Latvia and the Euro: Meet the EU's Newest Tax Haven

PHOTO: Latvia will become the the Euros areas newest member in January 2014, the same time that new tax laws go into effect allowing the country to compete with the likes of Cyprus and Malta.

Latvia will become the common currency area's newest member in January 2014 -- the same time that new tax laws go into effect allowing the country to compete with the likes of Cyprus and Malta. This could further destabilize the European economy.

Rietumu Bank isn't in Riga's best neighborhood. The streets are dusty, and graffiti on one building reads: "If Jesus comes back, we'll kill him again." The city's biggest soccer stadium -- which opens onto a meadow on one side -- is right next door.

This is the scene that bank manager Ilya Suharenko surveys from his top-floor office in the Rietumu Capital Centre. But Suharenko, 30, is optimistic about Latvia's future nonetheless. European finance ministers on Tuesday gave the Baltic country the go-ahead to join the common currency union on January 1 next year. Furthermore, new tax laws are set to go into effect at the same time. These laws, says Suharenko, will put his country "on a level with Ireland, Malta and Cyprus."

"It is a seal of quality for Latvia as a financial marketplace," Suharenko says. "The euro is coming and capital will follow."

Many observers don't share Suharenko's euphoria, though. Riga's planned reform has been designed to transform Latvia into the euro-zone's next tax haven. And it highlights the degree to which rhetoric and reality diverge in the European Union.

Ever since the International Consortium of Investigative Journalists (ICIJ) exposed the vast scale of tax evasion undertaken by multinationals around the world, the European Commission has made combating financial trickery a top priority. Theoretically, at least. In practice, exactly the opposite has happened. "Instead of eliminating established tax havens, we have added a new one to the euro zone," says Sven Giegold, a financial expert with the Green Party in the European Parliament.

Latvia's corporate tax rate is just 15 percent, far lower than the EU average of 23.5 percent. Within the euro zone, only Ireland and Cyprus, each at 12.5 percent, have lower rates. Yet the banking systems in both of those countries have collapsed -- and both have been forced to seek emergency aid money from EU bailout funds.

Bridgehead to Tax Havens

Holding companies -- firms that hold stock of other companies -- enjoy further benefits in Latvia. Since the beginning of 2013, their foreign profits earned via dividends and stock sales have been tax free. Transferring such profits out of country is also not taxed. Furthermore, as of 2014 Latvian holding companies will no longer have to pay taxes on interest and licensing fees they pay to foreign companies.

Such structures allow foreigners to not only park their money in Latvia, but also use it as a bridgehead to transfer money at low cost from Europe to tax havens such as the Cayman Islands. Indeed, Latvian law will impose even fewer limitations and lower fees for such transfers than exist in such countries as Malta, Ireland, Cyprus and the Netherlands.

Markus Meinzer, an analyst with the Tax Justice Network, has already begun calling Latvia a "Luxembourg for the poor."

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