Starting a business in Latvia: choosing a legal form and a tax regime
Starting a business in Latvia begins with two decisions that are made at the same time but are often treated as one: which legal form the activity will take and which tax regime will apply to it. These are separate questions. The form determines liability, accounting requirements and how counterparties see the business. The regime determines how much of the money earned stays with the business.
The wrong choice is rarely expensive immediately. It becomes expensive in the second or third year, once turnover has grown and the original structure no longer fits.
What follows is a practical breakdown of both decisions, with 2026 rates.
Summary
- Registered self-employed person is the simplest and cheapest form, but liability is unlimited.
- Sole trader is suitable when a business needs a company name, but personal liability still remains.
- SIA is the standard choice when growth, capital raising and more stable operations are planned.
- Micro-enterprise tax is 25 % of turnover, but only until the VAT threshold, and expenses are not deductible.
- General regime and CIT are relevant when the business is more complex and accounting precision matters more.
1. Legal forms
Registered self-employed person
The simplest form. An individual registers with the State Revenue Service (VID) as a person carrying out economic activity. No separate legal entity is created.
- Registration: State Revenue Service, no state fee.
- Liability: unlimited, with all personal assets. Business and private assets are not legally separated.
- Accounting: single-entry bookkeeping (a journal of income and expenses).
- Suits: service providers without employees, side activity, low-risk start-ups.
Sole trader (IK)
An individual registered in the commercial register as a merchant.
- Registration: Register of Enterprises, state fee EUR 30.
- Liability: also unlimited - an IK is not a capital company.
- Advantage over plain self-employment: a registered business name in the commercial register and merchant status, which some counterparties require.
- Suits: crafts, retail, any activity that benefits from a recognisable name where separating liability is not a priority.
Limited liability company (SIA)
The most common form in Latvia for a business with growth plans.
- Share capital: from EUR 2,800.
- State fee: EUR 75 for entry in the commercial register. Where there is a single founder, that rate already covers processing within one working day; where there are several founders and one-day processing is requested, the fee is charged at triple the rate.
- Liability: a shareholder risks the capital contributed, not personal assets. A board member can be liable separately - for negligence, tax debts and failure to perform statutory duties.
- Accounting: double-entry bookkeeping and an annual report.
- Suits: businesses with employees, contracts with large clients, outside investors or several owners.
Reduced-capital SIA
The same SIA with a lower entry threshold.
- Share capital: from EUR 1 to EUR 2,799.
- State fee: EUR 20 - the lowest rate of any capital company form.
- Conditions: shareholders may only be natural persons, no more than five; a person may be a shareholder in only one reduced-capital SIA.
- Mandatory reserve: until share capital reaches EUR 2,800, at least 25 % of annual profit must be allocated to a mandatory reserve each year. Dividends may only be paid from the profit remaining after that allocation.
- Suits: starting out where limited liability is needed but EUR 2,800 is not available up front.
Other forms
A joint-stock company (AS) is intended for larger businesses and capital raising; capital and governance requirements are considerably higher, and the state fee for entry in the commercial register is EUR 85. Partnerships (general and limited; state fee EUR 75) are used less often in practice, mainly by groups of professionals. Neither is a typical choice at the start.
Comparison of forms
| Form | Registered with | Share capital | State fee | Liability | Accounting | Micro-enterprise tax available |
|---|---|---|---|---|---|---|
| Self-employed person | VID | None | None | Unlimited | Single entry | Yes |
| IK | Register of Enterprises | None | EUR 30 | Unlimited | Single entry | Yes |
| Reduced-capital SIA | Register of Enterprises | EUR 1–2,799 | EUR 20 | Limited | Double entry | No |
| SIA | Register of Enterprises | From EUR 2,800 | EUR 75 | Limited | Double entry | No |
2. Liability - the difference that matters most
Tax rates change almost every year. The liability principle does not.
A registered self-employed person and a sole trader are liable for their obligations with all their assets - including assets acquired before the business started. A shareholder in a capital company is liable up to the capital contributed.
The practical conclusion: the larger the contracts, the larger the inventory bought on credit and the more employees there are, the weaker the case for a form without separated liability. Where the activity is a service with no significant obligations and no employees, the liability argument carries less weight, and the decision comes down to tax and administrative cost.
