Reorganization of a company in Latvia: Mergers, Division and Acquisitions
Mergers, divisions and changes in the form of Latvian companies fall under the reorganization rules. Information further covers the main legal and tax points to be taken into account in reorganizations in Latvia.
Merging can take the form of an acquisition or a consolidation. An acquisition is the process in which the acquired company transfers all of its property to the acquiring company. A consolidation is when two or more companies transfer all of their property to a newly founded acquiring company. In the case of a merger, the acquired company ceases to exist without liquidation procedures. All the rights and obligations of the acquired companies are transferred to the acquiring company. The shareholders of the acquired companies shall become shareholders of the acquiring company.
Division of companies
Division is a process by which the dividing company transfers all of its property to one or more acquiring companies through splitting up or divesting its assets. In the case of splitting up, the dividing company transfers all of its property to two or more acquiring companies and ceases to exist without liquidation procedures. But in the case of divestiture, the dividing company transfers part of its property to one or more acquiring companies and the dividing company shall continue to exist. The acquiring company can be an already existing company or a newly founded company.
All the shareholders of the dividing company or part of them become shareholders of the acquiring company. Alternatively, the dividing company can become the sole shareholder of the acquiring company in accordance with a decision regarding the divestiture of the company.
Restructuring is a process in which a company is restructured into a different type of company via acquisition. All the rights and obligations of the restructured company are transferred to the acquiring company and the restructured company ceases to exist without liquidation procedures. The shareholders of the restructured company become shareholders of the acquiring company.
Corporate income tax
On reorganization, the acquisition of one company by another where the previous owners retain control allows transfer of losses of acquired company to the acquirer.
For determining taxable income, the re-evaluation of assets and liabilities brought about by the reorganization are not taken into account. For example, the acquirer should take as a base the surplus value of the capital assets, as it was for the transferor at the moment of the reorganization.
This does not apply, if the shares acquired by the transferor where owned for less than three years, unless the transferor justly proves that the reorganization does not aim to decrease its taxable income, evade taxes payable in Latvia or decrease the amount of taxes. To prove this, the transferor submits to the tax authorities the copies of the documents certifying the transactions and substantiates the necessity to sell the shares.
If the companies are merged and the acquirer overtakes all obligations of the acquired company, the VAT for the transfer of the property is not calculated.
Therefore, the transferor should submit to the acquirer the list of real property, indicating the detailed information on the calculated VAT for each property. The list must be conformed by the tax authorities. The acquirer within 30 days should re-register the real property with its territorial tax authorities. Otherwise, the transferor must repay to the state the deducted input tax for the real property, transferred after the reorganization to the acquirer.
If the real property or part of it is sold within 10 years after its acquisition or its putting into operation, then the sum of tax, calculated by multiplying 10% of the deducted input tax by a number of years up to10, should be repaid to the state.
Loss carry back
If the company is reorganized through a merger with another company, but the new company after reorganization is controlled by one and the same person or group of persons, the second company after reorganization must assume the pre-taxation period losses of the first company. It can also cover them in the taxation period and in following taxation periods in chronological sequence from taxable income of the next five taxation periods.
The acquiring company must take over the losses in the previous taxation period of the transferring company, which are related to the types of economic activity transferred, and to cover such losses in the taxation period in which the transfer took place and in subsequent taxation periods. Losses can be covered in chronological sequence from taxable income of the next five taxation periods.
If, in the course of reorganization, the company is divided or divested and the company at the time of reorganization has losses that it must cover in accordance with the law, company’s losses must be assumed by the newly founded company.
But in the case of divestment (the company to be divided after reorganization and the newly-founded divested company) the division of the losses of the company split up between the original company and the newly-founded company in the case of divestment (and between the newly-founded company in the case of division after reorganization), should be proportional in relation to the value of the assets of the divested company after reorganization against the value of the assets of the company to be divided prior to reorganization.
Eva Narovska, attorney at law of the Gencs Valters Law Firm in Riga.
Practising in fields of Mergers and Acquisitions in Latvia, Estonia, Lithuania
T: +371 67 24 00 90
F: +371 67 24 00 91