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DOING BUSINESS IN LITHUANIA 2010


January 2011

INTRODUCTION The aim of this publication, which has been prepared for the exclusive use of BDO Member Firms and their clients and prospective clients, is to provide the essential background information on setting up and running a business in Lithuania. It is of use to anyone who is thinking of establishing a business in Lithuania as a separate entity, as a branch of a foreign company or as a subsidiary of an existing foreign company. It also covers the essential background tax information for individuals considering coming to work or living permanently in Lithuania.

This publication describes the business environment in Lithuania and covers the most common forms of business entity and the taxation aspects of running or working for such a business. For individual taxpayers, the important taxes to which individuals are likely to be subject are dealt with in some detail. The most important issues are included, but it is not feasible to discuss every subject in comprehensive detail within this format. If you would like to know more, please contact the BDO Member Firms with which you normally deal, who will be able to provide you with information on any further issues and on the impact of any legislation and developments subsequent to the date mentioned below.

Founded in Europe in 1963, the BDO network has grown to be the fifth largest in the world — it now has 1084 offices in 120 countries, with more than 47 000 partners and staff providing professional auditing, tax and consulting services on every continent.

BDO’s special skills lie in applying its local knowledge, experience and understanding of the international context to provide an integrated global service. In BDO, common operating and quality control procedures are not a constraint on innovation and independence of thought, but the starting point. It is a vigorous organisation committed to total client service.

BDO’s reputation derives from consistently offering imaginative and objective advice within the client’s time constraints. BDO Member Firms take pride in their clients’ success and in their relationships with their clients. It is a personal relationship that combines the benefits of professional knowledge, integrity and an entrepreneurial approach, with an understanding of a client’s business and an ability to communicate effectively. This ensures the highest-quality objective professional service, tailored to meet the individual needs of every client, whether they be governments, multinational companies, national or local businesses, or private individuals.

Service provision within the international BDO network of independent member firms (‘the BDO network’) is coordinated by Brussels Worldwide Services BVBA, a limited-liability company incorporated in Belgium with its statutory seat in Brussels. Each of BDO International Limited (the governing entity of the BDO network), Brussels Worldwide Services BVBA and the member firms is a separate legal entity and has no liability for another such entity’s acts or omissions. Nothing in the arrangements or rules of the BDO network shall constitute or imply an agency relationship or a partnership between BDO International Limited, Brussels Worldwide Services BVBA and/or the member firms of the BDO network.

BDO is the brand name for the BDO International network and for each of the BDO Member Firms.

The information in this publication is up to date to 31 July 2010.

Doing Business in Lithuania 2010 has been written by BDO Zelmenis & Liberte, a law firm in association with the Latvian member firm of BDO. Its contact details may be found at the end of this publication.

© Brussels Worldwide Services BVBA, January 2011

Brussels Worldwide Services BVBA Boulevard de la Woluwe 60 1200 Brussels Belgium

Tel: +32 2 778 0130 Fax: +32 2 778 0143

[email protected] http://www.bdointernational.com

Contents

1. THE BUSINESS ENVIRONMENT .............................................................................. 7

GENERAL INFORMATION .............................................................................................. 7 Geography ..................................................................................................... 7 History .......................................................................................................... 7 Government and political powers.......................................................................... 8 Population and language .................................................................................... 8 Currency ........................................................................................................ 8 Time, weights and measures ............................................................................... 8

BUSINESS ENTITIES ................................................................................................... 8 Forms of business organisation ............................................................................. 9 Limited-liability companies ................................................................................. 9 Joint-stock companies ..................................................................................... 10 Representative offices ..................................................................................... 10 Branches of foreign companies ........................................................................... 10 Business reorganisation and liquidation ................................................................ 11

LABOUR RELATIONS AND WORKING CONDITIONS ..................................................................... 11 Information on the employment market ............................................................... 11 Employment regulations and laws ....................................................................... 11 Working conditions ......................................................................................... 11 Social security ............................................................................................... 12

FOREIGN EMPLOYEES ............................................................................................... 13 Visa requirements .......................................................................................... 13 Schengen visa ................................................................................................ 13 National or long-term visa ................................................................................ 13 Short-term entry and stay in connection with employment ......................................... 13 Visa with work permit ..................................................................................... 13

2. FINANCE AND INVESTMENT ................................................................................... 14 BANKING AND LOCAL FINANCE ...................................................................................... 14

Equity market ............................................................................................... 14 ACCOUNTING AND AUDIT REQUIREMENTS ............................................................................ 15

Accounting and annual financial reporting ............................................................. 15 Foreign exchange policy ................................................................................... 16

INVESTMENT OPPORTUNITIES AND INCENTIVES ....................................................................... 16 Foreign investors' guarantees and rights ............................................................... 16 Performance requirements and incentives ............................................................. 16

3. THE TAX SYSTEM ............................................................................................. 17 INTRODUCTION ..................................................................................................... 17 PAYMENT .......................................................................................................... 17 ASSESSMENT........................................................................................................ 18 APPEAL PROCEDURES ............................................................................................... 18 ANTI-AVOIDANCE PRINCIPLE ........................................................................................ 18 4. TAXES ON BUSINESS .......................................................................................... 19 CORPORATE TAX SYSTEM ........................................................................................... 19

Scope and extent ........................................................................................... 19 Company residence ......................................................................................... 19 Taxable entities ............................................................................................. 19 Taxable income ............................................................................................. 19 Deductions ................................................................................................... 19 Capital gains ................................................................................................. 22 Dividends, interest and royalties ........................................................................ 22 Losses ......................................................................................................... 23 Group treatment............................................................................................ 23 Thin capitalisation ......................................................................................... 24 Transfer pricing ............................................................................................. 24 Controlled foreign companies ............................................................................ 24 Tax incentives ............................................................................................... 25

Tax rate ...................................................................................................... 25 Tonnage tax ................................................................................................. 25 Assessment procedure ..................................................................................... 26 Returns and payments ..................................................................................... 26

VALUE ADDED TAX .................................................................................................. 27 Taxable entities ............................................................................................. 27 Taxable activities ........................................................................................... 27 Place of supply, acquisition and importation .......................................................... 27 Exempt supplies ............................................................................................. 29 Standard and reduced rates .............................................................................. 30 VAT registration ............................................................................................ 30 Non-deductible input VAT ................................................................................. 30 VAT returns .................................................................................................. 30 Payment of VAT ............................................................................................. 31

5. TAXES ON INDIVIDUALS ....................................................................................... 32 INCOME TAX ........................................................................................................ 32

