Latvia: Corporate income tax changes include measures for “doubtful debts,” interest expense limits
Amendments to the corporate income tax law
Amendments to the corporate income tax law
Amendments to the corporate income tax law, passed by the Parliament in the third reading, include the following changes:
Portfolio accruals or provisions for receivables in accordance with IFRS no. 9: The measures outline the corporate income tax implications relating to provisions for “doubtful debts” by taxpayers that make such provisions in accordance with International Financial Reporting Standard (IFRS) No. 9. If certain criteria are met, then the provision for a debtor in accordance with IFRS no. 9 would be subject to corporate income tax only if the debt has not been recovered within 60 months from the date when the debt arose (instead of within 36 months, as provided under the general norms). The criteria specified in the corporate income tax measures are:
- Traceability of the debtor's debt
- The need for an auditor's sworn opinion regarding the financial statements
- A requirement for the taxpayer to establish a policy for recognizing, recovering, and writing off a provided receivable
Although the proposed amendments are viewed positively by tax professionals because they would provide an explanation for the application of the corporate income tax to portfolio accruals, the measures are complicated and may give rise to certain questions. Tax professionals have expressed a hope that the tax authority would issue guidance explaining the practical application of these new rules. For example, would the 60-month period be counted from the time when the debtor arises (and not from the time the provision was created)? In other words, how would this provision apply if the provision was made in the 59th month after the debt arose?
If adopted, these amendments would be effective and apply to provisions made from 1 January 2018. This would contradict Paragraph 28 of the Transitional Provisions, which stipulates that Article 9 of the corporate income tax law regarding taxation of doubtful debts applies only to those debts created after 1 January 2018. According to the new provisions, Article 9 of the corporate income tax law could be applied, for example, to a debt which was incurred in December 2017, but the provision was made in 2018. Hopefully, the tax authorities would address this contradiction and explain the rule in future guidance.
Interest payments: Article 10, Paragraph 3 of the corporate income tax law stipulates that in a situation when interest expenses exceed €3 million, interest expenses exceeding 30% of EBITDA (earnings before interests, tax, depreciation and amortization) will be taxable. This measure is clarified by the amendments. The limitation would not apply to interest payments, but to the difference between interest income and payments or net interest expenses. Thus, the amendments would provide that the standard complies with the EU Council Directive 2016/1164 (12 July 2016) and thereby eliminate the unfavorable treatment in Latvia (when compared to elsewhere in Europe). The amendments to the corporate income tax law also stipulate that interest expenses calculated in accordance with IFRS no. 16 “Lease” would not be restricted by Article 10 of the corporate income tax law. In order to deduct this interest in full, the lease transaction must comply with the Cabinet of Ministers Regulation no. 775 for operating leases defined in Chapter 11. These amendments would be effective retroactively and apply to interest expense as from 1 January 2021.
Transitional provisions: The transitional provisions would extend the debt provision limit from the 36-month period to 60 months, in recognition of the economic implications of the coronavirus (COVID-19) pandemic.
Other amendments: The debt-to-equity ratio limit of 4:1 would not be applied in 2021 and 2022.
Read an April 2022 report prepared by the KPMG member firm in Latvia
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