The three Baltic states are sold as one market and taxed as three. Promotional material treats them as a single region with a shared border, a shared currency and a shared attitude to digital administration, all of which is true and none of which survives contact with the statutes. On the question that determines where a group should place its entity, the three systems are not variations on a theme. Two of them tax profit when it leaves the company rather than when it is earned, and the third taxes it every year.
That is not a difference of degree. It changes which entity holds cash, when the group’s tax charge arises, what a holding company above the structure achieves, and whether a treaty or a directive has anything to work on. A comparison that starts with the headline rates puts the three countries within a few points of each other and then recommends the wrong one.
Two distribution systems and one conventional one
Estonia and Latvia both charge tax on the exit of value from the company rather than on the earning of it. Estonia applies 22/78 to the net amount distributed, which is twenty-two per cent of the pre-tax profit, and the Estonian Tax and Customs Board records that from 2025 the reduced 14/86 rate on regularly paid dividends no longer applies. Latvia applies a rate of twenty per cent under article 3 of the Enterprise Income Tax Law to a base that article 4, paragraph nine of the same law first divides by the coefficient 0.8, which is twenty-five per cent of the net distribution and twenty per cent of the pre-tax profit. Different fractions, the same architecture.
Lithuania is conventional. Article 5 of the Law on Corporate Income Tax charges profit annually, and in the consolidated text in force for 2026 the rate on the taxable profit of a Lithuanian entity is seventeen per cent, in the wording given by the amending law of 17 June 2025. Retained profit is taxed in the year it is earned.
The consequence is that the deferral argument, which is the whole case for Estonia and Latvia, does not arise in Lithuania, and the creditability argument does not arise in Estonia or Latvia. Where a group retains its profit for years at a time, the two distribution systems hold the charge off for as long as the retention lasts. Where it distributes annually to a parent that can use a credit, they leave that parent with nothing to credit.
Latvia’s arithmetic, and a new election for 2026
Latvia’s tax period is the calendar month, and under article 3 it is the quarter only for taxpayers entitled to record source documents once a quarter under the Accounting Law. The base under article 4 is distributed profit, meaning calculated dividends including extraordinary ones, payments treated as equivalent to dividends and the notional dividends computed under article 7, together with conditionally distributed profit, which sweeps in expenses not related to the business, doubtful debtor balances, increased interest payments, loans to related persons and transfer pricing adjustments, among other items. The second limb is where unprepared companies meet the tax without having resolved a distribution.
From 1 January 2026 the law contains an alternative. Article 3, paragraph five and article 4.2, in the wording introduced by the amending law of 3 December 2025, allow a taxpayer whose members in the tax period in which the dividends are calculated are exclusively natural persons to elect a fifteen per cent rate, with the base divided by the coefficient 0.85 rather than 0.8. That produces 17.65 per cent of the net distribution and fifteen per cent of the pre-tax profit, against 25 and twenty on the ordinary basis. The election reaches only the calculated dividends, so deemed and conditionally distributed profit continues to be taxed at twenty over eighty.
The eligibility condition matters more than the rate. A company with any corporate shareholder cannot elect, which removes the option from every group structure. It is a measure for founder-owned Latvian businesses, and for those it is a material reduction. Any note stating that Latvia taxes distributions at twenty over eighty without qualification is now incomplete.
What Latvia does not withhold
Article 5 lists the payments to non-residents from which corporate income tax is withheld, and the list is short. Management and consultancy fees bear twenty per cent. The alienation of Latvian immovable property bears three per cent and the letting or leasing of it five per cent. Dividends do not appear in that list, and neither do ordinary interest or royalties, so payments of all three to a non-resident leave Latvia without withholding tax unless the territorial rule below catches them.