Territoriality and residence .............................................................................. 32 Structure of income tax ................................................................................... 32 The family unit ............................................................................................. 33 Taxation of employment income ......................................................................... 33 Taxation of personal business income .................................................................. 34 Taxation of investment income .......................................................................... 35 Capital gains ................................................................................................. 35 Taxation of other income ................................................................................. 35 Deductions and allowances................................................................................ 35 The taxation of non-residents ............................................................................ 36 Tax rates ..................................................................................................... 37 Returns and payments ..................................................................................... 37 Appeals ....................................................................................................... 37

GIFT TAX ........................................................................................................... 37 INHERITANCE TAX .................................................................................................. 37

Territoriality and scope ................................................................................... 38 EXEMPT TRANSFERS ................................................................................................ 38

Rates of tax .................................................................................................. 38 WEALTH TAX ....................................................................................................... 38 6. OTHER TAXES ................................................................................................ 39 IMMOVABLE PROPERTY TAX ......................................................................................... 39 LAND TAX .......................................................................................................... 39 NATIONAL NATURAL RESOURCES TAX ................................................................................ 39 PETROLEUM AND GAS TAX .......................................................................................... 39 TAX ON ENVIRONMENTAL POLLUTION................................................................................ 39 VEHICLE TAXES ..................................................................................................... 39 ROAD-USER TAX .................................................................................................... 39 EXCISE DUTIES ...................................................................................................... 39

General provisions .......................................................................................... 40 CUSTOMS DUTIES ................................................................................................... 41 TAX ON LOTTERIES AND GAMES OF CHANCE.......................................................................... 41 SUGAR-SECTOR TAXES .............................................................................................. 41 7. SOCIAL SECURITY CONTRIBUTIONS ............................................................................ 42 INTRODUCTION ..................................................................................................... 42 EMPLOYEE CONTRIBUTIONS ......................................................................................... 42 EMPLOYER’S CONTRIBUTIONS ....................................................................................... 42 SELF-EMPLOYED CONTRIBUTIONS ................................................................................... 42


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1. THE BUSINESS ENVIRONMENT General information Geography

Lithuania (Lietuva) is a country in Northern Europe, the southernmost of the three Baltic States. Situated along the south-eastern shore of the Baltic Sea, it shares borders with Latvia to the north, Belarus to the southeast, Poland, and the Russian exclave of Kaliningrad to the southwest. Across the Baltic Sea to the west lie Sweden and Denmark. Lithuania has around 99 km of sandy coastline, of which only about 38 km face the open Baltic Sea, and has one single port of any significant size: Klaipėda. It is calculated that Lithuania has approximately 29 000 rivers, 20 of which are longer than 100 km. The longest is the Nemunas (Niemen), with a total length of 937 km, of which 475 km lie in Lithuania. The climate, which ranges between maritime and continental, is relatively mild.

With an area of km2 and a population of 3.345 million, Lithuania is the largest of the three Baltic States, but globally it is a small country.

Its capital and largest city is Vilnius, with a population of 558 000 in the metropolitan area (Vilnius region — 898 000); the second largest city is Kaunas, with a population of 352 000 and the third is Klaipėda, with a population of 183 000.

History

The first people are believed to have settled in Lithuania after the last glacial period in the 10th millennium BC. The first written mention of Lithuania is found in a mediaeval German manuscript, the Quedlinburg Chronicle, on 14 February 1009.

Initially inhabited by fragmented Baltic tribes, in the 1230s the Lithuanian lands were united by Mindaugas, who was crowned King of Lithuania on 6 July 1253. Mindaugas was the only indigenous ruler of Lithuania who claimed the title of ‘King’. His successors took the title of ‘Grand Duke’ (didysis kunigaikštis).

By the end of the 14th century, after the dynastic union of Grand Duke Jogaila of Lithuania and Queen Jadwiga of Poland in 1385, the Grand Duchy of Lithuania became the largest country in Europe and included present-day Belarus, most of present-day Ukraine, and parts of Poland, Moldova and Russia. Its geopolitical situation between the west and the east determined the multicultural and multiconfessional character of the Grand Duchy of Lithuania. The Lithuanian ruling élite practiced a rare phenomenon at that time — absolute religious tolerance.

The Kingdom of Poland and the Grand Duchy of Lithuania were formally united on the creation of the Polish–Lithuanian Commonwealth in 1569. As a member of the Commonwealth, Lithuania retained its institutions, including a separate army, currency, and statutory laws. In the 18th century, however, Lithuania was erased from the political map under the Partitions of Poland.

On 16 February 1918, Lithuania was re-established as a democratic state. Lithuanians quickly formed their first government, adopted a provisional constitution, and started organising basic administrative structures. The Republic of Lithuania remained independent until the outset of World War II, when it was occupied by the Soviet Union in June 1940 under the terms of the Molotov–Ribbentrop Pact, and incorporated into the USSR. This violation of international law was never formally recognised by many Western nations. Following a brief (1941-1944) occupation by Nazi Germany after the Nazis had declared war on the USSR, Lithuania again came under Soviet occupation for nearly a further 50 years. In the early 1990s, Lithuania restored its sovereignty.


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In October 2002, Lithuania was invited to join the European Union (EU) and one month later to join the North Atlantic Treaty Organisation (NATO); it became a member of both in 2004.

Government and political powers

According to the Constitution (Lietuvos Konstitucija), Lithuania is an independent democratic parliamentary republic. It has a unicameral parliament (Seimas), composed of 141 members elected for a term of four years in single-member constituencies and a multi-member constituency by universal and equal suffrage, in a secret ballot, during direct, mixed-system elections.

The citizens of the Republic of Lithuania elect the President of the Republic for a five-year term on the basis of universal, equal and direct suffrage and by secret ballot. Executive power rests with the prime minister, who is appointed by the President, and the Cabinet. Currently, the President of Lithuania is Mrs Dalia Grybauskaitė, who is the first female president in Lithuanian history, and the Prime Minister is Andrius Kubilius, of the party Tėvynės sąjungos-Lietuvos krikščionių demokratų partija (Fatherland Union-Lithuanian Christian Democratic Party). For administrative purposes, Lithuania has a three-tier division: the country is divided into 10 counties (Lithuanian: singular — apskritis, plural — apskritys), which are further subdivided into 60 districts (Lithuanian: singular — savivaldybė, plural – savivaldybės), which consist of over 500 parishes (Lithuanian: singular — seniūnija, plural — seniūnijos).

Lithuania became a full member of the European Union on 1 May 2004.

Population and language

The official language is Lithuanian, which is one of the two surviving members (the other one being Latvian) of the Baltic branch of the Indo-European language family. Lithuanian is the official and commonly spoken language, the second language being either English or Russian; these two are used to communicate with foreigners. Some 84% of the population is ethnic Lithuanian and there are two sizable minorities: Poles 6.1% and Russians 4.9%.

