One More Baltic State Enters Euro Zone 

July, 2013 - Maris Brizgo, Senior Associate and Leading Expert in EU law

After a slight pause, the Baltic States – Estonia, Latvia and Lithuania - are continuing on their path to entering the euro zone, which was first entered by Estonia in 2011.

At the beginning of this year, the Government of Latvia officially announced that the country is capable of fulfilling the Maastricht criteria in the long run and that the government has taken the strategically significant decision to apply for membership in the euro zone to become a full-fledged member state of the European Economic and Monetary Union. On 4 March 2013, the application for accession to the euro zone was submitted to the European Commission and the European Central Bank. On 5 June 2013, the European Commission published its 2013 Convergence Report on Latvia, concluding that the country has achieved a high degree of sustainable economic convergence with the euro area and, thus, proposing that the Economic and Financial Affairs Council (Ecofin) of the European Union issue a positive decision on Latvia’s admission. The positive assessment of Latvia’s economic performance against the convergence criteria set out in the EU Treaty and the fact that Latvia has been forecast as the fastest-growing economy in the European Union this year, made the country optimistic about the Council’s decision.

On 9 July 2013, in Brussels, the Ecofin Council adopted a decision to approve Latvia joining the euro zone and becoming the 18th Member State as of 1 January 2014.

Lithuania is preparing to follow the same path in 2015.

Although the procedure for introduction of the euro currency was established long ago and is regulated by the Council of the European Union Regulation (EC) No 974/98 of 3 May 1998 on the introduction of the euro in all member states, this article highlights the most crucial changes to be expected in Latvia this year, and in 2014.

The euro
The euro is the single currency shared by the European Union's Member States, which together make up the euro area or the “euro zone”. The currency was launched on 1 January 1999 as a major step in European integration.

With Latvia, there are currently 18 European Union's Member States:

Euro currency exchange rate in Latvia
The national currency of Latvia has already been tied to the euro for seven years. The Bank of Latvia has maintained a fixed currency exchange rate with one euro being equivalent to 0.702804 Latvian lats. The European Council adopted regulations setting a permanent conversion rate for the Latvian lat against the euro corresponding to the currently fixed exchange rate in Latvia. This means that those wishing to convert Latvian lats to euros will receive the same one euro and 42 euro cents for one lat as before.

Period of concurrent circulation
For the first two weeks following the euro introduction date, it will be possible to pay both in Latvian lats and euros within the territory of Latvia. However, upon payment for goods or services during this time, the change will be paid out in the euro currency, with the sole exception being payments for public transport. On the other hand, ATM machines will stop dispensing lats beginning from the euro introduction date.

Exchange of cash
It will be possible to exchange lats free of charge at all Latvian banking and credit institutions for a period of six months after 1 January 2014. Client service centres of the Latvian Post will be conducting this exchange of lats only for the first three months of 2014. After this time, it will no longer be possible to convert foreign currency into Latvian lats at any currency exchange office.

However, for those who have missed these deadlines and still hold uncoverted lats, it will be possible to convert them at cash offices of the Bank of Latvia for an unlimited period of time and free of charge.

Prices of goods and services
As of 1 October 2013 and until 30 June 2014, all business entities registered in Latvia must state the prices of goods traded and/or services provided both in lats and euro. That means that all stores will have to change their price tags, all cafes and restaurants will have to change their menus, and other vendors must modify their pricelists.

Re-calculating prices into euro will follow the accepted principles for rounding up prices, namely, the sum obtained as a result of the conversion shall be rounded to the nearest cent taking into account the third digit after the decimal point. If the third digit is 0 to 4, then the value of the euro cent will not change. On the other hand, if this figure is from 5 to 9, then the value of the euro cent will increase by one.

Articles of association and share ledgers
Due to the introduction of the euro, all companies registered with the commercial register of Latvia will need to make amendments to their articles of association and share ledgers. The share capital must be stated in euros.

Since par value of one share in private limited liability companies (in Latvia - SIA) must be stated in whole numbers, then, as a result of this transition to a Euro denominated share capital and rounding up, companies might have to disburse part of the share capital to the shareholders or allocate this to reserves.

For example, if the capital of a company (a private limited liability company) is divided into 100 shares with the par value of each share being LVL 20.00, then after conversion of the share’s value (according to the euro currency exchange rate established by the Bank of Latvia), the new par value of the share would be EUR 28.46. Since, in accordance with the Commercial Law of Latvia the nominal value may be stated only in whole numbers, in such case the par value should be stated in the amount of EUR 28.00. It would be possible to allocate the remaining balance in the amount of 46 euro cents (EUR 0.46) per each share (EUR 46.00 in total) in the company’s reserves or disburse this amount to the shareholders. Upon multiplying the number of shares with the newly calculated par value (EUR 28.00), the new share capital of the company would be EUR 2,800. Relevant amendments in respect to the size of the minimum share capital (currently LVL 2,000) will be also introduced in the Commercial Law of Latvia; its expression in euro currency would be EUR 2,800.

Par value of shares in joint stock companies (in Latvia - AS) may be expressed also in euro cents.

It will be possible to make these amendments to the articles of association and share ledgers by June 30 2016. Estonia’s experience shows that establishment of such a timeline is important. No timeline was provided for the registration of amendments in Estonia, and this resulted in the majority of companies submitting amendments to the commercial register in the second part of 2010, resulting in the considerable delay in the registration procedure due to the high number of applications submitted during the same period of time.

Incorporation of new companies

As of 1 July 2013, it will be possible to establish new companies in Latvia stating their share capital in euros.

Annual reports
The annual report for the year 2013 will be the last report in Latvia where entries will be reflected in Latvian lats. In the beginning of 2014, these records shall be made in the euro currency.

Although it will be possible to draft the annual report for the year 2013 using only lats; it would be advisable to concurrently convert the entries made in lats into euro. This is because the annual reports for the year 2014 must reflect comparative figures from the year 2013 in euros.

For the most part, all companies’ reporting years coincide with the calendar year (January 1 – December 31). But the Law on Annual Reports also allows the establishment of a different reporting period. In such cases, if the company’s reporting period begins later than the 1st of January then the entire annual report for the year 2013 will need to be prepared in euros.


Current contracts
The Law on Procedure for Introduction of the Euro stipulates the so-called continuity principle for legal instruments. The essence of the application of this principle to the present case is the following – if an amount in a legal document is stated in lats, then it shall not affect the legal effect of this document after introduction of the euro and such document shall continue to serve its intended purpose, the only change being that it will refer to euros.

Consequently, performance of contracts already entered into must continue and invoices received must be paid for, the introduction of the euro is not a reason to decline fulfilment of a contract or leave an invoice unpaid.

Public registers

If a person has a mortgage or a pledge registered with the Land Register or the Register of Vessels or the commercial register under the Register of Enterprises, then it is not necessary to visit the respective authority to convert the amounts entered in the registers to euro. It will be done by the authority itself based on the established conversion rate.


Euro Introduction Calendar for Your Business in Latvia
1 January 2014Day of introduction of euro
1-14January 2014Period of parallel circulation of euros and lats
1 January - 30 June 2014Period for exchange of lats against euros at credit institutions
1 January - 31 March 2014Period of exchange of lats against euros at the branches of the Latvian Post Office
1 October 2013 – 30 June 2014Period for parallel reflection of prices
1 January 2014 – 30 June 2016Amendments to the articles of association and share ledgers are to be submitted to the Register of Enterprises


 

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