The Baltic states punch far above their weight in technology, producing companies that reach global markets from a base of a few million people. That reach creates a structuring question earlier than it does for most companies: a Baltic technology company often has international customers, international investors and international ambitions before it has finished its first funding round, and where it places its holding shapes all three.
Estonia, Latvia and Lithuania share a coastline and a currency, not a corporate tax system. A structure built on the assumption that the Baltics are one regime is wrong in at least one of them.
The investor question comes first
A technology company raising from international venture capital is frequently asked to sit under a holding in a jurisdiction the investors understand, and while Baltic company law is modern and well regarded, a Dutch holding is a familiar and comfortable structure for European and international funds. We deal with this dynamic in our note on raising from a European fund that wants a European entity. Getting the holding right before the round rather than during it saves the company from restructuring under time pressure at exactly the wrong moment.
Inserting a holding above an operating company is a share exchange, and a relief is far easier to secure before an investor has set a price. The wider comparison is in our note on holding company jurisdictions compared.
Three countries, three corporate income taxes
Estonia and Latvia tax profit when it is distributed, with different arithmetic. The Estonian company pays income tax on distributed profit at 22/78, and since 2025 that is the only rate, the reduced 14/86 rate and the 7 per cent withholding beside it having gone, subject to the transitional treatment of the balance taxed at 14/86 up to the end of 2024, as the Estonian Tax and Customs Board sets out in its guidance on the taxation of dividends. Latvia charges 20 per cent under Section 3 of its Enterprise Income Tax Law, but Section 4, paragraph nine, first divides the taxable object by 0.8, so the real charge is a quarter of what is paid out. The alternative 15 per cent rate of Section 3, paragraph five, reaches only taxpayers whose participants are all natural persons.
Lithuania does not work that way. Under Article 5 of its Law on Corporate Income Tax profit is taxed at 17 per cent as it arises, whether or not anything is paid out, with zero for the first two tax periods and 7 per cent afterwards where income for the period does not exceed 300,000 euros and the combined income of the related entities named in the following paragraph does not either. The zero rate carries conditions of its own: the participants must be individuals, and across three consecutive tax periods including those two the company must not suspend its activity, be liquidated or reorganised, and its shares must not be transferred to new participants. Putting a holding above the company is that transfer, and reorganising instead is caught as well. Over a long product build the charge is dormant in Estonia or Latvia and annual in Lithuania. Our notes on Estonia’s distribution tax and a Dutch holding and on choosing the Baltic entry point go further.
Where the intellectual property sits
For a technology company the central asset is the intellectual property, and where it is owned determines a large part of where the value and the tax sit. A Dutch holding can own the IP where that is supported by genuine functions, but the allocation of return has to follow the people who actually develop and manage the technology rather than the group’s preferences. This connects directly to transfer pricing and the substance behind any IP-owning function, and it is a decision to make deliberately rather than by default.
The test is who performs and controls the development, enhancement, maintenance, protection and exploitation of the intangible, and who carries the risk of it failing. Article 8b of the Dutch Corporate Income Tax Act 1969 requires the profit of associated companies to be determined as if arm’s length conditions had been agreed, and its third paragraph requires each of them to hold in its records the information showing how those prices were arrived at. That file is described in our note on royalties, IP and DEMPE.
There is a reason not to move development out of Lithuania. The same law allows costs of research and experimental development, other than depreciation or amortisation of long-term assets, to be deducted three times in the period incurred, provided the work is connected with the ordinary or intended activity of the company from which income is or will be earned. Article 5, paragraph seven, then taxes at 7 per cent the share, given by the formula in paragraph nine, of profit from the use or transfer of an asset created in that research, provided the entity which created it earns the income and bears all the costs, and the asset is a copyright-protected computer program or an invention patented as that paragraph requires. That formula divides qualifying expenditure, uplifted by 30 per cent but capped at the total, by total expenditure, keeping the costs incurred through related persons and the cost of acquiring the asset out of the numerator while leaving them in the total. Development subcontracted inside the group shrinks the share the 7 per cent reaches.
A Baltic technology company usually meets the structuring question before it feels ready. Meeting it early, deliberately, is far cheaper than meeting it later under an investor’s deadline.