Currency

The currency of Lithuania is the litas (international abbreviation LTL), which is divided into 100 centai. On 2 February 2002, the litas was pegged to the euro at a rate of LTL 3.4528 to 1; this rate is not expected to change until the litas is completely replaced by the euro, which will not take place before 1 January 2014. Since 28 June 2004, the litas is part of the ERM II, the European Union’s exchange-rate mechanism.

At the time of going to press (late January 2011), the litas was quoted against the US dollar at the rate of LTL 2.5489 = USD 1.

Time, weights and measures

Lithuania uses Eastern European Time, which is two hours ahead of Greenwich Mean Time (GMT+2 hours). Between March and September, every year, Lithuania introduces Daylight Saving Time (GMT+3 hours).

Lithuania uses the metric system of weights and measures and the Celsius temperature scale.

Business entities There are no specific requirements for foreigners wishing to establish a business in Lithuania. Investors, whether Lithuanian or foreign, benefit from equal legal treatment and have the same right to establish business operations in Lithuania by incorporating separate legal entities. The procedure requires the fulfillment of certain legal formalities (registration with the Lithuanian Company Register (Lietuvos Respublikos Juridinių asmenų


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registras) and the State Revenue Service (Valstybinė Mokesčių Inspekcija prie Lietuvos Respublikos finansų ministerijos — referred to further as the ‘SRS’).

Forms of business organisation

The common forms of carrying on a business in Lithuania are companies, organised mainly as a limited-liability company or as a joint-stock company. Companies are required to have their own name, share capital (the minimal amount of which is also established by law), management, registered office and bank account. Companies established in Lithuania are subject to Lithuanian law, but agreements concluded by Lithuanian companies can be governed by any law agreed upon between parties. No permit is required by foreigners wishing to subscribe for the shares or to be appointed as a member of the board of a Lithuanian company. The legal address has to be local to ensure the delivery of official correspondence.

The most popular forms of conducting business are governed by the Companies Act. It allows two forms of business entity, both with limited liability:

• limited-liability company (uždaroji akcinė bendrovė — abbreviation UAB) • joint-stock company (akcinė bendrovė — abbreviation AB)

The Individual Enterprises Act regulates the form of business that is owned and entirely controlled by a natural person; this form of activity has an unlimited liability and is commonly used for small and family-owned businesses:

• individual enterprises (Individuali įmonė - abbreviation IĮ);

Others forms of doing business are a representative office and a branch of a foreign company. A representative office has limited functionalities and does not perform any business activity; therefore, it does not give rise to a permanent establishment in Lithuania. Individuals or partnerships providing professional services (lawyers, tax consultants, insolvency specialists etc.) have special forms of organisation that may or may not be recognized as a distinct legal entity. The Lithuanian Partnership Act recognises two forms of partnership (bendrija):

• general partnership (tikroji ūkinė bendrija — abbreviation TŪB); • limited partnership (komanditinė ūkinė bendrija — abbreviation KŪB).

Other forms of doing business in Lithuania are:

• the state enterprise (valstybės įmonė); • the local-authority enterprise (savivaldybės įmonė); • the agricultural company (žemės ūkio bendrovė); • the cooperative company (kooperatyvas); • the European company (Europos Bendrovė); • the European cooperative society (Europos kooperacinė bendrovė); • the European economic interest group (Europos ekonominiu interesu grupė)

The Lithuanian civil code does recognise the concept of a trust, where the trustee/settlor relationship is established and where the trustee is a natural or legal person. However, confidentiality is not guaranteed, and there is no case law available on the confidentiality issue in respect to trust services.

Limited-liability companies

The most common form of doing business in Lithuania is the limited-liability company, commonly abbreviated in Lithuanian to UAB.

Its share capital cannot be less than LTL 10 000 (EUR 2900; USD 3925) and it is normally divided in 100 shares with a nominal value of LTL 100 (EUR 30; USD 40) each. Other


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proportions for dividing share capital are possible, the only requirement being that the nominal value and the quantity of shares should be an integer. The maximum number of shareholders in a UAB is 250. Accordingly, it is the most appropriate form of starting business, as, ab initio, it does not need a considerable investment.

The organisational structure of a UAB requires a managing director, or a board of directors or both (optional). A supervisory board (valdyba) and auditor (auditorius) are also optional, if not expressly required by law (see Chapter 2).

Usually it takes about five days to establish a UAB in Lithuania. The procedure costs LTL 56 (EUR 16; USD 22) for the temporary (six-month) reservation of the company name, LTL 198 (EUR 57; USD 78) for company registration, and the notarial fees amount to LTL 250-800 (EUR 70-230; USD 100-315), or in total LTL 504-1054 (EUR 145-305; USD 200-415), excluding professional fees and expenses. A limited-liability company must be registered with the local office of the State Revenue Service (VMI) and file tax returns on a regular basis.

Joint-stock companies

A joint-stock company must bear the initials AB in its name. It has a minimum share capital of LTL 150 000 (EUR 43 450; USD 58 850) and the number of shareholders is unlimited; a single member is permissible. The shares can be either registered or bearer shares, and they can be freely traded or pledged. The share capital must be paid up no later than 12 months after the incorporation and entry in the Companies Registry.

A joint-stock company can be set up privately or by public subscription.

Its management structure does not differ from that of the limited-liability company. The supervisory board is optional, as is the management board. It is mandatory to have at least a general manager. The members of the management do not necessarily have to be shareholders.

Usually it takes about one week to establish an AB. The procedure costs LTL 56 for the temporary (six-month) reservation of the company name, LTL 198 for company registration, and notarial fees amount to LTL 400-900 (EUR 115-260; USD 155-355), or in total LTL 654-1154 (EUR 190-335; USD 255-455), exclusive of professional fees and expenses. A joint-stock company must be registered with the local office of the State Revenue Service (VMI) and file tax returns on a regular basis.

Representative offices

Foreign companies can set up a representative office (juridinio asmens atstovybė) in Lithuania in order to carry out non-income generating activities such as promoting and supervising the business of group companies. Representative offices may not perform commercial activities in Lithuania.

Branches of foreign companies

A branch (filialai) of a foreign company can be registered with the Lithuanian Companies Registry to carry out business in Lithuania. The foreign company will be liable to the employees and creditors of the branch for the actions of, and debts contracted by, its managers and agents on behalf of the branch. Branches can carry out only those activities for which the parent company is authorised.

Further to registration with the Companies Registry, the branch must also register for tax purposes with the State Revenue Service and it is subject to corporate tax as a permanent establishment. There is no branch remittance tax in Lithuania.

Usually it takes about one week to establish a new branch in Lithuania and the costs amount to LTL 99 (EUR 30; USD 40) in registration duties etc, exclusive of professional expenses.


