2026 Tax Changes in Latvia — Everything a Small Business Needs to Know

2026 Tax Changes in Latvia — Everything a Small Business Needs to Know

2026 brought several significant changes to Latvia's tax system — some will work in business owners' favor, others will require adjustment. A new alternative corporate tax regime, changed payroll tax thresholds, VAT changes for food and books, and higher excise duties all directly affect small and mid-size companies. Here's a roundup of the key changes and practical steps to prepare for them.

Key takeaways

• Since January 1, 2026, a new, voluntary alternative corporate/personal tax regime for dividends (15% + 6%) is available — but the real difference from the standard 20% corporate tax, when profit is fully distributed, is only about 0.1 percentage points, not several.

• Minimum wage: €740 → €780/month (€1,050 in construction); tax-free allowance: €510 → €550/month.

• The micro-enterprise tax (MUN) turnover ceiling is €50,000/year — not €100,000, as sometimes mistakenly stated.

• The reduced 12% VAT rate on basic food products (bread, milk, poultry meat, eggs) is temporary, in effect only from July 1, 2026 to June 30, 2027.

• Excise duty on tobacco rises from January 1; on strong alcohol, from March 15 — two different dates for two different product categories.

The new alternative corporate/personal tax regime for dividends (15% + 6%)

Until now, Latvia ran a distinctive system: corporate income tax (UIN) at 20% was payable only when profit was distributed, and individuals paid no additional personal income tax (IIN) on the dividends they received. The combined tax burden worked out to 20% of the distributed base.

As of January 1, 2026, companies whose shareholders are exclusively individuals have the option to choose an alternative regime: 15% corporate tax at company level on distributed dividends (calculated on a base of: distributed profit ÷ 0.85), plus a further 6% personal income tax, withheld at the time dividends are paid out.

An important nuance about the real tax burden: comparing both regimes on the same total cost base (i.e. how much the company has to set aside in total for the shareholder to receive a given amount), the difference between the standard 20% corporate tax and the alternative 15%+6% regime, in the case of full profit distribution, is minimal — roughly 20.0% versus 20.1%. For example, if a company uses exactly €100,000 in total resources for dividends and tax: under the standard regime the shareholder receives €80,000 (with €20,000 in corporate tax on top); under the alternative regime, the shareholder receives €79,900 (€15,000 corporate tax + €5,100 personal income tax). So the choice between regimes is rarely decisive on its own — other factors matter more (see below).

The choice is voluntary and made separately in each tax period (month) in which dividends are calculated, when filing that period's corporate tax return — you can't apply both rates to the same dividend payout at once.

When does the alternative regime pay off?

The real advantages of the alternative regime usually lie not in the rate itself, but elsewhere:

• Foreign investors who may be able to credit the 6% personal income tax paid in Latvia in their country of residence (depending on its rules and the applicable tax treaty), reducing the tax owed there.

• Companies with regular, predictable profit distributions, for whom simpler planning with a fixed, separately stated personal-tax component can be administratively more convenient.

If a company mostly reinvests its profit, on the other hand, the standard regime (20% corporate tax only at the point of distribution) is still more favorable — the tax is deferred until profit is actually paid out.

Source: Corporate Income Tax Law, Article 4.2

The alternative regime also applies to prior years' undistributed profit

Because Latvia's corporate tax is charged only when profit is distributed (not when it's earned), a distribution of profit accumulated on the balance sheet in prior years is governed by the rules in force in the year of the distribution — not the year the profit was earned. That means: if a company has undistributed profit accumulated from previous years, it can distribute it in 2026 too, choosing the new alternative regime (15% corporate tax + 6% personal income tax).

Minimum wage: €740 → €780

The monthly minimum wage for 2026 has risen from €740 to €780. In the construction sector (under the extended collective agreement), the minimum wage is set at €1,050.

These changes affect:

• Employers with staff on minimum wage — both gross salary costs and social insurance contributions (VSAOI) rise.

• Self-employed individuals and sole proprietors — the mandatory minimum VSAOI contribution increases (€780 × 31.07% = €242.35/month under the general rule; a different, 26.59% rate applies to real estate management).

