With solidarity contributions, it is planned to get 96 million euros in the 2025 budget, 60.8 million euros in 2026, and 66 million euros in 2027.
Minister of Finance Arvils Asheraden (JV) explained at the government meeting that “the idea of solidarity contributions did not come from an easy life”. The Minister stated that this is related to the tight situation of the state budget and the need to finance national defense.
With the solidarity contribution, it is planned to achieve two goals – funding for national security and a stimulus for the somewhat stagnant national economy in order to promote lending, Asheraden said.
The bill stipulates that the solidarity contribution will be 60% of the calculated base. This base will be the part of the credit institution’s calendar year net interest income, which exceeds by more than 50% the average annual interest income in the last five financial years – from January 1, 2018 to December 31, 2022.
Credit institutions are expected to make advance quarterly payments of solidarity contributions. The draft law provides that the contribution will have to be made for three payment periods – for 2025, 2026 and 2027.
At the same time, the draft law also defines the mechanism for applying the solidarity contribution discount, which will provide up to 100% discount if the credit institution reaches a certain lending growth rate in the given period.
For the amount of the calculated discount, the credit institution will be entitled to reduce payments, including advance quarterly payments. On the other hand, by summarizing the results of all three payment periods, the credit institution, when submitting the declaration of solidarity contributions for the year 2027, will be entitled to recover the overpaid contribution, evaluating the amount of the total discount.
FM explains that the purpose of solidarity contributions is to find, directly or indirectly, additional funds for ensuring the fiscal needs of the country’s national security for a limited period, in solidarity with the entire Latvian society, in the conditions of increased national security risk.
The FM indicates that the increase in the contributions of credit institutions can happen directly, by making payments to the budget, or indirectly, by significantly increasing the lending of the non-financial sector, which does not include the state administration, and thus also activity in the economy and budget revenues. This would allow more funding for the growing national security needs in the coming years.
In the annotation of the draft law, the FM 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 originators of lending of the credit institution with the indicators before the rapid increase of the EURIBOR rate, as a result of which the credit institutions still earn a significant extraordinary profit, which is not directly related to the operation of their assets.
A credit institution that started operations after 2018 will not take into account the calendar year in which it started operations in the calculation of the average annual net interest income, and the average annual net interest income will be calculated for the financial years that begin on January 1 of the year following the start of operations and end in 2022 .on December 31 of the year.
In order to ensure that the solidarity contribution applied to transactions with residents of Latvia, 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 issued by the credit institution to non-financial sector clients who are residents of Latvia by the total amount of deposits and loans issued by the relevant payer from non-financial sector clients.
The draft law also provides for the exclusion of mandatory payments of credit institutions related to lending to deposit guarantee funds from the base of solidarity contributions. They will include payments to the Deposit Guarantee Fund of Latvia and the deposit guarantee funds of other countries, as well as to the Single Resolution Fund.
Although the FM admits that the established solidarity contribution rate is high, the regulation provides for several measures that reduce the burden of payment, including the discount mechanism, the maximum permissible amount of solidarity contribution payment. It is also provided that the contribution will not have to be paid if the credit institution incurs economic activity losses.
The lending growth indicator will not include loans that arose during the payment period when the credit institution reorganized or took over rights and obligations or claims from another person. Similarly, the lending growth indicator will not include loans to persons who, in the sense of the Law on Credit Institutions, have close relations with the credit institution.
In order to apply the discount, the credit institution will have to ensure that the lending 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 budget law for the calendar year.
The discount is provided in the amount of 100%, 75%, 50% and 25% of the amount of the contribution calculated during the payment period. The discount will be applicable if the credit growth rate reaches or exceeds the GDP growth rate multiplied by the factors 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 bill, starting from January 1, 2025, January 1, 2026 and January 1, 2027.
In order to ensure a balanced application of the provisions of the law, as well as to eliminate the concerns expressed by the representatives of the industry, a mechanism has been incorporated into the draft law, which provides for the possibility of applying a discount from the quarterly advance payment of the first installments. The discount for the advance quarterly payment can be applied if the specified increase in the amount of lending has been achieved in the corresponding quarter.
At the request of industry representatives, a norm has been incorporated into the draft law, which determines the maximum permissible amount of solidarity contributions. Namely, it is expected that the contribution may not exceed 33% of the profit of the credit institution before the payment of the calculated corporate income tax and solidarity contributions.
In the event that the amount of solidarity contributions exceeds the mentioned threshold, it will be reduced to the specified maximum amount of contributions.
In order to ensure that the mentioned threshold is applied in relation to advance payments of the solidarity contribution, the amount of the payer’s forecasted profit for the relevant quarter will be used to calculate the threshold.
The amount of profit will be recalculated and accordingly adjusted according to the actual amount of profit before the payment of corporate income tax and solidarity contributions.
The FM states that this does not create obstacles to the achievement of the goal set by the draft law and eliminates the concerns expressed by the industry about restricting or delaying crediting.
In order to prevent unjustified application of solidarity contributions, it is envisaged that the payment will not have to be made if the credit institution has losses as a result of economic activity in the relevant payment period for which the payment of solidarity contributions is calculated.