Currently, the European Council is developing a draft directive (hereinafter – the Directive) laying down rules on a debt-equity bias reduction allowance and on limiting the deductibility of interest for corporate income tax (hereinafter – CIT) purposes. In other words, the Directive intends to introduce notional interest that can be used to reduce taxable income.

The aim of this European Union initiative is to encourage businesses to borrow less and use their own funds for development, namely, their retained earnings. Thus, by increasing equity and reducing excessive indebtedness, insolvency risks would be diminished.

The relief proposed in the Directive provides for the introduction of notional interest calculated on increases in equity, which can be used to reduce taxable income.

The Directive further provides how the notional interest rate and increase in equity should be determined and to which period the relief should be applied. The Directive also contains various anti-avoidance rules to prevent abuse of the framework.

If the Directive will be adopted, it should be transposed into Member States’ national law by 31 December 2023 and come into effect as of 1 January 2024. It is not known at the moment, how the Directive will be introduced in Latvia and what CIT base this relief will apply to - the tax base that arises from the distribution of dividends or any other CIT base.

 

 

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The article provides an insight into what KPMG Baltics SIA considers to be key changes in tax legislation in the 4th quarter of 2022.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Ivonna Balode, Manager in Tax, KPMG in Latvia