Getting profit up to the holding
The Parent-Subsidiary Directive reaches less far than it appears. Article 5 of the consolidated Directive 2011/96/EU exempts profits distributed by a subsidiary to its parent from withholding tax, and Annex I lists the Estonian, Latvian and Lithuanian corporate taxes among those that bring a company within it. But Article 7, paragraph one, provides that withholding tax does not cover an advance payment or prepayment of corporation tax to the Member State of the subsidiary made in connection with a distribution. The Estonian and Latvian charges sit outside Article 5 for a nearer reason: the taxpayer is the distributing company itself and not the parent, so nothing is withheld from the parent’s dividend.
Article 13 of the Corporate Income Tax Act 1969 leaves the benefits from a participation, and the costs of acquiring or disposing of it, out of account where the shareholding is at least 5 per cent of the nominal paid-up capital, its ninth paragraph withdrawing that treatment from a participation held as a portfolio investment unless it qualifies on the tests its eleventh paragraph sets out. The dividend reaches the BV untaxed, but there is no Dutch tax against which the Estonian or Latvian charge could be credited. It is a final cost.
Lithuania does withhold, at 17 per cent under Article 34 of its Law on Corporate Income Tax, and exempts the payment where the foreign recipient has held at least 10 per cent of the voting shares for an uninterrupted twelve months including the moment of distribution, unless that recipient sits in a target territory. The Directive also carries an anti-abuse rule, in Article 1, paragraphs two to four, which Council Directive (EU) 2015/121 put in place of the narrower abuse paragraph the act carried as adopted in 2011. The treaty version is in our note on treaty access and the principal purpose test.
Substance for a company that runs lean
Technology companies run lean, and the substance requirement set out in our note on Dutch substance requirements has to be met genuinely even by a small, fast-moving company. This does not mean relocating the engineering team; it means ensuring that the holding has real decision-making and management in the Netherlands, proportionate to its role. The mistake is to treat the holding as a formality and provide nothing, which is precisely the structure that fails when it matters.
The other end tests it too. That anti-abuse rule withholds the Directive’s benefits from an arrangement that both has a tax advantage defeating its object or purpose as a main purpose and is not genuine, and paragraph three treats one as not genuine to the extent that it is not put into place for valid commercial reasons reflecting economic reality.
Where the global minimum tax lands
Directive (EU) 2022/2523 applies, under Article 2, to constituent entities of groups with annual revenue of 750 million euros or more in the ultimate parent entity’s consolidated financial statements in at least two of the four fiscal years preceding the tested year, and Article 3 fixes the minimum tax rate at 15 per cent. Almost no Baltic technology company meets that alone, but one acquired by a group that does becomes one on completion.
The Directive contains a rule written for systems like Estonia’s and Latvia’s. Article 3 defines an eligible distribution tax system as one taxing profits only when they are distributed or deemed to be distributed to shareholders, or when the company incurs certain non-business expenses, at a rate at or above the minimum rate, and in force on or before 1 July 2021. Article 40 then lets a filing constituent entity elect annually to include a deemed distribution tax in the adjusted covered taxes, which stops a company that has not distributed from showing an effective rate of nil. The election opens a recapture account, and whatever remains in it on the last day of the fourth fiscal year afterwards comes back out of the earlier year’s covered taxes.
Article 50 is assumed more often than checked. It lets a Member State in which no more than twelve ultimate parent entities of in-scope groups are located elect not to apply the income inclusion rule and the undertaxed profits rule for six consecutive fiscal years from 31 December 2023, on notification to the Commission by that date. Whether a given Baltic state made that election is a question to put to that state rather than assume for all three, and paragraph two makes the other Member States apply the undertaxed profits rule regardless. The Dutch side is in our note on Pillar Two and the Netherlands.
Scaling and eventual exit
A technology company builds its structure with the exit in mind, whether that is an acquisition or a listing, and a clean Dutch holding above the operating company is a structure that an acquirer or an underwriter can diligence quickly. A tangled or hastily assembled structure is a source of friction at exactly the moment when friction is most expensive. The Baltic technology companies that do best treat the holding as part of building a company that can be sold or listed cleanly, not as an afterthought.
Retained earnings weigh more in a distribution-tax country: they carry an unpaid charge that is priced straight into the equity value. The file described in our note on the Dutch transfer pricing obligation is read by a buyer too.
The regional context
The Baltic technology story sits within the wider Central and Eastern European pattern we describe in our note on structuring Central European investments through Dutch BV holdings, but it is distinctive in how early and how internationally these companies operate. A Baltic founder is often thinking about European and global structure from the first year, which is unusual, and which makes getting the foundation right unusually valuable.
Montclare runs a dedicated CEE desk, structuring the corporate, tax and holding architecture for groups and families entering Europe through the Netherlands. Our services are set out on our services page.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.