On 9 July this year the Latvian Ministry of Finance opened the public consultation on draft law “Amendments to the Corporate Income Tax Law” (26-TA-85). Comments could be filed until 23 July; the draft now faces inter-ministerial coordination, the Cabinet of Ministers and the Saeima, the Latvian parliament.

Several of the changes directly affect transfer pricing adjustments and the way groups plan liquidations, share buy-backs and reorganisations.

This article looks at what the draft provides and where attention is needed already now. We start with transfer pricing.

A domestic corresponding-adjustment mechanism for transfer pricing

Where a foreign tax administration increases the taxable income of a related company in a transfer pricing review, Latvian law has so far offered no symmetrical reduction on the Latvian side. The only route for eliminating the double taxation was the - a formal process between the competent authorities of the two states under a tax treaty or the EU tax dispute resolution instruments, which regularly takes years. How that worked in practice is a separate question, but no corresponding-adjustment mechanism was written into the law.

The draft proposes to add one to Section 15 of the Corporate Income Tax Law. Where the taxable base of a foreign related party has been increased as a result of an arm’s length adjustment, the Latvian company will be able to reduce the dividends included in its taxable base by the corresponding amount. The condition: a confirmation from the tax administration of the country concerned that the related party’s base has been increased must be filed with the State Revenue Service (VID). If the year’s dividend base does not cover the adjustment, the remainder can be carried forward to the following tax periods. The annotation describes the document somewhat differently - as a confirmation of the tax paid as a result of the adjustment - so its precise content may still change during coordination.

In the Latvian CIT system tax falls due when profit is distributed, so the corresponding adjustment also works through the dividend base: the benefit is not a refund - it reduces the tax at the moment the profit is distributed. Compared with a MAP process measured in years, this is still a meaningful step: relief from double taxation will no longer depend solely on the authorities of the two states reaching agreement. The new mechanism does not replace MAP - the treaty procedure remains available, for example where the amount of the foreign adjustment is disputed or the confirmation cannot be obtained.

The concept itself is a welcome one. At the same time, the proposed amendments raise a number of practical and technical questions - how the new rules will work in practice, that is, how they will be applied technically in specific situations. If the amendments are adopted in the proposed wording, it will be essential to understand how VID applies them, as we can already identify several aspects whose practical application is not clear-cut.

The liquidation quota and share buy-backs become dividends

Today the liquidation quota is treated by the CIT Law as part of deemed profit distributions. The tax is paid by the company being liquidated; for the recipient the income is not a dividend. Where the quota is received by another Latvian company - a parent, for instance - it cannot pass the amount on to its own shareholders without CIT being paid again: the participation exemption in Section 6 covers only received dividends. The same profit is therefore taxed twice. The result is similar when a company buys back its own shares above their nominal value. The annotation concedes a further problem: in a liquidation, tax is charged on the entire part of equity above the shareholder’s contribution, including profit on which tax has already been paid - such as the CIT surcharge applied to credit institutions and consumer lenders.

The draft solves the problem at the level of definitions. The term “dividends” will in future also cover the calculated liquidation quota and the part of the consideration for a company’s own shares that is attributable to distributed profit. The calculation will be written into the law as well: the liquidation quota is the positive difference between the equity of the company being liquidated and the amount contributed by the shareholder, while in a buy-back the dividend is the difference between the calculated consideration and the nominal value of the shares.

The practical consequences are twofold. First, a received liquidation quota and the profit element of buy-back consideration will in future qualify for the Section 6 exemption when distributed onward as dividends. Second, the transitional provisions apply the new rules from 1 January 2026, and the annotation states in terms that taxpayers will be able to file adjusted returns for periods from that date. If a liquidation or a share buy-back has taken place in your group this year, the point deserves a calculation of its own.

Deemed dividends: reorganisation will trigger the tax

The planned changes also reach deemed dividends - retained earnings that have been converted into share capital. Section 7 of the CIT Law defers the tax on such profit: CIT falls due when the share capital is reduced, the liquidation is completed or the company registers as a micro-enterprise taxpayer. In a reorganisation the liability passes to the acquiring company and can roll on from one reorganisation to the next. The annotation is candid: where reorganisations repeat, accounting for and controlling the deferred CIT has become burdensome for taxpayers and VID alike, and it creates tax planning risks.

The amendments add two new payment moments. Deemed dividends will have to be included in the taxable base, first, where the share capital is reduced in the course of a reorganisation and, second, where the taxpayer ceases to exist as a result of one. A merger in which a company with this history disappears will in future mean payment of the tax, not a transfer of the liability.

