Exchange of Notes

His Excellency

Mr Valdis Birkavs

Minister for Foreign Affairs

8 May 1996

Excellency

I have the honour to refer to the Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Latvia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains which has been signed today and to make on behalf of the Government of the United Kingdom of Great Britain and Northern Ireland the following proposals for the purpose of applying:

1. Article 2 (3)

The United Kingdom takes note of the fact that the existing taxes as listed in the Convention are subject to a substantial programme of reform and wherever it is not possible to agree that a particular new tax satisfies the conditions of paragraph (4), the United Kingdom is ready to negotiate an amending Protocol to the Convention without delay.

2. Article 4 (3)

Where a person other than an individual is a resident of both Contracting States and the competent authorities of the Contracting States endeavour to determine its status by mutual agreement, they shall have regard to such factors as the place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors.

3. Article 5 (6)

The Contracting States agree that:

(I) where the transactions between the agent and the enterprise are made under the conditions which would be made between unrelated persons the second sentence of paragraph (6) shall not apply;

and

(ii) in considering whether the activities are devoted wholly or almost wholly on behalf of that enterprise, the Contracting States shall have regard to any relevant factors during any 12 month period commencing or ending in the fiscal year concerned. In particular if the relevant activities are devoted wholly or almost wholly on behalf of that enterprise for a period exceeding 9 months within that period of 12 months, they will be considered to have been so devoted in that fiscal year.

4. Article 6 (3)

The Contracting States understand that all income and gains arising from the alienation of immovable property situated in a Contracting State may be taxed in that Contracting State in accordance with Article 13 of this Convention.

5. Article 7 (3)

In determining the profits of a permanent establishment, it is understood that expenses to be allowed as deductions by a Contracting State include only expenses that are deductible under the domestic laws of that State.

6. Article 12

Where, in any Convention for the avoidance of double taxation, signed after the date of signature of this Convention, between Latvia and a third State, which is a member of the Organisation for Economic Co-operation and Development at the date of signature of this Convention, Latvia agrees to a definition of royalties which excludes any rights or other property referred to in paragraph 3 or to exempt royalties arising in Latvia from Latvian tax on royalties or to lower rates of tax than those provided for in paragraph 2, such narrower definition, exemption, or lower rate shall automatically apply as if it had been specified in paragraph 3 or paragraph 2 of Article 12 with effect from the date of entry into force of that Convention.

7. Article 24 (2)

It is understood that incentives to promote foreign investment shall not include incentives promoting only domestic investment.

If the foregoing proposals are acceptable to the Government of the Republic of Latvia, I have the honour to suggest that the present Note and Your Excellency's reply to that effect should be regarded as constituting an agreement between the two Governments in this matter, which shall enter into force at the same time as the entry into force of this Convention.

I avail myself of this opportunity to extend to Your Excellency the assurance of my highest consideration.

Sir Nicholas Bonsor Bt MP

Minister of State

His Excellency

Sir Nicholas Bonsor Bt Mp

Minister of State

Foreign

and Commonwealth Office

8 May 1996

Your Excellency

I am in receipt of your note dated 8 May 1996 which states as follows:

`'His Excellency

Mr Valdis Birkavs

Minister for Foreign Affairs

Your Excellency

I have the honour to refer to the Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Latvia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains which has been signed today and to make on behalf of the Government of the United Kingdom the following proposals for the purpose of applying:

1. Article 2 (3)

The United Kingdom takes note of the fact that the existing taxes as listed in the Convention are subject to a substantial programme of reform and wherever it is not possible to agree that a particular new tax satisfies the conditions of paragraph (4), the United Kingdom is ready to negotiate an amending Protocol to the Convention without delay.

2. Article 4 (3)

Where a person other than an individual is a resident of both Contracting States and the competent authorities of the Contracting States endeavour to determine its status by mutual agreement, they shall have regard to such factors as the place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors.

3. Article 5 (6)

The Contracting States agree that:

(I) where the transactions between the agent and the enterprise are made under the conditions which would be made between unrelated persons the second sentence of paragraph (6) shall not apply;

and

(ii) in considering whether the activities are devoted wholly or almost wholly on behalf of that enterprise, the Contracting States shall have regard to any relevant factors during any 12 month period commencing or ending in the fiscal year concerned. In particular if the relevant activities are devoted wholly or almost wholly on behalf of that enterprise for a period exceeding 9 months within that period of 12 months, they will be considered to have been so devoted in that fiscal year.

4. Article 6 (3)

The Contracting States understand that all income and gains arising from the alienation of immovable property situated in a Contracting State may be taxed in that Contracting State in accordance with Article 13 of this Convention.

5. Article 7 (3)

In determining the profits of a permanent establishment, it is understood that expenses to be allowed as deductions by a Contracting State include only expenses that are deductible under the domestic laws of that State.

6. Article 12

Where, in any Convention for the avoidance of double taxation, signed after the date of signature of this Convention, between Latvia and a third State, which is a member of the Organisation for Economic Co-operation and Development at the date of signature of this Convention, Latvia agrees to a definition of royalties which excludes any rights or other property referred to in paragraph 3 or to exempt royalties arising in Latvia from Latvian tax on royalties or to lower rates of tax than those provided for in paragraph 2, such narrower definition, exemption, or lower rate shall automatically apply as if it had been specified in paragraph 3 or paragraph 2 of Article 12 with effect from the date of entry into force of that Convention.

7. Article 24 (2)

It is understood that incentives to promote foreign investment shall not include incentives promoting only domestic investment.

If the foregoing proposals are acceptable to the Government of the Republic of Latvia, I have the honour to suggest that the present Note and Your Excellency's reply to that effect should be regarded as constituting an agreement between the two Governments in this matter, which shall enter into force at the same time as the entry into force of the Convention.

I avail myself of this opportunity to extend to Your Excellency the assurance of my highest consideration.''

The foregoing proposals being acceptable to the Government of the Republic of Latvia, I have the honour to confirm Your Excellency's Note and this reply shall be regarded as constituting an agreement between the two Governments in this matter which shall enter into force at the same time as the entry into force of the Convention.

I take this opportunity to renew to Your Excellency the assurances of my highest consideration.

Mr Valdis Birkavs

Minister for Foreign Affairs