Two European Union countries offer 0% corporate income tax (CIT) on reinvested profits: Estonia (since 2000) and Latvia (since 2018). This is not a loophole. It is the official tax law, fully compliant with OECD and EU regulations. Here is exactly how it works.
The principle: tax only when you distribute
In most European countries, corporate tax works the same way: you earn a profit, you pay CIT immediately, whether you distribute it or not.
Traditional model (France, Germany, etc.)
- Profit: €100,000
- Immediate CIT (25%): €25,000
- Capital remaining in the company: €75,000
Estonian / Latvian model
- Profit: €100,000
- Immediate CIT: €0
- Capital remaining in the company: €100,000
- Tax is triggered ONLY when you take money out (dividends, non-business expenses, etc.)
This mechanism is called deferred taxation, or the "Estonian model." As long as profits stay in the company and are used to grow the business, no tax is due.
Latvia vs Estonia: the key differences
Both countries use the same principle, but with different rates.
| Criterion | Latvia | Estonia |
|---|---|---|
| CIT on reinvested profits | 0% | 0% |
| Rate on distributed profits | 20/80 = 20% (effective 25%) | 22/80 = 22% (effective ~27.5%) |
| Model in effect since | 2018 | 2000 |
| EU / Eurozone / Schengen member | Yes / Yes / Yes | Yes / Yes / Yes |
| OECD member | Yes (2016) | Yes (2010) |
Key point: Latvia is 2 percentage points cheaper than Estonia on distribution. On a €100,000 distribution, that translates to €2,500 in savings.
What counts as "distribution" (taxable events)
Counts as distribution (taxable):
- Dividends paid to shareholders
- Gifts and donations (above €5 per month per recipient)
- Non-business entertainment expenses
- Transfer pricing adjustments
- Doubtful debts written off (above certain thresholds)
- Liquidation proceeds above contributed capital
Does NOT count as distribution:
- Salaries (subject to payroll taxes instead)
- Business expenses (rent, supplies, business travel)
- Reinvestment in equipment, hiring, growth
- Paying suppliers
- Retained earnings sitting in the company
Concrete examples with numbers
Example 1: Growth-phase company (€200K profit, 0% distributed)
| Scenario | Traditional CIT country (25%) | Latvia |
|---|---|---|
| Profit | €200,000 | €200,000 |
| CIT paid | €50,000 | €0 |
| Capital available for growth | €150,000 | €200,000 |
| Latvia advantage | +€50,000/year |
Example 2: Moderate distribution (€200K profit, €60K distributed)
| Scenario | France (CIT + flat tax) | Latvia |
|---|---|---|
| CIT on total profit | ~€50,000 | €0 (on reinvested portion) |
| CIT on distribution (20/80 of €60K) | Included above | €15,000 |
| Estimated total tax burden | ~€50,000 | €15,000 |
| Latvia advantage | ~€35,000 |
Example 3: Full distribution (€200K profit, 100% distributed)
In Latvia, the CIT would be 20/80 on €200,000 = €50,000, an effective rate of 25%. This is comparable to France (25%), but without additional charges like the flat tax on dividends for a Latvian tax resident shareholder. The model is less advantageous if you distribute all your profits. Its value lies in reinvestment.
The compounding effect over 5 years
Consider a company with €150,000 in annual profit, distributing 30% each year and reinvesting the rest.
| Year | Traditional CIT (25%): cumulative capital | Latvia: cumulative capital |
|---|---|---|
| Year 1 | €78,750 | €93,750 |
| Year 2 | €157,500 | €187,500 |
| Year 3 | €236,250 | €281,250 |
| Year 4 | €315,000 | €375,000 |
| Year 5 | €393,750 | €468,750 |
| Difference after 5 years | +€75,000 |
This calculation is simplified (no compound interest or revenue variation). In reality, if reinvested profits generate additional growth, the gap widens further. Over 5 years, the difference can exceed €100,000 to €200,000+ for a high-growth company.
Who benefits most?
- SaaS / digital businesses reinvesting in growth: ideal. Profits fund product development and hiring without tax drag.
- E-commerce reinvesting in inventory: ideal. Purchasing stock is a business expense, not a distribution.
- Freelancers who need all income as salary: less beneficial. Salary is subject to normal payroll taxes (34.09% total).
- Holding companies accumulating dividends: very beneficial. Dividends received by the holding remain untaxed as long as they are not redistributed.
- Retirees distributing everything: moderate benefit. The effective 25% rate is comparable to most European countries.
Common misconceptions
- "It's a loophole": no. It is Latvia's official tax law, in effect since January 1, 2018, voted by Parliament and compliant with EU directives.
- "You can never take money out": false. You can distribute at any time. You simply pay 20% (effective 25%) on the amount distributed.
- "Only for tech companies": no. Any SIA (the Latvian LLC equivalent) qualifies, regardless of industry.
- "The EU will close this": Estonia has used this model since 2000 without challenge. It is OECD-compliant, and the Pillar 2 minimum tax (15%) only applies to companies with global turnover above €750M.
- "You need to live in Latvia": the company must be Latvian and have real economic substance. You need a registered office and local accountant. Flexible residence options exist for founders.
How to set it up
- Register a SIA (Latvian limited liability company). Minimum share capital: €2,800.
- Open a business bank account in Latvia or the EEA.
- Establish economic substance: registered office, local accounting, and if necessary, employees or an office.
- Work with a local accountant for tax compliance and monthly/annual filings.
- Structure your remuneration optimally: combination of minimum salary + deferred dividends.
Discover our company formation service for full support.
Frequently asked questions
Is 0% corporate tax in Latvia legal?
Yes. It has been Latvia's official tax regime since January 1, 2018. It complies with OECD and EU rules. Estonia has used a similar model since 2000.
What happens when I distribute profits in Latvia?
You pay a tax of 20% on the net base (20/80 formula), which equals an effective rate of 25% on the gross amount distributed. Example: you distribute €80,000, you pay €20,000 in tax.
Is Latvia's tax system the same as Estonia's?
The principle is the same (tax only on distributed profits), but the rates differ. Latvia applies 20% (effective 25%), while Estonia applies 22% since 2025 (effective ~27.5%). Latvia is therefore 2 percentage points cheaper.
Can I use the 0% CIT if I'm not a Latvian resident?
Yes. The 0% rate applies to any SIA, regardless of the shareholder's nationality or residence. However, the company must be registered in Latvia and have real economic substance.
Does the 0% rate apply to all types of companies?
It applies to all SIA entities. It is not restricted to any specific industry. Micro-enterprises have a separate regime (25% of turnover). Branches of foreign companies follow different rules.
How does Latvia's 0% CIT compare to Ireland's 12.5%?
Ireland charges 12.5% (15% for large enterprises under OECD Pillar 2) on ALL profits, whether distributed or not. In Latvia, you pay nothing as long as you reinvest. For a growth-stage company reinvesting 70% or more of its profits, Latvia is significantly more advantageous.