Transfer Pricing in Latvia

The legal framework

Latvia's transfer pricing rules sit inside an unusual corporate tax architecture. Since 1 January 2018 the Enterprise Income Tax Law has taxed only distributed profits, and a transfer pricing adjustment enters the base as conditionally distributed profit under Section 4(2)(2)(e): the income a taxpayer would have earned, or the expenditure it would not have incurred, had its dealings with a related party been priced as between independent persons. The mechanics matter — the 20% rate applies to the adjustment divided by a 0.8 coefficient, so every assessment lands at an effective 25%. Latvia has no separate secondary adjustment regime and does not need one: the deemed-distribution treatment already captures the repatriation element inside the primary adjustment.

Relatedness is defined in Section 1(18) of the law On Taxes and Duties: parent-subsidiary chains, holdings above 50% or decisive influence (counting kinship to the third degree, spouses and affinity to the second degree), up to ten persons acting in concert, and side agreements — including unpublished ones. A 20-50% participation limb bites for transfer pricing purposes only where the counterparty is a related foreign enterprise. Documentation scope then reaches beyond relatedness altogether: any transaction with a person in a listed low-tax jurisdiction is controlled — Russia joined that list on 1 July 2023 — and domestic transactions economically linked into a supply chain with a foreign related party are caught as chain transactions under Section 15.2(2).

The OECD Guidelines are not binding law but carry express auxiliary status under Cabinet Regulation No. 677, paragraph 19. On permanent establishments Latvia has not adopted the Authorised OECD Approach: its 63 treaties retain pre-2010 Article 7, and Regulation 677 instead requires separate PE accounting with head-office charges deductible only up to 10% of PE-related expenditure.

Methods, comparables and benchmarking

Regulation 677 prescribes all five OECD methods, with the profit split rewritten in 2021 (Regulation No. 107) to track the revised OECD guidance, including EBIT-level splits and contribution and residual analyses. Selection follows the most-appropriate-method standard with no hierarchy (paragraph 8), weighing the functional profile, the availability of trustworthy data and the degree of comparability; methods may be combined, and other economic-analysis techniques are permitted. One domestic idiosyncrasy deserves attention: quoted commodity prices are generally not accepted as arm's length evidence, on the reasoning that quotations do not evidence concluded transactions — a trap for commodity groups relying on Chapter II's quoted-price guidance.

On comparables, domestic data are preferred where appropriate (paragraph 11.1) because they better reflect geographic-market factors, but VID accepts the tiered search practitioners actually run: Baltic first, widening to Central and Eastern Europe, then pan-European sets. Secret comparables are not used. There is no statutory arm's length range or interquartile rule; practice follows TPG paragraphs 3.55-3.62, and VID in reality expects statistical narrowing even though it cannot point to a legal basis for demanding it. Comparability adjustments are mandatory wherever the comparable falls short of the tested transaction, benchmarks must rest on data reasonably available within the reporting year, and the local file must document the entire search strategy with screenshots and dated database extracts under Regulation No. 802.

The one true safe harbour is the low value-adding services regime in paragraphs 18.1-18.9: qualifying support services priced at cost plus a fixed 5% mark-up, with simplified documentation replacing benchmarking. Pair it with awareness of the 20% withholding tax on management and consultancy fees, which prices services twice if ignored.

Documentation: what Valsts ieņēmumu dienests (VID) expects

Latvia's documentation regime was rebuilt by amendments adopted on 6 November 2025, in force 1 January 2026 and — critically — applicable to reporting years beginning in 2025. The centrepiece is a new structured controlled transactions report, filed through VID's Electronic Declaration System within 12 months of year-end wherever controlled transactions exceed EUR 250,000. It discloses, in machine-readable form, each transaction type, amount and counterparty, the method applied, the tested party, the comparables source and the profit-level indicator. For calendar-year taxpayers the first report covers FY2025 and falls due by 31 December 2026. This is a screening instrument: VID will select audits from it.

Automatic filing of master and local files is abolished. The local file must be prepared within 12 months of year-end where controlled transactions exceed EUR 250,000 and produced within 30 days of a request; the master file threshold rises to EUR 20,000,000 of controlled transactions, also 30 days on request. Domestic chain-transaction local files get 90 days. For open years FY2018-2024 the superseded regime still governs: automatic local-file filing above EUR 5,000,000, master file above EUR 15,000,000 or above EUR 5,000,000 with turnover over EUR 50,000,000 — the framework the July 2025 OECD country profile still describes.

The softer edges: transaction categories up to EUR 90,000 (previously EUR 20,000) may be omitted as immaterial; the local file may be refreshed only every three years where the methodology is unchanged, though tested-party financials and accepted comparables must be updated annually; and both files may be drawn up in Latvian or English, with VID entitled to a Latvian translation within one month. Dotnuva Baltic shows the translation demand is not decorative. CbC reporting follows the standard EUR 750 million model under Regulation No. 397, with constituent-entity notification due by the last day of the fiscal year.