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Business reorganisation and liquidation

A company can be liquidated voluntarily by a decision of its shareholders or in situations prescribed by law. The length of the reorganisation procedure is not specified by law but in practice it takes about a year and a half, most of which is taken up awaiting the compulsory tax audit by the State Revenue Service. It is mandatory to archive most documents, the expenses of which will absorb the majority of the liquidation budget.

Both the company and a creditor may file a bankruptcy petition.

Mergers and acquisitions are regulated by the provisions of the Lithuanian Civili Code and it takes approximately six to eight months to finish all formalities.

The decision to liquidate or reorganise is made by a qualified majority of two-thirds of the votes in a general meeting that has a minimum quorum of one-half of the shareholders participating.

Labour relations and working conditions With just over 3 million inhabitants, Lithuania is a small market in Eastern Europe. One of the main advantages of the Lithuanian labour market is its qualified specialists in social sciences, economics and law, and a strong IT sector; engineering, manufacturing and construction are the other highly qualified fields.

Information on the employment market

According to official statistics in the middle of 2010, about 1 million natural persons were employed by legal persons, excluding the self-employed; unemployment, in the wake of the economic crisis, stood at about 15.05%.

The minimum monthly wage set by law is LTL 800 (EUR 230; USD 315), and the minimum hourly wage is LTL 4.85 (EUR 1.40; USD 1.90). The average monthly gross wage at the end of 2009 was estimated to be LTL 1267 (EUR 365; USD 495).

Employment regulations and laws

Employment relationships are mainly governed by the Employment Code (Darbo kodeksas), which governs labour conflicts, trade unions and employers’ organisations as well as collective employment.

According to the Employment Code, an employment contract has to be in writing. However, an oral contract will be considered in force if at least one party has fulfilled the provisions of the contract. Some mandatory conditions like working hours and salary and remuneration methods etc have to be included in the provisions of the contract.

The State Employment Inspectorate (Valstybinė Darbo Inspekcija) is authorised to supervise the employment relationships, work safety and industrial equipment. It can impose a penalty when a violation of a provision of the legal acts in force is detected.

Working conditions

Working hours

The normal working period is eight hours per day with a one-hour lunch break, five days per week. There are specific working conditions for night work, physically demanding work, and employment of juveniles. Any overtime work has to be remunerated at a premium.

Holidays

Employers are obliged to pay holiday pay. The minimum period of annual holiday is 28 calendar days. In addition, the statutory holidays are as follows:

• 1 January New Year's Day


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• 16 February Independence Day (Re-establishment of the State of Lithuania) • 11 March Re-establishment of Lithuania's Independence • Easter Sunday and Easter Monday (set yearly) • 1 May International Labour Day • first Sunday in May Mother's Day • first Sunday in June Father‘s Day • 24 June Rasos (Midsummer Festival) and St John’s Day • 6 July National Day (Coronation of King Mindaugas) • 15 August Assumption Day • 1 November All Saints’ Day • 25 and 26 December Christmas

There are also paid-absence leaves for family events (childbirth, funerals etc).

Termination of an employment contract

Cancellation of an employment contract can be effected in one of the following ways:

• by agreement of both parties • by declaration with notice • by expiry of the contract, where applicable • by performance of the specific task covered, where applicable • under other circumstances prescribed by law

A different procedure applies to the employee and the employer in a unilateral termination of the employment. The employee may terminate the contract with 14 days’ notice. The employer may terminate the contact with two months’ prior notice, and in some cases with four months’ prior notice.

Employees are not obliged by law to state their reason for leaving. The employer must, however, state and justify the reasons for the termination of the contract. In addition the law provides an exclusive list of reasons when an employer may unilaterally terminate the contract. In general, Lithuanian employment law is employee-orientated and conservative. Steps for ‘liberalisation’ have already been taken, however.

The maximum probation period prescribed by law is three months. The termination of the employment contract during this period is permissible with three days’ notice. However, the employer must mention the grounds for the termination of the employment contract exactly as under the usual procedure.

Under certain conditions, the dismissal of personnel qualifies as a collective lay-off, which must be notified to and is to be supervised by the unemployment agencies. For example, there is a collective lay-off if there is a dismissal, within 30 days, of:

• at least 10 employees in a company with a staff of between 20 and 99 people • at least 10% of the staff in a company with a staff of between 100 and 299 people • at least 30 employees in a company employing more than 300 people

Fringe benefits

Among the most typical fringe benefits granted to employees are: extra holiday pay, medical insurance etc, stock-options, a company-paid mobile telephone and public transportation.

Social security

At present, Lithuanian social security legislation comprises five essential areas:

• pensions and other social security benefits for employees • healthcare services


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• unemployment benefits and assistance • allowances and support for the family (child allowance, supplementary allowance

for families with children, allowance for single-parent families) and • social assistance for disadvantaged individuals, including special protection for

disabled persons

The first three areas are part of the social insurance system for employees, having as its principal objective the provision of support to insured persons who cannot obtain regular remuneration in certain risk situations (temporary or permanent incapacity to work, maternity, retirement, unemployment etc). The social insurance system is based on collecting funds from insured persons and distributing those funds to those qualifying for the insured benefits.

Unlike the social insurance system, which is contributory, family and social assistance are non-contributory systems, financed by the state budget.

Both Lithuanian and foreign employees are governed by the same social security, health, pension and unemployment social insurance provisions, subject to any relief given under EU regulations and bilateral international social security conventions (see Appendix).

Foreign employees Visa requirements

Non-resident individuals who intend to carry on a business, to be employed or simply to enter Lithuania must obtain a visa, with the exception of EEA residents.

Schengen visa

Lithuania is a member of the Schengen area. There is consequently a Uniform or Schengen visa, which entitles foreigners to stay in Lithuania and the other Schengen countries — Austria, Belgium, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Luxembourg, Malta, the Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden and Switzerland.

National or long-term visa

Foreigners staying in Lithuania for a period exceeding 90 days in any six-month period have to apply for a long-term visa or residence permit depending on the circumstances of the particular case. This visa is valid only for a stay in Lithuania.

The maximum term of this visa under general conditions is one year.

Short-term entry and stay in connection with employment

If the employment of the foreigner is for a short term or is irregular, and does not exceed 90 days in any six-month period, the foreign national has to obtain a visa or residence permit for a certain term and a work permit. This also applies to those foreigners who are not required to obtain an entry visa.

If the employment of the foreigner is regular and for more than 90 days in any six-month period, the foreign national has to obtain a residence permit for a certain term and a work permit.

Visa with work permit

The competent state institution issues the work permit according to the expiry date of the visa if the foreigner meets the conditions prescribed by law.


