Tax Law in Lithuania (I)

Tax Law in Lithuania (I)

These are the highlights if you want to know the essential of Corporate Law in Lithuania.  This entry was drafted by STRATEGUM Dargis ir partneriai for”E-IURE COMPENDIUM” 2018. Link to e-IURE Network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case “ STRATEGUM Dargis ir partneriai” is an excellent option in Lithuania.

System of tax legislation of The Republic of Lithuania

The fundamentals of the system of tax legislation are enshrined in the Constitution of the Republic of Lithuania, where paragraph 3 of Article 127 thereof establishes that taxes, other payments to the budgets, and levies shall be established by the laws of the Republic of Lithuania. In accordance with Paragraph 15 of Article 67 of the Constitution, the Seimas of the Republic of Lithuania shall establish state taxes and other compulsory payments.

The system of tax legislation shall comprise tax laws and subordinate legal acts adopted on their basis.

The most important part of the system of Lithuanian tax legislation comprises the national legislation, in particular, the laws establishing taxes: for example, the Law on Corporate Income Tax of the Republic of Lithuania (hereinafter referred to as LCIT LR), the Law on Income Tax of Individuals of the Republic of Lithuania (hereinafter referred to as the LITI LR), the Law on Value Added Tax (hereinafter referred to as the LVAT LR), the Law on Real Estate Tax of the Republic of Lithuania (hereinafter referred to as the LRET LR), the Law on Land Tax of the Republic of Lithuania (hereinafter referred to as the LLT LR), etc.

The Law on Tax Administration of the Republic of Lithuania (hereinafter referred to as LTA LR), which establishes the basic concepts and regulations which must be observed in implementing the tax laws of the Republic of Lithuania, the basic principles of legal regulation of taxation, the list of taxes applied in the Republic of Lithuania, the functions, rights and obligations of the tax administrator, the rights and obligations of the taxpayer, the calculation and payment of taxes, the procedure of enforced recovery of taxes and related amounts as well as the procedure for the settlement of tax disputes, also falls within the legal system under consideration.

The tax administration procedures provided for in the Law on Tax Administration shall be applied in respect of all specified taxes and the taxpayers thereof, unless this Law or the relevant tax law provide otherwise.

2004 Following the accession of Lithuania to the European Union in 2004, the law in force of the latter (acquis communautaire) has become part of our national legal system. Customs (and some issues related to the administration of import duties and VAT) are attributed to the exclusive competence of the European Union (paragraph 1 of Article 2, paragraph 1 of Article 3 of the Treaty on the Functioning of the European Union). These taxes are established and administered directly by the legislation adopted by the legislative bodies of the Union, inter alia Council Regulation (EEC) No 2913/92 of 12 October 1992 establishing the Community Customs Code (hereinafter referred to as the Community Customs Code), Commission Regulation (EEC) No 2454/93 of 2 July 1993 laying down provisions for the implementation of Council Regulation (EEC) No 2913/92 establishing the Community Customs Code. The competence of the Member States (including Lithuania) in this area is usually confined to individual or individual issues related to the administration of the said tax obligations, and national law only applies only to the extent that they do not contravene the Community customs legislation acquis.

The main taxes in Lithuania – value added tax, corporate income tax, personal income tax, excise taxes – are administered by the State Tax Inspectorate (hereinafter referred to as STI). Structurally, the State Tax Inspectorate consists of: 1) the STI under the Ministry of Finance – the central tax administrator, and 2) the territorial STI – the local tax administrators subordinate and accountable to the central tax administrator.

STI under the Ministry of Finance implements the tax administration policy in Lithuania, ensures payment of taxes to the budget, coordinates, controls and manages the work of territorial branches of STI, adopts legislation implementing tax laws.

Territorial STI implement tax laws, tax administration priorities, procedures, ensure proper payment of taxes to the budget, and enforce recovery of tax arrears.

Tax disputes between the taxpayer and the tax administrator are dealt with by the central tax administrator, the Commission on Tax Disputes under the Government of the Republic of Lithuania and the court.

Hereinafter, this article discusses the main taxes of the Republic of Lithuania, i.e. corporate income, personal income, value added, real estate and land taxes. Also, compulsory health insurance and state social insurance contributions and contributions to the Guarantee Fund.

Corporate income tax

Corporate income tax in Lithuania is paid by entities complying with the status of legal entities – taxable entities, i.e. Lithuanian and foreign entities.

Object of corporate income tax (base)

The tax base of a Lithuanian entity is all income earned in the Republic of Lithuania and foreign countries, which is sourced inside and outside the Republic of Lithuania.

The tax base does not include the income from activities carried out through the permanent establishments of the Lithuanian entity located in the countries of the European Economic Area (EEA) or in the states with which Lithuania has concluded and applies treaties for the avoidance of double taxation (hereinafter referred to as the TADT), if the income from activities carried out through these permanent establishments is taxable by the same corporate income tax (or tax equivalent) in those countries by established procedures.

The tax base of a foreign entity is:

• income from activities carried out by a foreign entity through permanent establishments situated in the territory of the Republic of Lithuania, income from international telecommunications earned through permanent establishments situated in the Republic of Lithuania and 50 per cent of income from transportation which commences on the territory of the Republic of Lithuania and ends abroad or starts abroad and ends in the territory of the Republic of Lithuania, income earned in foreign countries assigned to those permanent establishments in the Republic of Lithuania in the event that such income relates to the activities of a foreign entity through permanent establishments in the Republic of Lithuania;
• income sourced in Lithuania and received otherwise than through a permanent establishment situated in the territory of the Republic of Lithuania.

