On Wednesday, the 23rd of October, Saeima’s Budget and Finance Committee conceptually supported the legislative draft On Solidarity Contributions, which makes it a duty for credit institutions registered in Latvia and branches of foreign credit institutions to pay a solidarity contribution in the next three years.
The representative of the Financial Industry Association stressed at the meeting that higher taxes cannot contribute to the development of the economy, and solidarity contributions are not to be supported, as they may have a negative impact on Latvia’s financial stability.
Opposition deputy Artūrs Butāns (NA) asked the responsible ministries whether the possibility of introducing solidarity contributions in other sectors was also assessed. According to the deputy, profits in the non-bank lending sector also reached record amounts, similar to those in the banking sector. Similarly, the situation is similar with supermarket chains, as evidenced by the report of the Competition Council.
Butāns believes that it is necessary to introduce solidarity contributions in these sectors as well. The opponent referred to a report indicating that the supermarket chains achieved record profits and impose not less or the same mark-up on the local manufacturer, but a higher mark-up than on the imported goods, thus increasing the proportion of imported goods, including from third countries.
The politician promised to submit this proposal for the second reading.
The Ministry of Finance has also assessed the possibility of establishing solidarity contributions to the non-banking sector, but is not promoting such an idea yet, the ministry representative said.
The solidarity contributions are planned to bring the state budget 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 envisaged 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 of Finance explains that the purpose of solidarity contributions is to increase the national security risk for a limited period of time, in solidarity with the entire Latvian society, directly or indirectly find additional funds to ensure the fiscal needs of the national security.
The ministry notes that an increase in the contributions of credit institutions may occur directly by making payments to the budget or indirectly by significantly increasing the lending of 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.
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 the 31st 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.
The draft law also provides for the exclusion from the solidarity contribution base of mandatory payments to deposit guarantee funds by credit institutions related to lending. They will include payments to the Latvian Deposit Guarantee Fund and other national deposit guarantee funds, as well as to the Single Resolution Fund.
Although the Ministry of Finance acknowledges that the established rate of solidarity contributions is high, the regulation provides for a number of measures that reduce the burden of payment, including a rebate mechanism, the maximum allowable amount for the payment of solidarity contributions. It is also provided that the contribution will not be paid if the credit institution incurs losses of economic activity.
Loans incurred during the payment period as a result of the credit institution re-organising or taking over rights and obligations or claim rights from another person will not be included in the lending growth rate. Similarly, the lending growth indicator will not include loans to persons who, within the meaning of the Law on Credit Institutions, have a close relationship with a credit institution.
In order to apply the discount, the credit institution will have to ensure that the credit growth rate during the payment period is at least 1.75 times higher than the annual growth rate of the Gross Domestic Product (GDP) forecast included in the calendar year budget law.
The discount is 100%, 75%, 50% and 25% of the deposit amount calculated during the payment period. The discount will be applicable if the lending growth rate reaches or exceeds the GDP growth rate multiplied by coefficients of 2.5, 2.25, two and 1.75, respectively.
Credit institutions will have the right to apply a discount for all payment periods specified in the draft law starting from the 1st of January 2025, the 1st of January 2026 and the 1st of January 2027.
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.