3. Tax regimes in 2026
Micro-enterprise tax
Rate: 25 % of turnover. The taxable object is turnover - income from economic activity. Expenses cannot be deducted from it.
The micro-enterprise tax covers two payments for the owner: mandatory state social insurance contributions and personal income tax on the business income share.
Who can pay it: a sole trader, an individual undertaking, a farm or fishing enterprise, and an individual registered with the State Revenue Service as carrying out economic activity. An SIA cannot pay micro-enterprise tax.
A key condition: a micro-enterprise taxpayer may not be registered for VAT. If the business becomes, or is required to become, a VAT payer, micro-enterprise taxpayer status is lost from the next tax period. In practice this means the regime works up to the VAT registration threshold - EUR 50,000 per calendar year.
Deadlines: the quarterly return is due by the 15th of the following month; payment into the single tax account by the 23rd.
When it works: when the expense share is low. For a service provider with no material costs, 25 % of turnover can be less than the general regime. In trade, where the cost of goods makes up most of the turnover, 25 % of turnover quickly becomes disproportionate.
The general regime for individuals
A self-employed person or sole trader who has not chosen the micro-enterprise tax pays personal income tax on profit (income less business expenses) plus social contributions.
Personal income tax in 2026:
- 25.5 % on annual income up to EUR 105,300;
- 33 % on the portion above EUR 105,300;
- tax-free allowance EUR 6,600 per year (EUR 550 per month).
Mandatory state social insurance contributions:
- if monthly income is at least EUR 780 (the 2026 minimum wage) - 31.07 % on at least EUR 780, plus 10 % for pension insurance on the portion of income above EUR 780;
- if income is below the minimum wage - 10 % of actual income, for pension insurance only.
The full 31.07 % rate provides pension, disability, maternity, paternity, sickness, parental and health insurance. The 10 % contribution provides pension cover only. That difference becomes real at the moment of incapacity for work or parental leave.
Filing: the annual income declaration for the previous year is submitted between 1 March and 1 June. It covers all income for the year, not just business activity.
When it works: when expenses are significant and documented, when income is irregular, and when full social insurance cover matters.
SIA: corporate income tax
Latvia's CIT model differs from the classical one: undistributed profit is not taxed. Tax arises when profit is distributed.
Standard regime: the CIT rate is 20 %, and the taxable base is first divided by a coefficient of 0.8. The effective rate on dividends is 25 %. An individual pays no additional personal income tax on such dividends.
Alternative regime from 1 January 2026: a capital company may choose to apply CIT of 15 % at company level (dividing the base by a coefficient of 0.85) and personal income tax of 6 % at individual level. Conditions: the company must be a capital company registered in Latvia, and its direct shareholders may only be natural persons.
| Regime | Effective CIT rate | PIT for the dividend recipient | Total effective rate |
|---|---|---|---|
| Standard regime | 20 / 0.8 = 25 % | Not applied | 25 % |
| Alternative regime | 15 / 0.85 = 17.7 % | 6 % | 23.7 % |
The existing regime may continue to be applied - the alternative is a right, not an obligation. Its main benefit is for non-resident individuals, who can use the 6 % Latvian personal income tax as a tax credit in their country of residence.
Important: if the owner also works in the company, the remuneration for that work is salary, and salary is subject to personal income tax and social contributions in the usual way. Dividends do not replace salary. The calculation can be checked with the salary calculator.
