Legislation in LATVIA

1. Description of Electric Supply

Latvia achieved its independence in 1991 during the fall of the old Soviet Union. The recently

formed Government immediately began to enact a complete package of reforms including

price and trade liberalisation, reduced-scale privatisation and macroeconomic stabilisation.

Many of these initiatives were successful and in the latter half of that decade, Latvia enjoyed

great economic development, single-digit unemployment and an increasingly stable

government (Latvia's credit rating grew through 2000 reaching the rating of “investment” by

agencies such as Standard & Poors, Fitch IBCA, Moody´s). The efforts Latvia made regarding

privatisation and economic reform led to being invited to the EU Summit in Helsinki in 2000

where negotiations began to accept its membership in the European Union.

Latvia's energy supply is based on a combination of the balance of energy sources and

renewable energy sources in 2002 represented 34 per cent of the distribution of primary

energy. In terms of renewable energy for the production of electricity from renewable energy

sources, Latvia boasts the highest percentage amongst the ten new member states of the EU.

The state-owned electric company, Latvenergo, owns 97 per cent of Latvia’s generation

capacity. The primary source of electricity is the hydroelectric dam on the Daugava River,

recently modernised and renovated. Additional electricity and urban heating is generated by

two large thermal energy plants and several smaller privately owned facilities.

The transport of electricity within Latvia is handled by seven regional transmission grids, all

belonging to Latvenergo. In 1998 companies from Latvia, Lithuania, Estonia and other

neighbouring countries set up the “Baltic Ring Electricity Cooperation” (BALTREL) with the goal

of interconnecting individual markets with regional exchange, improving production and

transmission systems in the region.

2. Energy Policy: Barriers and Incentives

The indicator objectives established within the framework of EU Directive 2001/77/CE for

Latvia in 2010 is to reach 49.3 per cent of electricity generated by renewable energies,

compared to the 42.4 per cent existing in 1997.

The 1997 National Energy Programme, reviewed in successive years, defines activities for

reliable strengthening of energy resources in the country until 2020. The programme

establishes that energy supply must comply with quality and quantity requirements set by

consumers, at the lowest possible cost and with the least environmental impact. The increase

of local sources of energy production from renewable energies (“FER”) is key to the

programme.

The main goal of the Energy Policy in the electric sector is to promote the development of the

sector according to balanced and sustainable development of the national economy.

Promoting the use of renewable energy resources as well as coordinating protection of the

environment and energy production, transport costs and consumption are amongst the tools

used to achieve the goals proposed for the electricity sector.

Energy policy in the electricity sector sets the goal of promoting the use of renewable and

national energy resources, which correspond to approximately 6 per cent of renewable

energies (not counting the large hydroelectric plants) in the balance of total electric

consumption.

Complete liberalisation of the Latvian electricity market occurred in 2007.

3. Wind Power

Latvia has very good potential for the development of wind power. The total wind-power

capacity installed in Latvia in March 2007 reached close to 27 MW. This represents an increase

of 8% over the figures at the end of 2005. There is great potential for development and several

projects are now on the drawing-board and taking shape.

According to data taken from the Renewable Energy programme, the technical potential of the

production of wind power has been estimated to be around 1,277 GWh, however, the

practical potential is estimated at 1,000 GWh/per year and represents close to 2,000 MW of

economic/technical wind-power potential. The places adequate for wind-power facilities are

the west coast and the eastern area of the Gulf of Riga (close to the city of Ainazi).

A broad atlas describing wind-power within the country, in which several areas are identified,

is available showing yearly averages of wind speeds of 6 m/s at heights of 30 m. The Physical

Energy Institute seems to be the main institution involved with wind-power.

The minimum sales price for renewable energies stands at around

96.4 €/MWh. The current sales price, with the obligatory purchase of electricity from

renewable energy sources at 50 MW, is 106.80 €/MWh. This rate is valid for the first ten years

of operation. After the tenth year, the price will be reduced by 40% (64.08 €/MWh for

50MW).

