A construction company owner once asked us why VID disallowed EUR 14,000 of his claimed expenses during an audit. He had receipts for everything. The problem was not documentation — it was relevance. Among his "business expenses" were a family ski trip to Austria (classified as a "team building event" for a company with two employees, both family members), a home entertainment system ("client presentation equipment"), and monthly grocery deliveries to his home address ("office supplies").

VID applies a straightforward test to every business expense: is it directly and exclusively related to the company's economic activity? If the answer is no — or even "sort of" — the deduction is at risk.

The Core Rule

Under Latvian tax law, an expense is deductible for CIT purposes if it meets all three conditions:

Business purpose — the expense must be directly connected to the company's economic activity
Proper documentation — a valid invoice or receipt with all mandatory details, plus supporting evidence of business purpose when the connection isn't obvious
Reasonable amount — the expense must be proportionate to the business need (EUR 500 for a business lunch for two people will attract questions)

Expenses that fail any of these tests are treated as non-deductible. If paid from the company's accounts, they may be reclassified as hidden profit distribution — subject to CIT at the 20/80 rate (effectively 25%), plus potential penalties.

What You Can Deduct (With Caveats)

Office rent and utilities. Fully deductible if the premises are used exclusively for business. If you work from home, only the proportional share attributable to the workspace qualifies — and you need documentation showing how you calculated the proportion (square meters of workspace vs. total living area).

Employee salaries and social contributions. Fully deductible. This includes gross salary, employer VSAOI (23.59%), and any mandatory bonuses or compensation. No issues here, as long as the employment is real and the salary is not artificially inflated to extract money from the company.

Professional services. Legal fees, accounting fees, consulting — deductible if there's a contract, an invoice, and a clear business purpose. A EUR 200/month accounting fee raises no eyebrows. A EUR 10,000 "consulting payment" to a company owned by your spouse, with no deliverable, raises many.

Business travel. Transport, accommodation, and per diem expenses for trips with a documented business purpose. Latvia's per diem rates are set by Cabinet regulation — as of 2026, the domestic daily allowance is EUR 8 for trips over 12 hours. International rates vary by country. You can pay higher amounts, but the excess above the official rate is taxable as employee income.

Vehicle expenses. This is where most disputes happen. If the company owns or leases a vehicle used exclusively for business, all related costs (fuel, insurance, maintenance, parking) are deductible. If the vehicle is also used personally — which VID assumes unless you prove otherwise — a portion of costs becomes non-deductible, and the personal use component may be taxed as a benefit in kind.

The way to defend full deductibility: maintain a trip log showing dates, destinations, purposes, and kilometers. Without a log, VID typically applies a 50/50 split — half business, half personal. For a vehicle costing EUR 600/month in total expenses, that's EUR 300/month in lost deductions and potential CIT implications.

Marketing and advertising. Deductible if connected to promoting the company's products or services. Website development, online advertising, printed materials, trade fair participation — all straightforward. Sponsorship is more nuanced: if it qualifies as representation expense, it falls under the annual limits described below.

Software and equipment. Computers, software licenses, office furniture — deductible, either immediately (if below the capitalization threshold of EUR 1,000) or through depreciation over the useful life.

The Tricky Categories

Representation expenses (reprezentācijas izdevumi). Client dinners, gifts, corporate events. Deductible, but subject to an annual limit — generally 5% of the company's total gross salary fund for the year. If your annual salary costs are EUR 50,000, you can deduct up to EUR 2,500 in representation expenses. Anything above that is non-deductible and taxed as a deemed distribution.

For each representation expense, keep a record of: who attended, their role or company, the purpose of the meeting, and the invoice or receipt. "Dinner with client" is insufficient. "Dinner with [Name], CEO of [Company], discussing Q2 project scope" is adequate.

Education and training. Deductible if directly related to the employee's job function. An accountant attending a PVN seminar — clearly deductible. The same accountant doing a wine sommelier course — not deductible (unless the company is in the wine business).

Insurance. Business-related insurance (property, liability, professional indemnity) is deductible. Health insurance for employees is deductible up to certain limits as a fringe benefit. Life insurance premiums paid by the company for employees are subject to special rules and may generate a taxable benefit.

Interest on loans. Deductible if the loan was taken for business purposes. Interest on a loan to purchase equipment — deductible. Interest on a loan the company gave to the owner at below-market rates — that creates a deemed benefit and potential transfer pricing issues.

What You Definitely Cannot Deduct

Personal expenses of any kind, regardless of who made the purchase
Fines and penalties (including VID penalties, traffic fines, and regulatory sanctions)
Expenses without documentation (no invoice = no deduction, period)
Bribes or illicit payments (this should be obvious, but it appears in the law explicitly)
Charity and donations (these are treated as non-economic expenditure and taxed as distributions under the 20/80 rule, though a 75% relief applies for donations to qualifying organizations up to 5% of the previous year's profit)

The Documentation Standard

A receipt alone is not always enough. For expenses above approximately EUR 150, or for categories that VID scrutinizes closely (representation, travel, vehicles), keep supporting documentation: a written explanation of the business purpose, correspondence showing why the expense was necessary, and any contracts or agreements underlying the transaction.

Digital records are acceptable. In fact, VID encourages electronic documentation. But the records must be organized and accessible — a folder on your computer labeled "2026 expenses" containing 400 unsorted PDFs does not meet the standard.

Stop Guessing Which Expenses Are Deductible

Expense classification errors are one of the most common triggers for VID audits -- and one of the easiest to prevent. We review your expense structure, set up proper documentation workflows, and train your team on what qualifies so every deduction stands up to scrutiny.

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