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Latvia: Luxembourg For The Poor

PUBLICATIONS / Newsletters / 2013 / Newsletter July

Latvia: Luxembourg For The Poor

Within several months, the Eurozone will get a new tax haven. So yet another EU country will attract foreign companies with a low tax rate, next to Malta or Cyprus. Latvia is going to move to a common currency in January 2014.
Foreign investors see its attractiveness already. According to Bloomberg, in the first half of 2013 the foreign inflow of capital reached $ 1.2 billion. “Bank deposits of non-residents are thus already at ten billion dollars, which is half of all bank deposits in the country,” writes Bloomberg.
According to local Rietumu Bank, Latvia attracts mainly companies from the former Soviet Union. Every day, there are hundreds of inquiries from Russia, Belarus, Kazakhstan and Ukraine, all from entrepreneurs who want to move their holding companies and assets to Latvia e.g. from Cyprus.
The corporate tax rate of Latvia is 15 percent, which is way less than the EU average of 23.5 percent. For comparison, in Belgium it is 37 percent, in Germany 29.8 percent and in Spain 30 percent. Moreover, since 2013 the holding companies are not being taxed on foreign dividends or profits from the sale of shares.
They may also transfer money to foreign accounts without any restrictions. That is why Latvia has already earned the nickname “Luxembourg for the poor”. And there is more. If your business involves telecommunications, you might become eligible to receive a relief of 25 percent of invested funds up to EUR 50 million.
The new currency itself will not increase the confidence in Latvian economy (Latvia’s current currency is tied to Euro already), however, it will lower the risk of unexpected losses and ease up the accounting.
According to economists, Latvia does not run the risk of becoming an economic ‘bubble’. The value of the assets on the balance sheets of banks in 2012 was 128 percent of the local GDP. The EU average is 359 per cent. In the past 3 years, the amount of non-performing loans decreased from 19 to 11 percent.
An example can be found e.g. in the financial statements of Danske Bank. In 2012, 80 out of 2350 loans (3.4 percent) were qualified as bad loans. This is much lower number than what the bank performed in Lithuania (7.5 percent) or Ireland (16 percent).
One alarming item, however, is Latvia’s high ratio of loans to deposits. In 2012, Latvia reached the value of 196 percent. For comparison, at the same time Cyprus reached only 123 per cent, Malta only 70 percent and Euro area average was 110 percent. If the number is too high, it generally means that banks do not have enough liquidity to provide loans and must therefore rely on the resources borrowed at the interbank market, which is more expensive than if the loans are covered by their own deposits.
The frequent comparisons with Cyprus are caused by the high influx of clients from the East, who are looking for near and yet attractive destination. Historically, Latvia is used to accommodate a huge Russian ethnic minority. There are hardly any language, cultural or geographical barriers.
And although Russian entrepreneurs do possess substantial assets, they do not always want to spend them to cover rather high service fees in The Netherlands or United Kingdom. The costs for corporate services in Latvia are significantly lower. This is valid in the whole Baltic region.
The enlargement of the Eurozone with Latvia and its tax regime offers interesting opportunities for international entrepreneurs in the Eurozone and its Eastern neighbors.
Should it be called a tax haven? We’re not sure. Maybe the EU countries that are still being called ‘tax havens’ should be considered as normal. France, Belgium and Portugal should be regarded as tax hells…

