DelfinGroup and ViziaFinance are challenging the norm on the 20% surcharge on CIT before the Constitutional Court In defence of the interests of their investors and shareholders, DelfinGroup AS and ViziaFinance SIA have challenged, before the Constitutional Court (CC), the obligation for non-bank lenders to pay a surcharge of 20% of the previous year's profits on top of Corporate income tax (CIT) from 1 January this year. The companies argue that consumer lenders are subject to an unjustified tax burden by being erroneously equating with the banking sector, even though the two segments have different and incomparable business structures. While banks can profit from increased interest rates on loans, non-bank lenders themselves find it more expensive to raise finance, which makes the tax on alleged excess profits imposed on non-bank lenders an inherently absurd requirement. Moreover, the surcharge is also disproportionate and taxes non-consumer lending activities.
The Constitutional Court initiated a case on the non-compliance of several articles of the Corporate Income Tax Law with the first sentence of Section 91 and the first and third sentences of Section 105 of the Constitution, which include the right to equality, as well as the protection of property rights.
According to DelfinGroup and ViziaFinance, the contested norms restrict the fundamental right to equality laid down in Section 91 of the Constitution, as non-bank lenders are compared to credit institutions without an objective and reasonable basis. The surcharge on CIT infringes the right to property guaranteed by Section 105 of the Constitution, since the procedure for calculating and paying the surcharge on CIT may result in non-bank lenders being subject to a triple obligation to pay tax, with the effective rate of CIT increasing to 83% in the case of DelfinGroup.
The amendments to the Corporate Income Tax Law were submitted to the Budget and Finance (Tax) Committee of the Parliament on 9 November 2023, and already then several State institutions and consumer lending service providers expressed doubts about the constitutionality of the contested norms.
Didzis Ādmīdiņš, Chairman of the Management Board of DelfinGroup, informs: "Although the Consumer Rights Protection Centre, the Fintech Latvia Association (FLA) and other industry experts pointed out the risks during the development of the new requirement, from 1 January this year we have been unjustifiably equated with the banking sector. Despite the fact that we have a different business structure and operate in a completely different market environment to banks. For example, in a period of high interest rates, banks make money by using customer deposits and placing them in overnight deposits with the European Central Bank, earning a return. This is essentially risk-free profit for the banks, without any economic activity and without sharing the proceeds with depositors. Consumer lending service providers, on the other hand, finance their business activities from a variety of sources, including floating rate loans."
D. Ādmīdiņš believes that the current situation is unfair. "This unjustified tax burden limits our ability to invest in development, causing losses and jeopardising the interests of our investors and more than 9000 shareholders, as the changes in the law significantly reduce our profit after tax," stresses D. Ādmīdiņš.
D. Ādmīdiņš mentions another important difference between non-bank lenders and credit institutions. All the funding that DelfinGroup and ViziaFinance use to secure their loan portfolios is at a variable rate. Consequently, as the EURIBOR has risen, so has the overall cost of funding for companies. However, despite this increase in costs, the companies do not intend to pass on this cost in the 2023 financing, and in the future, to the credit agreements between the companies and their customers. So, even if the EURIBOR rate increases, interest rates on loans to customers will not increase. This approach reflects the commitment of companies to maintain stability in customer costs, which is different from the practice of banks where such floating rates are usually passed on to customers.
"Taking all the above-mentioned considerations into account, we are pleased with the Constitutional Court’s decision to examine the matter on its merits and assess the compatibility of the contested norms with the Constitution. DelfinGroup provides consumer lending, pawnbroking and the sale of pre-owned and new goods and it is important to us that these services are available to as wide a section of the public as possible throughout Latvia. For example, in the current situation, our trading segment is also subject to an additional tax, which is not the purpose of these tax amendments. This decision is an important step in ensuring fairness, protecting our rights and the rights of our investors and shareholders, and allowing us to continue to grow our business," explains D. Ādmīdiņš.
Sorainen is providing legal assistance to DelfinGroup and VIZIA in the Constitutional Court proceedings. Attorney-at-law Katrīne Pļaviņa-Mika explains: "With the initiation of these cases, a significant part of the non-bank lending industry has already turned to the Constitutional Court, asking for control over the development and constitutionality of the CIT surcharge regulation. Although we can only expect the outcome of the case at the end of next year, it is a strong signal for a broader discussion on where and under what circumstances super-profits start in a successful business and what the role of the state is in such a situation."
About DelfinGroup
AS DelfinGroup is a licenced fintech company established in 2009 and operates under the brand names Banknote and VIZIA. The company has been profitable every year since 2010. DelfinGroup continuously develops and offers consumer and pawn loans, loans developed for senior citizens, Buy now pay later loans (BNPL loans), and the sale of pre-owned goods online and at more than 90 branches across Latvia and Lithuania. Since 2014, DelfinGroup has been known on the Nasdaq Riga Stock Exchange as a bond issuer and, since 2021, as a listed company on the Baltic Main List. The company regularly pays dividends to its shareholders. The sustainability of DelfinGroup is based on focused corporate governance, fintech innovation, responsible lending, financial inclusion, and facilitating the circular economy.
For further information, please contact:
Aldis Umblejs,
DelfinGroup Chief Financial Officer
Phone: +371 26189988
E-mail: IR@delfingroup.lv
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