Historical liabilities do not vanish either: deemed dividends taken over in reorganisations completed by 31 December 2026 will continue to be accounted for by the acquiring company and included in the taxable base under the current Section 7 rules. The date implies that the new rules are intended for reorganisations after 2026. For groups considering a simplification of their structure where the share capital has historically been increased out of profit, the timing of a reorganisation therefore becomes a tax question: the amount of deemed dividends is worth estimating before the merger decision is taken.

Electric cars, VID reviews and other clarifications

Electricity treated like fuel

Section 8 of the CIT Law on vehicle expenses has so far spoken only of fuel, and the recognition of charging costs for electric cars rested on interpretation and guidance. The amendments extend the rule expressly to electricity. The consumption limit will be the manufacturer’s highest stated consumption per 100 kilometres, which may be exceeded by no more than 20 percent; for representative cars the 60-month exception will cover electricity as well. For companies running electric cars this is a reminder to keep consumption norms and mileage records in the same order as for fuel vehicles.

Income identified in VID reviews

The obligation to adjust the taxable base for income not recorded in the books is currently tied to a tax audit. The amendments extend it to all tax control measures and, in addition, to amounts of unjustified income reduction identified in a review, aligning the CIT Law with the law “On Taxes and Fees”. We have written before about how to respond to a VID information request with a considered approach.

Loans to related parties

A loan to a related party can in certain circumstances create a taxable object for CIT, but the law provides exemptions whose calculation turns on the amount of loans issued in previous years. The amendments clarify that only loans issued to related parties count in this calculation. This writes into the law the reading already applied in practice and closes the door on other interpretations.

Permanent establishments, social enterprises and transitional provisions

The credit for tax paid abroad in Section 15 will be extended to payments treated as equivalent to dividends on which Latvian permanent establishments of non-residents calculate CIT. The law will also be aligned with the forthcoming amendments to the Social Enterprise Law, under which social enterprises will from 2027 be able to declare dividends of up to 50 percent of profit: reliefs that have seen no use in practice will be removed from the CIT Law, while the donations regime remains. A series of spent transitional provisions will be deleted at the same time.

Where does the process stand, and what comes next?

The public consultation closed on 23 July, and at the time of writing the draft is still with the Ministry of Finance. The next steps are known from procedure alone: the ministry compiles the comments received and prepares a summary report, the draft is coordinated with the other ministries, then considered by the Cabinet of Ministers, and only after that does it reach the Saeima, where a bill passes three readings. Tax bills are normally the responsibility of the Saeima’s Budget and Finance (Taxation) Committee.

Legislative forecasts are a thankless business, but the draft itself offers a few reference points. The new liquidation quota rules are meant to apply from 1 January 2026, while the transitional provisions draw the line between the old and the new reorganisation rules at 31 December 2026. Both dates suggest the drafters are counting on adoption before the end of this year. The most likely scenario therefore looks like this: the Cabinet of Ministers in the autumn and adoption by the Saeima at the turn of the year - either together with the package of bills accompanying the 2027 budget or separately, as the draft has no budget impact. Entry into force is envisaged in the general order; the draft sets no special date.

At the same time the text can still change - both in coordination and in the Saeima, where tax bills tend to attract substantial proposals for the second and third readings. If adoption slipped into 2027, the application dates would also have to be revisited, including the retroactive application from 1 January 2026. Conclusions about specific transactions are therefore best based on the current version of the text, not only on the draft published for consultation.

What to review already now?

Some homework can be done without waiting for the draft to be adopted:

  • if a transfer pricing audit of a foreign related company or a MAP process has closed or is under way abroad - compile the adjustment amounts by financial year and establish how, in the country concerned, to obtain the tax administration’s confirmation that the related company’s taxable base has been increased: this is the document that will need to be filed with VID for the new corresponding adjustment to apply in Latvia;
  • if a subsidiary’s liquidation has been completed or own shares have been bought back in the group in 2026 - calculate how the new definition of dividends would change the outcome, and follow the progress of the amendments: once adopted, there will be grounds for an adjusted return;
  • if you are planning a reorganisation and the share capital has historically been increased out of retained earnings - establish the amount of deemed dividends.

The scope of the amendments is wider than the words “technical clarifications” suggest. Transfer pricing is set to gain a domestic, statutory corresponding-adjustment mechanism, the liquidation quota and share buy-back consideration acquire dividend status with effect from 1 January 2026, and reorganisation becomes the moment when deferred CIT falls due. If the process keeps its usual rhythm, the final text will be known at the turn of the year. Until then is the right time to establish which of the changes touch your group and build them into the plans for the coming years.