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29.05.2020

Tax consequences of the determination of the date of acquisition of income

iTiesības published an article by Kristīne Sakārne, Senior Associate of PRIMUS DERLING and Kristers Zālītis, Associate of PRIMUS DERLING on tax consequences of the determination of the date of acquisition of income.

State Revenue Service tax audits may take a long time. In addition, a dispute over the decision taken by the SRS audit may prolong the perion ever more. At this time, the rules governing the obligation to pay tax may change. For example, the new regulation may provide that the the tax would no longer be due. The question may arise whether new or previous legal provisions apply in such a situation? The answer for the particular question is given by the Supreme Court of Latvia 10.10.2019 judgement in Case No. SKA-452/2019.

The claim was brought because of a decision taken by the SRS in 2016, concluding that the taxpayer (Claimant) had acquired a Personal income tax taxable income in January 2014 as well as calculated an additional amount of PIT and arrears to be paid in the budget. In general the Law establishes that the reduction of the loan is deemed to be taxable with the PIT. However, Section 9 Paragraph 35.1 of the Law “On Personal Income Tax” (hereinafter- PIT Law)provides an exception which was excluded from the law on 30.04.2015. The SRS considered that “c” criterion (excluded since 30.04.2015.) was not eligable for the application, therefore the PIT is applicable for the Claimants revenue. However, it has to be taken into account that the SRS decision was taken in August 2016, when the provision was no longer in force.

The District Court noted that the new and favourable norm had a remarkable force. In particular, the date of adoption of the SRS Decision (August 2016) was the new rule, which was then applicable.

The Supreme Court annulled the judgement of the District Court on the basis of the following conclusions. The Court emphasized that the obligation to pay taxes also arises on the day of earning. Accordingly, the provisions in force on the date of earning are also applicable in order to determine the tax liability. At the same time, the Court noted that the tax consequences could also be affected by subsequent legal provisions, but then the reversing force of the legal provisions must be established. The norm of law has retroactive effect only in cases specifically provided for by law. IN the PIT Law, such norms with reversing force are included in the transitional provisions of the PIT Law but are very rare.

The Supreme Court, contrary to the judgement of the District Court, concluded that, in determining the content of the tax liability, Article 9, paragraph 35.1, of the PIT Law was applicable in the version in force at the time of the entry into force of the agreement, that is, on 20 January 2014.

Accordingly, taxpayers should take into account that the obligation to pay taxes is to be determined on the basis of the rules in force on the date of receipt of the income. An exception to that is the case where the provision of the law (usually in the transitional provisions) expressly provides that the new provision is applicable or the old provision is not applicable retroactively (already on passed situations).

Read the full article in latvia here