That rule is territorial. Article 5, paragraph six imposes twenty per cent on all payments and dividends made to persons located, formed or established in low-tax or no-tax countries and territories, other than payments for supplies of goods and for European Union or European Economic Area publicly traded securities acquired at market prices, and paragraph eight reaches interest payments and payments for intellectual property to the same destinations at the same rate. The State Revenue Service may permit a payer not to withhold, but that power runs to the paragraph six payments alone and requires the payer to show with reasons that the payments are not made in order to reduce its taxable income or the tax payable in Latvia.
Article 6 completes the picture on the inbound side. A Latvian taxpayer may reduce the dividends included in its own base by dividends received from a payer that is subject to corporate income tax in its state of residence, or from which tax was withheld in the state of payment, with any excess carried forward to later periods. The relief is confined to dividends on which the payer’s own taxable income was not reduced in its state of residence, and it does not apply to dividends from persons in low-tax or no-tax territories, to dividends from a company registered as a micro-enterprise taxpayer in the period the profit arose, or where the main purpose of forming or maintaining the taxpayer, or of forming or maintaining another person related to the taxpayer, or of the transaction carried out, was to use the exclusion of dividends from the taxable base given by that article or by the law on personal income tax. Within those conditions there is no minimum shareholding and no holding period, so a Latvian company can hold participations and pass the income through without the distribution tax attaching.
Lithuania is the conventional one, and the rate has moved
The seventeen per cent in force for 2026 is the second change in two years. The amending law of 20 June 2024 set the rate at sixteen per cent, and the amending law of 17 June 2025 set it at seventeen. Any model still carrying a pre-2025 figure is two amendments out of date.
The small company regime is generous and its conditions have changed. Where income in the tax period does not exceed three hundred thousand euro, the rate is nil for the first and second tax periods and seven per cent thereafter. Article 5, paragraph two makes the nil rate available only where the members are natural persons and only where, across three consecutive tax periods including the first and second, the activity of the entity is not suspended, the entity is not liquidated or reorganised and its shares are not transferred to new members.
Two points are commonly got wrong. The condition that once limited the relief to entities with an average of up to ten employees appeared in the 2024 wording and was dropped in 2025, so it should no longer be repeated, and the same amendment extended the nil rate from the first tax period to the first and second and raised the following rate from six per cent to seven. And paragraph three disapplies the relief altogether where the combined tax period income of related entities, identified there by four tests of common ownership and of holdings by a member and that member’s family, exceeds the same three hundred thousand euro, which closes the obvious response of splitting the business.
Lithuania’s withholding and the twelve month rule
Dividends received by a foreign entity on shares or other rights in a Lithuanian entity bear seventeen per cent under article 34, calculated, withheld and paid into the budget by the distributing Lithuanian entity no later than the fifteenth day of the month following the month in which the dividends were paid. The same article exempts them where the foreign recipient holds not less than ten per cent of the voting shares for not less than twelve uninterrupted months including the moment of distribution, and where the recipient is not registered or otherwise organised in a target territory.
The twelve month test is the operative constraint, and the period must be running and unbroken at the moment of distribution rather than merely at a year end. On a structure being assembled now for an event in eighteen months, that is the date to work back from.
Interest is treated more favourably. Interest sourced in Lithuania and received by a foreign entity otherwise than through a permanent establishment is outside the charge where that entity is registered or otherwise organised in a state of the European Economic Area or in a state with an applicable double taxation convention, and bears ten per cent otherwise. Royalties bear ten per cent, and the exemption at source in article 37-1 requires the recipient to be a company resident in a Member State and the beneficial owner of the payment, and requires a direct holding of at least twenty five per cent, whether by the payer in the recipient, by the recipient in the payer or by a third Member State company in both, maintained for at least two uninterrupted years up to the moment of payment.
The levies that get confused
Both countries tax banks additionally. Latvia’s article 4.1 imposes a surcharge on credit institutions and consumer crediting service providers. It is computed by applying a twenty per cent rate to the previous year’s profit or loss after taxes, less the portion of income by which the taxpayer is subsequently entitled to reduce the dividends in its base. Against that figure the taxpayer sets the tax it has already paid in the tax year on distributions other than extraordinary dividends, and it pays the balance into the single tax account by the twenty-third of the month following the filing of the calculation. Lithuania’s article 38-3 imposes an additional five per cent corporate tax on banks, including branches of foreign commercial banks, on credit unions and on central credit unions, with the portion of the profit computed under that article up to two million euro exempt and with dividends and controlled foreign company income left out of the calculation.
