A draft law titled “Amendments to the Value Added Tax Law” has been published. Among other matters, it includes rules for the supply of goods and services for defence needs implemented using funding from the European Union defence instrument SAFE (Security Action for Europe), approved in 2025. The SAFE Regulation, which entered into force on 29 May 2025, provided for the application of a 0% VAT rate to such supplies of goods and services, while retaining the right to deduct input VAT.1
On SAFE instrument funding
SAFE funding is available for supplies of goods and services for defence purposes and covers military equipment and sensitive2 equipment, parts, assemblies and components of such equipment, construction works and services directly related to military equipment, construction works and services for military purposes, as well as other products used for defence needs. Accordingly, it covers a broad range of goods, services and construction works required for defence needs, even where they do not fall within the classic definition of military equipment. This creates a relatively broad scope of application for ensuring infrastructure, IT, logistics, communications and other defence projects.
The annotation to the draft law3 states that, according to the informative report “On the use of the SAFE loan for the development of defence capabilities: reclassification of existing projects and attraction of additional resources”, approved at the Cabinet of Ministers meeting of 25 November 2025, certain existing and planned projects of the Ministry of Defence and the Ministry of the Interior were recognised as meeting the criteria of the SAFE Regulation.
Publicly available information indicates that, in June 2026, Latvia signed the SAFE loan agreement, which provides for Latvia to receive almost EUR 3.5 billion in loans for strengthening defence and security capabilities. The first financing tranche, in the amount of approximately EUR 525 million, was expected to be received shortly after the agreement was signed.
VAT exemption and the procedure for its application
According to the draft law, the right to acquire goods and services with a 0% VAT rate within the framework of SAFE projects is granted to the Ministry of Defence, the National Armed Forces, the State Defence Logistics and Procurement Centre and the State Border Guard. The 0% VAT rate applies to supplies of goods and services in the territory of Latvia, as well as to intra-Community acquisitions of goods from the European Union and imports made by the above-mentioned state institutions. A taxable person making such supplies is entitled to deduct input VAT in respect of these transactions.
To apply the 0% VAT rate, a special certificate approved by the Ministry of Defence will be required. The supplier will have to retain the certificate as supporting documentation for the application of the 0% VAT rate.
In addition, in order for the supplier of goods or services to substantiate the application of the SAFE VAT exemption to defence products or other products used for defence needs, the supplier must have documentation linking each transaction to a SAFE-supported procurement. Such documentation may include, for example, contracts, order forms, acceptance and handover acts, invoices and other related documents that refer to a contract concluded within a procurement meeting the SAFE Regulation requirements and to the relevant defence products supplied.4
The transitional provisions of the draft law5 provide that the SAFE VAT exemption applies from 29 May 2025, namely from the date on which the SAFE Regulation entered into force. This condition also applies to procurement contracts concluded previously that are later reclassified as SAFE projects.
At present, the draft law is being reviewed by the Cabinet of Ministers, and therefore its final version may still be subject to change.
Which SAFE projects are planned in Latvia?
Publicly available information indicates that Latvia has participated very actively in the SAFE instrument. According to information published by the Ministry of Defence, SAFE funding is planned to be used to strengthen the combat capabilities of the National Armed Forces, including increasing firepower, improving the mobility of units, developing the defence industry in Latvia, strengthening border guard capabilities and pursuing other objectives related to national defence.
In April this year, the Cabinet of Ministers approved the use of the SAFE instrument for the acquisition of unmanned aerial vehicles and counter-drone systems, as well as the acquisition of three medium-class helicopters for the State Border Guard. The Ministry of Defence has provided information that Latvia’s minimum defence need consists of 18 ongoing and planned defence capability procurement projects, as well as additionally identified needs for the more timely fulfilment of NATO capability target requirements and support for Ukraine. The Ministry of Defence notes that Latvia’s maximum identified need includes a further 39 projects, including projects promoted by the Ministries of Transport, Health and the Interior that would directly support the implementation of national defence and security interests.
Considering that Latvia plans to use approximately EUR 3.5 billion of funding under the SAFE instrument for the development of the armed forces, border guard capabilities, military infrastructure and the defence industry, this opportunity will have a practical impact on a broad range of companies, from military equipment suppliers to providers of construction, IT, logistics and engineering services.
How can we help?
PwC supports companies in the defence sector in addressing VAT, other tax and compliance matters. Our specialists help identify and manage risks and find practical solutions in both local and international projects.
References
1. Council Regulation (EU) 2025/1106 of 27 May 2025 establishing the instrument “Security Action for Europe by strengthening the European defence industry” (SAFE), Article 20.
2. Article 1 of Directive 2009/81/EC provides that “sensitive equipment”, “sensitive works” and “sensitive services” mean equipment, works and services for security purposes, involving, requiring and/or containing classified information.
3. Annotation to the draft law “Amendments to the Value Added Tax Law” (25-TA-2418), paragraph 15.
4. SRS informational material on the VAT exemption provided for by Council Regulation (EU) 2025/1106 of 27 May 2025 establishing the instrument “Security Action for Europe by strengthening the European defence industry” (SAFE).
5. Paragraph 52 of the transitional provisions of the draft law.
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