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Latvia: Luxembourg For The Poor

Freemont Group
02 August, 2013

Within several months, the Eurozone will get a new tax haven. So yet another EU country will attract foreign companies with a low tax rate, next to Malta or Cyprus. Latvia is going to move to a common currency in January 2014.

Foreign investors see its attractiveness already. According to Bloomberg, in the first half of 2013 the foreign inflow of capital reached $ 1.2 billion. “Bank deposits of non-residents are thus already at ten billion dollars, which is half of all bank deposits in the country,” writes Bloomberg.

According to local Rietumu Bank, Latvia attracts mainly companies from the former Soviet Union. Every day, there are hundreds of inquiries from Russia, Belarus, Kazakhstan and Ukraine, all from entrepreneurs who want to move their holding companies and assets to Latvia e.g. from Cyprus.

The corporate tax rate of Latvia is 15 percent, which is way less than the EU average of 23.5 percent. For comparison, in Belgium it is 37 percent, in Germany 29.8 percent and in Spain 30 percent. Moreover, since 2013 the holding companies are not being taxed on foreign dividends or profits from the sale of shares.

They may also transfer money to foreign accounts without any restrictions. That is why Latvia has already earned the nickname “Luxembourg for the poor”. And there is more. If your business involves telecommunications, you might become eligible to receive a relief of 25 percent of invested funds up to EUR 50 million.

The new currency itself will not increase the confidence in Latvian economy (Latvia’s current currency is tied to Euro already), however, it will lower the risk of unexpected losses and ease up the accounting.

According to economists, Latvia does not run the risk of becoming an economic ‘bubble’. The value of the assets on the balance sheets of banks in 2012 was 128 percent of the local GDP. The EU average is 359 per cent. In the past 3 years, the amount of non-performing loans decreased from 19 to 11 percent.

An example can be found e.g. in the financial statements of Danske Bank. In 2012, 80 out of 2350 loans (3.4 percent) were qualified as bad loans. This is much lower number than what the bank performed in Lithuania (7.5 percent) or Ireland (16 percent).

One alarming item, however, is Latvia’s high ratio of loans to deposits. In 2012, Latvia reached the value of 196 percent. For comparison, at the same time Cyprus reached only 123 per cent, Malta only 70 percent and Euro area average was 110 percent. If the number is too high, it generally means that banks do not have enough liquidity to provide loans and must therefore rely on the resources borrowed at the interbank market, which is more expensive than if the loans are covered by their own deposits.

The frequent comparisons with Cyprus are caused by the high influx of clients from the East, who are looking for near and yet attractive destination. Historically, Latvia is used to accommodate a huge Russian ethnic minority. There are hardly any language, cultural or geographical barriers.

And although Russian entrepreneurs do possess substantial assets, they do not always want to spend them to cover rather high service fees in The Netherlands or United Kingdom. The costs for corporate services in Latvia are significantly lower. This is valid in the whole Baltic region.

Conclusion:

The enlargement of the Eurozone with Latvia and its tax regime offers interesting opportunities for international entrepreneurs in the Eurozone and its Eastern neighbours.

Should it be called a tax haven? We’re not sure. Maybe the EU countries that are still being called ‘tax havens’ should be considered as normal. France, Belgium and Portugal should be regarded as tax hells…


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Freemont Group

Freemont Group is a comprehensive provider of fiduciary services, including corporate formation and administration, trust, fund formation, legal-and tax services. Contact: info@freemontgroup.com

 

 

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