• SIA board members. An important clarification: a board member's compensation is always subject to payroll tax, but the obligation to calculate VSAOI on at least the minimum wage (so-called deemed income) arises only when two conditions are met at once — the company has no other employee or board member already earning at least the minimum wage, and that month's turnover exceeds five times the minimum wage (€3,900 in 2026). This obligation doesn't depend on whether the board member has a formal employment contract, or whether this is their "only job" — those are inaccurate simplifications sometimes seen online.

Source: State Social Insurance Law

Tax-free allowance: €510 → €550

As of January 1, 2026, the fixed tax-free monthly allowance for all salary recipients has risen from €510 to €550.

That means no personal income tax is withheld on the first €550 of salary. In practice, this increases net pay by roughly €8–10 a month, depending on gross salary.

The tax-free allowance is planned to rise to €570 in 2027, and stay at €570 in 2028 (subject to possible review).

VAT changes from 2026

The reduced 12% VAT rate on food — temporary, not permanent

From July 1, 2026 to June 30, 2027 (one year), Latvia will apply a reduced 12% VAT rate to certain food products. The list includes:

• Fresh or chilled poultry meat (frozen meat is excluded from the reduced rate)

• Thermally untreated poultry eggs (in shell)

• Cow's, goat's, or sheep's milk (excluding UHT milk)

• Bread and basic bread products

Fresh fruit, berries and vegetables have had a 12% rate since 2018, repeatedly extended year after year — the latest extension is planned through 2028. It's no longer a "pilot project" in the strict sense; it's more accurately described as a repeatedly renewed reduced-rate scheme.

After June 30, 2027, bread, milk, poultry meat and eggs automatically revert to the standard 21% rate unless a new extension is adopted.

All other food products — processed meat products, sweets, beverages, restaurant meals — remain subject to the standard 21% VAT rate.

Companies in food retail or production need to update their POS systems and invoice templates in time to correctly separate products taxed at 12% from those at 21%.

Source: LV portāls — reduced VAT rate on basic food products takes effect July 1

5% VAT on books — a narrower set of languages

As of January 1, 2026, the reduced 5% VAT rate for books, press and other publications no longer applies to publications in Russian. The 5% rate remains only for publications in:

• Latvian, Latgalian, and Livonian;

• the official languages of the EU, EEA, Switzerland, EU candidate countries, and OECD member states.

All other publications (Russian included) are now taxed at the standard 21% VAT.

Excise duty changes in 2026

It's worth not mixing up two different dates — tobacco and alcohol changes take effect at different times.

Tobacco — from January 1

As of January 1, 2026, excise duty on tobacco products rose by an additional 5 percentage points. For example, the minimum tax level for 1,000 cigarettes rose from €171.90 to €197.70.

Alcohol — from March 15

As of March 15, 2026, a sharper excise duty increase took effect for strong alcohol — +€15 per 100 liters of absolute alcohol. Excise duty on wine rises from €134 to €148 per 100 liters. The increase for beer is more moderate — from €9.80 to €10.58 per hectoliter/degree.

The next significant increase is planned for March 1, 2028, when excise rates will rise for every category of alcoholic beverage, including beer.

Source: VID — excise goods developments from 2026

Other excise duties

2026 also brought increases to the natural resources tax and the gambling tax. Separately, excise duty on non-alcoholic beverages, including energy drinks, is planned to rise from 2028.

Other significant changes

• Transfer pricing documentation — as of 2026, full transfer pricing documentation (the local file) only needs to be submitted to VID on request, within 30 days. At the same time, though, a new requirement was introduced: filing a standardized, electronic controlled-transactions report (KDP) every year, if transactions with related parties exceed €250,000. The KDP must be filed within 12 months of the reporting year's end — not only on request.

• Interest deduction limits (thin capitalization) — the range of financing sources exempt from the debt-to-equity ratio restriction has been broadened. This makes it easier to access alternative financing sources outside the banking sector.

A reminder on the micro-enterprise tax (MUN) for 2026

The MUN rate has been a flat 25% of turnover since 2024 (previously a progressive 15–25% scale depending on turnover) — that itself isn't changing in 2026, but it's worth restating, since it's still often confused.

