Latvia at the top of tax competitiveness. Why are investors still holding back?

Simona Sirsniņa, Head of Tax, BDO Latvia

In the Tax Foundation's 2026 International Tax Competitiveness Index, published on 19 October, Latvia once again ranks second among the 38 OECD countries, and first in the corporate income tax (CIT) category. At the same time, in this year's FICIL Sentiment Index only 47% of the foreign investors surveyed planned to increase their investment in Latvia, compared with 79% in 2023. This gap raises a question: why does a high place in the tax ranking not translate into an equally high willingness to invest? Investor caution is driven largely by geopolitical and political uncertainty, yet tax rules also have a significant impact on a company's cash flow and long-term decisions. To assess Latvia's advantages, one needs to look at the entire investment cycle – from reinvested profits to dividends, labour costs, and a stock exchange listing.

A high ranking does not yet mean the lowest costs

The index assesses how neutral and competitive the design of a tax system is. Latvia's strongest point is its CIT model, which taxes only distributed profits – the so-called distributed profit model. Property taxes (4th place) and cross-border rules (6th place) are also rated highly. Latvia’s weaker points lie elsewhere: it ranks 8th in individual taxes, compared with Estonia’s 1st place, and only 22nd in consumption taxes.
It is worth comparing Latvia's system with the countries we compete with for investment: Estonia and Lithuania as our closest Baltic competitors, Poland as the region's largest economy, the Nordic countries as a significant source of capital, and the United Kingdom as one of Europe's financial centres.
Moreover, the overall score combines very different areas. The United Kingdom ranks 30th overall but leads the ranking for cross-border tax rules. For investors, however, the overall ranking matters less than how the tax system affects their business at every stage – from generating the first profits to selling the investment or taking the company public.
The table summarises the rankings of the comparison countries in the Tax Foundation 2026 index – overall, for CIT and for individual taxes.

Country	Overall	CIT	Individual taxes
Estonia	1	2	1
Latvia	2	1	8
Lithuania	5	3	10
Sweden	13	6	18
Norway	20	15	29
Finland	22	10	24
United Kingdom	30	25	22
Denmark	31	19	37
Poland	32	12	11

Source: Tax Foundation, International Tax Competitiveness Index 2026 (38 OECD countries; a lower number means a better score). The index assesses the design of the system, not the tax burden of a specific company. Due to methodology changes, rankings from previous years are not directly comparable.

1. Company growth: the advantage lies in cash flow

Latvia's main trump card – reinvested profits

Latvia’s main advantage is that CIT is deferred until profits are distributed. As long as profits are reinvested, no CIT is due. Earnings can be used to purchase equipment, build up inventory, expand into new markets, or fund the next project, without having to demonstrate that they were spent on a specific asset. This is a natural engine of growth – especially for a company for which bank financing is expensive or hard to obtain. However, it is important to note that tax may also become payable in the absence of direct dividend payments, for example, on non-business-related expenses or income treated as equivalent to a profit distribution, such as certain loans to related parties.
Tax deferral has a measurable value. If EUR 100,000 of tax on EUR 400,000 of dividends is paid after four to eight years, at an 8% discount rate, which roughly corresponds to a company's cost of capital, its present value is approximately EUR 54,000–74,000. The benefit from the timing of payment alone is 27–46% of the tax amount – without any reliefs or additional conditions. The longer profits work within the company, the greater the benefit.
The OECD reaches a similar conclusion. In studies published this year on corporate income tax and business dynamism, it finds that young and small firms are more sensitive to tax rules than larger companies because they have more difficulty accessing external financing. They are hit hardest by rules that reduce cash flow. The Latvian model helps such companies by its very nature: no tax arises as long as the money is reinvested. Therefore, restrictions on loss carry-forward, which the OECD cites as an obstacle for innovative and initially loss-making companies, are much less relevant for a reinvesting company in Latvia.

