The Saeima on Thursday passed in the final reading government-approved amendments to the Corporate Income Tax Law introducing a 20 percent advance income tax for banks and nonbank lenders, payable from their previous year’s profit.
The amendments are included in the package of legislation related to Latvia’s 2024 draft budget.
The amendments drafted by the Finance Ministry will oblige credit institutions and consumer loan providers to pay a 20 percent surcharge on CIT in the tax year, calculated on the basis of pretax financial data and taking into account the profit distributed in the tax year and the amount of tax paid on it, while providing that the tax surcharge paid is taken into account in calculating the tax payable on the distribution of profit in dividends.
The Finance Ministry explains in the annotation to the draft law that, given the high concentration of the lending market, which makes services more expensive and less accessible to customers and the high interest rates which allow the financial sector to make substantial profits, the amendments are intended to ensure a fairer distribution of the burden of high interest rates between the public and the financial sector, as well as to ensure fiscal functions and state budget revenues, and meet the challenges of sustainable public service provision.
Currently, credit institutions and consumer loan providers pay CIT in the regular way, either by paying tax at the time of distribution of profits (decision of the owners of the business) or by incurring non-economic expenses. Therefore, the amount of CIT payable to the state budget does not depend on the amount of the profit made, but on the extent to which such profit is distributed or not.
The Finance Ministry, referring to the data published by the Bank of Latvia, notes that Latvian credit institutions made an aggregate profit of EUR 350.312 million in the first half of 2023, which is 2.6 times more than in the corresponding period of 2022. This situation is due to a number of external factors, such as the European Central Bank’s policy of raising interest rates, which is aimed at curbing inflation in the euro area.
However, based on the Consumer Rights Protection Centre’s review of the nonbank lending market in 2022, the Finance Ministry concludes that consumer loan providers, like credit institutions, are making substantial profits from the high interest rates on the loans they provide.
Looking at the overall profitability of consumer loan providers, the Finance Ministry concludes that in most cases above 30 percent, which is significantly higher than the average profitability of businesses operating in Latvia.
As regards the proportionality of the provisions mentioned in the draft amendments, the Finance Ministry indicates that the CIT surcharge paid by credit institutions and consumer loan providers will be taken into account in future periods, reducing the tax payable on the distribution of profits through dividends by the relevant amount.
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