This content is from: Local Insights

Interest rate calculation

Recently adopted changes to the civil law of Latvia transpose the requirements of EU Directive 2000/35/EC on combating late payment in commercial transactions. Previously if the interest rate was not determined by the loan contract, it was considered that the interest rate set by law had been implicitly agreed to. Also, in other kind of agreements if the rate of interest was not determined, it was deemed that contracting sides had agreed on the interest rate set by law, determined as 6%, which had not been changed since 1937 when the civil law was adopted.

Now according to the requirements of the Directive the interest rate is seven percentage points above the reference rate set by a national bank of Latvia (currently four percent).

According to civil law, interest means the compensation for the use of money or movable property, or for a delay proportional to the amount and the duration of use.

It should be mentioned that the main difference between a contractual penalty and interest is that the increase in interest has to stop when it reaches 100% of the debt, such a restriction does not apply to a contractual penalty. The percentage has to be calculated only for the debt or from the main capital.

Civil law also determines that the interest rate has to be paid for delayed payment of debt, even if the debt itself has no interest, as well as for delayed payment of invoices.

Latvia did not exercise its right to fix the period after which interest becomes payable to a maximum of 60 days for particular kinds of contracts. Instead interest becomes payable 30 days after the debtor received the invoice or an equivalent request for payment, or 30 days after the date of receipt of the goods or services (if the date of the receipt of the invoice or the equivalent request for payment is uncertain or has been received by creditor before he received the goods), or 30 days after the date of acceptance of the supplied goods (if it is determined by the contract).

It is expected that these amendments will solve the problems arising from unpaid bills to small and medium-sized enterprises in Latvia and will facilitate the process of obtaining payment for delivered products and services.

Instant access to all of our content. Membership Options | One Week Trial