Article submitted by Edgars Hercenbergs, Senior Associate at Sorainen, and Santa Prauliņa, Senior Associate at Sorainen
This article describes how companies can use Latvia’s tax advantages to save money on business investments. Companies can save up to 25% on the cost of business projects if they use the Latvian tax system (Corporate Income Tax or CIT and Transfer Pricing) correctly.
Suppose an international company (crypto platform, neobank, e-gaming or e-gambling platform), which creates content and offers services on a global market, plans to establish an IT company in Latvia or Estonia, which will be responsible for artificial intelligence (AI), including policy and centralised management, contracts for AI provision with third-party suppliers, in-house development and testing of AI, compliance control, operational control of AI within the group. If the company makes the right use of Latvian tax advantages, the group will be able to save 25% of the cost of the business project.
Tax
In Latvia, corporate profits are not subject to corporate income tax. This tax is payable on distribution of profits at an effective rate of 25% as deferred tax on payout basis. If no profit is distributed, no tax is payable. A similar system may be used in Estonia. According to the information below, Latvia and Estonia are the most competitive countries in the world in terms of corporate income tax regulations.
| Location | Country | Corporate tax rate, %
(2024) |
Is there a deferred profit distribution tax regime? | Top ranking as of 1 January 2025 (provisional) | Tax rate | Effective tax rate (
as at 1 January 2025) |
| 1 | Estonia | 20,00
(only on profit sharing or deferred tax) |
Yes | Latvia | 20,00%
(only on profit sharing or deferred tax) |
25% (= 20/80 or 25% of net payout) |
| 2 | Latvia | 20,
(only on profit distribution or deferred tax) |
Yes | Estonia | 22,00%
(only on profit distribution or deferred tax) |
28%(=net cost 22/78) |
| 3 | Lithuania | 15,00 | No | – | 16% | – |
| 4 | Hungary | 9,00 | No | – | – | – |
| 5 | Ireland | 12,50 | No | – | – | – |
| 6 | Sweden | 20,06 | No | – | – | – |
| 7 | Finland | 20,00 | No | – | – | – |
| 8 | Czech Republic | 21,00 | No | – | – | – |
| 9 | Slovenia | 22,00 | No | – | – | – |
| 10 | Switzerland | 19,60 | No | – | – | – |
Comparison of corporate tax rates, 2024-2025 data, source Tax Foundation, 2024 Annual Report (International Tax Competitiveness Index 2024 | Tax Foundation – taxfoundation.org)
To take advantage of Latvia’s (and Estonia’s) tax advantages, companies need to set transfer pricing in line with local and international standards.
Let’s cite one successful example. In a Latvian or Estonian start-up, “S” concentrates the initial funding needed to pay for the development and management of the AI. The new company S employs competent MI developers, but most importantly, the management of the Latvian company S takes decisions (including whether to take business risks, how to react to the risks, how to address the risks, etc.) regarding the development and commercialisation of the AI developed. The decision-makers must be competent to make these decisions, but the necessary information for decision-making can be obtained within the group or from reliable sources. As a result, the new company ‘S’ is entitled to a basic remuneration from the generated AI used by the group, plus a risk premium. The new ‘S’ company does not necessarily have to be the legal owner of the AI, but if it were, the new ‘S’ company could claim even higher returns from the commercialisation of the AI. The profits can be used by S to finance its own and other group activities.
Let’s take a look at how the tax benefits look in figures (Latvia as an example). The new company “S” earns €2,500,000 in its first €10,000,000 project, which is not distributed as dividends to the parent company. This €2 500 000 is further used to finance other larger projects. In particular, in order to be able to reduce the cost impact on the profit of other projects, i.e. to negotiate a more mutually beneficial price with the client (or clients) or to pay for additional costs in IT software development, the €2 500 000 previously earned is invested in a larger project with a value of € 22 250 000. The company can earn € 5 620 500. These profits are not subject to Latvian CIT until distributed as dividends and can be used to finance other future and even larger business projects.
AI Regulation
When assessing which of the group companies will be responsible for commissioning and maintaining the AI system, it is advisable to select the company with sufficient competence to be able to act as AI provider under the EU AI Regulation. This also implies taking responsibility for the risks that may arise from the operation of the AI system. It is also important to choose partners carefully, both at the start of the innovation and during the development and maintenance of the innovation. Appropriate and secure cooperation agreements and internal documentation must be in place to ensure that the operation of the AI system within the group company is both safe and legally compliant.
