On Tuesday, the 8th of October, the Latvian government approved the legislative draft for Solidarity Contributions developed by the Ministry of Finance. This new proposed law makes it mandatory for credit institutions registered in Latvia to pay a solidarity contribution in the next three years.
Using these solidarity contributions, it is planned to secure EUR 96 million in 2025, EUR 60.8 million in 2026, and EUR 66 million in 2027.
The draft law stipulates that the solidarity contribution will be 60% of the calculated base. This base will be the credit institution’s share of net interest income for the calendar year, which is more than 50% higher than the average annual interest income for the last five financial years – from the 1st of January, 2018 to the 31st of December, 2022.
It is planned that credit institutions will make quarterly payments of solidarity contributions in advance. The draft law provides that the contribution will have to be paid for three payment periods – for 2025, 2026 and 2027.
At the same time, the draft law also establishes a mechanism for applying a solidarity contribution discount, which will ensure a discount of up to 100% if the credit institution reaches a certain credit growth rate during the specific period.
For the amount of the calculated discount, the credit institution will be entitled to reduce payments, including advance quarterly payments. In turn, summarizing the results of all three payment periods, the credit institution, by submitting a declaration of solidarity contributions for 2027, will be entitled to recover the overpaid contribution by evaluating the total discount amount.
The ministry explains the purpose of solidarity contributions is to increase the national security in risky situations for a limited period of time, in solidarity with the entire Latvian society, by directly or indirectly finding additional funds to ensure the fiscal needs of the national security.
The Ministry of Finance points out that the increase in the contributions of credit institutions may occur directly by making payments to the budget or indirectly by significantly increasing lending to the non-financial sector, which does not include public administration, and thus activity in the economy and budget revenue. This would allow more funding for the growing national security needs in the coming years.
In the annotation to the draft law, the ministry explains that the principle of determining the contribution base has been chosen to ensure that contributions are applied in cases where credit institutions make extraordinary profits.
The extraordinary profit will be determined by comparing the credit institution’s lending indicators with the indicators before the rapid growth of the EURIBOR rate, as a result of which credit institutions still make significant extraordinary profits that are not directly related to their active activities.
A credit institution that started its activities after 2018 will not take into account the calendar year in which it started its activities in the calculation of average annual net interest income, and the average annual net interest income will be calculated for those financial years starting on the 1st of January of the year following the start of its activities and ending on 31st of December, 2022.
In order to ensure that the solidarity contribution applied to transactions with Latvian residents, the annual net interest income and the average annual interest income will be multiplied by a coefficient when determining the amount of the contribution base.
This coefficient will be obtained by dividing the amount of deposits and loans attracted by the credit institution from non-financial sector customers who are residents of Latvia by the total amount of deposits and loans attracted by the respective payer from non-financial sector customers.
In order to ensure a balanced application of the norms of the law, as well as to eliminate the concerns expressed by industry representatives, the draft law includes a mechanism providing for the possibility of applying a discount from the first quarterly payment of advance payments. The discount for the advance quarterly payment can be applied if the specified increase in the amount of credit is reached in the respective quarter.
The draft law, at the request of the representatives of the industry, includes a provision establishing the maximum permissible amount of solidarity contributions. Namely, it is provided that the contribution may not exceed 33% of the credit institution’s profits before the payment of the calculated corporate income tax and solidarity contributions.
In the event that the amount of solidarity contributions exceeds that threshold, it will be reduced to the established maximum amount of contributions.
In order to prevent the application of unjustified solidarity contributions, it is envisaged that the payment will not be made if the credit institution will incur losses as a result of its economic activity during the relevant payment period for which the solidarity contribution payment has been calculated.