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

Published on Spiegel Online International, by Stefan Schultz in Riga, Latvia, July 11, 2013 (Photo Gallery).

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 … //

… 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.”

There have been instances, however, in which Latvia has gone beyond merely offering a variety of legal possibilities to avoid taxes. Formally, Latvia has improved its laws relating to money laundering. But several loopholes still remain, according to an analysis performed by Moneyval, the Council of Europe body focused on combating money laundering and terrorism financing. The report noted that adherence to regulations is not strictly monitored in all cases.

The result is that money with shady origins keeps appearing. In April 2012, the United Nations Security Council determined that Latvia’s Parex Bank (which has since changed its name to Reverta) assisted military officers from the Ivory Coast in circumventing international sanctions. The bank refused to comment on the allegations. In mid-June of this year, a different Latvian bank was fined €191,000 ($249,000) for allegedly helping launder hundreds of millions of dollars that were stolen from the Russian government.

Darker Motives: … //

… Stable Financial System?

But with lower tax rates and impending euro-zone membership, that could soon change. “Latvia’s share of fees paid by offshore havens has risen sharply in recent years,” says Meinzer of the Tax Justice Network. “This trend is likely to continue.” Rietumu manager Suharenko hopes that “at least 10 percent of the capital in Cyprus comes to Latvia” in the next three years.

The EU, by contrast, wrote in its Convergence Report on Latvia in early June that the country’s financial system is stable. Latvian Prime Minister Valdis Dombrovskis has also sought to calm worries. “The new tax law was introduced in order to strengthen the competitiveness of our financial marketplace, but it will definitely not create a massive capital influx,” he said recently in an interview with SPIEGEL ONLINE. “The law does not conflict with the stability criteria of the euro zone.”

In reality, however, the stability criteria do not call for an analysis of the risks posed by the Latvian tax model, despite the problems encountered by Cyprus. “It is a mistake that euro-zone member states only look at inflation and the health of public finances when new countries are admitted to the currency union,” says Green Party politician Giegold.

He demands that laws be made consistent with the euro-zone norm. But that doesn’t seem realistic. As long as countries such as euro-zone founding-member Luxembourg continue to defend their own financial marketplace, tax havens will continue to be admitted to the common currency area. And they will continue to present even more risks to the already shaken currency.
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