Comparison of regimes
| Regime | What is taxed | Rate | Expenses deductible | Available to an SIA | Restriction |
|---|---|---|---|---|---|
| Micro-enterprise tax | Turnover | 25 % | No | No | Cannot be VAT registered |
| General regime (individual) | Profit (income – expenses) | PIT 25.5 % / 33 % + social contributions | Yes | No | None |
| SIA (CIT) | Distributed profit | 25 % or 23.7 % effective | Yes | Yes | None |
Which regime is available to which form
| Tax regime | Registered self-employed | Sole trader (IK) | Reduced-capital SIA | SIA | AS |
|---|---|---|---|---|---|
| Micro-enterprise tax - 25 % of turnover | Available | Available | Not available | Not available | Not available |
| General regime - PIT 25.5 % / 33 % + social contributions | Available (default) | Available (default) | Not available | Not available | Not available |
| CIT, standard - 25 % effective on distributed profit | Not available | Not available | Applies | Applies | Applies |
| CIT, alternative - 23.7 % effective (15 % + 6 %) | Not available | Not available | Optional¹ | Optional¹ | Optional¹ |
| VAT - from EUR 50,000 per year | Applies² | Applies | Applies | Applies | Applies |
| Payroll taxes on employees and board members | Applies | Applies | Applies | Applies | Applies |
¹ The alternative regime may only be chosen by a capital company whose direct shareholders are exclusively natural persons. The standard regime may be retained.
² For a self-employed person and a sole trader, VAT registration means losing micro-enterprise taxpayer status from the next tax period.
An individual undertaking and a farm or fishing enterprise are not shown in the table - they can pay micro-enterprise tax, but in certain cases, depending on the obligation to prepare an annual report, corporate income tax applies to them instead. That situation requires an individual assessment.
4. Value added tax
VAT does not depend on the legal form - it depends on turnover.
Registration threshold: EUR 50,000 per calendar year (January to December).
- Certain VAT-exempt transactions are also counted towards the threshold.
- If turnover exceeds the threshold by no more than 10 %, a small business may remain unregistered until the end of the calendar year. If the threshold was exceeded in the previous year, that option is not available in the current year.
Registering for VAT automatically means losing micro-enterprise taxpayer status from the next tax period. For a business that plans to work with VAT-registered clients and make large purchases, voluntary registration can pay off earlier - input VAT becomes deductible.
5. In numbers: where the turnover goes
The comparison only becomes clear with concrete figures. Below is a modelled calculation for one person who withdraws everything earned in the same year.
Model assumptions: one owner, one business; expenses are documented and fully attributable; the EUR 6,600 annual tax-free allowance is applied; no allowances for dependants; turnover stays below the VAT threshold; income stays below EUR 105,300. In the "minimum salary + dividends" variant, a salary of EUR 780 per month is modelled with the remainder paid as dividends.
Where EUR 40,000 of turnover goes
Turnover EUR 40,000, business expenses EUR 12,000 (30 %), pre-tax profit EUR 28,000.
| Regime | Total tax | Left for the owner | Tax as % of profit |
|---|---|---|---|
| Micro-enterprise tax | EUR 10,000 | EUR 18,000 | 35.7 % |
| General regime | EUR 9,012 | EUR 18,988 | 32.2 % |
| Company - all as salary | EUR 11,211 | EUR 16,789 | 40.0 % |
| Company - min. salary + dividends | EUR 6,930 | EUR 21,070 | 24.8 % |
| Company - alternative dividend regime | EUR 6,787 | EUR 21,213 | 24.2 % |
How the tax burden changes with turnover
The micro-enterprise tax line is straight - the tax grows in proportion to turnover and depends on neither expenses nor profit. In the other regimes the burden is built on profit, so the lines are flatter.
In percentage terms, the general regime is relatively expensive at low turnover - minimum social contributions are due even when income is small. As turnover grows, that fixed element dissolves and the effective rate falls.
When the micro-enterprise tax stops paying off
This is the most practical chart in the article. The micro-enterprise tax line is horizontal - 25 % of turnover regardless of what the activity costs to run. The other regimes become cheaper as expenses rise.
The crossover with the general regime occurs once expenses reach roughly 21–23 % of turnover. Beyond that point the micro-enterprise tax is more expensive, and the gap widens quickly. In trade, manufacturing and any activity with material costs, that line is crossed in the first year.
What these figures do not show
Social cover. The minimum salary plus dividends variant produces the lowest tax burden and also the lowest sickness benefit, parental benefit and pension accrual. That gap shows up not in a tax return but at the moment work becomes impossible.
Remuneration must match the work. If the owner works in the company, the remuneration must correspond to the actual work performed. Dividends are not a substitute for salary, and a mismatch is a tax risk.
Administrative cost. An SIA requires double-entry bookkeeping and an annual report. These costs are not included in the model and, at low turnover, absorb part of the benefit.
