PwC

Blickpunkt Osteuropa

Blickpunkt Osteuropa

Latvia: Non-residents to file Latvian income tax


The deadline for taxpayers who are required to file an income tax return is 1 June. We have already informed our subscribers about cases where Latvian tax residents are required to file an income tax return and cases where they can choose to do so voluntarily. This article explores a non-Latvian resident’s filing obligation.

Taxable income and withholding tax

Unlike Latvian tax residents, whose worldwide income is taxable in Latvia, non-Latvian residents are liable to pay Latvian personal income tax (PIT) on their Latvian-source income only. This means that a tax return should be filed by a non-resident who has gained any income on which PIT was not withheld at source.

In practice, more often than not, the source or payer of income will have already withheld PIT from the income, and so the non-resident need not file in Latvia. For example, a Latvian employer paying salary to a non-resident for work done in Latvia will withhold PIT under general procedure. Latvian credit institutions paying interest or dividends to non-residents are also required to withhold. The non-resident need not file in either case.

If, however, the source or payer of income has not withheld PIT from the non-resident’s Latvian-source income (or income attributable to Latvia), the non-resident is required to file in order to pay the PIT charged on that income. Below we list cases where the filing obligation arises:

  • A non-resident is hired labour, and the Latvian company on whose behalf the person was employed in Latvia has not withheld PIT from their income. Such a situation can arise, for example, if the foreign employer who hires out labour has failed to attribute relevant costs to Latvia, i.e. the non-resident’s foreign salary costs were not transferred to the Latvian company. This failure does not, however, affect the existence of labour hire, and the income attracts Latvian PIT;
  • A non-resident has received a bonus from the foreign employer in the current tax year for work done in Latvia in previous tax periods, but the foreign employer did not have the technical capability to withhold Latvian PIT;
  • A non-resident has gained income from leasing out real estate in Latvia, but the tenant or lessee has not withheld PIT at source, e.g. the tenant is an individual who does not carry on a trade, or the lessee is a non-Latvian resident entity. (This example ignores the fact that a non-resident gaining income from leasing out real estate may be required to register as a trader in Latvia, and the fact that this income may attract different rates of PIT.)

In all the cases listed above the non-resident is required to file (this is not an exhaustive list of cases where filing is mandatory).

In general, where no exceptions apply, non-residents are required to file by the same deadline as residents, i.e. the 2016 income tax return is due by 1 June 2017.

Latvia: Tighter requirements for external accountants from 1 July 2017


In an attempt to optimise costs, CEOs in small and medium firms tend to put their accounting function out to an external service provider under a written contract defining their rights, obligations, and liability. This article explores some recent amendments to the Accounting Act and some new proposals dealing with bookkeeping procedures.

An external accountant’s liability

The current law holds the CEO responsible for keeping the company’s books. The CEO can agree with an external accountant on the required scope of services and define their level of liability in a contract. External accountants have so far had the option of insuring their civil liability on a voluntary basis, meaning an increase in their service fees.

The Accounting Act as amended from 1 July 2017 lays down the liability of external accountants and requires that they insure their civil liability for any loss resulting from their professional acts or omissions for a minimum of €3,000. The amendments are likely to have the effect of reducing the number of available external accountants due to extra cost as well as improving the quality of their services.

The Financial Statements and Consolidated Financial Statements Act requires that a company’s financial statements be signed by its internal or external accountant or a responsible person appointed internally.

When it comes to filing financial statements through the Electronic Declaration System, there is a special field for giving the first name, surname and full title of the responsible person, the entity’s name and the person’s title, designed to help tax inspectors analyse details of accounting service providers.

Proposed amendments

A new set of proposals for amending the Accounting Act have been drafted to lay down administrative liability in the field of accounting. The proposals replace the current title of Chapter IV, “Apportionment of competence in accounting” with “Administrative liability in accounting and competence in imposing penalties” as well as laying down liability for the following offences:

  • Non-compliance with procedures for recording cash transactions;
  • Non-compliance with bookkeeping rules;
  • Non-submission or incomplete filing of financial statements;
  • Non-compliance with procedures for preparing, registering and using supporting documents;
  • Non-compliance with procedures for preparing, registering and using delivery or carriage documents.

The State Revenue Service can issue a warning or levy a fine of 70–400 units depending on the type of offence.

This means that the statutory requirements for bookkeeping and accounting are tightening up, and the company can agree with the external accountant on their terms of business in order to avoid risks and define their respective obligations.

