The foundation of any optimisation: don't distribute
The most powerful tax optimisation lever offered by Latvia is also the simplest: don't distribute the company's profits. As long as profits stay within the company, they're subject to no corporate tax at all. This has been the fundamental mechanism of the Latvian system since the 2018 reform.
An entrepreneur generating €150,000 in revenue through their Latvian company, with €80,000 in net profit after expenses, can choose to keep that full €80,000 within the company. Zero tax. These funds can then be reinvested, placed, or used to grow the business. This is the foundation of a sound, legal tax optimisation strategy (see our detailed simulation on €100,000 in profit to visualise the impact under different distribution scenarios).
"Tax optimisation with a Latvian company isn't a loophole, it's the system working as designed. Latvian lawmakers deliberately built this mechanism to encourage investment and business growth."
Reinvesting rather than distributing: concrete strategies
Keeping profits within the company doesn't mean letting them sit idle in a bank account. An effective optimisation strategy involves actively redeploying these funds into productive assets.
Investing in work tools
- Purchasing IT equipment, software, licences
- Developing a proprietary website or application
- Acquiring patents, trademarks, or intellectual property rights
- Investing in professional equipment
Business development and marketing
- Advertising campaigns and digital marketing
- Attending trade shows and conferences
- Expanding into new geographic markets
- Content creation, SEO, inbound marketing
Financial investments within the company
A Latvian company can also invest its surplus cash in financial instruments (bonds, shares, funds), and any resulting gains stay within the business without being taxed as long as they aren't distributed. This is particularly appealing for entrepreneurs who don't need to use all of their profits immediately.
Compounding effect over 5 years
An entrepreneur generating €60,000 in net profit per year who reinvests everything for 5 years ends up with €300,000 in capital in Latvia (before investment returns). The same entrepreneur under a 25% corporate tax rate elsewhere would only have €225,000 available. The €75,000 difference is exactly what that 25% tax would have taken over 5 years.
Deductible expenses: reducing taxable profit
As in any country, a Latvian company can deduct from its revenue the expenses incurred in the interest of the business. Although Latvia's taxation mechanism is different (taxed on distribution), reducing profits still matters for management and cash-flow reasons.
Standard deductible expenses include:
- Salaries and social contributions for Latvian employees
- Rent and costs related to business premises
- Travel and representation expenses related to the business
- Fees paid to service providers (accountants, lawyers, consultants)
- Outsourcing and external service costs
- Depreciation of tangible and intangible assets
The crucial importance of economic substance
Tax optimisation through a Latvian company is only legitimate if the company has genuine economic substance in Latvia. This is the essential condition for the structure to be respected both by the Latvian tax authorities and by tax authorities in your home country.
Economic substance is characterised by several cumulative elements:
- A real, functioning registered address in Latvia
- Genuine economic activity carried out from Latvia
- Management decisions made in Latvia (or by Latvian directors/proxies)
- Commercial contracts signed in the name of the Latvian company
- Regular accounting compliant with Latvian standards
Reclassification risk back home
If your home country's tax authorities demonstrate that the effective management of your Latvian company is exercised from your home country, risks appear: the company can be treated as tax resident there and taxed under domestic rules instead. Avoiding this risk requires serious structuring and professional support. For French residents specifically, see our guide on the tax risks for French residents.
The limits you must not cross
Legal tax optimisation has clear boundaries beyond which you enter the territory of tax evasion, which is illegal and can carry severe penalties. Here are the practices to avoid at all costs:
- Forming a Latvian company with no real activity solely to redirect income
- Invoicing fictitious "services" from the Latvian company back to your home country to create artificial expenses (see the taxable expenses automatically reclassified by the VID)
- Failing to declare dividends received from the Latvian company back home
- Failing to declare the holding of a foreign company to your home tax authority where required
- Using the Latvian company to receive payments you would normally have received personally at home
The role of tax treaties
For French entrepreneurs specifically, the bilateral tax treaty between France and Latvia is a fundamental legal framework. It sets out the applicable rules in cross-border situations and protects taxpayers against double taxation.
Among the key provisions for French entrepreneurs:
- Profits of a Latvian company with no permanent establishment in France are taxable only in Latvia
- The taxation of dividends paid from Latvia to France follows a Latvian tax credit mechanism
- Permanent-establishment rules determine whether activity carried out in France can be attributed to the Latvian company or not
- The information-exchange clause guarantees transparency between the two tax administrations
In conclusion, tax optimisation with a Latvian company isn't just possible, it's actively encouraged by the Latvian tax system itself. The key is to act within a rigorous legal framework, with genuine economic substance and full transparency towards the relevant tax authorities. Professional support from experts familiar with both your home country's law and Latvian law is strongly recommended to secure your situation.