Tax Optimization for Small Businesses in Latvia — Legal Options in 2026
Business owners who aren't looking for ways to reduce their tax burden are rare. But there's a critical line between "optimization" and "tax evasion" — in the first case you're using opportunities provided by law, in the second you risk penalties and criminal liability. This article covers only legal, practice-tested techniques that will let your SIA pay less tax in 2026 without breaking the law.
Key takeaways
Reinvested profit in Latvia is not taxed at all under corporate income tax (CIT) — 0% — tax arises only when profit is distributed
As of 2026, companies whose shareholders are exclusively natural persons can choose between the standard (20% CIT) and the alternative (15% CIT + 6% personal income tax) regime for dividends — the choice is made per taxation period (month) in which dividends are calculated, not once a year
A "representative car" (value over €75,000 excluding VAT, an M1-category car with up to 8 seats) means all related operating expenses are subject to CIT, not just the depreciation portion above the threshold
Representation and staff well-being expenses are exempt from CIT up to 5% of the previous year's total gross payroll
Input VAT can only be deducted for purchases used to carry out VAT-taxable transactions — for mixed use it must be split proportionally
1. Use the 0% CIT rate on reinvested profit
This is the most powerful legal tax optimization opportunity in Latvia. Unlike most EU countries, in Latvia corporate income tax (CIT) applies only when profit is paid out of the company — as dividends, deemed distributed payments, or expenses not related to economic activity.
As long as profit stays in the company, the CIT rate is 0%. In practice: if you earn €50,000 and leave the whole amount in the company for equipment purchases, next year's expansion, or reserves, you don't owe a single cent in tax.
Practical tip: if you're planning major investments (equipment, vehicles, software), make them before distributing profit. Every euro reinvested in the company is not subject to CIT — the saving is 20% of the distributed amount.
2. Separate business expenses from personal ones
Latvia's CIT law strictly separates business-related expenses from those of a personal nature. Expenses not related to economic activity are treated as deemed distributed profit and taxed under the 20/80 formula (effectively 25% of the expense amount).
These include: owners' and employees' leisure and entertainment trips in a company car, gifts, loans converted into gifts, and any other payments that are not part of remuneration or not connected to business activity.
What can be included as business expenses
Rent and utility payments
Employee salaries and social security contributions
Office equipment, software, and licenses
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 most important rule: every expense must be justified as business-related and backed by a corresponding supporting document. Without a document — even if the expense was genuinely business-related — your accountant will treat it as unrelated to economic activity, and CIT will be due. If you're unsure how to classify a specific expense, check with your accountant — see our accounting services.
3. Representation expenses: use the 5% limit
Representation expenses are costs incurred to build the company's prestige, host clients and business partners, and purchase low-value items for promotional purposes. Since 2018, this category also includes staff well-being measures — team-building, motivational activities, and social infrastructure maintenance costs.
Representation and staff well-being expenses are exempt from CIT up to 5% of the company's total gross payroll for the previous year. If the limit is exceeded, the excess is subject to CIT.
Example: If a company's total gross payroll in 2025 was €100,000, in 2026 it can spend up to €5,000 on representation and staff well-being measures without CIT. Any excess will be taxed.
What qualifies: client dinners, coffee and snacks in the office, team-building events, low-value branded souvenirs (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 proper documentation, all representation expenses can be treated as deemed distributed profit.
4. Car expenses: what's allowed and what isn't
For many small businesses, a car is a significant expense item. Here are the key principles.
Purchasing and depreciating a passenger car
If a company buys a passenger car, its purchase cost cannot be written off immediately — it must be recorded as a fixed asset and depreciated over several years.
This is one of the most commonly misunderstood rules, so let's clarify it carefully. The CIT law defines a "representative car" as a passenger car whose value excluding VAT exceeds €75,000, which is additionally an M1-category vehicle with no more than 8 seats (excluding the driver's seat), or in certain cases a specific N1-category vehicle used functionally as an M1. This threshold (previously €50,000) applies to cars purchased or leased since June 1, 2023. Excluded from the definition are operational vehicles, specially equipped passenger cars (e.g., ambulances, motorhomes), vehicles for people with disabilities, car dealers' demonstration vehicles, and rental company vehicles where passenger transport services generate at least 90% of turnover.