Rules on issuance of visas for entry to Ukraine and Transit through ist territory were simplified


Recently the Cabinet of Ministers of Ukraine (the “CMU”) approved new rules on issuance of visas for entry to Ukraine and transit through its territory.*

The new rules were officially published on 17 March 2017 and will become effective in 30 days after the publication date.

Key novelties are the following:

  • It will be possible to submit visa application online and conduct interviews with applicants via video conference.
  • The list of countries whose citizens are eligible to obtain visas at checkpoints at the state border of Ukraine is expanded.
  • The term for visa issuance and fees for its issuance were reduced.
  • A type D visa will be issued as a multiple entry visa and its term of validity will be 90 days (instead single-entry visa with 45 days term of validity).
  • It is no longer necessary to provide standard invitations issued by the State Migration Service of Ukraine in order to obtain a short- term type C visa.

It is expected that these changes will simplify and improve the procedure of issuance of Ukrainian visas.

*Approved by the CMU Resolution No. 118, dated March 1, 2013

Handelspartner und Investitionsstandort Bulgarien am 30. März 2017, PwC Berlin


Business Breakfast mit dem bulgarischen Wirtschaftsminister:

Handelspartner und Investitionsstandort Bulgarien. Herausforderungen und Erfolgsgeschichten

Der Osteuropaverein der deutschen Wirtschaft e.V. und die PricewaterhouseCoopers GmbH laden zum traditionellen gemeinsamen Business Breakfast ein, bei dem dieses Mal der Handelspartner und Investitionsstandort Bulgarien im Mittelpunkt steht. Ehrengast ist S.E. Professor Dr. Teodor Sedlarski, Wirtschaftsminister der Republik Bulgarien.

Nach einem Impulsvortrag von Herrn Stefan Ionkov, Leiter der Wirtschaftsabteilung der Botschaft der Republik Bulgarien in der Bundesrepublik Deutschland, berichten Unternehmen über Erfahrungen, Herausforderungen und Erfolgsgeschichten ihres Bulgarien-Geschäfts.

Anmeldung und weitere Details über Ina Enache: ina.enache@de.pwc.com.

Agenda

VAT scams in Poland – do you know your business partner?


VAT non-compliance is currently a hot topic in the European Union. VAT Gap grows rapidly, and budget revenues from VAT remain unstable. Polish VAT gap was estimated and government bodies chose to take decisive steps to prevent its growth.

There are many actions that affect VAT compliance in Poland, but the most common method of defrauding public funds remains the so called “carousel fraud” or “the missing trader fraud”. In this type of scams it is important to remember that, unfortunately, such practice may also have negative consequences for businesses that are conducted with integrity.

Persons guilty of tax fraud frequently take advantage of the ignorance of honest entrepreneurs when committing tax frauds and expose even the most reputable companies on the market to enormous costs. Recently, tax authorities have been conducting an increased number of inspection proceedings aimed at detecting such frauds, emphasising how important is to review a business partner.

Introducing an effective business partners verification procedures is very important. Honest enterpriser should review its business partners from the perspective of whether transactions concluded with them could potentially be deemed dishonest by the tax authorities / tax inspection authorities responsible for inspecting the correctness of tax settlements. Such approach will be useful in case of a dispute with tax authorities

Polish Ministry of Finance and the Ministry of Justice, realizing the scale of the problem, decided to take more radical steps in the fight against criminals. Ongoing legislation process is now focused on strengthening penalties for tax fraud, introducing imprisonment even for 25 years (currently it is up to 5 years or 10 years in case of extraordinary restrictions). The proposed changes are intended to discourage criminals to engage in the VAT extortion practice.

Poland is fighting fraud through new law regulations


Polish government is exacerbating the fight against the gray economy. Ministry of Finance and Ministry of Development has joined forces to prepare a new set of regulations aimed at further sealing a tax law in Poland. Ongoing legislation process is focused on requirements related to transport of sensitive goods such as fuel. Government Bodies want to introduce a new Act on registration and monitoring of road transport in Poland. The Act will specify a catalog of sensitive goods, which transport across the country will be controlled.

Under the new rules a monitoring system consisting of a Customs Service register of transported goods and dedicated mobile communications system will be introduced.

The carrier of the goods will have to register on the customs electronic platform. He will also receive a GPS device that will allow tax officials to keep track of the goods route. The route will not only be monitored, but also saved.

