0% Corporate Tax on Reinvested Profits: How It Works

Estonia introduced it in 2000. Latvia followed in 2018. The concept is straightforward: a company pays zero corporate income tax on profits it keeps in the business. Tax triggers only when money leaves — as dividends, share capital reductions, or deemed distributions.

Eight years into this system, Latvia's version has proven remarkably effective at encouraging reinvestment. But the rules around what counts as "reinvestment" and what triggers a deemed distribution are more nuanced than the headline suggests.

The Basic Principle

Under Latvia's standard CIT regime (which most SIAs use), the tax equation is simple:

Reinvested profit = 0% CIT
Distributed profit = 20/80 CIT (effectively 25% of the gross-up base)

There is no filing requirement for reinvested profits. No declaration. No reporting beyond standard financial statements. You earn profit, you keep it in the company, you pay nothing.

This is not a deferral — it is a genuine exemption, as long as the profits remain in the business. A company can accumulate millions in retained earnings over decades and never pay a cent of CIT on them.

What Counts as Reinvestment?

Everything that keeps the money inside the legal entity. Specifically:

Cash retained in bank accounts
Investment in equipment, real estate, or other fixed assets
Working capital (inventory, receivables)
Financial investments (securities, deposits)
Loans to third parties (with caveats — see deemed distributions below)
Research and development expenditure
Employee training and development

The beauty of the Latvian model is that it does not prescribe what you do with the retained profits. You can leave EUR 500,000 sitting in a current account earning minimal interest, and it still qualifies as reinvestment for CIT purposes. There is no requirement to deploy capital productively.

(This is philosophically different from investment incentives in other countries that require capital expenditure or job creation to qualify for reduced rates.)

What Triggers Tax: Beyond Obvious Dividends

The 0% exemption has guardrails. Certain transactions are treated as "deemed distributions" and trigger CIT at 20/80, even though no formal dividend was declared.

Deemed distribution triggers:

Expenses not related to business activity. If the company pays for the owner's personal car, apartment renovation, or family vacation, these are treated as deemed profit distributions. CIT applies at 20/80 on the personal benefit amount.

Loans to related parties on non-arm's-length terms. A loan from the SIA to its shareholder at 0% interest, with no repayment schedule, will likely be reclassified as a deemed distribution. VID looks at the substance: if a loan walks like a dividend and quacks like a dividend, it is taxed like a dividend.

In our experience, shareholder loans are the most common audit trigger in this area. The safe approach: if you lend money to a shareholder, use market-rate interest, set a clear repayment schedule, and actually enforce it.

Transfer pricing adjustments. If a Latvian SIA sells goods or services to a related foreign entity at below-market prices, the difference between the actual price and the arm's-length price is a deemed distribution. Similarly, purchasing from related entities at above-market prices increases the SIA's costs artificially and triggers adjustment.

Liquidation distributions. When a company is liquidated, the distribution of retained earnings to shareholders is taxed at 20/80 on the amount exceeding the shareholders' capital contributions.

Share capital reduction with payout. Reducing share capital and paying the difference to shareholders triggers CIT on the amount exceeding the originally paid-in capital.

Planning Strategies

Maximize retained earnings. The longer profits stay in the company, the longer they compound at 0% tax. A SIA with EUR 200,000 in retained earnings generating 5% annual return produces EUR 10,000/year of additional profit — all at 0% CIT as long as it stays internal.

Separate operating and holding functions. Some businesses create a holding SIA that receives dividends from an operating SIA. The operating company pays 20/80 CIT on distributions, but the holding company receives the dividend income tax-free (under the participation exemption). The holding company then reinvests, building a pool of untaxed capital.

This structure is not for every business — it adds administrative cost and complexity. But for companies with EUR 100,000+ annual profits and long-term reinvestment horizons, the compounding benefit can be substantial.

Time your distributions strategically. If you know you will need EUR 80,000 personally next year, consider whether it is better to take one large distribution (one CIT event) or spread it across months (twelve CIT events but identical total tax). The tax amount is the same; the administrative burden differs.

Use salary to cover personal needs. Instead of distributing profits for personal spending, pay yourself a reasonable salary. The salary is a deductible expense for the SIA, reducing the profit base. Yes, salary carries PIT and VSAOI, but it also builds social protection credits. In many cases, a combination of moderate salary plus occasional dividends produces a lower total tax burden than dividends alone — while also providing pension and sick leave coverage.

The Alternative Regime Disrupts This Logic

Under the alternative CIT regime (15% on annual profit + 6% PIT on dividends), the 0% reinvestment advantage disappears. All profit is taxed at 15% whether distributed or not.

This is the core trade-off. The standard regime rewards reinvestment with genuine 0% tax. The alternative regime taxes profit regardless but offers a lower combined rate on distributions.

If reinvestment is your primary strategy — if you are building the company's asset base, funding growth internally, or accumulating reserves — the standard regime is unambiguously better. You pay 0% on retained profits versus 15%.

The alternative only wins when you are distributing most of what you earn. At that point, the standard regime's 20/80 gross-up (effective 25%) costs more than the alternative's 15% + 6%.

The European Context

Latvia and Estonia are the only EU member states with a pure distributed-profit CIT model. This makes both countries uniquely attractive for reinvestment-oriented businesses.

A comparison: a German GmbH earning EUR 100,000 and retaining all of it pays approximately EUR 30,000 in corporate taxes (15% Korperschaftsteuer + ~15% Gewerbesteuer). A Latvian SIA in the same situation pays EUR 0.

That is not a marginal difference. It is a structural advantage that compounds over years and decades.

Building Retained Earnings? Let Us Help You Plan.

CORVUS Accounting & Tax advises companies on structuring their retained earnings strategy, avoiding deemed distribution traps, and optimizing the timing of future distributions. Our approach is long-term — we plan for where your business is going, not just where it is today.

Start the conversation →