Sometimes a situation arises when, due to certain circumstances, it is necessary to issue a loan (to a relative, an acquaintance, your company, a friend’s company, etc.) or to receive a loan.
What could be easier – you simply sign a loan agreement (and sometimes, as many might think, you can do even without a contract), then transfer the funds (or maybe even cash would be OK), and the job is done. However, not everything is as simple as it seems at first glance. Let’s review several situations in which there are risks associated with the issuance and receipt of loans.
Part 1. Issuance of a loan to an individual (resident of Latvia)
A loan issued to an individual is treated as the borrower’s income, from which personal income tax must be paid (at a rate of 20, 23 or 31%), if the loan is not repaid within 6 months after the loan repayment period specified in the loan agreement, but no longer than within 66 months (5.5 years) from the date of the loan.
There are several exceptions to this rule, for example: a loan issued by one lender (as well as the amount of several loans) that does not exceed 1,500 euros, loans issued to a spouse or relative up to the third degree of kinship, loans to cover proven medical expenses and education expenses are not treated as income.
If, on the day the loan is issued, the borrower is an employee, member of the board or council of the lender the borrower must additionally pay 22 percent of the income in the form of the loan received and not returned.
If a legal entity (a person perfotming economic activities, etc.), which is a resident of Latvia, has issued a loan to the borrower and has not fulfilled the following conditions:
1) the loan agreement is concluded in writing,
2) the issuance and return of the loan is carried out in the form of non-cash payments;
3) the loan repayment period specified in the loan agreement does not exceed 60 months;
4) on the day the loan is issued, the lender has no tax debts,
5) the maximum loan amount (its total amount) does not exceed 30% of the borrower’s average income from the lender for the last 12 months, multiplied by 60, and if the borrower is the owner or participant of the lender, the maximum loan amount does not exceed the amount of the lender’s equity capital in proportion to the borrower’s share in the capital of the lender;
6) the sum of all loans issued by the lender to individuals does not exceed the lender’s equity capital,
then, instead of the borrower, personal income tax is paid by the lender, including the aforementioned additional rate of 22%.
If the amount of loans received by an individual exceeds 15,000 euros, then they must be reported to the State Revenue Service, and if the loan is received from an individual (resident or non-resident), then the borrower must be the informer.
If an individual takes a loan from a non-resident who is located in a country with which Latvia does not have an agreement on the elimination of double taxation, or which is a tax-free territory, then the loan agreement must be concluded in the form of a notarial deed.
In the next part, we will talk about the risks associated with the issuance of loans by a legal entity to its participants (shareholders) and other related parties, as well as about additional risks in case of systematic (repeated) granting of loans.
Law firm Inlatplus, with its extensive experience, can at any time provide qualified legal assistance in respect of correct execution of loan transactions, as well as in all other issues of interest to the client.