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LV Amendments to the Law "On Personal Income Tax" clarify the norms related to the exemption of income from the alienation of agricultural land from personal income tax
At the meeting of State Secretaries on July 8, 2021, the draft law “Amendments to the Law “On Personal Income Tax”” developed by the Ministry of Finance (hereinafter – MoF) was announced, which mainly provides for:
- 1. to exempt grants awarded under the support program for the renovation of residential buildings and increasing energy efficiency from personal income tax;
- 2. determine that in the future, compensation for damage in the event of loss of working capacity related to mutilation or other health damage, as well as loss of a breadwinner, will be subject to personal income tax;
- 3. clarifies legal provisions regarding employees of micro-enterprises;
- 4. also make technical and editorial clarifications.
- 5. clarify legal provisions related to the exemption of income from the alienation of agricultural land from personal income tax
In accordance with the Law “On Personal Income Tax”11.7In accordance with the provisions of Article 11, personal income tax shall not be imposed on income from the alienation of real estate which is agricultural land by purpose of use, if all the conditions contained in this Article in relation to the buyer and seller of agricultural land have been met.
The current personal income tax regulations provide that:
- exemption for income from the alienation of agricultural land may be applied only if the real estate object does not consist of buildings and structures;
- If the real estate object community does not consist of buildings and structures, but also consists of forest or other land, the exemption is applied proportionally to the part of the land area that is agricultural land.
Although in general this approach is considered correct, since the purpose of the exemption is to promote the preservation and use of agricultural land in agricultural circulation, in some cases the mechanism for applying the exemption has created negative side effects. As a particularly noteworthy example, the program of JSC “Development Financial Institution “Altum”” (hereinafter – “Altum”), which provides for a loan against real estate collateral (the so-called reverse lease, i.e. with the alienation of land to “Altum” and its repurchase rights to the farmer, in the meantime the farmer leases the land from “Altum”). In this case, personal income tax (capital gains tax) must be paid on the income obtained as a result of the alienation if the real estate includes buildings and structures, because although the farmer plans to repurchase the land from “Altum” in the future, the alienation of land takes place in step 1 of the transaction. In the period from 01.07.2015. to 31.12.2019. There have been approximately 151 TP3T of such cases in the transactions of the Latvian Land Fund.
In order to promote the achievement of the goals of the “Altum” program, as well as the achievement of the goals set when determining the personal income tax exemption for income from the alienation of agricultural land, as well as at the same time minimize the risk that the personal income tax relief is used for tax optimization purposes, the draft law stipulates that if the real estate consists of buildings and structures, forest or other types of land (for example, swamps, land under water), the exemption shall be applied if the alienator of the real estate submits to the State Revenue Service an assessment provided by a certified real estate appraiser, which indicates not only the total market value of the real estate, but also the market value of a separate part of the real estate – agricultural land. In this case, the proportion of the part of the market value of the real estate attributable to agricultural land in the total market value of the real estate is taken into account for the application of the personal income tax exemption.
Example
The real estate object community consists of agricultural land (20 ha), a residential building, an outbuilding and land under the building and courtyards (0.2 ha).
The market value of the real estate, according to the valuation provided by a certified real estate appraiser, is 50,000 euros, including agricultural land – 30,000 euros. (The share of the value of agricultural land in the total market value is 60%.)
The owner is selling the real estate under the “Altum” program for 40,000 euros.
The purchase price of the real estate is 10,000 euros.
The proceeds from the sale of all property are 30,000 euros.
- 30,000 euros x 60%=18,000 – income from the alienation of agricultural land
- 30,000-18,000 = 12,000 euros – income subject to personal income tax
The exemption from personal income tax, using the aforementioned proportion, applies regardless of whether the agricultural land is alienated by “Altum” or another buyer of the agricultural land.
In turn, if the real estate does not include buildings or structures, but real estate consisting of agricultural land and forest or other types of land (for example, swamps, land under water) is alienated, the draft law provides that the exemption is applied to agricultural land in proportion to the share of its market value in the total market value of the real estate according to the assessment of a certified real estate appraiser or, if the taxpayer does not have such an assessment at his disposal, under the current procedure - in proportion to the part of the land area that is agricultural land according to the purpose of use.
When determining the personal income tax exemption for income from the alienation of agricultural land, if real estate is alienated, which will include agricultural land and buildings and structures, it is applied starting from January 1, 2021, if the taxpayer has an assessment from a certified appraiser that is no older than 12 months from the date the alienation agreement was concluded.
Please provide your opinion and comments, if any, by July 19 to e-mail: martins.trons@zemniekusaeima.lv or call.