Latvia – Transfer Pricing (2025)

Legal framework and scope

Latvia’s domestic transfer pricing framework explicitly references the Arm’s Length Principle in the Corporate income tax law, Section 4, Paragraph 2, Subparagraph 2e). Implementation and further rules are provided through the Rules on application of the Corporate income tax law (Cabinet of Ministers Regulation No. 677, adopted 14 November 2017, valid from 1 January 2018) and other administrative instruments. The Law “On Tax and Fees” contains related definitions and obligations, and the Transfer Pricing Documentation and Procedures for Concluding an Advance Agreement (Cabinet of Ministers Regulation No. 802, adopted 18 December 2018, valid from 21 December 2018) governs documentation procedures and APAs.

Arm’s Length Principle and the role of the OECD Guidelines

The OECD Transfer Pricing Guidelines are formally recognized and used as best practices and recommendations. Rules on application of the Corporate income tax law, Section 19, states that the TPG are used to guide the application of transfer pricing methods, functional and comparable analyses, to promote cooperation between taxpayers and tax administrations and to justify certain controlled transactions. The TPGs serve as interpretative and practical guidance rather than as autonomous domestic law.

Definition of related parties

Latvia provides a comprehensive statutory definition of “related persons” for transfer pricing purposes set out in the Law “On Tax and Fees”, Section 1, Point 18 and Corporate income tax law, Section 4, Paragraph 10. Two or more natural or legal persons (or a group of such persons or their representatives) are regarded as related if at least one of several conditions is met: a) they are parent and subsidiary commercial companies or co-operative societies; b) the shareholding of one commercial company or co-operative society in another is between 20% and 50% and that parent/subsidiary does not have majority voting rights (with certain exceptions relating to conditionally distributed profits); c) more than 50% of share capital or value of the shares in each of two or more companies is held or decisive influence is ensured (majority of votes) by the same person and that person’s kin up to the third degree, spouse or affines up to the second degree; d) more than 50% is held by several, but not more than ten, of the same persons; e) more than 50% is held by a commercial company in which a natural person (or his/her relatives to the third degree or spouse or affines to the second degree) hold more than 50% of capital; f) the same person(s) have majority of votes on boards of directors (executive bodies); g) in addition to a contractual transaction, the parties have agreed on additional remuneration not included in the contract or engage in coordinated activities aimed at reducing taxes; h) a natural person (or relatives/affines as specified) directly or indirectly owns more than 50% of equity value or has decisive influence. Furthermore, transactions with persons located in low-tax or tax-free jurisdictions are treated as transactions with related persons when calculating conditionally distributed profits.

Methods and application criteria

Latvia’s domestic framework contemplates the standard range of transfer pricing methods: the Comparable Uncontrolled Price (CUP), Resale Price, Cost Plus, Transactional Net Margin Method (TNMM), Profit Split and other accepted economic techniques. These methods and their technical application are set out in Rules on application of the Corporate Income Tax Law (Cabinet of Ministers Regulation No. 677), specifically Section 9 and Sections 13–17, which instruct that transaction pricing is determined using economic analysis techniques.

There is no strict statutory hierarchy of methods. The domestic framework requires selection of the “most appropriate method” as per Section 8 of the Rules on application of the Corporate Income Tax Law. Method choice must consider functions and risks, the reliability of available information and the degree of comparability of tested transactions or independent parties’ financial information, including comparability adjustments.

Comparability and use of ranges

Latvia follows the comparability analysis guidance of Chapter III of the OECD TPG (Rules on application, Section 11, 12 and 19). There is a stated preference for domestic comparables where they are appropriate to the controlled transaction, as domestic comparables better reflect geographic market comparability factors and are more reliable (Section 11 point 11.1).

