Spain and Latvia are two popular European destinations for setting up a company, and the tax choice between them can have a significant impact on your profitability. Find out the key differences between these two tax regimes, and why Latvia could be an advantageous option for international entrepreneurs.
Corporate Tax: Spain and Latvia, Two Opposing Models
When you're considering setting up a company in Europe, taxation is a decisive factor. In Spain, corporate tax is set at a standard rate of 25%, while in Latvia, deferring corporate tax until profits are distributed offers a unique kind of tax flexibility. Choosing the right country to set up in can therefore shape your entrepreneurial success.
Where your company is based plays a crucial role in tax management and long-term profitability. That's why it's essential to look closely at the tax regimes on offer before making an informed choice.
Tax Rates and Regimes in Spain
In Spain, the standard corporate tax rate is 25%. However, certain exceptions apply, notably for newly formed companies, which benefit from a reduced rate of 15% for the first two years they make a taxable profit. Some autonomous regions may also offer additional tax incentives.
Good to know
The Canary Islands, for example, offer a reduced rate of 4% for certain activities through the Canary Islands Special Zone (ZEC).
Here's a summary of the standard rates and exceptions:
- Standard rate: 25%
- Reduced rate for new companies: 15% (for the first two profitable years)
- Canary Islands Special Zone (ZEC): 4% for certain activities
Latvia's Tax System: Deferred Corporate Tax and Administrative Simplicity
In Latvia, the tax system stands out for its innovative approach to deferring corporate tax. Tax is only due once profits are distributed, letting companies reinvest their earnings without being immediately taxed. This flexibility is particularly appealing for companies in a growth phase.
Beyond this major advantage, Latvia is also known for its administrative simplicity and low formation costs. Setting up an SIA (the equivalent of a limited liability company) in Latvia is fast and inexpensive, making it an attractive option for entrepreneurs.
Good to know
The tax rate in Latvia is 20% on distributed dividends, but as long as profits are reinvested, no tax applies at all.
For the full detail on rates, the 2026 alternative regime and VAT, see our guide to corporate tax in Latvia.
Comparing the Tax Advantages for an International Entrepreneur
For an international entrepreneur, Latvia offers several notable tax advantages. The ability to defer corporate tax until profits are distributed allows for better cash management and encourages reinvestment. What's more, the administrative simplicity reduces the time and costs associated with tax management.
Consider a worked example: a company generating €100,000 in annual profit. In Spain, it would pay €25,000 in tax immediately. In Latvia, if the profits are reinvested, no tax is paid at this stage, letting the company grow faster.
Our article on Latvia's favourable taxation covers these mechanisms in more depth.
Spain or Latvia: Which Country Should You Choose for Your Company?
In conclusion, the choice between Spain and Latvia depends on your priorities in terms of tax management and growth strategy. Spain, with its fixed tax rate, may suit companies looking for tax stability. Latvia, on the other hand, offers appealing flexibility and reinvestment opportunities, particularly beneficial for growing companies.
For international entrepreneurs looking for tax optimisation and administrative simplicity, Latvia clearly stands out as a viable, advantageous option.
To find out more about setting up a company in Latvia and get personalised advice, contact us today.