(c) APPORTIONMENT BETWEEN BRANCH AND PARENT ENTERPRISE
1. Apportionment of Gross Profit of Local Branch to Real Centre of Management abroad
The principle of Latvian law that the establishment or branch of a foreign enterprise in Latvia shall be taxed as if it were an independent concern means that all the profits of these establishments are taxable, but they alone.
Hence, no part of the profits of the establishment can be ascribed to the enterprise abroad; but, if part of the establishment’s profit is due to the activities and services of the parent enterprise, that share may be deducted from the taxable profit. It is on this ground that deduction is allowed of commissions, royalties and interest paid to the parent enterprise, provided that these payments correspond to what would normally have been paid to third parties and that the parent enterprise, when invoicing goods supplied to its Latvian branch, includes in the invoice the profits which would normally have been earned, had these goods been sold to third parties.
2. Apportionment of Expenses of Real Centre of Management to Branch
Interest Charges. — If the parent enterprise is to ascribe to its Latvian branch a part of its interest charges and if that interest is to be deductible from the profits taxable in Latvia, the debt must have been incurred in the interest of the branch or the yield of the loan made over to it. Such interest may be charged to the Latvian establishment in proportion to the benefit the establishment has derived from the borrowed capital.
General Overhead. — The above rule applies mutatis mutandis to general overhead. These expenses may be deducted from the Latvian profit if they were incurred on behalf of the establishment or if they were of benefit to it.
3. Apportionment of Net Profit of Branch to Deficitary Parent or of Parent to Deficitary Branch
Given the general principle for allocating gross profits, it follows that the results of the parent enterprise do not affect the sum taxable in Latvia, either when the parent is working at a loss and the Latvian establishment at a profit, or when the position is reversed. In the latter case, the accounts of the taxable establishment will, of course, be examined especially closely.