Latvia is redrawing the line between capital and distribution

Latvia is redrawing the line between capital and distribution, and the two tax bills on the table this month move it in the same direction.

The Finance Ministry's corporate income tax bill, sent for inter-institutional coordination on 4 September, rewrites the definition of a dividend. A liquidation quota and the premium a company pays to buy back its own shares become dividends for UIN purposes, measured as the excess over what the shareholder paid in. The transitional rule dates it from 1 January 2026, once adopted.

The personal income tax bill the Cabinet approved on 25 August touches the other end. The 3% additional rate in force since 2025 applies to annual income above EUR 200,000 and counts dividends and capital gains alike. The bill would leave out, for 2025 to 2027, capital gains still taxed at the grandfathered 20% rate on deals begun before 2025.

Follow the money. A shareholder who sells shares back to the company today receives sale proceeds and reports a capital gain. Under the bill the same cheque splits in two: the paid-in amount returns as capital, and everything above it is a dividend, taxed once at the company and, on the Ministry's stated purpose, not again in the shareholder's hands. Not again at the rate, that is. It still counts towards the EUR 200,000 line, and above the line the 3% reaches a receipt the shareholder used to call a gain.

Latvia is deciding, receipt by receipt, what character money has when it leaves a company, and the character now settles three things at once: which tax, at which level, and whether the 3% applies.

The 2026 exit that was priced as a sale may be settled as a distribution. Read the waterfall against both bills before signing, and read it again once the Saeima has voted.

Both instruments are bills. 26-TA-85 has not reached the Cabinet, let alone the Saeima, and the 1 January 2026 date in its transitional rule is a proposal that can move or disappear. 25-TA-157 has been tabled but not voted.

The UIN bill changes the corporate side of the ledger. The IIN bill tabled in August says nothing about buy-backs, so how the shareholder's receipt is treated depends on reading the existing exemption for dividends on which UIN has been paid together with the new definition, and on how the Valsts ieņēmumu dienests approaches buy-backs completed in 2026 before the law is adopted. The Ministry's stated aim is no second charge at the recipient level; the mechanics of that aim are not yet on paper.

The corresponding-adjustment rule is narrower than it sounds: it runs through the dividend base only, only for related parties resident in the EU or a treaty state, and only on a confirmation from that state's tax administration that its base was increased. Nothing here touches the 15% alternative UIN rate with 6% IIN on dividends for companies owned solely by individuals (4.² pants, in force since 2026), which follows its own path.