Entrepreneurs who don't look for ways to reduce their tax burden are rare. But there is a crucial line between "optimization" and "tax evasion" — in the first case, you use the opportunities provided by law; in the second, you risk fines, penalties and even criminal liability. This article covers only legal, tried-and-tested methods that can help your SIA pay less tax in 2026 without breaking any laws.
1. Use the 0% CIT on Reinvested Profits
This is the single most powerful legal tax optimization tool in Latvia. Unlike most EU countries, Latvia's corporate income tax (CIT) is only applied when profits leave the company — via dividends, deemed distributions, or non-business expenses.
As long as profits remain within the company, the CIT rate is 0%. This means: if you earn €50,000 and leave the entire amount in the company to purchase equipment, expand operations, or build up reserves, you pay not a single cent in tax.
Practical tip: if you plan major investments (equipment, vehicles, software), make them before distributing profits. Every euro reinvested back into the company is free from CIT — saving you effectively 25% of the distributed amount.
2. Separate Business Expenses from Personal Ones
Latvia's CIT Law draws a sharp line between business-related and non-business expenses. Non-business expenses are treated as deemed profit distributions and subject to 20% CIT.
These include: owners' and employees' leisure and entertainment trips in company vehicles, gifts, loans converted into gifts, and any other disbursements that are not part of remuneration or are not related to commercial activities.
What qualifies as a deductible business expense
Office rent and utilities
Employee salaries and social contributions
Office equipment, software and licences
Professional services: lawyers, accountants, consultants
Website development, hosting, domain
Advertising and marketing — banners, Google Ads, social media campaigns
Employee training, certification, conferences
Accounting and legal services
The golden rule: every expense must be justified by its connection to business activity and supported by appropriate documentation. Without a supporting document — even if the expense was genuinely business-related — the accountant will classify it as a non-business expense, and CIT will become payable.
3. Representation Expenses: Use the 5% Allowance
Representation expenses are costs incurred to build company prestige, entertain customers and business partners, and purchase low-value items to enhance popularity. Since 2018, this category has also included staff sustainability measures — expenses for team-building, motivation, and maintaining social infrastructure.
Representation and staff sustainability expenses are exempt from CIT up to 5% of the company's total gross wages for the preceding year. If the cap is exceeded, the excess is subject to CIT.
Example: If the company's total gross wages in 2025 were €100,000, you can spend up to €5,000 on representation and staff sustainability expenses in 2026 without paying CIT. Any excess will be taxed.
What qualifies: client dinners, office coffee and snacks, team-building events, low-value souvenirs with the company logo (up to €20 per item).
Important: representation expenses must be recorded separately and clearly described in the accounting policy. Only then can the 5% exemption be applied. Without adequate documentation, all representation expenses may be classified as deemed profit distributions.
4. Car Expenses: What You Can and Cannot Deduct
For many small businesses, a car is a significant expense item. Here are the key principles.
Passenger car acquisition and depreciation
If the company purchases a passenger car, the acquisition cost cannot be expensed immediately — it must be recorded as a fixed asset and depreciated over several years. The depreciation period is typically 5 years.
An important restriction: if the car's value exceeds €75,000, the depreciation portion related to the amount above this threshold is treated as a deemed profit distribution and subject to CIT.
Car-related deductible expenses
If the vehicle is used for business purposes, the following costs may be included in expenses:
Fuel or electricity (for charging)
Repairs and maintenance
Insurance (OCTA, KASKO)
Tyres and seasonal servicing
Parking fees
Lease payments
Technical inspections
Road tax
Private vs business use
If the car is also used for private purposes, you must be able to separate the business-use proportion. This can be done by keeping trip records (route logs) or setting a fixed proportion based on actual usage. Without such separation, input VAT on car expenses is only deductible at 50%.
5. Recovering Input VAT
By registering as a VAT payer, the company gains the right to deduct input VAT — the VAT paid on purchases. For small businesses with significant initial investments (equipment, machinery, furniture), this can yield substantial savings.
For example, purchasing equipment for €10,000 + VAT 21% (€2,100): a VAT-registered business recovers that €2,100. A non-VAT-registered business pays this amount from its own funds.
Important: input VAT can only be deducted if the purchases are used for VAT-taxable transactions and appropriate documentation (invoices, receipts) has been retained.
6. Salary and Dividends — the Right Combination
This is one of the most effective everyday tax optimization strategies. Salary is subject to PIT (25.5%) and social contributions (totalling 34.09% of gross salary). Dividends under the standard regime are subject to CIT (effectively 25% of the net amount) but no additional PIT.
The optimal model: pay yourself the minimum salary (€780 per month in 2026) to ensure social contributions and social guarantees, and distribute the remaining profit as dividends.
The effective tax burden on dividends (20%) is significantly lower than on salary (reaching up to 45% at higher salary levels). For a more detailed comparison with calculations, see our article "Salary vs Dividends for SIA Owners — Which Is Better?".
7. Choose the Optimal CIT Regime
From 1 January 2026, companies whose shareholders are exclusively individuals have a choice between two CIT regimes:
Standard regime: 20% CIT, applying the 20/80 formula, only on distributed profits.
Alternative regime: 15% CIT + 6% PIT on dividends.
When the alternative regime is more advantageous: if you plan to distribute most of your profits (above 75–80%) as dividends. If you mainly reinvest profits, the standard regime remains more advantageous — CIT is only paid when profits are actually distributed.
The choice must be made each year when filing the CIT return. You can switch to a different regime the following year.
8. Time Your Profit Distributions
One of the simplest yet underused optimization techniques is the timing of profit distributions. Under the standard CIT regime, tax is only paid when the profit is withdrawn — so you have control over which tax period the payment falls into.
Practical tips:
If you are planning dividends in December, consider paying them in January instead, deferring the CIT liability by a full month.
If you expect higher revenue in the coming year, consider leaving some profit in the company as a reserve rather than distributing it immediately.
If you are planning major investments (e.g. new office fit-out), make them before distributing profits.
9. Plan Related-Party Financing
From 1 January 2026, amendments to the CIT Law expanded the exemptions from thin capitalisation rules. Interest payments on financing obtained from the following sources are no longer treated as deemed profit distributions:
Publicly traded securities issued in Latvia, the EU, or EEA and admitted to trading on a regulated market
Financing obtained from licensed crowdfunding platforms in Latvia, the EU, or EEA
These amendments open up new opportunities for businesses to raise financing from alternative sources without increasing their CIT burden.
When to Consult a Certified Tax Advisor
While many of these strategies can be applied on your own, there are situations where specialist help is essential:
The company is planning a significant restructuring or creating a holding structure
There are complex international transactions or transfer pricing issues
The company is considering switching CIT regimes and needs a detailed comparison
The SRS has initiated a tax audit or review
A certified tax advisor will help assess the risks, prepare the necessary documentation, and ensure that your tax optimization strategy is not only effective but also fully compliant with legal requirements.
Tax optimization is not just a mathematical exercise — it is a strategy that requires an understanding of legislation, company development plans, and financial flows. Our team helps entrepreneurs design and maintain a legal, well-thought-out tax strategy. Start with a free consultation.
Last updated: April 2026. Information is based on the Corporate Income Tax Law with 2026 amendments, and official materials from PWC, Baker Tilly, Leinonen, and the State Revenue Service.
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