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2. FINANCE AND INVESTMENT Banking and local finance Banking in Lithuania is regulated by The Banks Act (Bankų įstatymas) adopted on 30 March 2004, last amended on 22 December 2009.

The Bank of Lithuania, established in March 1990, has continued the traditions of the central bank operating in the period between the two World Wars. The new Bank of Lithuania Act (Lietuvos Banko įstatymas) adopted in 2001 granted a greater independence to the central bank and wider possibilities to be active in implementing monetary policy. With Lithuania’s continuing integration in Western structures, the development of its economic relations with EU Member States and the corresponding changes in the trade-currency structure, the decision was taken on 2 February 2002 to peg the litas to the euro, at a fixed exchange rate. On Lithuania's accession to the European Union on 1 May 2004, the Bank of Lithuania became a member of the European System of Central Banks (ESCB), which comprises the European Central Bank (ECB) and the national central banks of all EU Member States.

Currently, the banking system consists of several types of credit institutions:

• commercial banks • credit institutions • subsidiaries, branches and agencies of foreign banks

The minimum equity capital required for a bank is the equivalent of EUR 5 million (LTL 17.25 million; USD 6.87 million).

The supervision of Lithuanian banks is carried out by the Lithuanian Central Bank (Lietuvos Centrinis Bankas). Its activity is governed by the Bank of Lithuania Act.

Lithuania has fully implemented the MiFiD Directive 2004/39/EC, which regulates the financial markets. The central aim of the MiFiD Directive is to ensure the protection of investors’ interests and the perfect functioning of the financial-instrument market. Therefore, Lithuanian banks have introduced a number of improvements in their activity in order to ensure better protection for investors and to improve the provision of investment services.

The Association of Lithuanian Banks (Lietuvos Bankų asociacija) has 11 members, and is a public organisation uniting on a voluntary basis banks registered in Lithuania and branches of foreign banks. The purpose of the Association is to unite the efforts of the members of the association to develop favourable business conditions for banking development and the strengthening of confidence in the banking system of Lithuania.

Equity market

The official Stock Exchange (Vilniaus vertybinių popierių birža) is located in Vilnius and is the sole stock exchange operating in Lithuania. It is owned by NASDAQ OMX, with a controlling stake of 95.12%.

The Central Depository (Lietuvos Centrinis Vertybinių Popierių Depozitoriumas) administers all publicly issued securities in Lithuania. It main functions are:

• to keep safe custody of securities, clearing and settlement for securities trading and management of corporate actions

• to provide other services related to securities • to keep a register of numerous non-public joint-stock company, private limited-

company and other corporate debt securities • to keep the initial lists of shareholders for privatised enterprises


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• to administer the state-funded pension scheme, i.e. the second pillar of the pension system.

Accounting and audit requirements Bookkeeping and financial reporting in Lithuania is regulated by the Accounting Act (Buhalterinės apskaitos įstatymas), the Financial Statements of Enterprises Act (Įmonių finansinių atskaitomybių įstatymas), accounting standards (Verslo apskaitos standartai) and the Audit Act (Audito įstatymas).

Accounting and annual financial reporting

Accounting records

Accounting records have to be kept so that it is possible to enable any person qualified in accounting to clearly identify the financial situation of an enterprise, the transactions made during the accounting period, and to ascertain the beginning and the sequence of each transaction.

The accounting records must be kept in litai and in the Lithuanian language. However, a second language, if agreed upon by the parties and acceptable to the auditors, may be used.

The accounting records and all relevant mandatory documentation have to be stored in Lithuania, at the premises of the enterprise or the accounting firm.

Confidentiality

The information in the annual report, which consists of the financial statements and the management report, is not considered a trade secret and is publicly available, upon request. All other information in the accounting records is confidential. The only exception is made for auditors, the tax administration auditing the tax returns, and other state institutions, in the circumstances directly prescribed by law.

The reporting period is normally 12 months.

Consolidated reporting

A parent company must prepare a consolidated annual report if, for two consecutive years, it, together with its subsidiaries, has exceeded any two of the following criteria:

• a non-consolidated net turnover during the reporting financial year of LTL 30 million (EUR 8.69 million; USD 11.77 million);

• non-consolidated balance-sheet value of LTL 18 million (EUR 5.21 million; USD 7.06 million);

• average number of employees during the reporting year: 75

Statutory audit of financial statements

The annual financial reports of state-owned and local-authority enterprises, public-interest entities, public limited-liability companies, private limited-liability companies, cooperative societies (cooperatives), general partnerships and limited partnerships, the participators wherein are all public limited-liability companies, and of private limited-liability companies in which the State and/or a local authority is a shareholder, must be audited.

The annual financial reports of private limited-liability companies, cooperative societies (cooperatives), general partnerships and limited partnerships the participators wherein are all public limited-liability companies or private limited-liability companies must be audited when they exceed at least two of the following criteria on the last day of the financial year:


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January 2011

• net turnover during the reporting financial year of LTL 12 million (EUR 3.48 million; USD 4.71 million)

• balance-sheet value: LTL 6 million (EUR 1.74 million, USD 2.35 million) • average number of employees during the financial year: 50

Development of the accounting and auditing profession

All the largest international audit firms are represented in the Lithuanian market, and they have a dominant position in servicing large companies. There are 190 registered audit companies across the territory of Lithuania. Unlike the large networks, local firms rarely provide business consulting. The prices for the provision of services by local firms are generally significantly lower, but so is also the quality of their services.

Accounting software

According to the law, computerised accounting is allowed only if it is in compliance with the law. Moreover, the data output must be understandable to an independent third person.

Foreign and local accounting software packages are used; foreign packages are generally designed for large and medium-sized enterprises, while locally developed packages are mostly used for small and medium-sized enterprises.

Foreign exchange policy

The exchange rate of the litas against currencies other than the euro varies according to movements in the global foreign-exchange market. The foreign reserves of the Bank of Lithuania are comprised of gold, convertible foreign currencies, and XDRs. According to a statement of the Bank of Lithuania, the whole emission of litai is covered by gold. The Bank of Lithuania strictly invests in safe and liquid financial instruments, predominantly in government and government agencies’ securities of the United States of America, Germany, France, the United Kingdom and Japan, and in securities of international institutions.

Investment opportunities and incentives As a small country with limited private capital resources, Lithuania appreciates the impact of foreign direct investment on its continuing economic development. The government and local authorities, in cooperation with different business organisations, are committed to a further improvement of the legal and administrative environment for foreign and local business ventures wishing to establish in the country, by a number of methods and means. As an example, large foreign companies investing in Lithuania in 2009 included Barclays Bank.

