Complete Guide to Tax Regimes in Latvia (2026)

Latvia collected EUR 12.4 billion in tax revenue during 2025 — a record figure that reflects not just economic growth, but the sheer complexity of the country's tax landscape. For a nation of under two million people, Latvia offers a surprisingly diverse menu of tax regimes, each designed for a different type of business and a different stage of growth.

Choosing wrong can cost you thousands of euros per year. Choosing right can legally keep your effective tax rate in the single digits.

This guide covers every tax regime available in Latvia as of 2026, with real numbers, worked examples, and clear recommendations.

The Big Picture: What Makes Latvia's Tax System Unusual

Most European countries tax corporate profits as they are earned. Latvia does not. Since 2018, Latvia has operated a distributed-profit tax model — corporate income tax (CIT) applies only when profits leave the company as dividends, share buybacks, or deemed distributions.

This single design choice shapes everything.

A profitable SIA (limited liability company) that reinvests all earnings pays exactly 0% CIT. The moment it distributes dividends, the standard rate is 20/80 — effectively 25% on the net distribution. Starting in 2026, an alternative regime offers 15% CIT on annual profit plus 6% PIT on dividends, which in some scenarios produces a lower combined burden.

But CIT is only one piece. Depending on your business structure, revenue level, and number of employees, you might use the micro-enterprise regime, register as self-employed, or pay a fixed patent fee. Each has different rules, different obligations, and different break-even points.

Regime 1: Standard CIT (20% on Distributed Profits)

The default regime for any SIA registered in Latvia.

How it works: The company pays 0% on retained earnings. When distributing profits, the tax base is grossed up by dividing the net distribution by 0.8 (the 20/80 rule). The shareholder receives dividends with no additional PIT obligation.

Example: Your SIA earned EUR 100,000 in profit. You want to distribute EUR 50,000 as dividends.

Gross base: EUR 50,000 / 0.8 = EUR 62,500
CIT: EUR 62,500 × 20% = EUR 12,500
Net dividend received: EUR 50,000
No PIT on dividends
Combined effective rate on distributed amount: 20%

The remaining EUR 50,000 stays in the company at 0% tax. If you never distribute it, you never pay CIT on it.

Who this works for: Companies planning to reinvest most profits, businesses in growth phases, holding structures. In our experience, this regime benefits around 70% of standard SIAs.

Key obligations:

Monthly CIT declaration in the month following distribution
Full double-entry bookkeeping
Annual financial statements
Transfer pricing documentation if related-party transactions exceed thresholds

Regime 2: Alternative CIT (15% on Profit + 6% PIT on Dividends)

New for 2026. This is the most significant structural change to Latvia's tax system in years.

How it works: Instead of the 20/80 distribution-based model, the company pays 15% CIT on its annual accounting profit (whether distributed or not). When dividends are paid, the shareholder pays an additional 6% PIT.

Example: Same EUR 100,000 profit, EUR 50,000 distribution.

CIT: EUR 100,000 × 15% = EUR 15,000
Dividend PIT: EUR 50,000 × 6% = EUR 3,000
Total tax: EUR 18,000
Net dividend received: EUR 47,000

Wait — that looks worse than the standard regime. And here it often is, if you're distributing only part of your profits. But consider a company distributing everything:

Standard regime: EUR 100,000 / 0.8 × 20% = EUR 25,000 in CIT
Alternative regime: EUR 100,000 × 15% = EUR 15,000 CIT + EUR 85,000 × 6% = EUR 5,100 PIT = EUR 20,100

The alternative regime saves EUR 4,900 per year in this scenario.

The break-even point: When you distribute more than roughly 75% of profits, the alternative regime starts winning. Below that threshold, the standard 20/80 model is typically cheaper.

(There is a detailed comparison in our separate article on the alternative CIT regime.)

Who this works for: Owner-managed businesses that function as income vehicles, companies with stable profits that distribute regularly, situations where the owner needs most of the profit as personal income.

Regime 3: Micro-Enterprise Tax (MEN)

A simplified regime designed for very small businesses.

The rate in 2026: 25% on total revenue (not profit).

That single number replaces CIT, PIT, and social contributions for employees. The employer pays one tax and nothing else. Sounds clean. The catch is in the details.

Eligibility requirements:

Annual revenue must not exceed EUR 40,000
Maximum 5 employees (including the owner if employed)
Only natural persons as shareholders
Cannot provide financial, insurance, or certain regulated services

Example: A freelance designer operates through a micro-enterprise SIA. Annual revenue: EUR 35,000. Expenses: EUR 8,000.

MEN tax: EUR 35,000 × 25% = EUR 8,750
Take-home before personal expenses: EUR 35,000 − EUR 8,000 − EUR 8,750 = EUR 18,250

Under the standard regime with the same numbers:

Profit: EUR 27,000
If fully distributed: CIT = EUR 27,000 / 0.8 × 20% = EUR 6,750
But add VSAOI (23.59% employer + 10.50% employee) on any salary...

