP) proposes to employ the practice used in some countries, when residence permits are provided in exchange for acquiring shares in the state investment fund that invests money in communal or real businesses.

There is no agreement within the working group right now. However, they will need to come to an agreement in the next two months. It will become clear what opportunities foreign investors can hope for.

Tricks of the Trade

The holdings regime is worth mentioning in this context. It is being continuously implemented since January 1, 2013. According to experts, it can become a useful instrument not only for foreign, but also domestic companies.

The simplest of examples: an individual (entrepreneur A) has a profitable company, and he wants to invest some of his money for the creation of a new business. If he takes the money directly, he will need to pay a dividends tax of 10% of the withdrawn amount. But the entrepreneur has full rights to save money on treasury payments by putting a holding between himself and the profitable company. This combination is nothing new, however. Dividends between Latvian legal persons have been free of budget fees in the past as well. According to specialists, many entrepreneurs are still not aware of this method.

There are other methods as well. By selling real estate or other property, firm A pays 15% corporate tax. However, starting from 2013, there is now an option to sell not the asset itself, but the company that owns it. In this case, the earnings from this transaction are not taxable.

There is one more area this method can be used in – cross-border trade, especially with countries that do not have a signed agreement on avoiding double taxation.

Too low a threshold

It seems that domestic companies are more interested in more grounded matters than the effective use of the holdings regime. The Latvian Employers Confederation (LEC) and the Latvian Chamber of Commerce and Industry (LCCI) have criticized the current system of automatic registering of companies in the public Debtor Register if their debt exceeds 100 LVL. Representatives of these organizations believe that the threshold should be increased. Any company may experience short-term financial constraints at any moment. This increases the risk of them being included in the black list. The latter could even make a company lose the ability to participate in public contests and ruin relations with investors. Furthermore, even after a debt is paid there could be problems with exiting the list.

Nevertheless, Finance Minister Andris Vilks still supports the introduction of restrictions for participating in state procurement projects. According to statistical data for the beginning of April, the aforementioned list contained information about 53.59 thousand companies.

Banks want more

Representatives of the financial sector also fear for their businesses. The Latvian parliament has supported the amendments to the Civil Law. These amendments limit the opportunities of imposing sanctions by creditors against non-payers. Amendments are to be applied for a wide range of enterprises, including banks. President of the Latvian Commercial Banks Association Martins Bicevskis expressed concerns about the changes during his meeting with the President of Latvia Andris Berzins. Banks cannot be faced with the same restrictions as the fast credit companies, he said.

During his meeting with the head of the state, he also mentioned the amendments to the Insolvency Law. The changes provide for the cancellation of the regulation that does not allow the initiation of insolvency procedures in regard to individuals that have used at least 30% of the acquired credit for inappropriate means. According to Mr Bicevskis, the approval of these amendments would limit the abilities of banks to issue large credits to the country’s residents.

The current activity in the individuals’ sector remains low, he said. In total, households usually return more than they take.


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