Foreign investors' guarantees and rights

The Lithuanian constitution guarantees the right to private ownership. Both domestic and foreign private entities have the right to establish and own business enterprises and engage in all forms of commercial activity, except those prohibited by law. Private enterprises have competitive equality with public enterprises with respect to access to markets and business operations.

Performance requirements and incentives

The government extends domestic treatment to foreign investors. Therefore most investment incentives and requirements apply equally to local and foreign businesses. The Lithuanian government has prepared a series of incentive schemes for investment, both foreign and domestic, special economic zones, and in special assisted regions. Agreements between public and private sectors are available to local and foreign investors.


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January 2011

3. THE TAX SYSTEM Introduction The system of taxes and duties in Lithuania consists of:

• state taxes, the objects and rates of which are set by the Seimas • state duties, applicable under the Tax Administration Act (Mokesčių administravimo

įstatymas), other laws and regulations of the Cabinet of Ministers • local duties applicable under the Tax Administration Act and binding regulations

issued by the local authority concerned • directly applicable taxes and other obligatory payments prescribed in the European

Union’s regulatory enactments

The Tax Administration Act regulates 25 taxes, including:

• value added tax (pridėtinės vertės mokestis) • excise duty (akcizai) • personal income tax (gyventojų pajamų mokestis) • immovable property tax (nekilnojamojo turto mokestis) • land tax (žemės mokestis) • national natural resources tax (mokestis už valstybinius gamtos išteklius) • petroleum and gas resources tax (naftos ir dujų išteklių mokestis) • tax on environmental pollution (mokestis už aplinkos teršimą) • stamp duty (žyminis mokestis) • inheritance tax (paveldimo turto mokestis) • compulsory health insurance contributions (privalomojo sveikatos draudimo įmokos) • contributions to the Guarantee Fund (įmokos į Garantinį fondą) • lottery and gaming tax (loterijų ir azartinių lošimų mokestis) • corporate income tax (pelno mokestis) • state social insurance contributions (valstybinio socialinio draudimo įmokos) • tax on sugar-sector surpluses (pertekliaus mokestis cukraus sektoriuje) • sugar-sector production tax (gamybos mokestis cukraus sektoriuje) • customs duties (muitai) • social tax (socialinis mokestis) • one-off tax on additional quota for white-sugar production and on supplementary

quota for isoglucose production (papildomos baltojo cukraus gamybos kvotos ir pridėtinės izogliukozės. gamybos kvotos vienkartinio išsipirkimo mokestis)

Most of the taxes are specific and applicable to specified markets and businesses. The main taxes are: corporate income tax, value added tax, personal income tax, excise duties, state social insurance contributions and compulsory health insurance contributions. Only commercial immovable property is subject to immovable property tax. Land tax is paid by landowners; there are numerous exceptions, however. In addition there is an indirect tax for road users for certain categories of commercial transport.

Payment Taxes and duties are assessed and paid in Lithuanian currency.

The tax administration may not waive its right to claim for unpaid tax in favour of another person or transfer to any other person its right to claim taxes, duties and related payments with the exception of tax-debt recovery and the sale of confiscated and inventoried property in the cases provided for in other tax laws.

The set-off of taxes, duties and payments related thereto against other liabilities is not permitted.


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The due date for payment is provided by the legislation regulating the tax or duty.

Assessment The Lithuanian tax system is generally one of self-assessment. Taxpayers are responsible for computing their own tax payable on the basis of their tax return, as well as for withholding the amount of tax payable as provided for in specific tax laws. Taxpayers, except those individuals who are not economic actors, are obliged to file tax and information returns in electronic format. The taxpayer is also responsible for the preservation of documents verifying the income from and expenses relating to financial and economic activities for at least ten years (with exceptions).

The tax administration has the right to perform tax audits, provided that it informs the taxpayer of an upcoming tax review (audit) of the time, the taxes, duties or other mandatory payments to be examined, the tax returns to be examined and the taxable periods under review. The tax authority is allowed to audit and calculate or recalculate the tax due in respect of the current calendar year and the five preceding calendar years.

The tax administration has the right, after a tax review (audit), to adjust the amount of tax due and to impose penalties.

Appeal procedures Any person who disagrees with a fiscal administrative document (including an assessment) or a refusal to issue such a document has the right to lodge an appeal.

Decisions taken by local-authority officers may be appealed within a period of 30 days from the receipt of the decision.

If the taxpayer is dissatisfied by the result of the first-stage appeal, he may appeal to the courts.

Anti-avoidance principle Lithuania has specific anti-avoidance rules. As a matter of principle, where a tax liability is not calculated or is calculated on a taxable base that differs from the one that exists in reality, thus breaching the scope of the tax law, the tax liability is to be recalculated on the real taxable base (‘substance over form principle’).


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4. TAXES ON BUSINESS Corporate tax system Scope and extent

Corporate income tax is levied on the worldwide profits realised by Lithuanian legal persons and locally-sourced profits derived by non-resident legal persons through a permanent establishment. Non-resident legal persons without a permanent establishment in Lithuania are liable to tax only on certain capital gains sourced in Lithuania.

Company residence

For tax purposes, a taxpayer other than a natural person is considered a resident of Lithuania if it is established and registered or should have been established and registered in accordance with the laws of the Republic of Lithuania. It is not possible for a Lithuanian company to change its residence without being dissolved and reincorporated abroad.

Taxable entities

Liability to corporate income tax extends to:

• Lithuanian companies or entities carrying on a business (performing economic activities)

• foreign companies and other foreign legal persons deriving income or capital gains in Lithuania

• permanent establishments of non-residents carrying on a business in Lithuania

The following are not liable to corporate income tax:

• state-funded institutions • the Bank of Lithuania • government and local authorities • governmental and local-authority institutions, organisations or other similar

structures • Indėlių ir investivijų draudimas (the state-owned deposit and investment insurance

company) • European economic interest groups.

Taxable income

The Lithuanian tax authorities levy corporate income tax on the worldwide profits of Lithuanian legal entities and on the profits sourced in Lithuania and derived by foreign entities (whether or not they are legal entities) through a permanent establishment. All types of business income including dividends, interest income, royalties, capital gains and rental income are subject to corporate income tax.

Taxable income is calculated by adjusting the accounting profit for non-taxable and non-deductible items, and any other adjustments required by law.

Deductions

As a general rule, an expense is deductible only if it is directly related to the company’s business. There are expenses with limited deductibility and wholly disallowed expenses. For instance, advertising and promotional expenses are only partially deductible (to the extent of 75%).

Expenses not directly related to the company’s business are generally not deductible. These expenses include entertainment, relaxation, pleasure trips and recreational events for owners or employees, and private (not business-related) travel in company vehicles of the taxpayer, grants, gifts, gratuitous loan waivers, as well as other disbursements in cash


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January 2011

or some other form (in kind) to owners or employees which are not remuneration for work performed or which are not related to the economic activity of the company.

