On Wednesday, the 4th of December, the Saeima adopted the Solidarity Contributions Law in its final reading, which will oblige credit institutions registered in Latvia and branches of credit institutions from other countries to make solidarity contributions for the next three years.
Members of the opposition did not criticize this initiative, but they did say this solutions comes late.
The parliament rejected the proposal from National Alliance member Artūrs Butāns to introduce solidarity contributions for consumer loan service providers and food retailers.
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 law states 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 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 lending 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 also 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, 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 the 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.
The 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 reorganising 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 amount will be equal to 100%, 75%, 50% and 25% of the amount paid calculated for the payment period. The discount will be applicable if a credit institution’s growth indexes either reach or exceed GDP growth rate multiplied by 2.5, 2.25 and 1.75.
It will be allowed to apply a discount for credit institutions for all payment periods set in the legislative draft that start from the 1st of January 2025, 1st of January 2026 and the 1st of January 2027.
To ensure balanced application of requirements of the law, as well as put to rest the concerns of representatives of the industry, a special mechanism is included in the legislative draft. This mechanism provides for the application of the discount from the first advance quarterly payment.
The discount for an advance quarterly payment may be applied if a specific lending growth threshold was reached in that specific quarter.
Following a request from industry representatives, a special article was included in the law. This article lists the maximum cap on solidarity contributions. It will not be allowed to exceed 33% of the credit institution’s profits before taxes and solidarity payment.
If the solidarity payment amount exceeds this threshold, it will be returned to the maximum permitted amount instead.
To ensure it applies to advance payments, the threshold’s calculation will use the payer’s profit outlook for each quarter.
The profits will be calculated repeatedly and corrected accordingly in accordance with the actual profit volume before taxes and before payment of solidarity contribution.
The Ministry of Finance notes that this does not present any obstacles to achieve the objective of the legislative draft and will help put concerns about lending restrictions to rest.