How FATCA Will Impact Tax Planning

It has been postponed several times, but on July first 2014 the US Foreign Account Tax Compliance Act will ultimately come into force. FATCA requires foreign banks to report US account holders or face a 30% withholding tax on their US assets. While this should not be of immediate concern to our European clients, FATCA may set a precedent to other countries, supranational organisations and aspiring empires such as the OECD and EU.
First off, lets have a look at how FATCA impacts countries such as Switzerland and Panama. The United States tax authorities, IRS, ‘encourage’ other nations to conclude an Inter-Governmental Agreement for the application of FATCA on all domestic financial institutions. So far, the following countries have concluded such an agreement:
United Kingdom
Swiss banks are now forced under Swiss law to comply with the demands of the IRS: to report any US account holders as well as signatories. The treaty concluded also allows for fishing expeditions; non-specific requests for information on account holders, something that up until now was resented by the Swiss Government.
Panama on the other hand, has not concluded such IGA (in spite of demands from its banking sector) and banks have the option of negotiating theirs own foreign financial institution agreements (FFI). At first glance it seems to little advantage: Panama uses the dollar as currency, and all its banks depend on US correspondent banks to conduct their business. They have no choice but to conclude a FFI.
However it does permit banks to exempt US account holders who hold deposits in currencies other than dollars. And since FATCA only applies to bank deposits over $50.000, US citizens may hold their assets under a foundation or simply use several bank accounts to circumvent reporting requirements. Without assistance from the Panamanian government, the possibility of fishing expeditions or other means to put real pressure on Panamanian banks, confidentiality is still a reality even for US citizens.
The cost of FATCA
The main problem with FATCA is not so much eroding privacy (most countries already have tax information exchange agreements) but the huge burden it places on businesses. The costs of compliance have been estimated on $8 billion annually, and $1-2 billion in the UK alone. Weigh that against an estimated tax revenue increase of only $792 million annually according to the United States Congress Joint Committee on Taxation. An enormous price tag for a little extra revenue on a voluntary tax.
There is some backlash too: some countries want something in return. China, Germany and France have demanded that financial institutions of the biggest tax haven in the world, the United States, should report on assets held by their citizens too. President Obama seems to have no problems with such reciprocity, but the US financial service industry will certainly use its lobbying powers to put a stop to this.
What can be done
FATCA is not about raising revenue, nor is it about fighting tax evasion: the law does neither. It is simply about increasing the power of government over its citizens, just like the recent NSA spying scandal or the massive fraud with bail-out funds on both sides of the pond. Such grave human rights violations and inexcusable intrusions into ones privacy can only be limited by starving governments of tax revenue.
Fortunately there are still countries such as Panama that do respect certain inalienable god given rights. Where citizens and foreigners alike have “the right (…) to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures (…), and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized,” as the US bill of rights’ fourth amendment reads.
Please contact Freemont Group to learn more about banking in Panama.

Off-shoring Your Internet Identity

The world recently found out that the NSA and other governmental organizations are massively spying on citizens worldwide. This is to fight terrorism. We do not claim that terrorism is not a threat, but in the Western world more people die from falling down stairs.
Information that is being scanned is also used for political and commercial ends.
There are some steps you can take to prevent unwelcome guests from nosing around in your private affairs.
Off-shoring your email
Many people happily use the free emails servers like Gmail, Outlook etc. The problem with these services is of course that they are not free. They sell your data to advertisers and bombard you with pop-ups and other commercial bells and jingles that compete for your attention. These companies are also America based and are not shy to hand over your data to the authorities, all under the lovely Patriot Act.
An alternative to this is to use a paid service with an email server that is located in a jurisdiction where personal privacy is protected. For example Switzerland.
Examples of services like these are:
Based in Switzerland.
Based in Switzerland.
Based in Norway, which has strong privacy laws. Cheap and quality option.
Parent company is incorporated in Hong Kong with servers located in Switzerland.
Domain names
When you run a company you will need a website. And when you have a website you will most likely have a .com domain. This is the most commonly used. However, .com domains are registered by a US based company. And the Immigrations and Customer Enforcement agency claim jurisdiction of ALL websites ending with .com, no matter where the domain is hosted.
This can have significant consequences. When you upset the American “justice” system they can seize your domain name and they can even call for extradition.
Read the wiki of Richard O’Dwyer, who lived in the UK, hosted a site in Sweden but found himself in trouble with the US government simply because of his .com domain.
The solution to this problem is to have your domain name registered in a jurisdiction where these limitations do not apply.
Examples like this can be:
Colombia (.co)
Belize (.bz)
These domain names are so called ccTLD’s (country code top level domains). These are contributed to a country and will normally primarily appear in the search engines of this country.
However, the .bz and .co are so often being used that Google is starting to approach them as international domains, with even .co ranking as a TLD (top level domain) like .com and .net.
The ranking of .com and .co in search engines is heavily debated on the internet. With both arguments stating that .com domains still rank better and others stating that is does not matter. But without a doubt, a .com is better marketable and recognizable than .co
Other URL’s that you see appearing are: .me (Montenegro) and .tv (Tuvalu)
Finally, when registering your URL you should always use a Whois guard. It prevents every random person to simply look up your contact details and home address simply by checking your URL with Whois.
Safe Surfing
When surfing the internet your unique IP address can easily be identified and located, leading to all sorts of privacy infringements. When you want your surfing behavior to be anonymous, make sure to hide your IP address.
The first option is Tor. Tor provides an anonymous Internet connection through a randomized proxy where your data is stripped of information that identifies its source.
This can also provide you with an opportunity to access certain internet site that somehow has been blocked in your geographical location.
A second option would be to use a so call VPN. This is a paid service that provides a secure connection to its server from where you can surf the internet freely.
Our highly digitalized world has brought us tremendous freedom. Unfortunately, the stream of data we produce provides a lot of information for advertisers and governments, which they use for their own ends.
Luckily, there are a number of options available for us to decrease our digital vulnerabilities and increase our privacy. Because we at Freemont believe that privacy is a fundamental human right and absolutely essential for a decent working free market economy.
Freemont does not have any connection with the parties provided, nor do we receive any referral income. Most of this information came from articles on International Man that can be found (here) and (here).

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