(Bloomberg) -- Latvia’s plans to force banks to pay corporate taxes and a fee levied to finance mortgage rate cuts will cost the lenders about €230 million ($250 million) next year, the banking association said.
The Baltic country’s financial sector — dominated by Nordic lenders such as Swedbank AB and SEB AB — has seen profits rise as about 95% of housing and non-financial corporate loans have floating rates, boosting banks’ net interest income as deposit rates have been slow to catch up. The government and the lenders have been negotiating for months on potential relief for borrowers.
Latvia’s parliament is due to hold a final vote on Dec. 6, to cut mortgage interest rates by 30%, financed by a fee on lending portfolios for one year. The cost of the rate cut will amount to about €90 million, Edgars Pastars, legal adviser to the Finance Latvia Association, said by phone. The government earlier announced plans to mandate lenders — now subject only to dividend taxation — to pay taxes on profits, for expected income of about €140 million.
“Technically this new model is easier to administer, but the banks do not agree with it,” Pastars said by phone.
The new measures will amount to a fee of 2% on the credit portfolios. The government had offered banks a lower rate of 1.5% as long as lenders signed a memorandum, requiring them to “agree to the tax with their signature and further invest in the Latvian economy and agreeing a review of pricing of some services,” Pastars said. “The banks were not ready to do this, among other things considering future claims on the constitutionality of the new tax.”
The finance ministry and the prime minister’s office didn’t respond to requests to comment.
Neighboring Estonia’s government in September agreed with mainly Nordic-owned banks to increase dividend payments — and thereby taxes on dividends — rather than imposing a direct levy. Lithuania imposed a time-limited windfall tax on its lenders.
“When the banks had problems in 2008-2010, or when they laundered money, the public had to have solidarity with the banks,” Latvian President Edgars Rinkevics said in a news conference on Nov. 29. “Now, the banks are not ready to do anything.”
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