I-1. Anonymous (90 upvotes)
I love how you tried to bury the most important change – withholding tax – at the very end and with zero clarification. Same for 2ndary market changes
I-2. Anonymous (75 upvotes)
Please, I’d like to have a simple guide about taxing for Notes.
I-3. Anonymous (59 upvotes)
“We’ll provide more details on tax withholding on the date of Notes launch.”Can you provide information BEFORE Notes will come?
I-4. Japke (21 upvotes)
Mintos is unable to give tax advice, but will there be guidance provided on how double tax treaties (DTT) and withholding tax (WHT) work for the EU countries?
I-5. Manos (13 upvotes)
Please clarify the tax withholding details prior to the notes launch date. Otherwise I’ll be forced to stop the investments until this information is available.
I-6. Anonymous (10 upvotes)
Wie hoch ist der Steuerabzug und kann dieser reduziert werden? (How high is the tax deduction and can it be reduced?)
I-7. Anonymous (4 upvotes)
Wird bei den Schuldverschreibungen Steuern einbehalten, muss man Quellensteuern zahlen ? (Will taxes be withheld on the Notes, do I have to pay withholding taxes?)
Response to questions 1-7
We invited investors to ask questions for this Q&A article just after we shared the information about the date of the launch of Notes. We soon followed up with an email to investors with general tax-related details on 19 May 2022. With answers provided here, we will aim to further expand information about Notes and tax withholding.
About tax withholding
First, we will share about tax withholding in general. Please note that the answers provided below are applicable to the current legislation setup. Already for some time, we’ve been working with the Latvian financial trade associations and other stakeholders to amend the law in a way that would impose a flat 5% withholding tax rate for investors who are private individuals from the EU, and without a need to submit additional documents by investors. At the same time, the 0% withholding tax rate for investors who are legal entities would be preserved. We will inform you about the progress and results of this work.
Withholding tax (WHT) is a common tax practice and a way for countries to manage income generated in one country and paid out to someone in another country. The entity that manages the tax withholding process is usually the one that pays out income to investors who have earned it. For example, it can be a company that makes dividends or interest payments or a bank that makes interest payments to its clients (deposit holders). In the case of Mintos and financial instrument Notes, the issuer (a special purpose entity, established in Latvia) is the subject that will be paying out the interest, hence the one who will be managing the tax withholding process.
The economic background behind tax withholding is that governments tax the income generated in their countries. While it’s well known that governments tax the income of their residents, tax withholding is enabling them to do this also for the income made in their country by non-residents.
While tax withholding enables countries to tax income made within their jurisdiction, WHT is also structured in a way that protects individuals (investors) from facing double taxation. To avoid or minimize the possibilities of double taxation (which in certain situations can occur), countries are signing double tax treaties (DTTs). DTTs are agreements between two countries to resolve issues involving double taxation of their respective citizens. Among other points, they define lower tax withholding rates on particular types of income, such as income earned from interest. Here you can find the list of countries that have DTTs with Latvia, and the WHT rates for those countries.
Example: If the investor’s local personal income tax rate in their country of residence is 19%, and the DTT with Latvia stipulates a deduction of 10%, this means that 10% of the income earned with investments in Latvia will be withheld (as WHT), and the investor will pay 9% in their country of residence, amounting to 19% in total.
Although tax withholding is a widespread practice, the applicable WHT rates and processes of obtaining eligible tax certificates vary from country to country, due to different tax policies. As a result, the investor’s WHT experience differs based on their country of residence, and the country where income is generated.
This is how it might look in practice.
The tax rate applied in investors’ countries of residence vary: from zero tax, tax in the lower range of 3-5%, or tax in the higher range of 20% or more. The country-based differences are also reflected in how straightforward it is to obtain the required document (tax resident certificate) that will enable the payer (e.g. issuer in the case of Mintos) to apply DTT on an investor’s income in a foreign country. While obtaining the tax resident certificate needed for DTT for residents of some countries may be as simple as obtaining self-declaration, for others this might imply reaching out to the home country’s tax service with a request for the tax resident certificate (which is instructed by the Latvian law, too).
To get more information about the DTT, investors should research what is the minimum double tax treaty rate for their country and what paperwork is necessary to get it. We provide information about the double tax treaty rates for these countries.
To remind, all tax-related requirements for Mintos are set by the Latvian tax authorities and Latvian law.