Payments to tax-haven entities

Payments made by Lithuanian companies to entities resident in a prescribed tax-haven jurisdiction are not deductible.

The current ‘blacklist’ of tax havens is shown in Table 1.

Table 1 Prescribed tax havens Alderney GrenadaGrenada Netherlands Antilles Andorra Guatemala New Caledonia Anguilla Guernsey Niue Antigua and Barbuda Hong Kong Panama Aruba Isle of Man St Helena Azores Jamaica St Kitts and Nevis Bahamas Jersey St Pierre et Miquelon Bahrain Kenya St Vincent and the Grenadines Barbados Kuwait Samoa BelizasBelize Lebanon San Marino Bermuda Liberia Sark British Virgin Islands Liechtenstein Seychelles Brunei Darussalam Macau Tahiti Cayman Islands Madeira Tonga Cook Islands Maldives Turks and Caicos Islands Costa Rica Marshall Islands US Virgin Islands Djibouti Mauritius United Arab Emirates Dominica Monaco Uruguay Ecuador Montserrat Vanuatu Gibraltar Nauru Venezuela

Tax depreciation

Any of three methods may be used:

• straight-line. The straight-line method consists of depreciating fixed assets over their useful life down to a residual value (which may not exceed 10% of the cost)

• reducing balance. Under reducing-balance depreciation, the depreciation rate is derived by doubling the percentage corresponding to a complete write-down of the cost over the useful life of the asset. Thus, if the useful life is five years (corresponding to 20%), the rate of depreciation is 40%, applied each year to the written-down value. In the final year, the amount of depreciation is the difference between the written-down value at the beginning of the year and the disposal value

• production method. Under the production method, a depreciation rate equal to the ratio of actual output or raw materials processed in the period concerned to the total potential output or amount of raw materials that could be processed in that period by use of the asset concerned is applied to the difference between the cost or acquisition value of the asset and its residual value

The Corporate Income Tax Act specifies in respect of different classes of asset both the method to be used and the minimum useful life over which depreciation is to be applied. See Table 2 for details.


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Table 2

Class of fixed assets Method Minimum useful life (years)

Corresponding to depreciation rate (%)

Minimum useful life (years) if assets are intended for use and are used for scientific research and experimental development

TANGIBLE ASSETS New buildings used for business and renovations of buildings listed in the Register of Immovable Cultural Property of the Republic of Lithuania where such buildings were constructed or renovated after 1 January 2002.

SL or RB 8 12.5 (SL) 25.0 (RB) 8

Residential buildings SL 20 5.0 20 Buildings other than listed above SL 15 6.67 15

Plant and machinery SL or RB 5

20 (SL) 40 (RB)

2 (except when applying the RB method)

Installations (structures, wells, etc.) SL 8 12.5 2

Power transmission and communications facilities (except for computer networks)

SL 8 12.5

8

Rolling stock (locomotives, rail wagons, rail tankers), ships SL

8 12.5 8

Pipelines, aircraft, weapons SL 15 6.67 15 Furniture (other than in hotels) SL 6 16.67 6

Hotel inventory and furniture SL or RB 6 16.67 (SL) 33.33 (RB)

6

Computer and communications equipment (computers, computer networks and software)

SL or RB 3 33.33 (SL) 66.67 (RB)


Passenger cars: 1) used for short-term car rentals, driving-school services or transport services, not older than 5 years

SL or RB 4 25.0 (SL) 50.0 (RB) 4

2) other passenger cars, not older than 5 years SL 6 16.67 6

3) other passenger cars SL 10 10.0 10 Goods vehicles, trailers and semi-trailers, buses, not older than 5 years

SL or RB 4 25.0 (SL) 50.0 (RB) 4

Other goods vehicles, trailers and semi-trailers, buses SL 4 25.0 4

Tangible assets other than listed above

SL or PR

4 (except when applying the PR method)

25.0 (SL) variable (PR)

2 (except when applying the PR method)


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Class of fixed assets Method Minimum useful life (years)

Corresponding to depreciation rate (%)

Minimum useful life (years) if assets are intended for use and are used for scientific research and experimental development

INTANGIBLE ASSETS

Software SL or RB 3 33.33 (SL) 66.67 (RB)


Acquired rights SL or RB 3 33.33 (SL) 66.67 (RB)


Other intangible assets SL 4 25.0 2 GOODWILL Goodwill SL 15 6.67 15

SL = straight-line; RB = reducing-balance; PR = production

Capital gains

Lithuania has no separate capital gains tax; for the purposes of corporate income tax, gains are taxed at the same rate as ordinary income.

Capital gains from the sale of securities or from the sale of real property are equal to the difference between the acquisition price and the sales price.

Lithuania exempts capital gains on the transfer to another company of securities of a company resident in another EEA member state or in a treaty-partner jurisdiction, provided that the following criteria are met:

• the transferee company is subject to a corporate income tax or the equivalent • the Lithuanian transferor company has held more than 25% of the voting shares with

voting rights in the transferee company during a continuous period of two years (three years, if the shares were acquired in a reorganisation) and

• the shares are not transferred back to the issuer of the shares

Dividends, interest and royalties

Dividends

Lithuanian tax legislation takes a broad view of dividends. They are as such defined in the Companies Act, but for tax purposes the term dividends is incorporated in the term ‘profits received through the distribution of profits among members of the entity’.

Individual shareholders (residents or non-residents) are subject to a 20% final withholding tax on distributed dividends. The tax is calculated and paid by the entity distributing the dividends. If a distribution of profits does not qualify as a dividend, it is treated as a gain in kind or other form, and subject to the 15% personal income tax. An increase of the share value or the issue of new shares for no consideration (bonus shares) to existing shareholders is not considered to constitute taxable income.

When a Lithuanian company receives a dividend from a company resident outside Lithuania, the dividend is exempt from tax, provided that:

• the foreign distributing company is of a type listed in Schedule 1 to the EEC Mergers Directive (90/434/EEC), is not treated under the terms of a treaty concluded with


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January 2011

a third country as resident outside the European Union and is subject to corporate income tax or

• where the Lithuanian entity or Lithuanian permanent establishment of a foreign entities has, for an uninterrupted period of at least 12 months, including the moment of distribution of dividends, held at least 10% of the voting shares, provided that the foreign distributing entity is subject to corporate income tax or an equivalent tax, and is not registered or otherwise organised in a listed tax-haven territory

Interest

Interest received by Lithuanian-resident companies from debt obligations and from deposits in Lithuania or abroad is fully taxable.

For the treatment of interest receivable by non-residents, see under ‘Withholding taxes’ below.