Prepared regulations besides carriers control introduce severe sanctions in case of any irregularities in the carriage of goods – for example, penalty amount of 46 percent of net value of transported goods.

The proposed Act focused on transport is another solution by which Polish government wants to fight the gray economy mainly in the fuel market. The first was entered into force on 1 August 2016 so called fuel package.

Solutions that are to come into force in Poland were already successfully introduced in Hungary and Portugal.

Serbia: Amendments to Montenegrin Corporate Income Tax Law


In brief

Montenegrin Parliament adopted in August 2016 amendments of the Corporate Income Tax Law which come into effect on 1 January 2017. The amendments introduced rules regarding tax deductibility of certain expenses, electronic filing of tax return, assessment and mechanism for taxation of capital gains realised by non-residents on sale of Montenegrin capital goods, revised penalties for non-complying with the provisions of this law, as well as broader definition of income realized by non-residents subject to withholding tax.

Montenegrin Parliament adopted in August 2016 amendments of the Corporate Income Tax Law (hereinafter: the Law). The amendments became effective as of 1 January, 2017. It seems that key driver for amendments was the intention to improve certain areas previously regulated in an insufficient manner. We list the major changes for your further consideration below.

Submission of tax returns:

Taxpayer is obliged to electronically submit CIT return through the portal of Tax Authorities. The aim of this amendment is reduction of administration and time spent by the taxpayer on complying with the provisions of the law as well as reduction of the possibilities for making errors in respect to data entry.

Please note, that in order to submit CIT return electronically, taxpayers should possess digital certificate issued by the certification body- AD “Pošta Crne Gore“.

Taxation of non-residents

The adopted amendments to the Law introduced specific rules for assessment and mechanism for taxation of:

  • capital gains of non-residents in transactions with other non-resident entities or resident and non-resident individuals;
  • Montenegrin sourced income realised by non-residents on the basis of lease of movable and immovable assets from a person who is not obliged to calculate, withhold and pay withholding tax (i.e. non-resident entities or resident and non-resident individuals).

The non-resident is obliged to file the tax return, via their Montenegrin tax representative (tax agent), within 30 days from generating income. Tax liability will be determined based on decision issued by the Montenegrin Tax Authorities.

Withholding tax

Amended Law provides more detailed definitions of the income earned by a non-residents on the basis of dividends, royalties, interest, fees for consulting, market research and auditing services, which is subject to withholding tax on payments to non-residents.

Withholding tax will also be payable on income earned by:

  • a non-resident on the basis of performing entertainment, artistic, sport or similar program in Montenegro;
  • a non-resident or resident individuals on the basis of repurchase of used products, semi-final products and agricultural products from a manufacturer which is registered for VAT purposes.

Assessment of CIT base:

  • Salary costs, severance payments related to retirement of employees, costs related to technological surplus and other payments related to termination of employment are recognized as deductible in the tax period in which they are paid (not in the period in which they are accrued).
  • Impairment of assets -expenses incurred on the basis of impairment of assets are not deductible for CIT purposes. Impairment expenses are deductible in the period in which assets are disposed of or damaged due to force majeure.
  • Write-off of receivables – amendments relate to conditions which need to be fulfilled so write-off of receivables can be treated as CIT deductible. Namely, write-off of receivables can be considered as CIT deductible only if such receivables were previously included in taxpayer’s revenues, if they are written-off as uncollectible in taxpayer’s books, if the taxpayer can provide a proof of filling a lawsuit or that enforced proceedings were instigated or that receivables were reported in the bankruptcy or liquidations proceedings and if such receivable is older than 365 days.
  • Expenses deductible up to the amount of 3.5%of total revenues – The list of expenses deductible up to the amount of 3.5% of total revenue is expanded and encompasses expenses incurred for social purposes, reduction of poverty, protecting persons with disabilities, child and youth social care, elderly care, protection and promotion of human and minority rights, the rule of law, civil society and volunteerism, Montenegro’s Euro – Atlantic and European integration, art, technical culture, promotion of agriculture and rural development, sustainable development, consumer protection, gender equality, the fight against corruption and organized crime and fight against addictions.

Expenditures for abovementioned purposes are recognized regardless whether they are made in cash, goods, rights and services.

Expenses incurred in this regard will be deductible for CIT purposes only if they are made to legal entities, which are engaged in provision of the aforementioned services in accordance with specific regulations, and if received funds are used by such entities exclusively for the above mentioned purposes.

