Tax

Thin-capitalization rules are Abolished in 2021 and 2022

Martins Lubgans
By:
On 25 November 2021, the Saeima adopted the “Amendments to the Law on the Suppression of Consequences of the Spread of Covid-19 Infection”, which enter into force on 2 December 2021 (hereinafter referred to as- the Covid-19 Law and Amendments).

As a result, the Covid-19 Law has been supplemented with a new Section 7.1, which lays down that the payers of the corporate income tax (hereinafter – the CIT) shall not apply Section 10, Paragraph 1 of the CIT Law for interest payments made in the accounting year which begins in 2021 and 2022. Therefore, interest payments can be included in operating expenses to the full extent, and there is no need to recalculate interest payments. Therefore, when filling in the CIT declaration for the last month of the accounting year 2021, 2022, it is not necessary to show the interest amounts.

Necessity for Amendments

It is explained in the annotated amendments that taxpayers suffered losses during the crisis, because of which the equity capital of companies decreased or became negative, or companies increased the amount of borrowed capital. As a result, they incur additional CIT liabilities in case, if the ratio of the borrowed and equity capital of a company exceeds the ratio of 1: 4 set in Section 10, Paragraph 1 of the CIT Law. Consequently, the CIT taxable base is formed for companies that make interest payments. This is unlikely to happen if no significant restrictions are imposed on economic activities. For these reasons, the Covid-19 Law was supplemented by the foregoing Amendments, i.e., Section 71, which temporarily suspends restrictions on interest payments.    

It should be noted that the Amendments do not apply to Section 10, Paragraph 3 of the CIT Law. Thus, if the difference between interest payments and interest income in the accounting year exceeds EUR 3mln, the company will continue to be bound by interest expense restrictions in the accounting years 2021 and 2022.

We herewith remind you that the restriction on interest payments set out in Section 10, Paragraph 1 of the CIT Law provides for that interest payments are included in the CIT base pro rata to that in what amount the average scope of debt liabilities exceeds the amount which is equal to the amount of equity capital at quadruple rate (fourfold). It shall apply to the debt liabilities received from other persons. Restrictions on interest deduction do not apply to loans received from financial institutions, credit institutions - residents of Latvia, EU Member States, third countries with which tax conventions are in force, etc. In the case if funds are received from the related parties, this type of transactions must be included in the transfer pricing documentation and interest rates consistent with the arm's length transaction principle must be set, i.e., it is required to determine the "market price".   

Have questions regarding tax changes? Contact us!