From 1 January 2026, significant amendments to the Latvian Corporate Income Tax (CIT) and Personal Income Tax (PIT) framework will enter into force, introducing an alternative dividend taxation model for companies whose shareholders are exclusively natural persons.
The purpose of the amendments is to improve companies’ access to financing, reduce capital costs, promote investment attraction and balance the tax burden between domestic and foreign investors.
Under Latvia’s general tax system, a 20% Corporate Income Tax (CIT) is applied at the moment profit is distributed. Legally, this tax is considered to be paid at the company level. However, in many foreign tax systems (including Germany, the United States and others), Latvian CIT is not recognised as personal income tax paid by an individual.
As a result, investors often cannot credit the tax already paid in Latvia in their country of residence. This creates economic double taxation and reduces Latvia’s investment attractiveness.
To address this issue, the legislator introduced an alternative dividend taxation regime for companies whose shareholders are exclusively natural persons. This creates a clearer and internationally more recognisable tax structure, simplifying investors’ tax reporting in their country of residence.
The amendments were adopted by the Parliament of the Republic of Latvia and entered into force on 1 January 2026.
What Will Change?
Until now, company profits in Latvia were subject to 20% CIT only at the time of profit distribution, while individuals receiving dividends were exempt from PIT.
From 2026, companies whose shareholders are exclusively natural persons will be able to choose between two models:
- applying the existing CIT regime – 20% tax at the moment of profit distribution;
- or choosing the alternative model:
- 15% CIT;
- plus an additional 6% PIT on dividends received by individuals.
The total tax burden will remain approximately at the current level of around 20%, however, an important difference is that part of the PIT revenue will be allocated to municipal budgets.
Why Are These Changes Important?
The previous regulation created a situation where:
- domestic and foreign investors experienced different effective tax consequences;
- foreign investors generally prefer a model where the company pays corporate income tax and the individual pays personal income tax. This is the standard model in most OECD countries, making Latvia more recognisable and understandable on the investment market;
- municipalities did not receive revenue from dividends;
- regional investment attraction was not sufficiently encouraged.
The new model provides that part of the tax revenue will be allocated to municipalities according to the investor’s declared place of residence or the company’s place of registration, thereby increasing municipalities’ interest in business development.
Who Will Be Eligible for the Alternative Regime?
The alternative 15% CIT regime will only be available to companies whose shareholders during the taxation period are exclusively natural persons.
Important:
- the selected regime must be applied to all dividends calculated during the relevant period;
- it will not be possible to simultaneously apply both the 20% and 15% CIT rates to dividends within the same period;
- the alternative rate will not apply to other CIT taxable objects, such as non-business-related expenses.
The law also provides that when applying the 15% CIT rate, a correction coefficient of 0.85 will be used in the tax calculation.
Changes to Interest Payment Regulation
The amendments also supplement Section 10 of the CIT Law with new Parts 4.1 and 4.2, expanding the exceptions to interest deduction limitation rules.
In certain cases, interest payments will be fully deductible as business expenses and will not be subject to the interest deduction limitation established in Section 10(1) of the CIT Law.
The exceptions will apply to financing obtained through:
- issuance of securities listed on a regulated market;
- licensed crowdfunding platforms;
- credit institutions or investment brokerage companies;
- securitisation structures;
- alternative investment funds.
At the same time, these exemptions will not apply where financing is provided by a related party.
Additionally, the amendments provide that the interest limitation rules under Section 10(1) of the CIT Law will also not apply to special purpose entities established in accordance with the Public and Private Partnership Law.
The purpose of these amendments is to improve access to alternative financing sources, develop the capital market and reduce financing costs for companies.
What Should Companies Evaluate Already Now?
Companies and their owners are advised to assess in advance:
- the company’s ownership structure;
- planned dividend policy;
- the impact of the tax burden on investors;
- potential benefits of the alternative regime;
- the impact on cash flow and investment attraction.
In certain cases, the new model may become an important instrument for more efficient capital planning.
Conclusion
The new amendments mark significant changes in Latvia’s corporate tax system. Although the overall tax burden remains broadly unchanged, the new model introduces a more flexible approach to investor taxation while simultaneously strengthening municipal revenue bases.
Companies are advised to evaluate already now whether the alternative CIT regime will be suitable for their business model and shareholder structure.
Additional information is available on Likumi.lv – Amendments to the Corporate Income Tax Law and Likumi.lv – Amendments to the Law “On Personal Income Tax”.
If the planned changes may affect your company’s or investors’ tax situation, it is advisable to assess potential risks, tax consequences and the most appropriate tax regime in advance.
Innovator tax consultants provide support with:
- assessment of tax consequences;
- analysis of suitability for the alternative regime;
- evaluation of dividend distribution structures;
- practical application of the regulation in everyday business operations.
Timely legal and tax consultation may help reduce tax risks, avoid potential sanctions and enable financially beneficial decisions for the company.
©INNOVATOR 15.05.2026.
