Latvia Publishes Law Implementing Hybrid Mismatch Measures and Other Amendments

Latvia published the law with amendments to the Corporate Income Tax Act in its official gazette. The law entered into force on February 12, 2020.

Hybrid mismatch measures

Article 7¹ of the law concerns hybrid mismatch measures. Hybrid mismatch means a situation in which a taxable person engages in activities of an affiliate, of an affiliate, of a permanent establishment outside Latvia, of two or more permanent establishments of the same company or of a structured event has a deduction without inclusion or a double deduction.

If the hybrid mismatch results in a double deduction, then:

1. if the Republic of Latvia has jurisdiction over the investor, the taxable person shall increase the taxable amount by a deduction which is also deducted from taxable income abroad;
2. if the Republic of Latvia has jurisdiction over the paying agent, but the taxable amount is not increased by the amount of the deduction for tax purposes in the jurisdiction of the investor, the taxable person shall increase the taxable amount by the amount of the deduction;
3. the taxable person is entitled to deduct, in respect of any such deduction, any double-entry income accruing during the tax period or the post-tax period.

If the effect of the hybrid mismatch is a deduction without inclusion:

1. and if the Republic of Latvia has jurisdiction over the paying agent, the taxable person shall increase the taxable amount by a deduction which, for tax purposes abroad, has not been adequately taken into account in determining taxable income;
2. and if the Republic of Latvia has jurisdiction over the recipient and the taxable amount is not increased abroad by the amount of the deduction, the taxable person shall increase the taxable amount by the amount of income which was not taken into account in calculating the taxable income;
3. the taxable person shall then be entitled not to apply paragraph 2 of this paragraph in respect of hybrid non-conformities which give rise to deduction without inclusion in accordance with paragraphs 2, 3, 4 and 6 of paragraph 3 of this Article.

Other amendments

In addition, the law includes amendments concerning tax basis, non-resident tax rate, non-operating expenses, elimination of double taxation, withholding tax and information, preparation of declaration and payment of tax and special conditions for re-organisation.