The comparison gets complicated fast. In our experience, MEN stops being attractive once expenses represent less than 30% of revenue — because you're paying 25% on the gross, not the net.

Critical limitation: Employees in a micro-enterprise receive reduced social contribution credits. This affects their pension, sick leave, and parental benefits. Many employees refuse to work under this regime for exactly this reason.

When to exit: If your revenue approaches EUR 40,000, plan your transition early. Exceeding the limit mid-year triggers retroactive recalculation at standard rates, which can produce an unpleasant surprise.

(See our detailed analysis: Micro-Enterprise Tax in 2026.)

Regime 4: Self-Employed (Saimnieciskās darbības veicējs)

Not a company structure — this is a natural person registered with the State Revenue Service (VID) as conducting economic activity.

Tax obligations in 2026:

PIT: 25.5% on income up to EUR 105,300 per year; 33% above that threshold
VSAOI: 31.07% (minimum base applies even in months with no income)
VAT registration mandatory if turnover exceeds EUR 50,000 in 12 months

Expense deduction: Self-employed individuals can deduct business expenses, reducing the PIT base. If actual expenses are difficult to document, a flat 25% deduction is available (up to EUR 5,000 per year for certain creative activities, higher for specific professions).

Example: A consultant earns EUR 60,000 per year with EUR 12,000 in documented expenses.

Taxable income: EUR 48,000
PIT: EUR 48,000 × 25.5% = EUR 12,240
VSAOI: calculated on actual income, approximately EUR 14,914
Total tax burden: approximately EUR 27,154 (45.3% effective rate)

That is substantially higher than operating through a SIA. The self-employed route makes financial sense primarily for low-income earners who benefit from the non-taxable minimum (EUR 550/month in 2026) and for those who value the simplicity of not maintaining a legal entity.

The non-taxable minimum advantage: Unlike SIA owners who take dividends, self-employed individuals can apply the monthly EUR 550 non-taxable minimum, which reduces their PIT base by up to EUR 6,600 per year. At the 25.5% rate, this saves EUR 1,683 annually. But as income rises, the non-taxable minimum progressively decreases to zero.

Regime 5: Patent Fee (Patentmaksa)

The simplest regime available. A fixed fee paid monthly or annually — no income tracking, no expense documentation, no declarations beyond the patent itself.

How it works: Certain small-scale activities qualify for a patent fee. The amount is fixed by Cabinet regulations and varies by activity type (typically EUR 50–100 per month, depending on municipality and activity).

Eligibility:

Only for natural persons (not companies)
Limited to specific activity types listed in regulations
Annual income must not exceed EUR 15,000 (from the patented activity)
Cannot employ others

Who uses this: Tutors, small-scale craftspeople, home bakers, certain personal service providers. This is not a regime for serious commercial activity — it is a formalization tool for micro-scale self-employment.

The patent fee includes a small VSAOI component, but the social protection it provides is minimal. In our experience, the patent fee works well as a starting point, but most people who grow beyond occasional income should transition to self-employed or SIA status within a year or two.

(More details: Patent Fee explained.)

Regime 6: Author Royalties (Autoratlīdzība)

A special framework for payments to authors, artists, musicians, and other creative professionals.

For unregistered authors (not self-employed):

The payer withholds 25% at source (covering PIT and VSAOI)
The author has no filing obligations
Simple, but expensive

For registered self-employed authors:

Standard self-employed rules apply (PIT + VSAOI)
Eligible expense deductions: 25–50% depending on activity type
Net tax burden is typically lower than the 25% flat withholding

The break-even: If your annual royalty income exceeds approximately EUR 10,000–15,000, registering as self-employed and claiming expense deductions almost always reduces your total tax.

(Full analysis: Author Royalties Tax Guide.)

Comparison Table: All Regimes at a Glance (2026)

| Feature | Standard CIT | Alternative CIT | Micro-Enterprise | Self-Employed | Patent Fee | |---|---|---|---|---|---| | Tax on retained profit | 0% | 15% | N/A | N/A | N/A | | Tax on distribution | 20/80 (eff. 25%) | 6% PIT | N/A | N/A | N/A | | Tax on revenue | No | No | 25% | No | Fixed fee | | Tax on income/profit | No | 15% | No | 25.5%/33% PIT | No | | VSAOI included | No (separate) | No (separate) | Yes (reduced) | 31.07% | Minimal | | Revenue limit | None | None | EUR 40,000 | None | EUR 15,000 | | Employee limit | None | None | 5 | 0 | 0 | | Bookkeeping | Full | Full | Simplified | Income/expense | None | | Legal entity required | SIA | SIA | SIA | No | No | | VAT registration | If >EUR 40K | If >EUR 40K | Optional | If >EUR 40K | No |

How to Choose: Decision Framework

Forget the theoretical comparisons for a moment. Here is how we advise clients in practice.

