A new Latvian-Estonian convention on preventing double taxation and tax evasion as regards income tax has been drafted.

The Latvian government committee on Monday upheld the draft convention to be put before the Cabinet on Tuesday. The document will also require the approval by the Latvian parliament. The new convention will replace the existing document suspended by Latvia in respect of corporate bodies after Estonia introduced a new corporate income tax in 2000. The new convention will establish stable taxation regime for investors in both countries, setting forth specific terms for taxation of dividends, royalties and capital gains. Under the document, the tax rate on dividends in their country of origin may not exceed 5 percent of gross amount if paid to a corporate body holding at least 25 percent of capital in the company making the distribution or 15 percent in all other cases. Interest payments may be taxed at maximum 10 percent of gross amount. The same rate also will apply to royalties, expect that a 5 percent rate will be used on royalties for use of production, commercial or scientific equipment. The situation in Estonia changed dramatically after it introduced new taxation arrangements, requiring companies to pay income tax only upon distribution of dividends. The rate is 35.14 percent of distributed profit but as long as the company does not distributed any profit, no taxes will be levied on profit.