Latvia Corporate Income Tax 2026: 0% Profit or 15% Regime | Balansis

Corporate Income Tax in Latvia — how the 0% tax on reinvested profits works and the new alternative regime

Imagine a country in the European Union where your company can earn, grow and accumulate capital without paying a single cent in corporate income tax — until the moment you decide to distribute the profit to yourself. That is exactly what Latvia offers. This is not a tax trick or a special discount — it is the very logic of the system, embedded in law since 2018 and enhanced with new options from 2026. But, like any beneficial system, it has its nuances — and you need to understand them before your first dividend payment.

How the Latvian CIT model works

Since 1 January 2018, Latvia's corporate income tax (CIT) system has been based on the principle: tax is paid only on profit that is withdrawn from the company. As long as the profit remains in the company and is used for its development — CIT is 0%. This principle applies to both active (trading) and passive (dividends, interest, royalties) income types, as well as to capital gains from the sale of all types of assets.

This means that the company can:

• Purchase equipment and machinery without increasing the tax burden.

• Build reserves for future projects.

• Grow and expand without tax impacting cash flow.

But — as soon as money leaves the company, the tax obligation arises. And the law carefully monitors the ways in which profit can be "withdrawn" — not only through formal dividends but also through hidden distribution methods.

How the taxable base differs from accounting profit

This is one of the most important nuances that new entrepreneurs often do not understand. CIT is imposed not on accounting profit, but on distributed and conditionally distributed profit. Moreover, when calculating the tax, the net amount is divided by a coefficient of 0.8 — so the effective rate is 25% of the distributed net amount, not 20%.

What is the CIT calculation formula

Suppose you want to pay yourself €80,000 in dividends. The calculation looks like this:

1. Taxable base: €80,000 ÷ 0.8 = €100,000

2. CIT 20%: €100,000 × 20% = €20,000

3. Total cost to the company: €80,000 + €20,000 = €100,000

Thus, the effective tax rate is 25% of the net distributed amount. This is called the 20/80 formula, and it must be used every time the company pays dividends or makes other taxable payments.

What is included in "distributed profit"

The taxable base consists of two main categories: actually distributed profit and conditionally distributed profit.

Actually distributed profit

These are payments that obviously reduce the company's capital for the benefit of members:

• Dividends (including interim dividends)

• Payments equivalent to dividends — profit distribution in cooperative societies, individual enterprises, partnerships and permanent establishments

• Liquidation quotas

Conditionally distributed profit

This is where most of the surprises lie for new entrepreneurs. The law establishes that certain expenses and transactions are considered "conditional profit distribution", even if no money is physically paid to members. These include:

• Non-business expenses — expenses not directly related to the company's commercial activity. For example, the owner's personal travel, entertainment expenses without economic justification.

• Excess representation expenses — under the law, the non‑taxable limit for representation expenses and staff sustainability events is 5% of the company's total gross salary amount for the previous year. Anything exceeding this threshold becomes conditionally distributed profit.

• Bad debts — receivables not recovered within 36 months of the provision being made (with certain exceptions, e.g., in insolvency proceedings, the term may be up to 60 months).

• Excessive interest payments — loan interest exceeding certain limits (thin capitalisation), for example if the debt-to-equity ratio exceeds 4:1.

• Loans to related parties — with several exceptions (e.g., parent company loans to a subsidiary, short‑term loans up to 12 months).

• Transfer pricing adjustments — if transactions with related parties do not comply with arm's length prices.

• Excess assets upon liquidation.

• Assets transferred abroad.

• Hybrid mismatches.

Special case of luxury cars

If a company purchases a passenger car worth more than €75,000, the portion of depreciation relating to the amount above this threshold is treated as conditionally distributed profit and subject to CIT. For example, if a car costs €90,000, the depreciation on the €15,000 excess is taxed with CIT each year.

The new alternative CIT regime (15% + 6%)

From 1 January 2026, companies whose members are only natural persons have the option to choose an alternative tax regime.

How it works

Under the alternative regime:

• The company pays 15% CIT on distributed profit (dividends), not on total accounting profit. Calculation formula: distributed profit × 15% (dividing by coefficient 0.85).

• An additional 6% PIT is withheld from the dividends paid to the natural person.

Important: Unlike the standard regime, where CIT is paid only at the time of distribution using the 20/80 formula, the alternative regime has a lower CIT rate (15%), but 6% PIT is added. However, in both regimes, tax is paid only on the profit actually distributed — not on total accounting profit.

The 6% PIT goes to the municipal budget according to the member's declared place of residence, and foreign investors can use it as a tax credit in their country of residence.

Calculation example for the alternative regime (full profit distribution)

Assume the company's annual profit is €100,000, and all of it is distributed as dividends.

