To combat inflation in Latvia and to respond to a number of market rating agencies, a number of inflation fighting measures have been recently introduced. One set of measures has been taken to dampen the demand for loans, the theory being, prices rise partly due to the easy availability of credit. Accordingly, amendments were made to the Consumer Rights Protection Law, requiring that consumer loan issuers:
- request and receive a State Revenue Service document confirming the income of the applicant for the loan, and
- assess the consumer's ability to repay the loan taking into account the State Revenue Service confirmation, prior to issuing a loan.
The amendments provide that in the case of mortgage loans for real estate, the loan can be issued in an amount not more than 90 percent of the market value of the real estate. If a loan is granted for the purchase of goods or receipt of services, the consumer is to receive the loan only after making the first installment, which should be at least 10 percent of the price of the financed goods or financed service.
The above-mentioned measures and limitations do not refer to cases when the price of goods or services is less than 100 minimum monthly salaries fixed in the country, which currently is 120 lats (171 euros). Thus, if the price of goods or services is less than 12,000 lats, the above-mentioned measures do not apply.
A State Revenue Service confirmation is not necessary if:
- the consumer loan is done through financial instruments;
- the consumer loan agreement is signed with residents of other countries and if the purpose of such a loan is not the purchase or use of real estate or other property registered in the public registers of the Republic of Latvia;
- the borrower is a public servant or information about the person's income is publicly available.
A set of Cabinet Regulations was adopted prescribing the procedure by which the State Revenue Service is to issue a confirmation on the borrower's income. The Regulations prescribe that the borrower must turn to the State Revenue Service office applicable to the borrower's declared place of residence. The content of the State Revenue Service confirmation is to include the borrower's income for the preceding taxation year and the current taxation year (from the beginning of the current year). The confirmation is to be issued within one business day.
One more area to which the inflation-fighting plan refers is the changes in tax legislation. Amendments have been adopted by the law "On Personal Income Tax," which prescribe that a real estate transaction is subject to a 25 percent tax if the sold property belonged to the seller for less than 60 months. If the property was the seller's for more than 60 months and, in addition, if at least for a year it was the seller's declared place of residence, then such transaction is not subject to tax withholding.
Exceptions to which these amendments do not refer and to which the old law continues to apply will be those persons who had the real estate in his property before the respective amendments to the law came into force, i.e., before June 12. It means that the amendments will not be applied if:
- title was registered in the Land Book or title to the property is not registered in the Land Book, but will be registered by December 31, 2008;
- title is not registered in the Land Book due to a dispute regarding title which is confirmed by a court judgment upon granting standing to bring the claim;
-a decision is made on renewal of title of real estate and a taxpayer is entitled to perform cadastral measurements at the expense of the National Budget funding, but this measurement has not yet been made.
These new rules apply to purchase and sale transactions entered into after June 12, 2007. You may be aware that with respect to real estate purchase and sale transactions in Latvia it is customary to enter into a deposit agreement in advance of the purchase and sale agreement. Even if the date of a deposit agreement is prior to June 12, 2007, it does not prevent the applicability of the new rules on the grounds that deposit agreements are not considered to be agreements by which title is transferred. The date of the purchase and sale agreement is considered to be the determinant of whether or not the new rules apply to the transaction.
Valters Kronbergs is managing partner at Kronbergs & Cukste, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms which includes Teder, Glikman & Partnerid in Estonia and Jurevicius, Balciunas & Bartkus in Lithuania, dedicated to providing a quality 'one-stop shop' approach to clients' needs in the Baltics.