4. Taxation

For corporations, the tax regime foresees a tax on profits and a tax on Real-Estate property.

Regarding indirect taxation, in 1995 a VAT system was introduced, based on the most relevant

principles of EU Community legislation.

Corporate Tax (Uznemumu ienakuma nodoklis) assesses income obtained from the

development of an economic activity within Latvia as well as abroad, on corporations, religious

enterprises and public institutions.

The most common corporation types are the Public Liability Company (akciju sabiedribas) and

the Limited Liability Company (sabiedribas ar ierobezotu atbildibu). Civil organizations are, on

the other hand, transparent for taxation purposes and all income is attributed to the partners.

All companies incorporated and registered in Latvia are considered to be resident

corporations.

The starting point for determining the tax base is the accounting result of the corporation. In

general, all profits are taxable, although certain adjustments are foreseen, since some income

is tax-exempt, there are non-deductible amounts and amortisation. Regarding exemptions,

the main one is applicable to dividends from resident corporations.

Expenses directly related to the earning of taxable income are deductible; however, the Law

expressly states what is not deductible.

Expenses not directly related to the company's economic activity.

Expenses related to courtesy gifts to company employees, if they are not directly

related to the corporate activity.

There is also a restriction on the deduction of expenses for interest payments that operate on

a ratio of subcapitalisation. The limit is the same amount as the total of company funds at the

beginning of the tax period, multiplied by the last short-term interest rate for credit

institutions. In the event that this limit is exceeded, the excess shall be deductible in the

following tax years. This restriction is not applicable to interest payments to Latvian credit

institutions or Latvian branches of foreign banks with which Latvia has signed a treaty to

prevent international double taxation.

Capital gains are treated like any other profit, although those derived from the sale of

marketable securities are tax-exempt.

Corporate negative tax bases are compensated by profits during the following 5 tax years,

unless the company should change partner, in which case limits shall be applied to this

compensation.

If the company should merge, the negative tax bases of the merged company may be

compensated by the merging company. In the case of a split, the resulting companies may

compensate their tax bases, but only if they are controlled by the same persons that controlled

the split corporation.

Capital losses derived from the sale of securities may only be compensated with earnings from

the sale of assets of the same type, during the same tax year or the following five. Any other

type of capital losses are deductible from ordinary corporate profit.

With regards to the tax rate, it is currently set at 15%.

Payments made to companies resident in Latvia are not, in general, subject to withholding.

However, if the receiver is tax exempt or enjoys tax benefits granted to foreign investors or for

corporations established in the special economic zones or free-ports, between 2% and 15%,

must be withheld, depending on the type of payment involved.

Tax Incentives

Economic Zones and Free Ports

Latvia has set up two special economic zones, in the port of Liepaja and its surroundings and in

Rezekne. There are two Free Ports: Reiga and Ventspils. Investors who wish to set up

operations in those zones must incorporate a special company to do so and the tax advantages

offered are the following:

The Corporate Tax rate is reduced by 80%;

Amounts invested in infrastructure located in these zones and belonging o the State

and local government are deductible from taxable income;

Property Rates are reduced by 80%. In addition, municipal governments may grant a

further 20% reduction, resulting in a full exemption;

Withholding applicable to payments made to non-resident entities is reduced by 80%,

except for payments to residents in tax havens;

Regarding VAT, a tax rate of 0% is applied to certain operations.

Special Regions

Corporations operating in certain regions can benefit from accelerated amortisation and may

compensate their negative taxable income during the ten years following earning it.

Resident companies may also deduct 40% from invested amounts that comply with the

following criteria:

That they exceed the amount of 10 million Lats (15,435,485 Euros).

That it be a fixed-asset investment, such as buildings, technology or equipment used

for carrying out business related activities.

The investment must be completed within a three year period.

Consolidated Tax Regime

Companies affiliated within the same group may compensate any losses amongst themselves.

Groups of companies are understood to be corporations that are subsidiaries of the same

parent company, resident in Latvia or in a country with which Latvia has signed a treaty to

avoid international double taxation, and its subsidiaries, which must be residents and belong

at least by 90% to the parent company, by another subsidiary or a combination of both.

