Taxation in the Baltic Republics
Lithuania, Latvia and Estonia are all members of the European Union, the Eurozone, NATO, the OECD as well as of many other Western and International institutions. The Baltic Countries are located at the North-Eastern borders of of the EU, they are consolidated and advanced democracies with well educated and skilled population with an efficient education system.
The "International Tax Competitiveness Index" report published by the OECD for 2021 ranks Estonia and Latvia respectively at first and second place and Lithuania at sixth place among the OECD Member Countries for tax competitiveness. How is that possible? This is possible thanks to mainly two factors: the transparency and effectiveness of their Tax Administrations, but mainly for Estonia and Latvia thanks to their corporate tax system and for Lithuania thanks to its low corporate tax rates.
Estonian and Latvian tax deferral system
Estonia first in 2014 and Latvia later in 2018 have introduced into their corporate tax legislation the so-called "tax deferral" abandoning an accrual-based system in favor of a cash-based system which allows companies, entities, partnerships and permanent establishments to pay corporate tax not when profits are generated, but when profits are distributed via dividends or other forms of distributions to shareholders which means that in Estonia and Latvia any retained or re-invested corporate profits are exempted from taxation. In both the Countries is in place a corporate tax regime which benefits holding and parent companies as they can exempt from corporate tax the profits of their foreign branches and subsidiaries already taxed abroad. The scheme below helps to understand better how the deferral tax system of Latvia and Estonia works.
Along with Belgium, Denmark, France, Ireland, and Italy, both Latvia and Estonia are signatory parties of the "Convention relating to the suppression of the legalization of documents in the member states of the European Economic Communities" of the 1987 therefore any notarial deed or official document from any authority of those jurisdictions will not require any legalization among the signatory countries.
0% tax on re-invested profits
0% tax on dividends from foreign subsidiaries and branches
20% enterprise income tax payable only on distribution
which is the 25% of the net-dividends (20/80)
Example
Profits of the year in EUR
Dividends in EUR before tax
Tax due in %
Tax due in EUR
Net dividends in EUR
Tax coefficient
Effective tax rate (tax/net dividends)
100
60
20%
12
48
20/80
25%
Now let's go deep into each country's profile
Estonia
Latvia
Or maybe you are looking for a Country with a even lower corporate tax rate?
In Lithuania your company can enjoy a 15% corporate tax rate
Have a look at the Lithuanian taxation more in details!
The table below show what would be the taxation outcome for 11 different scenarios. In this case has been set as reference taxation the Italian one with 27,9% of corporate tax and 26% withholding tax for dividends to natural persons shareholders. In 8 scenario is assumed an operational ("active") company with and without a parent holding company. On the table is assumed a 75% distribution of profits via dividends to beneficial owners.
The table above confirmed the data of the Tax Competitiveness Index of the OECD; the most tax efficient business structuring would be obtained by setting up an active company in a Baltic Republic also with a Holding Company. The worst scenario remains a tax structuring involving an active company in a Western European country, in this case has been taken as example Italy.
Lorenzo Ghiggini
International Tax Affiliate of the Chartered Institute of Taxation
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CTA (Certified Tax Adviser aka “Tributarista”)
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ADIT (Advanced Diploma in International Taxation), CIOT (Chartered Institute of Taxation), London (UK)
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VCD (VAT Compliance Diploma) at Association of Tax Technicians (ATT), London (UK)
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LLM in International tax law
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LLM in Tax Law
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