The measure most often misdescribed is Lithuania’s security contribution, introduced by law No. XV-283 of 17 June 2025 and in force from 1 January 2026. It is reported in general commentary as a defence levy on corporate profits. It is not. The rate is ten per cent, the base is the premiums under non-life insurance contracts where Lithuania is the state in which the insurance risk is located, the payers are insurers, and the obligation exists for the purpose of financing the State Defence Fund. Compulsory motor liability cover taken out by individuals for vehicles that will not be used in business, and contracts whose subject is crops, plants or the health of farm animals, are outside it. The State Tax Inspectorate’s published guidance treats a pre-2026 contract renewed after 1 January 2026 as a new contract taxed on the whole premium, and a pre-2026 contract merely amended as taxed only on the part of the premium by which the amendment increases it.
Separately, Lithuania operated a temporary solidarity contribution on banks. The Seimas extended it to 2025 by the law of 18 June 2024 amending articles 5, 6, 8 and 11 of law No. XIV-1936, and the State Tax Inspectorate’s guidance on that extension records that the payment period for calculating the contribution for 2025 is the calendar year ending on 31 December 2025. That is the avowedly temporary measure of the three. The two bank charges above it sit in the ordinary corporate tax codes of the two countries.
Indirect tax and the entry decision
Both countries charge value added tax at a standard rate of twenty one per cent, Latvia under article 41 of the Value Added Tax Law and Lithuania under article 2 of the Law on Value Added Tax. Article 59 of the Latvian law allows a domestic taxable person not to register while the total value, excluding tax, of its supplies of goods and services in Latvia in the calendar year has not passed a registration threshold of fifty thousand euro, and allows registration to be deferred to the end of the calendar year where that threshold is exceeded by no more than five thousand. Lithuania’s domestic small business scheme, in article 71, paragraph two of its law, applies where the total consideration for goods supplied and services provided in the country in the preceding calendar year did not exceed forty five thousand euro and that figure is not expected to be exceeded in the current year, with tax to be calculated from the month in which it is passed.
The practical significance is not the numbers. Registration in one Baltic state does nothing for the others, and a business selling across all three from a single entity acquires three sets of obligations rather than one. Groups that chose a Baltic entry point on the basis that the region is administratively unified discover this at the first quarter end.
Choosing the entry point
For an operating business that reinvests and is held through a corporate shareholder, Estonia and Latvia are close and the choice turns on detail rather than on rate. Latvia’s monthly period and its wider deemed distribution base make it the less forgiving of the two administratively, and its twenty per cent on pre-tax profit sits marginally below Estonia’s twenty-two. For a Latvian company whose members are exclusively natural persons, the fifteen per cent election changes that comparison, though only for the dividends it actually calculates and declares.
For a business that distributes annually, the position reverses. Lithuania’s tax is an ordinary corporate income tax, so it arises each year, it is capable of being credited where a parent jurisdiction gives credit, and it is reducible at source on the participation terms set out above.
The unifying point concerns what a Dutch or comparable holding company achieves. Above a Lithuanian subsidiary it removes the seventeen per cent withholding tax once a holding of at least ten per cent of the voting shares has run for twelve uninterrupted months and provided the holder is not registered or organised in a target territory, which is a substantial and quantifiable saving. Above an Estonian or a Latvian subsidiary it removes nothing, because neither country withholds on ordinary dividends and because the charge each imposes is the subsidiary’s own tax rather than a tax on the shareholder. A participation exemption in the parent state exempts the receipt and therefore leaves no liability against which that tax could be credited. The reasons to hold such a company are the treaty network, the exit route and the governance. They are not the reason most structure papers give.
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.