An SIA's accounting depreciation follows the company's accounting policy and does not change the CIT base. Our depreciation calculator shows the depreciation categories for personal income tax payers (such as the self-employed), so for an SIA it is only an indicative comparison.
The key point that's often misunderstood: if a car meets the "representative car" definition, CIT applies as an expense not related to economic activity to all operating expenses connected to that car — depreciation, fuel, repairs, insurance, lease payments, tires, and other maintenance costs — not just the depreciation or value portion exceeding the €75,000 threshold. It's an all-or-nothing rule: either the car (by value and type) qualifies as representative and all of its costs are subject to CIT, or it doesn't qualify and its costs are fully deductible as ordinary business expenses. A representative car that has been in use for 5 years or more loses this status, and its expenses are thereafter treated as ordinary business expenses.
Source: Corporate Income Tax Law, Article 1, Section 1(17) and Article 8, Section 2(12)
Car-related expenses
If a car does not qualify as representative and is used in business activity, expenses may include:
Fuel or electricity (for charging)
Repairs and maintenance
Insurance (compulsory and comprehensive)
Tires and seasonal servicing
Parking fees
Lease payments
Technical inspection
Vehicle circulation tax
Private and business use
If a car is also used for private purposes, you need to be able to separate out the share of business use. This can be done by keeping a trip log (route sheets) or by setting a fixed proportion based on actual use. Without such a split, input VAT on car expenses is deductible only at 50%.
5. Recovering input VAT
By registering as a VAT payer, a company gains the right to deduct input VAT — VAT paid on purchases. For small companies with large upfront investments (equipment, hardware, furniture), this can produce a significant saving.
For example, when buying equipment for €10,000 + 21% VAT (€2,100), a VAT payer recovers that €2,100. A company that is not a VAT payer pays this amount out of its own funds.
Important: input VAT can only be deducted if the purchases are used to carry out VAT-taxable transactions, and appropriate supporting documents (invoices, receipts) are kept. If purchases are used both for VAT-taxable and VAT-exempt (or non-business) transactions, input VAT must be split proportionally — full deduction is not permitted in that case. More on registration requirements: VAT registration in Latvia.
Source: Value Added Tax Law, Article 100
6. Salary and dividends — the right combination
This is one of the most effective everyday tax optimization strategies. Salary is subject to personal income tax (25.5%) and social security contributions (34.09% of gross salary combined). Under the standard regime, dividends are subject to CIT (effectively 25% of the net amount), but not to personal income tax.
Optimal model: pay yourself the minimum salary (€780/month in 2026) to secure social security contributions and social guarantees, and pay out the rest of the profit as dividends.
The effective tax burden on dividends (20% of pre-tax profit, or 25% of the net amount paid out) is considerably lower than on salary (up to ~45% of the employer's total cost at higher salary levels). For a broader comparison with calculations, see our article Dividends vs. salary — which is more advantageous for an SIA owner?, or use our dividend calculator to compare specific numbers.
7. Choose the optimal CIT regime
As of January 1, 2026, companies whose shareholders are exclusively natural persons have a choice between two CIT regimes for dividends:
Standard regime: 20% CIT, applying the 20/80 formula, only on distributed profit. No personal income tax is due on dividends.
Alternative regime: 15% CIT at the company level + 6% personal income tax, withheld at the time dividends are paid out.
This is an important clarification: the alternative regime is not available to just any company — it can only be applied if all of the company's shareholders are natural persons (not, for example, another legal entity or a foreign holding structure).
The choice between the two regimes is not made once a year when filing the annual CIT return — it is made per taxation period (month) in which dividends are calculated. Within the same month, both rates cannot be applied to different dividends at once — one must be chosen. In theory, a company could choose different regimes in different months within the same year, but in practice the choice should be made thoughtfully, since it also affects how the return is filed and the calculation base.
When the alternative regime is more advantageous: on rates alone the choice gives no material benefit — for a full profit distribution both regimes cost almost the same (see Latvia tax changes 2026), so the choice depends on other factors, such as the shareholders' country-of-residence rules. If you mainly reinvest profit, the standard regime remains more advantageous — CIT is due only once profit is actually paid out.