Step 1: How much will you earn?

Below EUR 15,000/year — consider the patent fee or self-employed status. The administrative cost of maintaining a SIA (annual report, registered address, bookkeeping) may exceed the tax savings.

Between EUR 15,000 and EUR 40,000 — the micro-enterprise regime competes with self-employed status and a standard SIA. Run the numbers for your specific expense ratio.

Above EUR 40,000 — you need a SIA. The question becomes: standard CIT or alternative CIT?

Step 2: How much will you distribute?

If you plan to reinvest most profits (distributing under 30%), the standard 20/80 regime is almost certainly optimal. You benefit from 0% on retained earnings, and the occasional distribution costs 20%.

If you distribute 75% or more, model the alternative 15% + 6% regime. For high-distribution companies, the savings can reach EUR 3,000–8,000 per year on EUR 100,000 of profit.

Step 3: Do you need social protection?

SIA owners who take only dividends receive zero social contribution credits — no pension accrual, no sick pay, no parental benefits. If social protection matters, you need to pay yourself a salary (at least minimum wage of EUR 780/month in 2026), which adds VSAOI costs but builds entitlements.

Self-employed individuals automatically pay VSAOI and accrue benefits. Micro-enterprise employees receive reduced benefits. Patent fee holders receive minimal coverage.

Step 4: Consider the non-tax costs.

A SIA requires:

Registration (EUR 150–250 at the Enterprise Register)
Registered address (EUR 50–150/month if rented for this purpose)
Bookkeeping (EUR 100–500/month depending on transaction volume)
Annual report preparation and filing
Bank account maintenance

Self-employed status requires almost none of this. If your income is modest, the overhead of a SIA can consume the tax advantage entirely.

Step 5: Think about liability.

A SIA limits your personal liability to your invested capital. Self-employed and patent fee holders bear unlimited personal liability for business debts. If your activity carries risk (consulting with contractual penalties, construction, e-commerce with product liability), the SIA structure provides protection that has nothing to do with taxes.

Common Mistakes We See

Staying in micro-enterprise too long. Many businesses outgrow MEN within two years but delay the transition because "it's simpler." By the time they switch, they've overpaid taxes for months and face a messy accounting transition.

Ignoring the salary component. SIA owners who take zero salary save on VSAOI but lose social benefits. We have seen clients face serious consequences — no sick pay during a hospital stay, no pension credits for years of work. A minimum-wage salary (EUR 780/month, costing roughly EUR 1,048 with employer VSAOI) is often worth the expense.

Choosing based on today's income. Tax regime optimization is a 3–5 year decision. A company earning EUR 30,000 today may hit EUR 80,000 in two years. Choose a structure that accommodates growth, not just the current quarter.

Not modeling the alternative CIT before opting in. The 15%+6% regime is new, and it is not universally better. We have seen early adopters realize mid-year that their low distribution pattern makes it more expensive than the standard regime. Model both scenarios before committing.

A Note on VAT

VAT registration is mandatory once your taxable supplies exceed EUR 50,000 in any consecutive 12-month period. This threshold applies across all regimes except patent fee.

Voluntary VAT registration is possible at any revenue level and can be advantageous if your clients are VAT-registered businesses (they can reclaim input VAT, making your prices effectively neutral). If you sell primarily to private individuals, VAT registration adds 21% to your prices with no offsetting benefit for the buyer.

The standard VAT rate in 2026 is 21%. A reduced rate of 12% applies to certain goods (including food products starting July 2026), and a super-reduced rate of 5% exists for specific categories.

What About Non-Residents?

Non-residents operating through a Latvian SIA follow the same CIT rules as residents. Non-residents earning income from Latvian sources without a permanent establishment are subject to withholding taxes — typically 20% on management/consulting fees, 5% on royalties (subject to tax treaty modifications).

If you are a non-resident considering business in Latvia, the regime choice is the same, but the cross-border implications (transfer pricing, permanent establishment risk, treaty benefits) add layers of complexity that require professional analysis.

Final Thoughts

Latvia's tax system rewards deliberate planning. The difference between the optimal and suboptimal regime for a given business can easily reach EUR 5,000–15,000 per year. That is not a rounding error — it is a meaningful competitive advantage.

The regimes themselves are not complicated. What is complicated is matching them to real business situations with variable income, changing headcount, cross-border elements, and evolving distribution needs.

Need Help Choosing Your Tax Regime?

CORVUS Accounting & Tax (Russell Bedford network) advises businesses across all Latvian tax regimes. We model multiple scenarios with your real numbers — not hypothetical examples — so you can make a confident, data-backed decision.

Schedule a consultation →