The procedure for determining the basis of corporate income tax

The income tax is calculated not from the total income received by the taxable entity, which forms the subject of this tax, but only from taxable profit, i.e. from the part of the income earned (received) by the taxable entity, which remains after deduction of operating expenses and allowable deductions.

When calculating the taxable profit of Lithuanian entity, the following is deducted from its income: non-taxable income, allowable deductions, deductions of limited amounts.

The taxable profit of permanent establishments of foreign entities is calculated by deducting the same non-taxable income from the earned income and the same allowable deductions of the limited amounts as for Lithuanian entities, as well as such deductions that are related to earning of income by foreign entity through permanent establishments.

The taxable profits earned by a foreign entity otherwise than through a permanent establishment shall include all of its income sourced in the Republic of Lithuania and the obligation to tax it at source (without any deductions).

Corporate tax rates

Main 15% tax rate is imposed:

• on the taxable profits of Lithuanian entities and permanent establishments;
• on income from distributed profits;
• on sponsorship received which is used for purposes other than specified and that part of sponsorship received in cash from a single provider of sponsorship during the tax period, which exceeds the amount of EUR 9,500 (without any deductions);
• on foreign entities – income for the sale, transfer or otherwise transferred to the ownership or leased immovable thing by nature situated in the territory of the Republic of Lithuania, income from performing and sports activities carried out in the Republic of Lithuania.

10% tax rate is imposed:

• on foreign entities – royalties, income from compensation for violation of copyright or related rights;
• on foreign entities not registered or otherwise organized in the EEA state or in the state with which the TADT treaty is concluded and applied, interest other than interest on Government securities, interest accrued and payable on deposits and interest on subordinated loans.

5% tax rate is imposed:

• on taxable profits of entities (except for non-profit entities) whose average number of employees on the list does not exceed 10 and whose income over the tax period does not exceed EUR 300 000;

This rule does not apply to:

• entities (individual/personal entities) whose members and/or family members of such members control, on the last day of the tax period, over 50% of the shares (interests, member shares) in other entities as well as entities in which members of other entities (individual/personal enterprise) and/or family members of such members control, on the last day of the tax period, over 50% of the shares (interests, member shares);
• entities in which the same member controls, on the last day of the tax period, over 50% of the shares (interests, member shares);
• entities in which the same members jointly control, on the last day of the tax period, over 50% of the shares (interests, member shares).
• entities, whose income during the tax period comprises more than 50% of income from agricultural activities, including income from cooperative companies (cooperatives) for the sale/purchase of agricultural products produced by their members.

Mixed taxable income is imposed:

• That part of taxable profits of non-profit entities, whose income from economic and commercial activity over the tax period does not exceed EUR 300 000, which amounts to EUR 7,250 shall be taxed at a rate of 0% and the remaining part of taxable profits shall be taxed at a rate of 15%.

Income not attributable to the economic activity of non-profit entities, which is directly attributed to the financing of activities carried out in the public interest.

Income tax is not imposed:

• on profit of social enterprises and cooperative companies (cooperatives) if they meet certain requirements established by laws;
• in interest of foreign entities that are registered or otherwise organized in the EEA state or in the state with which the TADT treaty has been concluded and applied.

Also, corporate income tax shall not be paid by budget-financed institutions, the Bank of Lithuania, the State and municipalities, state and municipal institutions, agencies, services or organisations, state company “Deposit and Investment Insurance”, European Economic Interest Groupings.

Tax period

The corporate income tax period is the fiscal year that coincide with a calendar year.

At the request of the taxpayer and taking into account the characteristics of its activity, the local tax administrator may set other tax period subject to condition that the tax period is 12 months.

Corporate income tax reliefs

The following entities have the right to a lower corporate income tax rate:

• Enterprises of free economic zone (hereinafter referred to as FEZ). FEZ enterprise (except for credit institution or insurance company) in which capital investments amount to at least EUR 1 million shall not pay corporate income tax for 6 tax periods beginning with the tax period in which such an amount was reached and shall be subject to a 50% reduced corporate income tax rate for the subsequent 10 tax periods.
• An enterprise of free economic zone whose average number of employees in a tax year is not less than 20 and in which capital investments amount to at least EUR 1 million shall not pay corporate income tax for 6 tax periods beginning with the tax period in which such an amount was reached and shall be subject to a 50% reduced corporate income tax rate for the subsequent 10 tax periods.

The relief may be applied only where not less than 75% of the income of a free economic zone enterprise for the relevant tax period comprises income from certain types of activities specified by the law.

The relief may be applied only in the event that the free economic zone enterprise has an auditor’s report confirming the required amount of capital investments.

• Legal persons whose income from own production exceeds 50% of the total income received and which employ persons with limited capacity for work shall reduce the calculated corporate income tax as follows:

Income tax of individuals

Income tax shall be paid by any individual who has derived and/or earned income.

The Law on Income Tax of Individuals of the Republic of Lithuania (hereinafter referred to as LITI LR) establishes the procedure for imposing income tax on the income of individuals.