Latvia's Corporate Tax 2026 — How the 0% Rate on Reinvested Profit Works, and the New Alternative Regime (15%+6%)
Picture an EU country where your company can earn, grow, and build up capital without paying a single cent of corporate income tax — until the moment you decide to pay yourself out of it. That country is Latvia. This isn't a loophole or a special discount — it's the core logic of the system itself, in place since 2018 and expanded with new options from 2026. But like any favorable system, it has its nuances, and you need to understand them before the first dividend payment.
Key takeaways
Reinvested profit in Latvia = 0% corporate tax (UIN). Tax only applies once profit is distributed (dividends or payments treated as dividends).
Under the standard regime, UIN is 20%, but it's calculated on a base = amount paid out ÷ 0.8 — effectively 25% of what the shareholder actually receives (which is 20% of the pre-tax amount).
Since 2026, an alternative regime (15% UIN + 6% IIN) is available for companies whose members are only natural persons — but it applies only to distributed profit, exactly like the standard regime.
Calculated correctly on the same base, the real cost of both regimes for a full distribution is almost identical (~20% vs. ~20.1% of pre-tax profit) — not a difference of thousands of euros, as a surface-level "20% vs. 15%+6%" comparison might suggest.
The UIN declaration is due by the 20th, but payment is due by the 23rd — two different deadlines.
How Latvia's corporate tax model works
Since 1 January 2018, Latvia's corporate income tax (UIN) system has been built on one principle: tax is due only on profit that leaves the company. As long as profit stays in the business and funds its growth, UIN is 0%. This applies to both active (trading) and passive (dividends, interest, royalties) income, as well as capital gains from the sale of any type of asset.
In practice, this means a company can:
Buy equipment and machinery without increasing its tax burden.
Build reserves for future projects.
Grow and expand without any tax drag on cash flow.
But the moment money leaves the company, the tax obligation kicks in. And the law watches closely for how profit can be "taken out" — not just through formal dividends, but through hidden forms of distribution too.
How the taxable base differs from accounting profit
This is one of the nuances new business owners most often miss. UIN doesn't tax accounting profit — it taxes distributed and deemed-distributed profit. And when you calculate the tax starting from the amount you want to receive net, that amount is divided by a coefficient of 0.8 — so the effective rate is 25% of the net amount paid out (which is 20% of the pre-tax amount).
⚠️ An important note on the calculation logic: the UIN 20/80 formula can be applied in two different ways, depending on what figure you start from. If you start from the amount you want to pay a shareholder in hand (a net target), UIN is an additional cost on top of that amount for the company. If instead you start from the company's total annual profit, using that entire profit to cover both the distribution and the tax, the dividend is 80% of that profit and UIN is 20% of it; this is the same formula (UIN = dividend ÷ 0.8 × 20% = 25% of the dividend), so there is no need to divide by 0.8 a second time. Both approaches give a correct result — the key is not to mix them in a single calculation. Both are illustrated separately below.
The UIN formula (starting from the desired net amount)
Say you want to pay yourself €80,000 in dividends "in hand" — and you want to know how much extra the company has to pay in tax. The calculation looks like this:
Taxable base: €80,000 ÷ 0.8 = €100,000
UIN at 20%: €100,000 × 20% = €20,000
Total cost to the company: €80,000 + €20,000 = €100,000
So if you want a specific amount in your pocket, it costs the company 25% more than the amount paid out. This is known as the 20/80 formula, and it applies every time a company pays dividends or makes other taxable distributions.
What counts as "distributed profit"
The taxable base consists of two main categories: actually distributed profit and deemed distributed profit.
Actually distributed profit
These are payments that clearly reduce the company's capital in favor of its members:
Dividends (including interim dividends)
Payments treated as dividends — profit distributions in cooperative societies, individual enterprises, partnerships, and permanent establishments
Liquidation quotas
Deemed distributed profit
This is where most of the surprises for new business owners hide. The law treats certain expenses and transactions as a "deemed distribution of profit," even when no money is physically paid to shareholders. These include:
Expenses unrelated to economic activity — expenses not directly tied to the company's business, such as the owner's personal travel or entertainment costs without a business justification.
Excess representation expenses — the tax-exempt limit for representation expenses and staff wellbeing events is 5% of the company's total gross payroll for the previous year. Anything above that threshold becomes deemed distributed profit.
Bad debts — receivables not recovered within 36 months of the provision being created (with some exceptions — e.g., up to 60 months in insolvency proceedings).
Increased interest payments — loan interest exceeding certain limits (thin capitalization), e.g. where the debt-to-equity ratio exceeds 4:1.
Loans to related parties — with several exceptions (e.g., loans from a parent company to a subsidiary, short-term loans up to 12 months).
Transfer pricing adjustments — where transactions with related parties don't reflect market prices.
Surplus assets on liquidation.
Assets transferred abroad.
Hybrid mismatches.