Audits, penalties and the enforcement climate

Latvia polices documentation harder than most jurisdictions its size. Missing the submission deadline, or preparing documentation so deficient that arm's length pricing cannot be verified, attracts a fine of up to 1% of the controlled transaction value, capped at EUR 100,000. VID's guidelines (Order No. 201 of 11 September 2023) grade the violation: minor defects at 0.05% capped at EUR 15,000, less significant at 0.1-0.5% capped at EUR 50,000, significant at 0.5-1% up to the full cap — and multiple violations are fined separately within an overall EUR 100,000 ceiling. The Administrative Regional Court's 3 April 2025 judgment in Dotnuva Baltic upheld the maximum fine where a local file was misaddressed, covered the wrong years and lacked a Latvian translation: defective documentation was treated as non-submission.

Substantive adjustments carry a fine of 20% of the understated tax (30% where the understatement exceeds 15% of the tax due), halved for first-time compliant and cooperative taxpayers, plus late-payment interest at 0.05% per day. The limitation period for transfer pricing review is five years — not the general three — and covers taxes concurrently affected.

The enforcement pattern is deliberate rather than voluminous: roughly 14 TP audits between 2018 and mid-2023 alongside more than 50 thematic compliance reviews, with average assessments near EUR 0.7 million and several exceeding EUR 5 million. Loss-making limited-risk distributors, intra-group financing, business restructurings and benchmarking quality dominate — a lineage running from Samsung Electronics Baltic through Severstal Distribution and Rīgas Dzirnavnieks. VID's risk letters inviting voluntary CIT-return corrections are the tell: taken seriously, they avoid audit fines entirely.

Dispute resolution and advance certainty

Latvia's advance pricing agreement offer is genuinely competitive for the region. Unilateral APAs are available for transactions with related foreign enterprises exceeding EUR 1,430,000 a year, for a state fee of EUR 7,114; the term runs up to five years, and since the 8 June 2023 amendments an APA can also roll back across previous years within the five-year limitation period — VID itself markets the combination as up to ten years of certainty. A concluded APA bars VID from adjusting covered prices where its terms are observed (Section 16.1(2)), which makes it the only true penalty shield in the system. The discipline is real, though: VID terminates the procedure if agreement is not reached within one year. Bilateral and multilateral APAs require a treaty basis equivalent to Article 25(3) of the OECD Model.

MAP runs through Latvia's treaties, the EU Arbitration Convention and the Tax Dispute Resolution Directive, transposed as Chapter XV of the law On Taxes and Duties. For EU disputes VID must decide on a submission within six months and may, with the taxpayer's consent, resolve the case unilaterally without engaging the other competent authority. That matters because unilateral downward corresponding adjustments are otherwise unavailable: taxpayer-favourable relief comes only through MAP. Year-end true-ups follow the same asymmetry — upward adjustments are mandatory via the CIT return, adjustments in either direction are possible before Annual Report approval using corrective invoices, and afterwards only upward corrections are permitted. Domestic appeals go to the VID Director General within one month, then to the administrative courts, with cassation before the Senāts.

Pillar Two and what changes in 2026

Latvia elected the EU Minimum Tax Directive's Article 50 deferral, postponing the income inclusion and undertaxed profits rules to the end of 2029. In the interim, its June 2024 minimum-tax law imposes information obligations on Latvian constituent entities of EUR 750 million groups — designating the filing entity and feeding data to the top-up tax return filed abroad. Public country-by-country reporting applies to financial years beginning on or after 22 June 2024. Amount B has not been adopted: Latvia will not apply the simplified approach domestically and will respect covered-jurisdiction outcomes only under a signed competent-authority agreement.

The practical 2026 change is the documentation reform itself. Compliance shifts from bulk annual filing to structured disclosure plus readiness-on-demand: the controlled transactions report becomes VID's risk-selection engine, while 30-day production windows leave no room to build a local file after the request arrives.

How practitioners should respond

Three disciplines follow from the design of this regime. First, treat the FY2025 controlled transactions report as an audited document: every method, tested party and profit-level indicator disclosed in EDS must reconcile exactly with the local file that VID can demand 30 days later. Second, price the asymmetries into policy — a 25% effective charge on adjustments, no downward relief outside MAP, and a five-year lookback argue for setting results inside the range during the year rather than repairing them afterwards. Third, for material recurring flows, the EUR 7,114 APA fee against ten years of protection from both adjustment and the EUR 100,000 documentation penalty regime is one of the cheaper certainty trades available anywhere in the EU.