Neighbours adopt the principle, but not the whole model

Estonia has operated a similar system since 2000, but its tax rate on profit distributions is 22/78, compared with Latvia’s 20/80. Thus, out of a total distribution budget of EUR 100,000, EUR 80,000 is available for dividends in Latvia, compared with EUR 78,000 in Estonia.  
Other countries do not copy the Latvian model, but adopt its core principle – invested profits are not taxed immediately. In 2026 Lithuania raised its CIT rate to 17%. At the same time, it introduced a permanent option to immediately deduct the cost of equipment, computer hardware, software, and other qualifying assets, provided they are used for at least three years and the investment project tax relief is not claimed. As a result, profits invested in such assets are practically untaxed in the year of investment – similarly to Latvia, only in a narrower scope. It was precisely these changes that led the Tax Foundation to raise Lithuania’s score. Poland generally applies a 19% CIT rate (9% for small companies), but since 2021 it has also offered the so-called Estonian CIT – a tax on distributed profits only. This is the best evidence that the distributed profit model is competitive: the region's largest economy is adopting it. In Poland, however, this is an optional tax regime subject to strict eligibility requirements: all shareholders must be individuals, the company must employ at least three people, and it cannot hold shares in other companies. In Latvia, by contrast, this is the standard regime for all companies, including subsidiaries of foreign corporate groups. In the United Kingdom a similar immediate deduction is available for new equipment, while the Finnish government proposes reducing the CIT rate to 18% from 2027.
For capital-intensive projects, these tax reliefs can significantly narrow the gap with Latvia. However, the Latvian model retains an advantage when growth requires more than just investment in equipment - for example, when it involves working capital, hiring staff, entering new markets or expanding through acquisitions of other companies. That is why, in my view, countries should be compared using a single cash-flow model rather than by looking at tax rates and reliefs in isolation. Otherwise, Lithuania’s 17% rate with immediate expensing and Latvia’s 0% tax on reinvested profits cannot be meaningfully compared.

2. Investor entry: the taxation of dividends and capital becomes important

What do taxes mean for an investor and an IPO?

The tax question does change, however, when a company brings in an external investor or prepares for an IPO. Shareholders of a listed company usually expect regular dividends, which means paying CIT on each profit distribution – in other words, the deferral advantage ends for the profits paid out. The dividend policy must already be disclosed in the IPO prospectus, so its tax cost must be calculated before listing and factored into the company's valuation.
At this stage, Latvia offers strong terms for a foreign investor. Latvia does not withhold tax on dividends, interest and royalties paid to non-residents, except for payments to low-tax jurisdictions as defined by Cabinet regulations. A Latvian company's income from the sale of shares is exempt if the shares have been held for at least 36 months and Latvian real estate does not exceed half of the company's assets. This is important for holding structures and for group restructuring before an investor comes in. Latvia also offers a straightforward exit process for foreign investors: capital gains earned by a foreign company from the sale of shares in a Latvian company are generally exempt from Latvian tax if the shares have been held for more than 36 months. An exception applies to companies whose assets consist mainly of Latvian real estate, in which case 3% of the sale price is withheld. In Lithuania, by contrast, dividends paid to foreign companies may be subject to both 17% CIT and a 17% withholding tax if the conditions for the participation exemption are not met - generally, a minimum 10% shareholding held for at least 12 months - and the tax treaty between Lithuania and the investor’s country of residence does not provide for a lower rate.
From 2026, Latvia also offers an alternative tax regime for companies whose shareholders are exclusively individuals during the period for which dividends are calculated: 15% CIT and 6% PIT on dividends. For a Latvian resident this gives practically the same result (EUR 79,900 versus EUR 80,000 under the standard 20/80 CIT regime from a distribution budget of EUR 100,000). For a foreign individual it may be more beneficial if their country of residence allows a credit for PIT paid in Latvia under its domestic legislation or its tax treaty with Latvia.
The capital market also needs domestic private investors. Capital gains in Latvia are taxed at 25.5%, and an additional 3% applies to a resident's income above EUR 200,000 per year. An investment account allows the tax to be deferred, but the Nordic countries go further. In Sweden's investment savings account (ISK), tax is paid not on each capital gain or dividend, but on the value of the account: a standardised income rate (the government borrowing rate plus one percentage point) is applied to it and taxed at 30%, so the effective burden is roughly 1% of the account value per year. Transactions do not need to be declared, and an account value of up to SEK 150,000 (from 2026 – SEK 300,000) is tax-exempt. More than three million Swedes use the account, and it is often cited as one of the reasons why Swedish households invest so widely in shares. If we want Baltic companies to also find local investors on the stock exchange, the taxation of savings is just as important as the CIT model.
Large corporate groups: where the CIT advantage diminishes
International groups with consolidated revenue of at least EUR 750 million must also take into account the global minimum tax (Pillar Two). These are OECD-agreed rules that have been applied in the EU since 2024, requiring large corporate groups to pay an effective tax rate of at least 15% on their profits in every country where they operate. If less has been paid in a given country, the difference – the so-called top-up tax – is collected by another country, usually the parent company's country. If a Latvian subsidiary reinvests its profits and pays no CIT, its effective tax rate in Latvia is below 15%, and the group may have to pay the difference in the parent company's country. A simplified example: if a Latvian subsidiary earns one million euros and reinvests all of it, there is no CIT in Latvia, but the group may have to pay up to EUR 150,000 in top-up tax in another country; the actual amount is reduced by the substance-based carve-out for payroll costs and tangible assets in Latvia. Latvia, like Estonia and Lithuania, uses the deferred application permitted by the EU directive until the end of 2029, but this only protects against the tax being collected in Latvia, not against a top-up at group level. For tax systems that tax profits upon distribution, the GloBE rules provide a special election known as the Eligible Distribution Tax System (EDTS). Under this election, a corporate group may assume, for calculation purposes, that CIT on a given year’s profits in Latvia will be paid as if those profits had been distributed, thereby avoiding an immediate top-up tax. However, if the profits are not distributed and CIT is not paid within four years, the difference must be paid retroactively. In other words, the election provides a four-year waiting period, not an exemption. Therefore, Latvia's advantage for large groups works only partially: it is retained if the group plans to distribute profits within four years, or if the Latvian subsidiary has enough employees and tangible assets for the carve-out to substantially reduce the top-up tax. For a group that has only a holding or intellectual property structure in Latvia, the benefit practically disappears. This must be calculated before the investment decision, not after it.