Distribution of Profits

The distribution of dividends by resident companies is not subject to withholding or later

taxation in the headquarters of the partner, except in those cases where the corporation

distributing the dividends benefits from tax incentives foreseen for Special Economic Zones

and Free Ports. In this case, the receiver must pay taxes on that income and can later claim

deductions to avoid double taxation.

Dividends from abroad are not included as taxable income, as long as the company the shares

are owned in is not located in a tax haven and the receiver owns at least 25% of the shares in

it. When said requirements are not met, a deduction system for international double taxation

is foreseen, by which it is possible to deduct the amounts withheld by the other country at the

time the income was distributed, limited to the amount that should have been paid in Latvia

for that same income, calculated before applying the deduction.

If the company in which shares are owned is located in a country with which Latvia has signed

a treaty to avoid international double taxation and that foresees a system more beneficial than

what is applicable in the internal regulations, the treaty is applicable.

Non-Resident Taxation

Non-resident companies that have set up permanent establishment in Latvia are subject to

Corporate Tax for income attributable to said establishment, whether earned in Latvia or

abroad. When there is no permanent establishment, the non-resident shall only be taxed for

certain income, paid by a resident in Latvia.

Dividends distributed by a company resident in Latvia to a foreign resident corporation are

subject to the withholding of 10% of the gross amount. Interest paid to foreign persons or

entities connected to the Latvian payer must pay a withholding tax of 10%. Should the

payment correspond to royalties the amount withheld will vary between 5% and 15%.

The amounts withheld may be reduced if the country of residence of the receiver has signed a

treaty with Latvia. Spain has not signed such a treat, therefore the tax rates applicable will be

the ones mentioned above.

For payments made to residents of territories classified by the Latvian government as tax

havens, the payer must withhold and deposit an amount equivalent to 25% of the amount

paid. The Administration will exempt the obligation to withhold, if the payer can prove that

the operation was not carried out for a business purpose and that there was no intention of

reducing taxes paid in Latvia.

Property Rates

This is a local tax applied to Real-Estate property located in Latvia, no matter which country

the Owner resides in. There are exemptions foreseen for those plots on which the Law forbids

economic activities being carried out, properties declared to be cultural monuments, sports

stadiums and forests.

Buildings the construction or refurbishing of which was completed before January 2001 are

exempt for the first year after their being put to use.

The tax rate applicable is 1.5% and is applied to the Cadastral value of the property. Local

Authorities may grant deductions of up to 90% of the quota.

It is important to point out that property rates paid are deductible from Corporate Tax, as long

as the property is being used for corporate purposes.

Indirect Taxes

In general, commercial transactions are subject to VAT, except for certain imports under

specific conditions. The general tax rate is 21%, although there is a reduced rate of 10%

applicable to certain operations.

EMISSIONS TRADING

Latvia, as a signatory of the Kyoto Protocol may benefit from the Joint Implementation

Mechanism since it is included in Annex B (the Parties included in Annex I are listed in Annex B

of the Kyoto Protocol), regulated in Article 6 of the Kyoto Protocol, which permits that a

country listed in Annex I of the Convention (developed countries and countries transitioning to

a market economy) may invest in projects aimed at reducing emissions of man-made

greenhouse gases in another country listed on Annex I. This type of project will permit a

reduction in emissions by sources and removal by sinks of all greenhouse gases.

The investing country shall obtain Emission Reduction Unit allowances (URE) which are

discounted from the emission allowance units assigned to the receiving country and in this

manner the country financing the project will earn UREs at a lesser price that what it would

have cost in the original country and the receiving country will benefit from the investment

made in it.

As a member state of the European Union, Latvia participates in the “EU Emissions Trading

Scheme” (EU ETS), which is the main pillar of Climate Policy in the European Union. This

Scheme began in January of 2005 with an initial phase from 2005 to 2007 and a second phase

that will reach from 2008 to 2012 (this Scheme has been defined in European Directive

2003/87/EC).