SRS and interest rates in related party loans: what the Senate said about using the “average”

When the SRS addresses related party loans, the central issue is almost always the interest rate. In practice, a seemingly simple approach is often used: to compare the loan interest rate with the average indicators published by the Bank of Latvia and, if it exceeds the “average”, to make tax adjustments.

The Senate of the Republic of Latvia already clearly indicated in 2021 that such an approach is incorrect.

What was the dispute in case SKA-103/2021 about?

The case evaluated loans between related parties – a Latvian company had received loans from Lithuanian group companies with a 6% interest rate. The SRS considered that this rate exceeded the market level and, based on Bank of Latvia statistics, adjusted the company’s taxable income.

Both the company and the SRS used the comparable uncontrolled price method. The dispute was not about the choice of method, but about how comparable data is used.

Why the average is not enough

The Senate emphasized a crucial principle: average statistical indicators alone do not ensure compliance with the arm’s length principle. If there are differences between comparable transactions that can significantly affect the price, adjustments must be made.

In the case of loans, such differences may include:

1. existence or non-existence of collateral;
2. borrower’s risk;
3. loan term;
4. fixed or variable interest rate;
5. economic conditions at the time of the transaction.

If these factors are not taken into account, direct use of statistical data is not permissible.

Bank of Latvia data as a starting point

The Senate does not claim that Bank of Latvia statistics are unusable altogether. They can serve as a starting point for analysis. However, this is not enough. If the data do not reflect the essential parameters of comparable transactions, they must be adjusted or other comparable data must be sought.

It is particularly important that the compliance of a transaction price with a wide range of interest rates does not, in itself, mean compliance with the arm’s length principle. A detailed comparability analysis is required.

Another important aspect – procedural fairness

In this case, the Senate also addressed a procedural issue. The regional court had based its judgment on data that had not been appended to the case materials and about which the parties to the proceedings had not had the opportunity to comment.

The Senate clearly stated: a judgment may only be based on evidence about which the parties have had the opportunity to express their opinion. This aspect is particularly important in situations where the tax administration or court refers to internal or restricted access data.

What this judgment means in practice

This case clearly shows that determining interest rates in related party loans is not a mechanical exercise. Average rates from public statistics cannot replace a full economic analysis.

For companies, this means the following: if loan terms are justified by clear logic and comparability analysis, they can be defended even in a dispute with the SRS. Conversely, a formal approach where the interest rate is chosen “approximately” creates a risk when this transaction comes under scrutiny.

This judgment shows that disputes over interest rates in related party loans often arise not because the company acted maliciously, but because the transaction is not sufficiently justified economically and documented.

In our practice, we often see situations where loan terms are essentially defensible, but the justification or comparability analysis used does not meet the level expected by the SRS in case of control or dispute.

If a company has related party loans or if the SRS has already raised questions about interest rates, timely evaluation helps avoid a situation where arguments must be sought in a hurry. In such cases, professional involvement often changes the dynamic of the dispute from the very beginning.