Introduction
The corporate income tax in Latvia is only payable upon the distribution of profits. As long as a Latvian company retains its earnings, a 0% tax rate applies. The tax is calculated using the 20%/80% rule, where the net amount is multiplied by this ratio to determine the payable tax.
A significant advantage of this new tax structure is the ability to delay tax payments. It allows companies to reinvest profits into their operations, investment vehicles, or simply hold onto the cash. Deferring the tax payment benefits the company through the time value of money.
Shareholders
Local individual shareholders benefit more from the new tax system since they no longer pay a dividend tax. The new tax rate is 20% on gross dividends, an improvement over the previous 15% corporate income tax and 10% personal income tax. Additionally, Latvian tax residents do not pay taxes on dividends received from foreign countries, making Latvia an attractive destination for saving on taxes from overseas profits.
For foreign individual shareholders with investments in Latvian companies, it is advisable to reassess their investments. Distributed profits will incur Latvian tax, which may not be credited against the dividend tax in their home countries. Potential solutions include:
- Changing tax residence to Latvia to avoid dividend tax.
- Establishing a holding company between the Latvian operating company and themselves.
- Replacing some equity financing with loan financing.
For foreign legal entities, the increase in tax rate from 15% to 20% is balanced by the time value of the postponed tax payment, resulting in a neutral long-term impact. However, manufacturing companies might lose current tax reliefs related to new equipment acquisition.
Financing
Latvian law allows companies to be financed through loans (subject to thin capitalization rules), but restricts cash withdrawals from the company via loans.
Holding Company
A Latvian company has the following benefits as a holding company:
- The sale of shares is tax-exempt if the Latvian company has held them for 3 years.
- Flow-through dividends are tax-exempt.
Are you considering starting your business in Latvia, or are you looking for support with all legal matters related to establishing a company?
We can assist with both to ensure everything runs smoothly and without concerns related to tax or legal issues. Our core focus is on comprehensive advisory services throughout the company establishment process or the acquisition of an existing company, including tax and accounting matters:
- Company Establishment Services: We provide consultations on legal and tax matters, along with accounting services, to support your company from the outset and help it grow by ensuring compliance with legislative requirements.
- Business Consultancy Services: We offer guidance on business structure to help you choose the most appropriate business form, especially if you are uncertain about how to implement your business vision by selecting the most appropriate legal form for company registration.
- Tax Consultancy Services: We provide tax advisory services for both legal entities and individuals.
- Accounting Services: We can manage all accounting matters from the very beginning of your company’s establishment.
- Registration with the State Revenue Service: We assist with registering as an employer in Latvia and provide related payroll services.
- Company Management: If you wish to change your advisory or accounting services provider, we can take care of your company’s needs.
- Due Diligence for Investors: With over 15 years of extensive knowledge and experience in the tax field, we ensure that your potential investment is free of tax issues and accurately reflects its asset value.
For more information about our services for legal entities and individuals, or if you would like to begin cooperation—whether you need tax consultation or services related to company establishment—and receive a proposal, please feel free to contact us at info@taxwise.com. We will be pleased to assist you.
corporate income tax