3. Day-to-day business: competitiveness is also determined by labour costs

Labour costs – the weak point in Latvia's competitiveness

OECD Taxing Wages data for 2025 show that for an average wage earner without children or dependants, labour taxes (PIT and social security contributions) in Latvia amount to 40.1% of the employer's total costs. This is less than in Estonia (42.6%), Finland (42.5%) and Sweden (41.1%), but more than in Lithuania (39.8%), Norway (36.4%), Denmark (35.8%), Poland (35.0%), and the United Kingdom (32.4%).
However, the OECD data refer to 2025, and Estonia has changed its rules since then. From 2026 it applies a uniform non-taxable allowance of EUR 700 per month to all employees (previously it decreased to zero as wages rose) and a flat PIT rate of 22%. In Latvia, the non-taxable minimum in 2026 is EUR 550 per month, and the PIT rate is 25.5%, and 33% on income above EUR 105,300 per year. Therefore, the OECD comparison, in which Latvia looks better than Estonia, no longer reflects the situation in 2026. A different question matters to an investor: how much does an employee cost who must receive a certain net salary? At the same net salary, Latvia is one of the most expensive countries in the comparison. At the lower wage level, all the other countries except Poland are cheaper, while at the higher wage level, only Poland, Finland and, marginally, Sweden are more expensive than Latvia. In Estonia the employer pays 4–5% less at both levels, while in Lithuania a higher-paid specialist costs 6% less – and Vilnius is Riga's most direct competitor in attracting service centres:

Country	Cost at net ~€2,140	vs Latvia	Cost at net ~€4,140	vs Latvia
Latvia	~€3,710	–	~€7,415	–
Estonia	~€3,535	–4.7%	~€7,095	–4.3%
Lithuania	~€3,600	–2.9%	~€6,965	–6.1%
Poland	~€3,740	+0.9%	~€8,050	+8.6%
Sweden	~€3,455	–6.8%	~€7,445	+0.4%
Norway	~€2,975	–19.7%	~€6,500	–12.3%
Finland	~€3,150	–15.1%	~€7,620	+2.8%
Denmark	~€3,285	–11.3%	~€6,610	–10.8%
United Kingdom	~€2,800	–24.4%	~€6,110	–17.6%