Penalties

Fines ranging from EUR 550 to EUR 16,500 are introduced for failing to calculate CIT in accordance with provisions of the Law.

Should you require any clarification or any further information regarding the above changes in the tax legislation, please do not hesitate to contact us via e-mail or phone.

Hungary: Changes to environmental protection product fee regulations from 1 January 2017


Economic operators can expect several changes to tax laws from 2017, including changes to the environmental protection product fee. These changes, however, will be introduced as a standalone amendment, rather than as part of the “omnibus” amending regulations. Accordingly, on 5 December 2016, Act CXXXIX of 2016 was published in Issue No. 191/2016 of Magyar Közlöny (the official gazette of the Hungarian State), which includes the amended provisions of Act LXXXV of 2011 on the Environmental Protection Product Fee (“Product Fee Act”) effective from 1 January 2017.

Notable changes to the Product Fee Act: extension of the scope of the flat fee imposed on motor vehicles; clarifications to the rules on chain transactions; changes to the fee payment obligation for paper-based advertising materials; and simplifications to the rules on individual waste management. Other changes include removing flexible cooler bags from the product category of plastic shopping bags, and abolishing the obligation to pay the product fee on goods recycled from products subject to the product fee that have become waste in Hungary. Below is a summary of the key changes mentioned above.

As a result of extending the scope of the flat fee for motor vehicles, from 1 January 2017, this type of fee payment will be applicable to buses classified under customs tariff number 8702, and to commercial vehicles classified under customs tariff number 8704.

Concerning chain transactions, the following clarifications have been made:

  • The first domestic buyer may assume the product fee liability from the party liable to pay the product fee if at least 60% of the products are exported.
  • For packaging materials (excluding materials that are part of the packaging of goods), the first domestic buyer may assume the product fee liability not only in the case of resale, but also in the case of own use.
  • Taxpayers adding goods to stock may also assume the product fee liability from 1 January 2017.

For paper-based advertising materials, the rules on product fee payment will become more stringent: from 1 January 2017, paper-based advertising materials will also qualify as such if the customer makes no declaration to the print shop that makes the paper-based advertising material concerned.

The rules on individual waste management will be simplified. Previously, individual waste management included (among others) own waste collection from the end-customer; from 1 January 2017, the product fee-related rules will be much more lenient. From 1 January 2017, in the case of individual waste management, it will no longer be required by law to collect waste generated from products subject to the product fee from end-customers, nor will it be required for individual waste managers to collect such waste on their own.

The definition of “plastic shopping bag” will also change as of 1 January 2017. Flexible cooler bags previously classified as plastic shopping bags will no longer be included in this category from 1 January 2017. They will be reclassified under plastic packaging materials, which means that the applicable product fee will be significantly reduced, from HUF 1900 to HUF 57 per kg.

In accordance with the general objectives of the Product Fee Act (i.e., reducing pollution and environmental damage, saving natural resources, and promoting renewable energy sources), there will be additional cases from 1 January 2017 in which economic operators will not be required to pay the product fee. For example, this applies to cases in which the goods subject to the product fee that are to be released for circulation in Hungary, used for own purposes or added to stock are recycled from products that have become waste in Hungary.

Latvia: SRS ruling on taxation of board member’s income


In July 2016 the SRS published a ruling on how income received by someone sitting on a company’s management board is taxed under section 8(2.9) of the Personal Income Tax (PIT) Act. This article explores the approach the SRS takes in analysing the taxpayer’s issue.

Background

X Ltd has two officers: the chairman of the board and a board member who is also the company’s CEO. The chairman receives no remuneration for his work, but the board member is remunerated by three companies: X Ltd, U Ltd (X’s parent company), and C Ltd.

X Ltd asked the SRS to issue a ruling on whether X qualifies for the exception available under section 8(2.10)(1) of the PIT Act (i.e. the right to exempt a board member’s income from wage tax).

Provisions of the PIT Act

Section 8(2.9) of the PIT Act states that a company’s board member is considered to have received taxable income equal to the statutory minimum monthly wage (€370 in 2016) for the current month in which the company has no employee or board member receiving remuneration that equals or exceeds the minimum wage, if the company’s revenue for that month exceeds five minimum monthly wages (€1,850 in 2016).

