0% Corporate Tax on Undistributed Profits: The Key Advantage
The first and main advantage of Latvian taxation is its deferred-taxation mechanism. Since the 2018 reform, Latvian companies pay no corporate tax as long as their profits aren't distributed to shareholders. Latvia's 20% corporate tax rate (around 25% effective once the gross-up factor is applied) only kicks in when profits are actually distributed.
This means 100% of the income a company generates can be immediately reinvested in the business, with no tax deduction at all. For a company in a growth phase, this is a considerable advantage: every euro earned can be put back into growth, without having to hand a quarter of it to the state every year.
"Latvia understood that taxing profit before it's used slows economic development. By taxing only on distribution, it encourages productive investment."
Preserving Cash Flow and the Leverage Effect
The impact on a company's cash position is immediate and substantial. Let's compare two identical companies, one in a country with a standard corporate tax rate such as France, the other in Latvia, each making €80,000 in profit and reinvesting all of it over three years:
Company in France (CIT 15% up to €42,500, 25% above)
- Year 1: €80,000 in profit, €15,750 in corporate tax, €64,250 available
- Year 2: another €80,000 in profit, €15,750 in corporate tax, another €64,250 available
- After 3 years (3 x €64,250): around €192,750 in cumulative capital
Latvian Company (0% CIT on reinvested profits)
- Year 1: €80,000 in profit, €0 in corporate tax, €80,000 available
- Year 2: another €80,000 in profit, €0 in corporate tax, another €80,000 available
- After 3 years (3 x €80,000): around €240,000 in cumulative capital
The gap represents around €47,250 in extra funds available for the Latvian company over 3 years — nearly 25% more capital to put to work. A simplified example for illustration only: your actual situation will depend on your specific costs and is worth checking with a Latvian accountant.
Who Benefits Most
This system mainly benefits entrepreneurs who regularly reinvest their profits: e-commerce sellers, consultants, software developers, digital agencies, investors. On the other hand, if you need to pay yourself the full amount of your profits every year, the advantage is smaller.
EU and Eurozone Member
Latvia has been a member of the European Union since 2004 and adopted the euro in 2014. This brings essential legal and practical guarantees for European entrepreneurs:
- Freedom of establishment within the EU with no restrictions
- European company law and investor protection apply
- No currency risk: all transactions are in euros
- Access to the European single market of 450 million consumers
- Access to European funding programmes (structural funds, Horizon Europe)
- Data protection and GDPR rights apply
An Extensive Network of Tax Treaties
Latvia has signed bilateral tax treaties with more than 60 countries, including France, Germany, the UK, the US and most OECD countries. These treaties help avoid double taxation and set out clear rules for determining which country has taxing rights over which income.
The France-Latvia treaty, for example, is favourable to French entrepreneurs structuring their business through a Latvian company: it provides for reduced withholding tax on dividends and clear rules on permanent establishment. This treaty fully complies with OECD standards and anti-abuse regulations.
A Light Administrative Burden
Beyond taxation strictly speaking, Latvia stands out for the simplicity of its administrative obligations for companies:
- SIA registration in 1 to 3 working days once the file is complete; budget 5 to 10 days in practice, or even 2 to 4 weeks if a non-resident needs to open a bank account
- Symbolic minimum share capital of €1 for small structures
- Standardised bookkeeping, accessible remotely
- Simple monthly tax filings (only if distributions are made)
- No social contributions for non-employed, non-resident shareholders
- A digital business register, everything searchable online
Latvia in International Rankings
Latvia ranked in the global top 20 of the World Bank's last Doing Business ranking for ease of starting a business. It also features among the most tax-competitive countries in Europe according to the Tax Foundation's International Tax Competitiveness Index.
Comparison With Other Popular European Countries
Several European countries are often cited as tax-attractive for entrepreneurs. Here's how Latvia positions itself against its competitors:
- Ireland (12.5%): low rate but standard annual corporate tax, high cost of living in Dublin, physical presence often required
- Estonia (20% on distributions): similar model but higher formation costs and less flexibility for non-residents
- Malta: complex tax-credit system, requires a physical presence, sometimes mixed reputation
- Cyprus (12.5%): low rate but annual corporate tax, reputation sometimes questioned, stricter substance requirements
- Latvia: 0% on reinvested profits, solid legal framework, EU, eurozone, administratively simple
Latvia therefore stands out for the unique combination of an advantageous tax mechanism, eurozone membership and administrative simplicity that few of its competitors can match all at once.