USE OF SPVS IN LOW- TAX JURISDICTIONS IN EUROPE SUCH AS

Janis Zelmenis, Attorney at Law, Managing Partner, Law Firm VARUL GDP of Baltic States

GDP, billions of EUR 40,00 34,49 35,00 31,30 30,84 30,00 26,90 26,51 24,58 25,00 20,79 20,71 18,89 20,00 17,36 17,53 16,17 15,95 13,96 15,00 13,76

10,00

5,00

0,00 2008 2009 2010 2011 2012

Estonia Latvia

2 M&A transactions forecast

Which country/region do you believe will be the principal markets with which your country will conduct cross- border M&A over the next year?

And over the next five years?

Source: Doing the deal 2013. A NetJets Europe study of European M&A and IPO Largest M&A transactions in Latvia in 2013 Buyer Seller Price Tella Capital SIA Baltcom TV SIA Contaq Latvia Cable undisclosed Holding S.a.r.l. MG Capital AS (GE Money Marginalen AB GE Capital Corporation undisclosed Latvia) SIA Douglas Baltic (49%) Douglas Holding AG Fragrances undisclosed International UAB SIA Lielzeltiņi, AS Linas Agro Group AB undisclosed EUR 12’500’000 putnufabrika Ķekava, SIA Broileks, SIA Cerova Latvijas Biznesa Banka Andrejs Vdovins Andrejs Molčanovs undisclosed

AS Ceļu Pārvalde (88,7%) AS Rīgas sanitārā Riga municipality Object treansporta autobāze

SIA Rigas Universālais Portek International undisclosed EUR 21’000’000 Termināls Limited AS Rīgas Dzirnavnieks Malsen Plius AB Lantmannen AB undisclosed

AB Holding (66,6%) Bislan undisclosed undisclosed Abdulmuslimov SIA Plus Punkts SIA Plus Punkts Ibofa Establushment EUR 6’500’000 Holding Ltd AG Source: Unofficial data published by Dienas Bizness

Business considerations

WHY TO SELL WHY TO BUY • Planning to retire • Valuable company • Planning to invest • Target market is already in a new project known • Moving/ changing • Operating systems are in location place • Poor performance • Experienced employees, • New challenges executives • Reached goals • Recognizable brand • Possibility to get better terms on taking a loan in a bank • Immediate cash flow, return on investment is certain Legal considerations

WHEN SELLING WHEN BUYING • Identification of potential • Research of the potential buyers market, analysis • Information memorandum • Valuation of the company about the company • Confidential Business • Adequate confidentiality Review (CBR) agreements • Identifying influence of • Negotiations other potential buyers • Letter of Intent (LOI) • Negotiations • Due Dilligence by the buyer • Letter of Intent (LOI) • Reaching the agreement • Due Diligence • Closing the transaction, • Reaching the agreement transferring the ownership • Closing the transaction, transferring the ownership Tax considerations

WHEN SELLING WHEN BUYING • Structure of sale • Tax due diligence • Profit repatriation • Elimination of tax risks • Future plans • Structure for purchase - asset protection • Attraction of financing - new business • Optimisation of business development activity - financing - family planning Tax Aspects

8 TAX AUDITS IN BALTIC STATES

9 TAX AUDITS IN LATVIA I and II quarter of 2013 TAX AUDITS PERFORMED 976

614 362

Legal entities Private individuals

Successful – 953 (98%)

10 TAX AUDITS IN LATVIA I and II quarter of 2013 ADDITIONAL TAX AMOUNT, LVL

73,5 m

69,1 4,4 m m

Legal entities Private individuals 94% 6%

11 TAX AUDITS IN LATVIA I and II quarter of 2013

DIVISION OF TAXES

VAT (37,9 m LVL) 52%

CIP (5,6 m LVL) 8%

PIT (2,9 m LVL) 4%

Others (27,1 m LVL) 36%

12 TAX AUDITS IN I and II quarter of 2013 TAX AUDITS AND AUDITED PERSONS AMOUNT

4 186 2 927

Amount of completed Tax Audits Amount of audited persons

13 TAX AUDITS IN ESTONIA I and II quarter of 2013 CALCULATED AND COLLECTED TAX REVENUES AS A RESULT OF TAX AUDITS, EUR

19,2 17,3 m m

Calculated Revenues Collected Revenues

14 TAX AUDITS IN LITHUANIA I and II quarter of 2013 OUTCOME OF TAX CASES IN THE SECOND INSTANCE COURT: 6% 73%

For benefit of tax For benefit of the payers tax authority 8% 7% Sent to first 6% instance court for rehearing Returned to tax Other dispute commission to rehearing 15 TAX AUDITS IN LITHUANIA I and II quarter of 2013 THE MOST COMMON BREACHES IN CASES WERE:

40% 15% 10%

VAT deductions Shadow income 0% VAT applicability

5% 5% 25%

Wrong usage of Purchases from Other Charity or the natural purpose funding persons 16 HOLDING REGIMES IN EU Corporate Income Tax Comparison in 2013

