Unplanned tax changes are damaging Latvia’s international image in the eyes of investors and will significantly expand the shadow economy, according to a letter from the Foreign Investors’ Council in Latvia (FICIL) to the Ministry of Finance.
FICIL expresses disapproval of the government’s intention to disregard agreements previously reached with businesses and its plan to increase excise taxes. The organization argues that such a sudden departure from the approved schedule for excise tax increases undermines investors’ confidence in a stable and predictable legal environment in Latvia.
In the letter, FICIL acknowledges that the government’s objectives and the need for additional state budget revenue to strengthen security and defence capabilities and address other urgent priorities are understandable.
FICIL reminds that when work on the 2025 budget began, the excise tax on tobacco and related products had been fixed by law for a three-year period, increasing by 10 percent annually until 2027. However, the Ministry of Finance has now proposed additional increases that, according to FICIL, will negatively affect legal businesses and reduce overall budget revenues. The ministry proposes a 15 percent increase in excise tax from 1 January 2026, instead of the planned 10 percent. In doing so, it ignores industry recommendations and the negative impact that unplanned excise tax hikes would have on legal businesses between 2026 and 2028, FICIL explains.
The letter notes that the share of illicit tobacco products stood at around 18 percent in the second quarter of 2025 but has risen to an estimated 23 percent in the third quarter. This represents roughly EUR 70 million in uncollected excise revenue for the state budget.
To ensure a balance between the public interest and business predictability, FICIL suggests keeping the existing excise tax increase schedule- 10 percent in 2026 and annually thereafter.
A transition period of approximately six months is objectively necessary to allow the industry to adapt to tax changes, the letter states. FICIL stresses that companies have already planned pricing policies and contractual obligations based on the previously agreed 10 percent increase, and the rapid changes proposed by the Ministry of Finance would undermine confidence in a stable and predictable legal environment.
The letter also notes that many EU member states introduce unplanned tax changes gradually, giving companies sufficient time to adapt. In neighbouring Estonia and Lithuania, the law provides for a six-month transition period for any tax increases.
FICIL emphasizes that national objectives can be achieved gradually, without imposing a disproportionate burden on consumers or creating a market shock. A one-off 15 percent increase from 1 January would, in FICIL’s view, have drastic and unpredictable consequences: a sharp rise in prices, consumer shock, risks of contractual breaches, and significant financial losses. Based on industry estimates and past experience, FICIL says the legal tobacco market would shrink by at least 12–13 percent, resulting in lower-than-planned budget revenues and a larger informal economy.
A gradual 10 percent increase would mitigate these risks, ensure more predictable and stable tax revenues, and provide a more proportionate solution in the current complex economic and geopolitical context, FICIL argues.
A sudden deviation from the approved excise tax increase schedule without a transition period could also create litigation risks, FICIL warns. Such a move could undermine the principle of legitimate expectations and potentially give rise to international investment disputes. At the same time, it would negatively affect Latvia’s reputation as a predictable, investment-friendly, and stable legal environment.
In light of these considerations, FICIL calls on the Ministry of Finance to assess the impact of its proposals on the tax environment, state budget revenues, and the sustainability of legal businesses. FICIL believes that adhering to the previously approved excise tax increase schedule is the most proportionate and fiscally responsible solution under the current circumstances.
Source: BNS
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