Section 8(2.10) of the PIT Act states that section 8(2.9) does not apply where a board member in a company meeting the criteria listed in section 8(2.9) receives board remuneration in another company for the current month that equals or exceeds five minimum monthly wages, and if the two companies are members of the same group within the meaning of the Corporate Income Tax Act.

The SRS analysis and findings

The SRS measured X’s revenue for the first five months of 2016: it exceeded €30,000 in total and was €1,850 or more for each of the months. The SRS found that the board member’s monthly gross remuneration was €145.11 from X Ltd, €1,425.03 from U Ltd, and €435.32 from C Ltd.

The SRS examined whether X, U and C qualify as members of the group under section 12(7) of the Corporate Income Tax Act. The SRS found that X and U are related companies within the meaning of the Act, but X and C are not.

The SRS found that X may escape section 8(2.9) of the PIT Act only if the board member of U and C (group entities) is a board member also in X, with his total board remuneration for one month exceeding five minimum monthly wages.

However, C does not qualify as a member of the group, and so the board member’s remuneration from C was ignored for the purpose of applying the provision of law in question.

The SRS found that X cannot take the exception available under section 8(2.10)(1) of the PIT Act because the board member’s remuneration from X and U combined is less than €1,850 (145.11 + 1,425.03 = 1,570.14).

The SRS also mentioned that the National Social Insurance Act (Section 1(2)(m)) treats a company’s board member as an employee if the company’s revenue for the current month of the tax year exceeds the minimum monthly wage prescribed by the Cabinet of Ministers multiplied by a coefficient of 5 and if the company has no employee or all its employees pay social insurance contributions on an income that is below the minimum wage in that month.

Latvia: Tax implications of investing in public infrastructure items


Companies that launch property development projects or pursue other lines of business in an area with no infrastructure (no roads, no streets, no lighting, no water main, etc) are often forced to build the necessary items of public infrastructure, because municipalities do not have enough funds. Later, to reduce the cost of managing that public infrastructure, the developer requests that the municipality should take ownership of those items and carry out their further management and maintenance. This article explores the tax implications of such activities.

The Municipalities Act states that a municipality’s functions include providing local residents with utility services as well as improving and cleaning the municipality’s administrative area, including building, refurbishing, maintaining and lighting the streets, roads and squares. So it makes perfect sense to transfer any items of public infrastructure built with private-sector money to the municipality for their further management.

Initial questions arise when it comes to legally documenting the transfer of the public infrastructure item to the municipality, because there is no legal form of transaction that would precisely reflect the intentions of the parties and lead to public infrastructure items built by the private sector being passed to the municipality for their further management and maintenance. Since municipalities are not prepared to reimburse the cost of building such public infrastructure, these items are transferred to municipalities without consideration under a deed of gift. However, generosity is not a motive for such private-sector activities: a gift is the only form of transaction that provides for the transfer of an asset without consideration.

Also, the corporate income tax (CIT) and value added tax (VAT) legislation is silent about how public infrastructure development costs should be recorded in the company’s books.

Since the company has invested in public infrastructure items for commercial and not personal reasons, in practice accounting for the cost of developing a public infrastructure item depends on the company’s line of business. These costs are either accrued in inventories under current assets if the company’s core business activity is property development and disposal, or in PPE (with depreciation being included in the value of services rendered) if a public infrastructure item has been built for the company’s own business that is not property sales (e.g. a logistics centre or a shop). Any input VAT paid on the construction of a public infrastructure item is deductible, even though the infrastructure can be used by the public and no consideration has been received for that use.

What are the VAT and CIT implications if a public infrastructure item is transferred to the municipality without consideration (i.e. donated)?

VAT implications

The SRS has not reached a consensus on whether the gift of a public infrastructure item to the municipality in these situations qualifies as a deemed taxable supply (personal consumption) within the meaning of the VAT Act. In our view, if we evaluate the economic substance of the transaction, it is not a deemed taxable supply and should not attract VAT (if the company has invested in a property that qualifies as “used” at the time of transfer to the municipality, the supply should not be recorded as exempt, either).

Passing the public infrastructure item to the municipality raises the next question: Does the deducted input VAT need adjusting? In our view, it does not matter that a public infrastructure item is transferred to the municipality without consideration, because the transfer to the municipality for further management and maintenance does not restrict its further use and does not change its significance in the company’s business. Accordingly, the deducted input VAT needs no adjusting. The SRS has mostly agreed with this view.