The use of secret comparables is not permitted under the domestic framework. Regarding statistical measures and arm’s length ranges, the domestic rules indicate that use of an arm’s length range or statistical percentiles to determine arm’s length remuneration is not permitted as a domestic rule, although the guidance in paragraphs 3.55–3.62 of the TPG is widely used in practice. Comparability adjustments are required where a selected unrelated party or transaction exhibits comparability issues with the tested party or transaction, per Section 8.3 and Section 12.3.2 of the Rules on application of the Corporate Income Tax Law.

Documentation and reporting requirements

Latvia requires taxpayers to prepare transfer pricing documentation and, depending on thresholds, to submit Master File, Local File and Country-by-Country Report consistent with Annexes I–III of Chapter V of the TPG. These obligations are set out in Law “On Tax and Fees”, Section 15² and Cabinet of Ministers Regulation No. 802; CbCR rules are regulated by Cabinet of Ministers Regulation No. 397 (adopted 4 July 2017, valid from 14 July 2017).

The thresholds and timing explained in the published profile are as follows: the Local File submission threshold is EUR 5 000 000 of transaction value with foreign related companies. The Master File threshold is EUR 15 000 000 of transaction value with foreign related companies, or alternatively where transaction value with foreign related companies is EUR 5 000 000 combined with a net turnover of EUR 50 000 000. If these thresholds are met or exceeded, the taxpayer is obliged to submit the Local File or both Local File and Master File within 12 months after the end of the relevant reporting year.

Additionally, taxpayers must draw up the Local File within 12 months after the end of the reporting year and, if requested by the tax administration, submit it within one month after the request for transactions between EUR 250 000 and EUR 5 000 000. Global documentation (Master File and CbCR) and Local File must be prepared in Latvian or English; if prepared in English, the tax authority may require translation of all or part into Latvian.

Penalties and compliance incentives

The domestic framework provides for penalties specific to transfer pricing documentation. Under Law “On Tax and Duties”, Section 15², Paragraph 14 and Section 325 Paragraph 2, the tax administration may impose a fine of up to 1% of the amount corresponding to the controlled transaction (which is required to be documented) indicated in the taxpayer’s revenue or expenditure for the reporting year, with a cap of EUR 100 000, where the taxpayer fails to comply with documentation submission deadlines or seriously violates documentary requirements so that it is impossible to verify whether the transaction price was determined at market value. For failure to submit the country-by-country report within the statutory time limit or to follow CbCR preparation and submission procedures, a fine of up to 1% of the taxpayer’s annual turnover in the reporting period may be imposed, capped at EUR 3 200.

There is an exemption from preparation and submission of Local and Master Files for taxpayers that do not meet the transaction value and turnover thresholds described above.

Safe harbours and other simplifications

Latvia provides a simplified approach for low value-adding intra-group services consistent with Chapter VII of the TPG. Rules on application of the Corporate Income Tax Law (Section 18¹ to 18⁹) and Cabinet of Ministers Regulation No. 802 (Section 4) set out classification criteria for these services and the appropriate mark-up. A specific administrative simplification permits a taxpayer who is not automatically required to submit the Local File, but who must prepare it, to review the Local File every three years when the circumstances affecting transfer pricing methodology have not significantly changed; notwithstanding this, comparable financial data must be reviewed annually. These measures are contained in Rules on application, Section 18¹ and Law “On Tax and Fees”, Section 15².

APAs and MAP; procedures and timing

Latvia allows rulings and Advance Pricing Agreements (APAs), including unilateral, bilateral and multilateral APAs. The duration of an APA can be up to five years, and rollback for up to five years is permitted. Bilateral or multilateral APAs can be initiated provided the relevant tax treaty contains a provision equivalent to Article 25(3) of the OECD Model Tax Convention (2017) or the Convention on Mutual Administrative Assistance in Tax Matters applies between the parties. MAP is regulated by the Law “On Tax and Fees” (Sections 119, 120 and 133), and the State Revenue Service has published methodological material on elimination of double taxation and MAP procedures. In disputes with EU Member State authorities, the State Revenue Service decides on acceptance or refusal of a MAP submission within six months after receipt of the submission or additional information; within that six-month period it may also unilaterally resolve the dispute if the taxpayer agrees, and will promptly inform the other competent authority of such decision.