It's important to get the MUN turnover ceiling right: it's €50,000/year (matching the VAT registration threshold), not €100,000, as is sometimes mistakenly stated. There's no employee-count limit for MUN and sole proprietorships.

If you're operating as a micro-enterprise, check that you still meet the criteria (turnover up to €50,000/year). It's worth talking to an accountant about switching to the general regime if MUN stops paying off for you — our SIA vs. sole proprietorship vs. self-employed comparison is a useful next read.

Change calendar — what takes effect when

Worked example: standard or alternative regime?

Say SIA "Konsultants" has a single individual shareholder, and the company decides to distribute its entire €50,000 profit as dividends in 2026.

In this example, where the shareholder wants exactly €50,000, the two regimes come out almost identical (a ~€78 difference in favor of the standard regime), but in practice the deciding factor is usually other considerations (a foreign investor's possible tax credit, administrative convenience) rather than the rate itself.

You can run the numbers for your own situation with our dividend calculator.

What business owners should do now

1. Review your payroll budget. If you have staff, make sure salaries meet the new €780 minimum (or €1,050 in construction). Recalculate VSAOI costs with our payroll calculator.

2. Evaluate the corporate tax regime. If your shareholders are exclusively individuals and you plan to distribute profit, work out which regime — standard 20% or alternative 15%+6% — suits your situation better. Talk to an accountant — the difference is usually smaller than it first appears.

3. Update your VAT accounting. If you operate in food or publishing, update POS systems, invoice templates, and product classification to match the new VAT rates — and remember that the 12% rate on food is temporary.

4. Track the excise changes. Alcohol and tobacco retailers need to plan for higher purchase costs and adjust retail prices accordingly — keep in mind tobacco and alcohol have different effective dates.

5. Don't forget the transfer pricing requirements. If you transact with related companies above €250,000, make sure your transfer pricing documentation is ready, and that you file the controlled-transactions report (KDP) within 12 months of year-end.

6. Review your micro-enterprise status. If you're on the MUN regime, confirm your turnover stays under €50,000/year and that the 25% rate still works in your favor.

Frequently asked questions

Do I have to switch to the alternative corporate tax regime?

No, it's voluntary. For most companies that fully distribute their profit, the difference between the two regimes is small — you choose separately in each tax period (month) in which dividends are calculated, when filing the corporate tax return.

Will the new 12% VAT rate on food still apply in 2028?

No, unless a new extension is adopted — this specific rate (for bread, milk, poultry meat, eggs) is set for one year only, through June 30, 2027.

Why does a board member have to pay VSAOI on the minimum wage if they don't actually receive a salary?

That only happens when two conditions are met at once: the company has no other employee earning the minimum wage, and monthly turnover exceeds €3,900. Outside those cases, there's no such obligation.

Does the minimum wage increase affect the self-employed too?

Yes — the self-employed VSAOI contribution base is tied to the minimum wage, so the mandatory minimum contribution rises along with it.

Where can I keep track of further tax changes?

We'd recommend checking VID's and the Ministry of Finance's official pages regularly, along with our blog's tax section — we update our articles as new amendments take effect.

On balance, the 2026 tax changes look moderately favorable for small businesses — higher payroll thresholds raise labor costs, but the new corporate tax regime opens up more flexible options for paying dividends, especially for foreign investors, even though the actual rate difference is smaller than it's often presented. Our team helps business owners navigate these changes and make well-informed decisions. Get in touch.

See also: 0% corporate tax on reinvested profit and the alternative regime and wage changes and the minimum wage in 2026.

Legal sources and references

• Corporate Income Tax Law — Section 3(5), Section 4.² (alternative regime)

• Law "On Personal Income Tax" — transitional provision 197 (non-taxable minimum)

• Law "On State Social Insurance" — social insurance contribution rates

• Cabinet Regulation No. 680 of 19 November 2025 — minimum monthly wage in 2026

• Value Added Tax Law — Sections 41 and 42 (reduced rates), transitional provision 48 (12% rate from 01.07.2026 to 30.06.2027)

• Microenterprise Tax Law — Sections 4 and 6 (turnover limit and rate)

Last updated: September 2026. This information is based on amendments passed by the Saeima and VID's official materials.