The special case of luxury cars
If a company buys a passenger car whose value excluding VAT exceeds €75,000, it is a representative car (Corporate Income Tax Law, Article 1, part 17), and all related expenses — the purchase cost or rent, and operating costs during the 60 months from registration — are treated as non-business expenses and subject to UIN (Article 2, part 2, point 8 and part 8). For example, if a car costs €90,000 (excluding VAT), all these expenses are taxed with UIN, not only the part above €75,000. The threshold should always be read excluding VAT — Article 1(17) of the Corporate Income Tax Law states this explicitly.
The new alternative UIN regime (15% + 6%)
From 1 January 2026, companies whose members — in the tax period in which dividends are calculated — are only natural persons have the option to choose an alternative tax regime.
How it works
Under the alternative regime:
The company pays 15% UIN on distributed profit (dividends) — not on the whole year's accounting profit regardless of distribution. Just as under the standard regime, tax applies only at the moment of distribution — reinvested profit stays at 0%.
The taxable base is the distributed portion of profit, divided by a coefficient of 0.85; UIN = base × 15%.
An additional 6% IIN is withheld from dividends paid to the natural person.
Once the shareholder receives the dividend, 6% IIN is withheld from it. Whether and how a foreign investor can credit this tax in their country of residence depends on that country's law and the applicable tax treaty.
Worked example for the alternative regime (full profit distribution)
Say a company's annual profit is €100,000, and the entire amount (both the payout and the tax itself) is used to convert it into dividends.
Distributable portion (base): out of €100,000 total resources, UIN and dividends split proportionally per the formula — the distributable portion is €85,000
UIN at 15%: €85,000 ÷ 0.85 × 15% = €15,000
IIN at 6% (on the €85,000 paid out): €85,000 × 6% = €5,100
Net dividends to the shareholder: €85,000 − €5,100 = €79,900
Total tax burden: €15,000 + €5,100 = €20,100
For comparison — converting that same €100,000 fully into dividends under the standard regime (using the whole amount to cover both the dividend and UIN): dividends = €80,000, UIN = €20,000, the shareholder receives €80,000.
A conclusion that surprises many: comparing both regimes correctly on the same base (the company uses exactly the same €100,000 in resources), the shareholder receives €80,000 under the standard regime and €79,900 under the alternative regime. The difference is just €100 — not several thousand euros, as a surface-level "20% vs. 15%+6%=21%" comparison might suggest. In fact, calculated properly, the standard regime comes out about €100 per €100,000 ahead of the alternative regime for a full distribution — the two are essentially on par.
When the alternative regime is still worth considering
Since the pure tax cost of the two regimes for a full distribution is nearly identical, the choice between them should be based on other factors, not just the headline rate:
Distribution level (of €100,000 profit) | Standard regime (20/80) — net to shareholder | Alternative regime (15%+6%) — net to shareholder |
|---|---|---|
30% (€30,000) | €24,000 | €23,970 |
75% (€75,000) | €60,000 | €59,925 |
100% (€100,000) | €80,000 | €79,900 |
Where the alternative regime can be more advantageous in practice:
For foreign investors, who may be able to credit the 6% IIN paid in Latvia in their home country (depending on its rules and the applicable tax treaty) — this can reduce the overall tax burden more than the Latvian-only calculation shows.
Situations where predictability and simplicity matter for regular, monthly dividend payouts.
The standard regime remains the simpler default for most Latvian SIAs, because:
If you mostly reinvest profit and don't distribute it, you pay no tax at all (0%), regardless of the regime chosen.
Nothing extra needs to be withheld or declared at the shareholder level when dividends are received — that's already handled at the company-level UIN.
Purely numerically, for a full distribution the standard regime comes out at least as good as the alternative, often slightly better.
Important nuances of the alternative regime
The choice of regime is made in the tax period in which dividends are calculated — that is, separately in each tax period (a calendar month, or a quarter if the company books documents quarterly) in which dividends are calculated, when filing that period's UIN declaration. The law does not set a fixed advance deadline for this choice (such as one that must be made already in January) — the choice happens naturally alongside filing the declaration for that period. You can freely revert to the standard regime the following period.
The alternative rate applies to dividends calculated in the tax period (UIN Law, Section 4.²); the law does not restrict which year the distributed profit was earned in.
The regime is only available to companies whose direct members are exclusively natural persons. Holding companies and corporate groups cannot use it.
The 15% UIN rate does not apply to deemed-distributed profit items — those are always taxed under the standard 20/80 formula, regardless of which regime is chosen.
Practical example: how much tax a typical SIA pays
Let's look at a company with €100,000 in annual profit across three scenarios. In each, profit is the total resource the company uses to cover both the payout to the shareholder and all related taxes.
Scenario A: The company reinvests all its profit
The company buys new equipment, hires staff, and expands operations.
Standard regime: UIN = €0 (profit is not distributed)
Alternative regime: UIN = €0 (here too — if profit isn't distributed, no tax is due)
Conclusion: For a growing company that reinvests all its profit, both regimes are tax-equivalent (0%). In both regimes, no UIN declaration is needed for months without a distribution.