Adjustments, secondary adjustments and year-end practices

Latvia permits and, in certain cases, requires year-end adjustments. While there is no detailed statutory regime solely dedicated to year-end adjustments, the principle is accepted within the general arm’s length framework. A taxpayer must perform an upward adjustment of the Corporate Income Tax taxable base and increase deemed conditional profit by the difference between actual value and market price/value of controlled transactions if an appropriate transfer pricing method identifies that actual transaction value is below market value. Such upward adjustments should be made in the CIT return for the relevant taxation period (month or quarter) and submitted to the State Revenue Service. Upward or downward adjustments may be made without being reported until approval of the Annual Report, via corrective invoices (credit/debit), but after approval of the Annual Report only upward adjustments to the CIT base are allowed. These rules derive from Corporate income tax law, Section 4, Paragraph 2, Clause 2, sub-paragraph e), and Section 17, together with Rules on application of the Corporate Income Tax Law (Sections 12–17).

Latvia’s domestic framework does not provide for secondary adjustments (the profile indicates “No” in relation to secondary adjustments).

Attribution of profits to permanent establishments

Latvia’s tax treaties generally contain Article 7 in the pre-2010 wording; 63 treaties contain Article 7 as it read before 2010. Latvia does not apply the Authorized OECD Approach (AOA) and has reserved the right to use the prior version of Article 7. The domestic framework does not contain specific guidance following the AOA. However, Rules on application of the Corporate Income Tax Law (Sections 22, 24–26) and State Revenue Service methodological material (“Application of corporate income tax to a permanent establishment registered in Latvia”) set out that a permanent establishment (PE) must account for the revenue and expenditures associated with its activity and assets and liabilities separately from its non-resident head office. In determining PE profits, deductions are allowed for expenditures directly related to the PE’s economic activity and supported by written documentary evidence; if goods are supplied to a PE for resale, expenditure should reflect what an independent intermediary would pay at market prices, and payments for general administrative and operational costs may not be treated as non-income beyond certain limits unless supported in writing by the non-resident.

Other relevant administrative aspects

In addition to transfer pricing-specific rules, Corporate income tax law, Section 5 Paragraph 1 Subparagraph 1 imposes a 20% withholding tax on management and consultancy services. For financial transactions, the State Revenue Service has prepared methodological material assisting taxpayers to prepare transfer pricing documentation aligned with the OECD Guidance on Financial Transactions, and thin capitalisation rules are contained in Corporate income tax law, Section 10. Latvia does not have specific domestic guidance on Cost Contribution Arrangements; instead, domestic legislation tends to rely on the OECD TPG for CCA matters.

Conclusion

Latvia’s transfer pricing regime is grounded in domestic law (Corporate income tax law and implementing rules) and formally integrates OECD TPG as interpretative guidance. The framework provides broad definitions of related parties, prescribes the use of appropriate TP methods (chosen on a most-appropriate-method basis), mandates documentation consistent with the Master File/Local File/CbCR approach subject to monetary thresholds (Local File EUR 5 000 000; Master File EUR 15 000 000 or combinations with EUR 5 000 000 and turnover EUR 50 000 000), and sets deadlines and language rules for documentation. There are substantial penalties for non-compliance, administrative simplifications for low value-adding services, and available dispute prevention and resolution mechanisms including APAs and MAP. For areas not fully articulated in domestic law (e.g., CCA, certain intangible-specific rules), the Latvian practice relies on the OECD TPG as primary guidance.

References

For further information see the OECD transfer pricing country profiles page: https://www.oecd.org/en/topics/sub-issues/transfer-pricing/transfer-pricing-country-profiles.html