Holding regime Holding regime jurisdiction Standard CIT rate jurisdiction Standard CIT rate in EU in EU 25% Latvia 15% Belgium 33,99% Luxemburg 29,22% Cyprus 12,50% Malta 35% Denmark 25% 25% 15,83% 30% Ireland 12,50% Sweden 22% 31,40% United Kingdom 20%

17 LOW-CORPORATE INCOME TAX JURISDICTIONS IN EU

Bulgaria 10% Cyprus* 12,50% Ireland* 12,50% Latvia* 15% Lithuania 15%

*Cyprus, Ireland and Latvia are Holding Regime Jurisdictions

18 WHY LATVIA?

Latvia has successfully overcome the economic recession, economic situation is continuously improving (GBP – 6,9%; budget deficit 3,5%; decrease of inflation);

Latvia is a stable economic platform for external investments (increase 39%);

Banks in Latvia – safety, reliability, confidentiality (capital adequacy ratio – 17,25%; liquidity ratio – 59%; credits - 60,4%);

Availability of information in English (knowledge of English language 95% of young population);

19 WHY LATVIA?

Convenient geographical situation, developed infrastructure;

Wide network of international treaties (on avoidance of double taxation; on mutual protection of investments, on legal assistance in civil, family and criminal proceedings);

Low expenses on company registration and maintenance;

Company registration procedure 1-5 days;

In Latvia on the basis of the company registration it is possible to obtain a temporary residence permit for up to 5 years allowing unlimited travelling to the Schengen zone countries

20 WHY LATVIA?

Latvia has quite an extensive DTT network with former “East Block” countries; the withholding tax on dividends is usually reduced to 5%.

It benefits from all EU Directives;

Latvia has 55 effective tax treaties for the avoidance of double taxation and the prevention of fiscal evasion;

The Corporate Income Tax rate is one of the lowest in Europe: 15%;

General Transfer Pricing rules, but documentation required.

21 LATVIA – A NEW HOLDING REGIME

Corporate or shareholder

Dividends - 0% WHT* Dividends - 10% WHT* Interest/royalty 0% WHT*

Holding Dividends: 0% CIT Alienation of shares: 0% CIT

Dividends 0% WHT

Subsidiary

* Except payment s to offshore companies 22 TAXATION – CORPORATE INCOME TAX HOLDING REGIME IN LATVIA

Standard rate 15% Tax incentive Economic zones and free ports, Special regions, Donations, Tonnage tax, Substantial long-term investment Dividends paid by a subsidiary to its corporate shareholder are free of DIVIDENDS DISTRIBUTED withholding tax (exception – offshore – 15%) Dividends distributed by subsidiary to an individual – 10%

DIVIDENDS RECEIVED Dividends received by holding are free of CIT (exception – offshore – 15%)

CAPITAL GAINS ON Capital gains are tax exempt ALIENATION OF SHARES (exception – offshore – 15%)

INTEREST 0% paid to a related / non related* EU company

ROYALTY 0% paid to a related / non related * EU company

* In force as from 1 January 2014 also for non EU companies (exception – offshore – 15%) 23 TAXATION – PERSONAL INCOME TAX

RATE INTERST SSC - SSC - DIVIDENDS (standard) INCOME employee employer

Latvia 24% 10% 10% 10,50% 23,59%

Lithuania 15% 15% 15% 9% 30,98% (3%+6%)

Estonia 21% 0% 21% 4% 34% (2%+2%) (33%+1%)

24 TAXATION – PERSONAL INCOME TAX

Annual Salary Non-taxable Net gross costs for SSC PIT minimum salary salary employer

Latvia 10 000 € 12 359 € 900 € 1 050 € 1932 € 7018 €

Lithuania 10 000 € 13 980 € 676 € 900 € 1264 € 7836 €

Estonia 10 000 € 13 400 € 1 728 € 400 € 1653 € 7947 €

25 TAXATION – VALUE ADDED TAX

STANDARD RATE REDUCED RATE

Latvia 21% 12% medication, medical equipment, books, hotels 9% heating power, periodical and non-periodical publications, public transport Lithuania 21% 5% supply of medicines and medical equipment, technical aid and the repair services for the disabled 9% Estonia 20% books and workbooks used as learning materials, medicines, periodic publications, hotels

26 Founding of a company

27 FOUNDING OF A COMPANY

MAIN TYPES OF MINIMUM SHARE KEY CORPORATE CORPORATE COMPANIES CAPITAL DOCUMENTS GOVERNANCE

One-tier structure Private limited EUR 2’800 (or Articles of with an option to liability company less) Association have a two-tier (SIA) structure

Public limited Shareholders Mandatory two-tier liability company EUR 35’000 Agreement structure (AS)

Company registration procedure 1-5 days

28 OBTAINING PERMITS

SELECTED FIELDS OF ACTIVITIES WHERE PERMITS ARE REQUIRED:

• Banking & Finance • Pharmacy & Medicine • Transport • Energy • Alcohol & Tobacco

29 Jānis Zelmenis Attorney at Law, Partner

Law firm VARUL Alberta street 1-2 Riga, Latvia [email protected]