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Lower personal taxes but on a tighter leash

Oct 17, 2013

By Zinta Jansons, LAWIN

So the government decided to reduce the social insurance rate for employees by 1% to 34.09% of which the employee pays 10.5% and the employer 23.59%. In the grand scheme of things probably for most not a significant change.

At the same time as part of the 2014 budget package, the plan to reduce the personal income tax rate to 20% by 2016 has been sidetracked and a „revised" position proposed:

2014 - 24%
2015 - 23%
2016 - 22%.

To tighten the leash on taxpayers, proposed amendments to the personal income tax law broaden the scope of taxable income to include certain types of deemed income:

  • Deemed taxable income for board members equal to the minimum monthly salary in cases when a company does not have any employees or board members that receive taxable income and company revenue exceeds EUR 7,000. In 2014 the minimum monthly salary is set at Ls 225 or EUR 320;
  • Non-business loans to be deemed as income to the borrower and in certain cases to the lender if they are not repaid within 6 months after the repayment term or within 66 months from the date the proceeds were issued (limited exceptions apply including loans between close family members, loans less than EUR 1500).
  • Income from reduced interest will be deemed as taxable income to the borrower. The deemed income will be calculated as the difference between interest rates charged on a loan and the Bank of Latvia average interest rate for domestic loans issued by lenders that are not financial institutions multiplied by a coefficient of 0.7.

(Note: the deemed income from loans and interest does not apply to loans issued by licensed lenders - so don't worry about your mortgage and bank loans.)

The new regulation is quite detailed especially with respect to the loans deemed as income. Various criteria and exceptions are applicable. Assuming the proposals are enacted into law and come into effect for 2014, there will be two main issues to address - First, lenders and borrowers will have to make sure they document loans and follow the applicable criteria to avoid incurring additional tax liability and second, the tax authorities will need to be consistent in their approach in evaluating and enforcing the new regulation.

To read more articles on Tax Update.

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