Ombudsman reviews capital gains tax in Latvia.

Ombudsman of the Republic of Latvia on February 10, 2011 turned to the Prime Minister of the Republic of Latvia and the Minister of Finance with the request to stop State Revenue Service`s illegal activities in violation of principle of legitimate trust and violation of the Constitution of the Republic of Latvia what guarantees the fundamental human rights.

In the end of year 2010, seven persons submitted complaints to Ombudsman`s office about the same topic - activities of the State Revenue Service institutions. These Institutions charged personal income tax, late payment penalty and penalties from income of alienability of real estate, which have been possessed by a person for more than 12 month.

As in the activities of the State Revenue Service authorities are noticed violations of the principle of good management and the principle of legitimate trust, the Ombudsman proposed the test cases " Of the breach of the principle of legitimate trust in the activities of the State Revenue Service institutions and arbitrariness acting against the law".

The cases were about the realization of the real estate. Persons had several land plots and they decided to sell them. Persons were not registered as a economic operators, and in the annual income declarations income from sale of property was presented as a non-taxable income.

The State Revenue Service performed personal income tax audit and concluded that persons have systematically engaged in real estate sales and made a profit. Therefore, the income from the alienability of the real estate does not qualify as income from sale of property, but as income from economic operations.

Reviewing the test cases, the Ombudsman referred to the Senate of the Supreme Court of the Republic of Latvia Department of Administrative Cases Judgment of December 3, 2010 (SKA-526/2010) and Decision of January 7, 2011 (SKA-232/2011).

The Court concluded that the Law on Personal Income Tax Section 9, Paragraph 1 (19) (c) establishes that there is not included in the annual taxable income and tax is not imposed on income from sale of the own property, excluding revenue income from the sale of the property, which has been a personal possession less than 12 months.

The provision does not directly establish if income from the sale of several properties, which have been in personal possession for more than 12 months, are included in the annual taxable income.

Therefore, the Senate looked at the concept of "own property" from the intention of the parties and examined another Judgment of September 13, 2005. The Senate recognized the translation of Law on Personal Income Tax Section 9, Paragraph 19 applying concept "own property", that it shall be interpreted as a property of the person who purchased it for personal use. If the property appears to be acquired rather than personal use, but the realization, sale of the Property, in understanding of the Law on Personal Income Tax, can not be considered as a own property sale. It is the property acquired and sold within the framework of economic operations.

Legislator has performed dependant the tax imposement on Income from sale of the property on a single criterion - as long as real estate has been possessed by a person. In the Law on Personal Income Tax Section 9, Paragraph 1 (19) (c) the 12 month period is the criterion of regularity. If the property is being sold within that period, the income is taxable when sold later, it is not taxable. If sold several properties, which have been property of one person for more than 12 months, then the income is not taxable. By 12 months the Legislator has tried to draw the line between economic operations with real estate and alienation of "own property". Legislator's view is that once the real estate is not sold during the year, it becomes "own property".

The Ombudsman acknowledges that the State Revenue Service has violated person`s fundamental rights, or Article 105 of the Constitution of the Republic of Latvia establishing that "Everyone has the right to own property. Property rights may be restricted by law. Expropriation of property for public purposes shall be allowed only in exceptional cases to a specific law against fair compensation".

The Ombudsman also acknowledged that the State Revenue Service has acted against the State Administration Structure Law, Article 10 providing that the State administration shall be governed by law and rights, it shall act within the scope of the competence prescribed by regulatory enactments, may use its powers only in conformity with the meaning and purpose of the authorisation and shall respect human rights, good governance, including transparency of enterprises and individuals in order to ensure the respect for individual rights and legal interests.

The State Revenue Service performing the charge of the unforeseen tax, have created, perhaps irreversibly, to persons losses and substantial damage.

The Ombudsman notified that as a result of the targeted actions of the management of the State Revenue Services seriously threatens the Legal personality of the Republic of Latvia.

Valters Gencs

Tax Attorney & Founding Partner

Gencs Valters Law Firm, Riga

Email: valters.gencs@gencs.eu

Tel: +371 67 24 00 90