Illustrative calculation using 2026 rates. Latvia – gross EUR 3,000 and EUR 6,000, EUR 550 non-taxable minimum, no reliefs. Estonia – EUR 700 allowance, 2% pension pillar II, unemployment insurance 1.6% and 0.8%, social tax 33%. Excludes the business risk state fee and additional benefits. Other countries – 2026 PIT and social security contribution rates without reliefs; for Sweden and Finland with the average municipal rate; for the United Kingdom the 2026/2027 tax year. National currencies converted to euros at autumn 2026 exchange rates. Amounts are rounded.
For higher-paid specialists the gap widens: in Latvia, a 33% rate applies to income above EUR 105,300 per year and a further 3% above EUR 200,000, while in Estonia the rate remains 22%. This is also reflected by the Tax Foundation – in the individual taxes category Estonia is first and Latvia eighth. For a technology company or service centre, where salaries account for the largest share of costs, this difference can outweigh the benefits of deferred CIT. For a service centre with 100 employees earning salaries at the higher level shown in the table, labour costs would be approximately EUR 400,000–540,000 lower per year in Estonia or Lithuania. This is more than the benefit of deferring CIT on several million euros in reinvested profits. In my view, this is where the Latvian tax system falls short most significantly in supporting the growth of Latvian businesses - growth that would ultimately generate greater tax revenues for the state budget.

4. Investment planning: the stability of rules has a price

Investors also need tax predictability

In the FICIL survey, investors identify geopolitical, structural and political uncertainty, rather than taxation, as the main factors holding back investment. Nevertheless, taxation is part of that uncertainty, and Latvia’s record in this area leaves little room for complacency: within just two years, PIT rates and thresholds have been changed, the tax rate on capital income has increased from 20% to 25.5%, and an additional tax rate on income exceeding EUR 200,000 and a new dividend tax regime have been introduced. Each of these changes may be justified on its own, but taken together, they mean that an investor’s financial model prepared in 2023 no longer reflects the reality of 2026. A company planning how to use its profits over several years considers not only the tax rate itself, but also how frequently the rules change and how much advance notice is given.
The OECD makes the point clearly: tax complexity increases compliance costs and uncertainty, disproportionately affecting small and young companies that lack the resources to absorb these additional costs. The OECD's recommendation to countries is simpler, more predictable and internationally coordinated rules. In practice, this means timely VAT refunds, clear transfer pricing rules and the possibility of obtaining a clear position from the State Revenue Service before a significant transaction.

How to turn a ranking advantage into investment

Latvia’s tax system has a rare, internationally recognised advantage: it allows companies to grow using their own earnings, a principle that other countries are now adopting as well. Second place in the ranking helps open doors to discussions with investors, but the benefits are not the same for everyone. The system works best for a growing mid-sized company that reinvests its profits and faces high capital costs; offers more limited benefits to a listed company that pays regular dividends; and provides the least benefit to a subsidiary of a large corporate group subject to the global minimum tax. An investor's decision is determined not by a place in a table, but by cash flow over the entire investment cycle: from the first reinvested profits to dividends, employee costs and the moment the company is sold or listed on a stock exchange.
Latvia has three weaknesses that it can address itself: labour taxes, which make employing highly paid specialists more expensive than in Estonia and most other countries in the comparison; the taxation of personal savings, which does not encourage domestic investment in the stock market as effectively as in the Nordic countries; and the predictability of tax rules, which investors value just as highly as tax rates. If Latvia maintains its distributed-profit tax model as a long-term principle and addresses these three weaknesses, its second-place ranking could translate into real investment. Otherwise, it will remain just an impressive figure in a presentation.

Simona Sirsniņa is Head of Tax at BDO Latvia. She advises local and international companies on corporate income tax, transfer pricing, and global minimum tax (Pillar Two) matters. She has previously held senior roles at international consulting firms.