Scenario B: The company uses 50% of profit for a dividend payout
Of the €50,000 portion the company allocates to the payout (including the tax itself).
Standard regime:
UIN: €50,000 × 20% = €10,000
Net dividends to the shareholder: €50,000 − €10,000 = €40,000
No additional personal tax is due.
Alternative regime:
UIN: €50,000 × 15% = €7,500
Remainder for dividends (IIN base): €50,000 − €7,500 = €42,500
IIN: €42,500 × 6% = €2,550
Net dividends: €42,500 − €2,550 = €39,950
Conclusion: On the same base, the standard regime gives the shareholder slightly more (€40,000 vs. €39,950) — a difference of just €50, practically negligible. The choice should rest on other considerations (such as a foreign investor's tax credit), not this gap.
Scenario C: The company uses all its profit for a dividend payout
Standard regime:
UIN: €100,000 × 20% = €20,000
Net dividends: €100,000 − €20,000 = €80,000
Alternative regime:
UIN: €100,000 × 15% = €15,000
Remainder for dividends: €100,000 − €15,000 = €85,000
IIN: €85,000 × 6% = €5,100
Net dividends: €85,000 − €5,100 = €79,900
Conclusion: On the same base, the standard regime comes out €100 ahead. Both regimes are practically on par — the choice between them is a matter of circumstance, not a large amount of money.
UIN declaration filing and payment deadlines
The UIN declaration in Latvia is filed monthly, whenever a distribution or deemed distribution of profit has occurred in that month. The filing deadline and the payment deadline differ:
Declaration filing deadline: by the 20th of the month following the end of the tax period.
Payment deadline: by the 23rd of the following month — a different date from the filing deadline, and confusing the two is one of the most common mistakes.
If no distribution or deemed distribution occurred in a given month, no declaration is due for that month.
Frequently asked questions
Can I really avoid paying UIN if I don't distribute dividends?
In principle, yes. But you need to be careful with expenses. If the company pays for expenses not directly related to its economic activity, they're treated as deemed distributed profit and subject to UIN.
Does paying UIN under the standard regime exempt me from IIN?
Yes. Dividends paid from profit earned after 2017 on which UIN has been paid are not subject to additional personal income tax (IIN). Under the alternative regime, however, an additional 6% IIN is withheld.
Is the alternative regime always more advantageous because the rate is lower (15% vs. 20%)?
No — this is a common misconception. The 15% rate applies to a different base than the 20% rate, and when both regimes are calculated on the same base, a full profit distribution comes out practically equivalent under both (a difference of around €100 per €100,000). The real value of the alternative regime usually lies elsewhere — for example, in a possible tax credit for foreign investors (depending on their home country's rules).
Can I change regimes every year?
Yes, choosing the alternative regime is voluntary, and the choice is made separately in each tax period (month) in which dividends are calculated, when filing that period's UIN declaration.
How should I handle representation expenses?
Representation expenses and staff wellbeing events (client dinners, team-building events, for example) are capped at 5% of the previous year's gross payroll. Any excess over that limit is taxed with UIN under the standard 20/80 formula — regardless of whether the company has chosen the alternative regime. Plan these expenses at the start of the year and track the limit throughout.
What happens if I can't recover a receivable?
If a receivable isn't recovered within 36 months of the provision being created, it generally has to be included in the UIN taxable base. That's why it's important to pursue debt recovery in good time and document every attempt to recover the funds.
Are the UIN declaration and payment deadlines the same date?
No. The declaration is due by the 20th, but the tax must be paid by the 23rd — two different deadlines, and this distinction is often missed.
Next steps
If you're planning your first dividend payout, or weighing whether the alternative UIN regime fits your company, an accurate calculation needs to account for your specific ownership structure, distribution frequency, and — where relevant — any foreign investor's tax situation in their home country. Use our dividend calculator to quickly compare both regimes for your situation, or get in touch for an individual consultation.
Conclusion
Latvia's corporate tax system is one of the strongest advantages this country offers business owners, local and international alike: reinvested profit stays untaxed for as long as it's working for the business. The new alternative 15%+6% regime widens the choice, but it isn't a "cheap trick" that automatically saves thousands — calculated correctly, it comes out nearly on par with the standard 20/80 formula for a full distribution. Our team helps business owners choose the optimal tax strategy for their specific situation, factoring in both business needs and personal financial goals — get in touch to talk through yours.
See also: dividends vs salary and tax optimization for small businesses.
Sources and references
Corporate Income Tax Law — Article 1(17) (luxury car threshold), Article 4 (standard base and the 20/80 formula), Article 4.2 (alternative regime)
VID, "Personal Income Tax Rates" — 6% IIN rate on dividends from alternative-regime profit
VID methodical material "Procedure for completing the corporate income tax declaration" (vid.gov.lv/lv/media/1455/download) — UIN declaration and payment deadlines, worked examples
Last updated: September 2026. Based on the Corporate Income Tax Law as amended for 2026 and official VID materials.
Comments