Latvia: Supreme Court clarifies definition of permanent establishment
Supreme Court Senate, in case Nr.SKA-358/2013, due to Swedish company “Snickers Workwear AB” claim against the State Revenue Service of Republic of Latvia (hereinafter SRS), in the Judgment of September 30, 2013, has clarified what criteria shall be taken into account determining whether the permanent establishment of the company exists.
Swedish company who is one of the leading manufacturers of workwear industry in Europe, have established Daughter Company in Latvia.
In SRS view, the Board member of the Daughter Company is considered as the dependant agent of the Swedish company. Therefore the activity of the Latvian company has created a situation that the Swedish company has the non-registered permanent establishment in Latvia and the income have to be imposed with Enterprise income tax.
According to article 7 and 8 of the Law On Taxes and Fees, it is considered that a non-resident (foreign merchant) has a permanent representative office in Latvia if all of the following conditions are complied with simultaneously:
1) the non-resident (foreign merchant) utilises a specific place for activities in Latvia;
2) the place for activities is permanently utilised or is established for the purpose of being utilised permanently; and
3) the place for activities is utilised for the performance of entrepreneurial activities (commercial activities).
In the Judgment Court has clarified that for determining the existence of permanent representative establishment shall also be taken into account the following:
- what commercial activities could be performed by the Applicant through the permanent establishment;
- has the Swedish company been leading the activities of permanent establishment;
- has the Swedish company given any instructions to permanent establishment;
- has the Swedish company received the execution of the requests;
- to acknowledge the “administration fee” as income of permanent establishment, it has to be established for what services it has been paid (to abstract it from remuneration of the board member within the meaning of Commercial Law).
Therefore, according to the Judgment, the case was decided in favour or Swedish Company “Snickers Workwear AB” and for determining whether the company has existing permanent establishment, Article 7 of the Law On Taxes and Fees as well as other criteria have to be taken into account.
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