Question.
On the basis of a contract (contract from 01.01.2012-31.12.2012), a natural person lends funds of LVL 15,000 to a legal entity of a limited liability company, in cash and by instalments to the company's treasury. In one month LVL 10000 is paid to the cashier, in the next month LVL 5000. Is the company in breach of Section 30 of the Taxes and Duties Act? In our opinion, no. But the State Revenue Service considers that the law has been violated because it considers that a natural person may lend only LVL 10000 in cash to one legal person, regardless of the tax period.
The State Revenue Service (SRS), on the basis of the Law „On Taxes and Fees”, considers that SIA has not complied with the provisions of Section 30 (1) of the said Law, and is therefore liable to administrative liability under Section 159.7 (3) of the Latvian Code of Administrative Offences, which provides that for making a transaction in cash, if the amount of the transaction exceeds ten thousand lats, except for the transaction of commercial companies of ship and aircraft agency and the transaction of international road transport and freight forwarding, - a fine of fifteen per cent of the amount of the transaction shall be imposed on natural persons and legal entities.
The administrative penalty for such an offence is very high, so in this case the SRS staff considers that the penalty of 15 % should be calculated from LVL 15 000.00, which is LVL 2 250.00. I fully agree that such fines are disproportionately high and may lead to the insolvency of the LLC.
The SRS basically justifies its position as follows.
The provisions of Section 30 (1) of the Law „On Taxes and Fees” restrict taxpayers to carry out transactions in cash in the amount exceeding LVL 10 000.00. According to Section 1(11) of the said Law, a transaction is an act to establish, modify, continue or terminate a legal relationship.
Article 1511 of the Civil Code states that a contract is an agreement between several persons for the establishment, alteration or termination of a legal relationship, but according to Article 1934 of this Law, a loan contract means the transfer of a certain quantity of fungible goods, with the obligation to return what is received in the same quantity and in goods of the same class and utility.
When assessing the above-mentioned legal norms, the SRS usually concludes that the SIA, by concluding a loan agreement with a natural or other legal person, has agreed to establish a legal relationship with another person for the loan of funds. It also finds that the SIA has established this legal relationship by borrowing funds from a natural or legal person or by lending funds to a natural or legal person.
In addition, the SRS considers that the legislator's aim with the provision of Section 30 (1) of the Law „On Taxes and Fees” was to include also such transactions where the entire payment is not made at once, but in several instalments, as well as to exclude the possibility of artificial division of the transaction amount.
Thus, summarising all the above, the SRS considers that there are sufficient grounds to hold the person administratively liable by imposing disproportionately high fines.
Unfortunately, this issue is a „sore point” for many companies, case law has not given a clear answer on the best way to proceed, so there is a wide range of opinions on this issue. I will also give my opinion on this issue.
It is important to note that under the Civil Code, a loan agreement is a real contract, i.e. the signing of a loan agreement does not establish or prove the existence of a loan relationship, as the loan agreement is only effective from the moment the loan is transferred. If the money is not received, there is no loan.
Article 1865(1) of the Civil Code provides that a contract that has not yet been performed, in whole or in part, is destroyed by its cancellation as if it had never been. The same rule applies even when, literally, only one or other of the parties should be released from its obligation.
Thus, the company should look at whether the loan agreement has been executed in accordance with its terms and scope, and therefore the SRS officials should also look at whether it can serve as a legal basis for holding the company administratively liable.
Section 30(1) of the Law on Taxes and Fees states that taxpayers, except natural persons who are not sole traders, shall declare each month by the 15th of each month, in accordance with the procedure established by the Cabinet of Ministers, all cash transactions (regardless of whether the transaction takes place in one operation or in several operations), the amount of which exceeds LVL 3,000, carried out between them during the previous month. Taxpayers, except natural persons who are not sole traders, shall not be allowed to carry out cash transactions in excess of LVL 10 000 (regardless of whether the transaction takes place in one operation or in several operations).
Paragraph 1 of the Cabinet of Ministers Regulation No 237 of 10 April 2007 „Regulations on Declaration of Cash Transactions” stipulates that The Regulations establish the procedure for taxpayers, except for natural persons who are not individual traders and who have not registered with the State Revenue Service as economic activity performers (hereinafter - counterparties), to declare their cash transactions on a monthly basis.
In accordance with Paragraph 2 of the Regulation, counterparties shall, except as otherwise provided in these Regulations, declare all transactions in cash between them during the month (whether in a single transaction or multiple transactions) exceeding LVL 3 000; and paragraph 4, counterparties shall declare transactions in cash during the month in their declaration of transactions in cash.
The regulation of the above-mentioned legal acts clearly and unambiguously defines the circle of persons to whom the obligation to comply with these provisions applies and the scope and type of their legal obligations, namely that legal persons, sole traders and economic activity entrepreneurs must declare mutual cash transactions exceeding LVL 3 000.00 and are prohibited from carrying out cash transactions exceeding LVL 10 000.00, i.e. both parties to the transactions must ensure the submission of appropriate declarations and such law subjects are prohibited from mutual transactions exceeding this limit within one month.
Such a limitation of the period of cash transactions is also provided for in Article 159.7 of the LAPC, i.e. the first part of the said Article establishes a penalty for failure to declare cash transactions and explicitly sets the limits of the offence - one month, and I quote, for failure to declare transactions made in cash, if the amount of transactions exceeds LVL 13,000 per month but does not exceed LVL 10,000, except for transactions made by commercial ship and aircraft agency companies and international road transport and freight forwarding transactions - a fine of three per cent of the undeclared amount shall be imposed on natural persons, and five per cent of the undeclared amount shall be imposed on legal persons. So, if a transaction exceeding LVL 3 000.00 but not exceeding LVL 10 000.00 is made in one month, then it must be declared, while a transaction exceeding LVL 10 000.00 in one month must not be made, and if it is, then the penalty is provided for in the third part of this Article.
According to legal theory, a legal provision must be applied in its entirety and interpreted in the context of other provisions, so that it does not lose its logic and is actually enforceable.
The above interpretation of the provisions is clear and understandable, whereas the position of the SRS in prohibiting cash transactions with any person exceeding LVL 10 000.00 in any period raises important questions and leads to some confusion, i.e., how an enterprise is to establish and determine whether and when it is entitled to carry out cash transactions with the person concerned up to LVL 10 000,00 repeatedly (if there is no prohibition to carry out a single transaction with a specific person up to LVL 10 000.00), so that they are not aggregated and an administrative penalty is not imposed as a result of the SRS audit, because currently the SRS analyses cash transactions for a period of one year back from the start of the thematic inspection or audit.
Thus, I believe that since an absolutely illogical and incomprehensible situation arises and it is impossible to determine the period of time during which it would be possible to carry out a repeated cash transaction with the relevant partner, there is reason to believe that the SRS unjustifiably extends the limits of the time limit contained in Section 30(1) of the Taxes and Duties Law - „during the previous month”, for up to twelve months. The SRS imposes penalties but does not explain how the taxpayer should take action to avoid breaching this cash transaction rule.
Source - http://www.ifinanses.lv/
