The truth about Latvia's "0%"
The reality of Latvia's tax system is both simpler and more nuanced than a slogan like "0% tax". Here are the plain facts: in Latvia, a company genuinely pays no tax on its profits as long as it doesn't distribute them. That's true. It's not a myth or an oversimplification.
What the "0%" doesn't say, though, is that the tax hasn't disappeared: it's deferred. When profits are distributed to shareholders as dividends, the company then pays 20% tax on the distributed amount. So the "0%" is conditional on profits staying inside the company.
"Latvia's system doesn't remove the tax, it moves it in time. It's a fundamentally different philosophy: you tax the consumption of profit, not its creation."
How exactly does this mechanism work?
In 2018, Latvia adopted a so-called "distribution tax" model, inspired by the system Estonia has run since 2000. The principle is simple: corporate tax is a tax on the outgoing flow, not on accumulation.
What triggers the tax
- Paying dividends to shareholders
- Disguised distributions (personal expenses billed to the company)
- Loans to shareholders treated as distributions
- Certain related-party transactions priced outside market norms
What does NOT trigger the tax
- Profits kept in reserve within the company
- Investment in equipment, software, marketing
- Hiring employees or contractors
- Financial investments made by the company
- Real estate purchases for business use
The key takeaway
As long as the money stays "inside" the company and funds its operations or growth, it isn't taxed. The 20% tax only applies once funds "leave" the company for shareholders personally.
Latvia is not a tax haven
It's crucial to distinguish Latvia's tax system from a tax haven. Tax havens are typically characterised by near-total lack of transparency, refusal to cooperate internationally, and nominal 0% rates across the board for all income types. Latvia meets none of these criteria.
- Latvia is an OECD member and applies its transparency standards
- It automatically exchanges tax information with its partners (CRS/FATCA)
- It's on no EU or OECD blacklist or greylist
- It fully applies EU anti-money-laundering directives
- Latvian companies must have real economic substance
Latvia's tax advantages are the result of a deliberate political choice to attract investment and boost economic growth. It's a sovereign tax policy, entirely comparable to Ireland's 12.5% corporate rate or the Netherlands' participation exemption.
The 20% distribution rate: understanding the calculation
When a distribution is made, the tax calculation has a technical quirk worth understanding. The taxable base isn't the net amount distributed, but a "grossed-up" amount using a 20/80 ratio.
In practice: if you want to distribute €80,000 net to shareholders, the Latvian company must declare a taxable base of €80,000 / 0.80 = €100,000, and pay 20% × €100,000 = €20,000 in tax. The total cost of the distribution is therefore €100,000 (€80,000 net paid out + €20,000 tax). The effective rate against the gross amount remains 20%.
Filing calendar
Tax on distributions must be declared and paid by the 20th of the month following the distribution decision. Filings are made through the Latvian tax authority's online portal (EDS), accessible remotely by any authorised company representative.
Why this is entirely legal
Latvia's system rests on several solid legal foundations. First, tax sovereignty: every EU member state remains free to set its own direct-tax system, provided it respects the fundamental freedoms of EU law (free movement of capital, freedom of establishment). Latvia respects these principles.
Second, compliance with EU directives: the parent-subsidiary directive, the interest and royalties directive, and the ATAD (Anti-Tax Avoidance Directive) rules are all transposed into Latvian law. Latvia also applies OECD BEPS recommendations, particularly on economic substance and transfer pricing.
Finally, transparency: Latvia actively participates in automatic exchange of tax information. Anyone who is tax resident elsewhere and owns a company in Latvia should expect their home tax authority to be informed the company exists, which underlines the importance of correctly declaring foreign assets and income at home.