An accurate comparison requires an individual calculation, since the effective tax burden under each regime can differ depending on the amount and the shareholders' tax residency. If you're considering switching regimes, consult an accountant or tax advisor — get in touch with us.
Source: Corporate Income Tax Law
8. Time your profit distribution
One of the simplest, yet underused, optimization techniques is timing the distribution of profit. Under the standard CIT regime, tax is due only when profit is actually paid out — so you have control over which taxation period this payment falls into.
Practical tips:
If you're planning to distribute dividends in December, consider paying them out in January instead, deferring the CIT payment by a full month.
If you expect higher revenue next year, consider leaving part of the profit in the company as a reserve rather than paying it out immediately.
If you're planning major investments (for example, fitting out a new office), make them before distributing profit.
9. Plan financing from related parties
As of January 1, 2026, amendments to the CIT law took effect that expand the exemptions from the thin capitalization rules. Interest payments on financing obtained from the following sources are no longer treated as deemed distributed profit:
Publicly traded securities issued in Latvia, the EU or the EEA and admitted to trading on a regulated market
Financing obtained from licensed crowdfunding platforms in Latvia, the EU or the EEA
These amendments open up new options for companies to raise financing from alternative sources without increasing their CIT burden.
When to consult a certified tax advisor
While you can handle many of these techniques yourself, there are situations where professional help is needed:
The company is planning a significant restructuring or setting up a holding structure
There are complex international transactions or transfer pricing questions
The company is considering switching CIT regimes and needs a detailed comparison
VID has opened a tax audit or inspection
A certified tax advisor can help assess risks, prepare the necessary documentation, and make sure your tax optimization strategy is not just effective, but fully compliant with the law.
Frequently Asked Questions
Can any company choose the alternative CIT regime (15% + 6%) for dividends?
No. The alternative regime can only be applied by companies whose shareholders are exclusively natural persons. If even one shareholder is a legal entity (for example, another company or a holding), the alternative regime is not available — you must stay with the standard 20% CIT model.
Is the CIT regime (standard or alternative) chosen once a year?
No — that's a common misconception. The choice is made per taxation period (month) in which dividends are calculated, not once a year. Both rates cannot be mixed within the same month, but different months can use different regimes — the decision is made each time dividends are calculated.
Is the €75,000 car value threshold with or without VAT?
Without VAT. If a car costs, say, €90,000 including VAT but €74,380 excluding VAT, it doesn't reach the threshold and the car doesn't qualify as representative (provided it also meets the other criteria — seat count and vehicle category).
If my car is "representative," is only part of its expenses subject to CIT?
No — if a car meets the representative-car definition (value over €75,000 excluding VAT and a matching category/seat count), CIT as an expense not related to economic activity applies to all operating expenses connected to that car, not just the depreciation portion above the threshold. This also covers fuel, repairs, insurance, and lease payments.
Can input VAT be deducted for any purchase?
No. Input VAT can only be deducted for purchases used to carry out VAT-taxable transactions. If a purchase is used for mixed purposes — both taxable and exempt transactions — input VAT must be split proportionally.
Can the representation expense limit be exceeded?
It can, but the excess is subject to CIT as deemed distributed profit. The limit is 5% of the company's total gross payroll for the previous year, and representation expenses must be recorded separately for the limit to apply at all.
Is reinvested profit in Latvia really not taxed at all?
Correct — as long as profit stays in the company and isn't paid out as dividends or spent on purposes unrelated to economic activity, the CIT rate is 0%. As soon as profit is distributed, the CIT obligation arises.
Conclusion
Tax optimization isn't just a math problem — it's a strategy that requires understanding the law, the company's growth plans, and its cash flows. The most common mistakes we see in practice: applying the alternative CIT regime without checking whether all shareholders are natural persons, and only partially (rather than fully) excluding a representative car's expenses from the tax base.
Our team helps business owners build and maintain a legal, well-thought-out tax strategy — from choosing the right CIT regime to correctly accounting for car and representation expenses. Start with a free consultation, or see our accounting services for small businesses.
Legal sources and references
Last updated: September 2026. Information is based on the Corporate Income Tax Law and the Value Added Tax Law with 2026 amendments, as well as publicly available explanatory materials from VID. Tax legislation changes — before making decisions, it's advisable to check the current text of the law and consult a certified accountant or tax advisor.
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