Being able to pay dividends quarterly without waiting until the end of accounting year is the No. 1 advantage for a Latvian company for many. When the effective social and income taxes can eat up to 47% of your salary, paying the 20% income tax on dividends in Latvia instead may sound very appealing! In this article, you’ll learn the procedure of paying dividends quarterly from your Latvian company (also known as, extraordinary dividends).
The Difference In Effective Tax Paid
Let’s assume that the amount of money that you’ve budgeted for paying your bills for running the business is €3’000/month. When ‘normally’ you’d pay the full amount as your monthly salary (or wait 1 year until your next dividends), in Latvia you can legally pay: (1) the minimum salary and the remainder as extraordinary dividends, or (2) the full sum as extraordinary dividends, if there is at least 1 more employee of the business and the employee earns at least the minimum salary.
View the difference in taxes paid yourself:
|Max Salary||Salary + Dividend||Max Dividend|
|Salary||3,000.00 €||533.59 €||-|
|Dividend||-||2,466.41 €||3,000.00 €|
|Tax on Salary||-1,301.20 €||-187.43 €||-|
|Tax on Dividend||-||-493.28 €||-600.00 €|
|Net Income||1,698.80 €||2,319.29 €||2,400.00 €|
|Effective tax paid:||43.37%||22.69%||20.00%|
The difference in effective tax paid: -23.37%
The difference in net income from €3’000: + €701.20
It turns out that the difference increases even further as the income increases, because of the progressive income tax.
If you are not looking forward to enjoying retirement anytime soon, paying less tax on your monthly income makes perfect sense.
The Conditions You Need To Fill When Paying Extraordinary Dividends in Latvia
- The Latvian company’s Articles of association (Statutes) must be revised with the extraordinary dividend payout procedure. You have to register the revision at the Latvian Register of Enterprises. If you are registering a new company in Latvia, it is suggested that your company’s Articles of association include the extraordinary dividend payout procedure from the day one;
- The company has to be profitable in the end of the accounting year (and in the annual report);
- Equity capital of the Latvian company needs to be at least €2’800 and paid in full;
- The company doesn’t have any tax debts, and the extraordinary dividends doesn’t eat up outstanding tax;
- Extraordinary dividends account for less than 85% of the calculated profit for the period;
- At least 3 months must have passed since the last distribution of dividends.
The Procedure For Paying Dividends In Latvia Quarterly
- According to the Latvian Commercial Law (Section 161.1), you have to revise the Latvian company’s Articles of association (if you haven’t done so already for emergency dividends). Specify the following points:
- Dividends may be determined and calculated also from the profit acquired during a time period after the end of the previous accounting year;
- A time period upon setting of which a deadline is to be determined by which the board members shall hold a shareholders’ meeting in order to make a decision to determine extraordinary dividends.
- Prepare a balance sheet for the specific time period for which the extraordinary dividends are calculated (e. g. 3 months);
- Send the invitations for the shareholders’ meeting together with the prepared balance sheet;
- Hold a shareholders’ meeting and include in the meeting minutes that:
- A report of economic activity regarding a period in respect of which extraordinary dividends are determined was presented;
- A proposal regarding a part of profit (max 85%) to be paid out in extraordinary dividends was made;
- The financial situation of the company has not significantly decreased until the day of the meeting of shareholders;
- Paying out of extraordinary dividends does not cause any risk to the fulfillment of commitments of the company during the remaining months of the accounting year;
- Extraordinary dividend amount was determined.
While the difficulty of the procedure behind paying extraordinary dividends from your Latvian company increases as the size of the company grows larger, paying extraordinary dividends at a small company is a very straight-forward process.
Have you paid extraordinary dividends before? Share your experience in the comments below!
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