1. CIT 15%: €100,000 × 15% = €15,000

2. Remaining dividends: €100,000 − €15,000 = €85,000

3. PIT 6%: €85,000 × 6% = €5,100

4. Net dividends: €85,000 − €5,100 = €79,900

5. Total tax burden: €15,000 + €5,100 = €20,100

By comparison, under the standard regime using the 20/80 formula (for full profit distribution), the total tax would be €25,000. Difference: €4,900 in favour of the alternative regime.

When is the alternative regime beneficial?

The main factor determining the advantage of the regime is how much of the profit you plan to distribute as dividends.

Under the alternative regime, 15% CIT is paid only on the distributed portion, so the larger the distribution share, the more you save compared to the 20/80 formula.

Conclusion: The alternative regime is more advantageous at any distribution level, because the total 15%+6% burden (21% of the distributed amount) is lower than the standard regime's 25% burden. However, note that under the alternative regime, 6% PIT is withheld from dividends, whereas under the standard regime, the individual pays no additional tax on dividends.

The alternative regime is particularly beneficial for:

• Owners who live off company income — if the SIA is your main source of income and you withdraw most of the profit.

• Companies with stable and predictable profits.

• Foreign investors who can use the 6% PIT paid in Latvia as a tax reduction in their home country.

The standard regime is still more advantageous if:

• You mainly reinvest your profits and do not distribute them — then you pay no tax at all (0%).

• You have large conditional distribution risks (representation expenses, bad debts, etc.), which under the standard regime are subject to the 20/80 formula.

Important nuances of the alternative regime

• The regime is chosen each year anew when submitting the CIT return. You can return to the standard regime the next year.

• The alternative 15% rate may also be applied to undistributed profit from 2018–2025.

• The regime is available only to companies whose direct members are only natural persons. Holding companies and corporate groups cannot use this regime.

• The 15% CIT rate does not apply to conditionally distributed profit items — they remain subject to the standard 20/80 formula.

Practical example: how much tax a typical SIA pays

Consider a company with an annual profit of €100,000 in three different scenarios.

Scenario A: The company reinvests all profit

The company buys new equipment, hires employees and expands operations.

• Standard regime: CIT = €0 (profit not distributed)

• Alternative regime: CIT = €0 (here too — if profit is not distributed, no tax is due)

Conclusion: For a growing company that reinvests all profit, both regimes are equivalent in tax terms (0%). However, the standard regime is simpler — no monthly returns are required if there is no distribution.

Scenario B: The company distributes 50% of profit as dividends

The member receives €50,000 (gross before company‑level tax).

Standard regime:

• CIT: €50,000 ÷ 0.8 × 20% = €12,500

• Net dividends: €50,000 − €12,500 = €37,500

• No additional tax for the individual.

Alternative regime:

• CIT: €50,000 × 15% = €7,500

• Remaining dividends: €42,500

• PIT: €42,500 × 6% = €2,550

• Net dividends: €42,500 − €2,550 = €39,950

Conclusion: Under the alternative regime, net dividends are higher (€39,950 > €37,500), thanks to the lower overall tax rate.

Scenario C: The company distributes all profit as dividends

Standard regime:

• CIT: €100,000 ÷ 0.8 × 20% = €25,000

• Net dividends: €75,000

Alternative regime:

• CIT: €100,000 × 15% = €15,000

• PIT: (€100,000 − €15,000) × 6% = €5,100

• Net dividends: €79,900

Conclusion: The alternative regime saves €4,900.

CIT return submission deadlines

CIT returns in Latvia are submitted every month. The deadline is by the 23rd of the following month after the end of the tax period. If there was no profit distribution or conditional distribution in that month — no return is required (except under the alternative regime if there was distribution — then a return must be submitted).

Frequently asked questions

Can I really pay no CIT if I do not distribute dividends?

In principle — yes. But you must be careful with expenses. If the company pays for expenses not directly related to business activity, they are treated as conditionally distributed profit and subject to CIT.

Does paying CIT under the standard regime exempt me from PIT?

Yes. Dividends paid from profit earned after 2017 on which CIT has been paid are not subject to additional PIT at the individual level. Under the alternative regime, 6% PIT is withheld additionally.

Can I change the regime every year?

Yes, the choice of the alternative regime is voluntary and can be changed each year when submitting the CIT return.

How to handle representation expenses?

Representation expenses and staff sustainability events (e.g., client dinners, team building events) are limited to 5% of the previous year's gross salaries. Any excess over this limit is subject to CIT. Plan these expenses at the beginning of the year and monitor the limit throughout the year.

What happens if I cannot recover a receivable?

If a receivable has not been recovered within 36 months after the provision was made, it generally must be included in the CIT taxable base. Therefore, it is important to carry out debt collection activities in a timely manner and document all attempts to recover the funds.

Latvia's CIT system is one of the strongest advantages this country offers to entrepreneurs — both local and international. But using it effectively requires understanding and planning. Our team helps entrepreneurs choose the optimal tax strategy, taking into account both the specifics of the business and personal financial goals.

Last updated: April 2026. Information is based on the Corporate Income Tax Law with 2026 amendments and official materials of the State Revenue Service (VID).