Liability. The model shows money, not risk. The choice of form is governed by both.
6. How to choose: four typical cases
A service with no employees, turnover up to EUR 20,000 a year, few expenses. Registered self-employment. The choice between the micro-enterprise tax and the general regime should be settled by calculation; the micro-enterprise tax offers administrative simplicity, at the cost of weaker social cover if contributions are small.
Trade with purchased goods. The micro-enterprise tax is almost certainly wrong, because 25 % is charged on turnover rather than on the mark-up. The general regime or an SIA.
A business with employees, contracts and investment plans. An SIA. If starting capital is limited, a reduced-capital SIA - accepting that part of the profit must be allocated to the mandatory reserve until it reaches EUR 2,800.
Side activity alongside employment. Registered self-employment. Note that the annual declaration combines all income for the year, and the progressive personal income tax rate applies to the total.
7. Registration steps
- Choose the form - before preparing documents, not after.
- Check the name in the commercial register (applies to IK, SIA, AS).
- Prepare and file incorporation documents. The Register of Enterprises accepts documents electronically with a qualified e-signature; economic activity is registered with the State Revenue Service through the Electronic Declaration System.
- Pay the state fee - sole trader EUR 30, reduced-capital SIA EUR 20, SIA and partnership EUR 75, joint-stock company EUR 85. The fee must be paid before the application is filed.
- Choose and apply for a tax regime. Micro-enterprise taxpayer status can be applied for together with the registration application at the Register of Enterprises.
- Open a bank account, prepare accounting policy documents, set up the bookkeeping system.
- Register for VAT if the threshold has been reached or if voluntary registration is advantageous.
8. Common mistakes
The form is chosen by tax rather than by risk. A 25 % micro-enterprise tax looks simple until the first serious contract arrives and liability reaches personal assets.
Turnover and profit are confused. Under the micro-enterprise tax, the tax is due even if the year ends in a loss - the taxable object is turnover.
Social contributions are treated as a cost rather than as cover. Minimum contributions mean minimum sickness benefit, parental benefit and pension.
The VAT threshold is noticed too late. The threshold is measured over a calendar year, and exceeding it costs a micro-enterprise taxpayer the regime.
Dividends are paid instead of salary. If the owner works in the company, the remuneration must be a salary with the corresponding taxes.
Summary
The form is a decision about liability. The regime is a decision about money. Both are taken at the same time, but they must not be merged.
In practice, most new businesses choose between three options: registered self-employment under the micro-enterprise tax or the general regime, a reduced-capital SIA with a low entry threshold, and a full SIA. The deciding factors are the turnover forecast, the expense ratio, whether there will be employees, and the level of risk.
A calculation comparing the regimes on actual figures can be prepared before registration - it costs less than changing the form in the second year. Bookkeeping is covered by accounting outsourcing; planning and forecasting by fractional CFO services.
Sources
- Micro-enterprise Tax Law - rate, eligible taxpayers, filing deadlines: https://likumi.lv/ta/id/215302
- State Revenue Service on the micro-enterprise tax rate: https://www.vid.gov.lv/lv/mikrouznemumu-nodokla-likme
- LV portāls on self-employed taxes in 2026 (PIT rates, tax-free allowance, social contributions): https://lvportals.lv/e-konsultacijas/37771-ka-pasnodarbinatajam-jamaksa-nodokli-2026-gada-2025
- PwC on the new dividend tax regime from 2026: https://www.pwc.com/lv/lv/news/jauns-nodoklu-rezims-dividendem.html
- LV portāls on determining the VAT registration threshold: https://lvportals.lv/skaidrojumi/371524-izmainas-pvn-maksataju-registracija-un-registracijas-slieksna-noteiksana-no-2025-gada-2025
- Register of Enterprises on the reduced-capital SIA: https://www.ur.gov.lv/lv/registre/uznemumu-vai-komersantu/mazkapitala-sia/
- Cabinet Regulation No. 664 of 11 October 2016 - state fees for entries in the commercial register: https://likumi.lv/ta/id/285320
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Note: This article is informative and does not replace individual advice. Rates and thresholds reflect the 2026 rules.
Published: 25 August 2026.