Law firm in Latvia: The Constitutional Court of the Republic of Latvia rules on tax imposed on interest income

Before January 1, 2010, Section 9 (1) (3) of the Law “On Personal Income Tax” provided that income from deposits in credit institutions and savings and loan associations registered in the Republic of Latvia and other Member States of the European Union or states of European Economic Area, as well as income from mortgage bonds shall not be included in the annual taxable income and the tax shall not be imposed upon.

However on December 1, 2009, in the frameworks of the package of draft laws, the Saeima adopted the Law “Amendments to the Law “On Personal Income Tax”” that came into effect on January 1, 2010.

Section 6 of the Amendments provides crossing out the Section 9 (1) (3) of the Law “On Personal Income Tax”.

At the same time the Amendments also supplement the Law “On Personal Income Tax” by:

1.) Section 8 (3) (13) which provides that the rest of the income of a natural person for which the tax must be paid are interest income and incomes similar to it, as well as income related to interest income.

2.) Section 16.¹ (9) establishes the following:

“Within the meaning of this Law, the date of obtaining income and the day of disbursement of interest income shall be the date when a natural person is conferred the right to unrestrictedly use the respective income in accordance with a concluded agreement or law and when the respective income becomes available to the person according to the way and procedure established by the person.”

Two applicants submitted constitutional complaints to the Constitutional Court of the Republic of Latvia regarding recognition of the Contested norms not complying with the Constitution of the Republic of Latvia.

On December 6, 2010 The Constitutional Court established that Contested restriction has been established by law and it does have a legitimate aim – protection of welfare of the society.

In European States at present interest income are also taxed, although application procedure of such tax differ. For instance, in the German Federal Republic, such tax that considerably exceeds the tax established in the Contested Norms is imposed on capital income of a certain minimum amount. In Austria and in Great Britain, the personal income tax is imposed on such income, the income being constituted of other income of a person, too. However, in Cyprus, tax rate for interest income depends on the type of the institution that disburses interest income.

The general principle of the Law “On Personal Income Tax” is that tax that is in force on the date of obtaining income is applied to incomes of a person. To illustrate, income of a person from a wage labour are taxed in accordance with the regulatory framework that is effective on the date of disbursing of the wage rather than on the date when a labour agreement is concluded.

Pursuant to this general principle, the personal income tax is also imposed on interest income of a person in accordance with the regulatory framework that is effective on the date of obtaining income rather than on the date when a person made a deposit.

The Constitutional Court grounded the establishment that the German Federal Constitutional Court neither established any infringement of the property right in the case initiated based on constitutional complaints regarding the fact that interest from deposits in credit institutions in 1971, 1973 and 1974 were taxed insofar as it did not exceed reduction of capital value at each particular year (see: Judgment of 19 December 1978 by the German Federal Constitutional Court in the case No. 1 BvR 335, 427, 816/76, BVerfGE, 50, 57).

Assessing proportionality of the Contested Restriction, the Constitutional Court of the Republic of Latvia takes into consideration that the interest income is mainly characteristic to prosperous members of the society. The Contested Norms are not aimed at income of those social groups that would need special protection by the State.

Consequently the Constitutional Court held that the Contested Restriction does comply with the principle of proportionality, and therefore the Contested Norms do comply with the Constitution of the Republic of Latvia.

Valters Gencs

Tax Attorney & Founding Partner

Gencs Valters Law Firm, Riga

T: +371 67 24 00 90

Email: valters.gencs@gencs.eu