The unplanned tax changes in the budget undermine Latvia’s international image in the eyes of investors and significantly increase the shadow economy in Latvia, the Foreign Investors Council in Latvia (FICIL) said in a letter to the Ministry of Finance (FM).
FICIL condemns the government’s plans to ignore the previously reached agreement with the industry and the approved plan on the procedure for increasing the excise duty when creating the new budget draft. FICIL believes that such a sudden departure from the excise tax increase plan approved by law on an international scale undermines investors’ confidence in a stable and predictable legal environment in Latvia.
FICIL states in the letter that it understands the government’s goals and the need to provide additional state budget revenues to strengthen security and defense capabilities and implement other urgent priorities.
The letter reminds that during the preparation of the 2025 budget, the increase in the excise tax on tobacco and similar products for a three-year period was confirmed by law, with a 10% increase in the tax every year until 2027 inclusive, however, three months before the entry into force of the new norms, the FM is promoting additional increases in the package of budget laws, which will have a negative impact on the legal industry and reduce the total state budget revenues. The proposal envisages an increase in the excise tax by 15% from January 1, 2026, instead of by 10% as planned. Thus, the FM does not take into account industry recommendations and calculations about the negative impact of an unplanned excise tax increase on legal trade in 2026-2028. year, explains FICIL.
The letter emphasized that the volume of illegal tobacco products was around 18% in the second quarter of 2025, but the preliminary data of the third quarter already shows that the illegal market has grown to 23%, which represents around 70 million euros in excise revenue not collected in the state budget.
In order to ensure a balance between public interests and the predictability of the business environment, FICIL calls not to review the procedure for increasing the excise tax and to leave the approved procedure in force until 2027, anticipating a tax increase of 10% in 2026 and annually thereafter.
FICIL points out that companies in the industry, which operate in a distribution model without local manufacturing capabilities, have expressed that adjusting the supply chain to such changes in excise duty requires a transition period. Ordering a product, securing EAN codes and tax stamps, as well as production and distribution planning generally take several months, and time is also needed to clear the market of previous markings and recommended prices.
Therefore, a transition period of approximately six months is objectively necessary for the industry to adapt to tax changes. In the letter, FICIL emphasizes that the companies had already planned the price policy and contractual obligations based on the predetermined 10% increase, and faster changes without a transition period would undermine confidence in a stable and predictable legal environment, which, according to Article 1 of the Constitution and the principles of European Union (EU) law, is an integral part of a democratic and legal state.
Also, FICIL’s letter states that many EU member states introduce unplanned tax changes gradually, giving companies time to adapt. Good practice of tax application in the neighboring countries of Estonia and Lithuania provides for a legal norm of a six-month transition period for any tax increases. For example, in Estonia, the tax increase in 2025 was divided into two stages – on January 1 and July 1.
FICIL points out that it is also possible to achieve the national goals gradually, without imposing a disproportionate burden on consumers and without causing a market shock. A one-time increase of 15% from January 1 would, in FICIL’s opinion, cause drastic and unpredictable consequences – a sharp jump in prices, consumer shock, risks of breach of contracts and significant financial losses. Based on the calculations of the industry and the experience of previous years, FICIL emphasizes that in such a scenario, the size of the legal market will decrease by at least 12-13%, which also means failure to fulfill the planned budget revenues and an increase in the share of the shadow economy.
Entrepreneurs offer fiscally neutral calculations that would ensure less burden on consumers without driving them in the direction of the illegal market. Currently, in Latvia, more than 50% of products paid excise duty outside of Latvia are produced in illegal factories. FICIL points out that constant pressure for steep price hikes makes criminal activities increasingly profitable and justifies the risks involved.
On the other hand, a gradual increase – 10% – would reduce these risks, ensure more predictable and stable tax revenues, and would also be a more proportionate solution in the current difficult economic and geopolitical situation, says FICIL’s letter.
Abruptly withdrawing from the statutory increase in excise duty and failure to provide for a transition period may create litigation risks, including claims for damages caused to companies, warns FICIL. Also, in the opinion of foreign investors, such behavior would undermine the principle of legal trust and could become the basis for international investment disputes. At the same time, it would negatively affect Latvia’s reputation as a predictable, investment-friendly and stable legal environment.
Taking into account the mentioned considerations, FICIL invites the FM to evaluate the impact of the current proposals on a stable tax environment, state budget revenues and the sustainability of legal business. FICIL believes that a gradual, pre-approved increase is the most proportionate and fiscally responsible solution under the current circumstances. FICIL calls for a thoughtful and balanced approach that will ensure both the achievement of the country’s strategic goals and a stable and predictable business environment.