Withholding taxes

Table 3 shows the withholding-tax rates for non-resident legal entities, applicable if a double tax treaty does not state otherwise (assuming the EU Parent-Subsidiary Directive applies).

Table 3 Type of payment EU or EEA recipient Third-country recipient Dividends 0% 15% Interest 0% 10%

Royalties 15% 10% Other1 15% 15% Notes 1 Other includes certain income such as sale, other transfer of ownership or lease of

immovable property in Lithuania. In addition income from sports activities performed in Lithuania and bonuses to supervisory-board members.

For rates of withholding tax under Lithuania’s double taxation treaties, see Appendix.

Losses

Losses for the tax period, except for losses incurred as a result of the disposal of securities and/or derivative financial instruments by entities other than financial institutions, may be carried forward for an unlimited period of time. Carry-forward is terminated if the entity ceases the activities on which the losses were incurred, except for cases where the entity ceases the activities for reasons beyond its control.

Losses incurred on the disposal of securities and/or derivative financial instruments can be carried forward for five years.

Where tax-related losses are incurred for a period exceeding one fiscal year, the losses incurred during the tax period of the previous year can be carried forward first. Losses incurred subsequently can be carried forward only after the losses for the previous tax periods have been covered.

Group treatment

Stating from 2010 a tax loss can be transferred between group companies within Lithuania.

An entity may transfer its current year’s tax loss (or part thereof) to another entity of the group. The entity can reduce its profit by the amount of the losses transferred, provided that:


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• on the day of transfer, the parent entity in the group of entities holds, directly or indirectly, at least two-thirds of the shares or other rights to distributable profits of each of the subsidiaries surrendering and claiming the loss, and

• the loss is transferred between entities within the group which have been part of that group for an uninterrupted period of at least two years up to the day of transfer of the loss, or

• the loss is surrendered to a member (or members) of the group which have been part of the group since the date of its or their incorporation and will remain members for an uninterrupted period of at least two years starting from the date of its or their incorporation

Losses from the transfer of securities and/or derivative financial instruments may be surrendered against gains from such transfers only.

A foreign entity can transfer tax losses (or part thereof) to a Lithuanian entity only where:

• the foreign entity is resident in an EU Member State, corresponds to one of the forms of business organisation listed in the Annex to Council Directive 90/434/EEC and which is subject to the tax specified in Article 3(c) of Directive 90/434/EC

• the loss transferred by the foreign entity cannot be carried forward to the following fiscal year (or deducted from its income (profit)) under the law of the EU Member State in which it is resident and

• the loss transferred by the foreign entity has been calculated (recalculated) in accordance with the provisions of the Lithuanian corporate income tax Law.

An entity that has any tax arrears may not transfer a tax loss to another entity.

An entity is prohibited from transferring its current-year loss where it is exempt from corporate income tax or an equivalent tax.

Tax losses incurred before the tax year 2010 may not be transferred.

Thin capitalisation

Lithuania has thin capitalisation rules. Interest on shareholder and related, non-controlled (see below) party loans is deductible; interest on controlled debt and currency exchange losses on controlled debt are not deductible. If the borrower can reasonably prove that the borrowing occurred at arm’s length conditions, the thin capitalisation rules will not be applied.

A controlled debt exists when there is a debt to a controlling lender. A controlling lender is one that controls alone, directly or indirectly, either more than 50% of the shares of the borrower, or more than 10% alone and more than 50% together with related persons. Members of the group of a controlling lender are also controlling lenders. Further, Lithuania applies a 4:1 debt/equity ratio (the part exceeding the ratio is treated as controlled debt). The ratio is calculated at the end of tax year, excluding the result of that year.

Transfer pricing

Transfer pricing rules apply to residents and non-residents if they are deemed to be related parties. The tax authorities can adjust the price to the market value if, in a transaction between related parties, goods or services are sold below or bought above market price.

Controlled foreign companies

Lithuania has CFC regulations.


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January 2011

The CFC regulations apply to a Lithuanian company that directly or indirectly holds more than 50% of the shares of the foreign company or, together with related parties holds more than 50% and itself holds not less than 10%.

The rules apply where the controlled foreign company is:

• is resident in a territory not included in the tax-haven list (see Table 1 above), but which enjoys a special privileged income tax régime in that territory or

• where it is subject in its home country to a rate of corporate tax that is less than 75% of the rate of Lithuanian corporate income tax (currently, therefore, less than 11.25%)

The income attributed to the Lithuanian company includes both active and passive income (such as interest, finance-lease rentals, copyright income etc), but under certain strict conditions, active income will not be attributed. Those conditions are that:

• the controlled company has a ‘reasonable’ number of employees corresponding to its function

• no more than 10% of its income is derived from sources outside the jurisdiction where it is resident and

• more than 50% of its income is derived from persons not controlled by or related to the Lithuanian company

Tax incentives

There are certain general incentives available in Lithuania, such as to companies located in special economic zones, a special tax reduction for companies employing disabled workers or first-time employees. For tonnage tax, see below.

Tax rate

The current standard rate of corporate income tax is 15% on all taxable income. A rate of 20% applied for the year 2009 only.

A special reduced rate of 5% applies to small businesses whose taxable income does not exceed LTL 500 000 (EUR 144 800; USD 196 175) in the period concerned and which have an average number of employees not exceeding 10 in that period. Certain companies are excluded, being:

• one in which an individual holding more than 50% of the shares and/or his or her family members also own a sole proprietorship

• one of two or more companies in which the same person holds (or the same persons together hold) more than 50% of the shares

Tonnage tax

Lithuanian companies and Lithuanian permanent establishments of EEA companies engaged in shipping may opt to pay tonnage tax, in place of ordinary corporate income tax. A number of conditions must be satisfied for a company to qualify for the tonnage-tax régime. These include a requirement that the company be engaged in international maritime traffic or directly related activities; that the vessels managed by the company all be registered in an EEA country; and that the company own no less than 25% of the vessels it manages.

Once a company has opted for the tonnage-tax régime, it must remain within it for a minimum of 10 years. Tonnage tax is charged per vessel at a rate of 15% on the taxable tonnage. The taxable tonnage is a daily monetary amount varying at a progressive rate according to the net tonnage of the vessel, expressed in ‘net tonnage units’ (NTUs) per Table 4. A taxable vessel must have a net tonnage of at least 100 NTUs.


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Table 4 Taxable tonnage of vessels Tonnage of vessel in NTUs Taxable tonnage per day (per 100 NTUs) First 1000 LTL 3.20 per day Next 9000 LTL 2.30 per day Next 15 000 LTL 1.5 per day Balance over 25 000 LTL 0.92 per day Assessment procedure

As already mentioned, corporation tax is self-assessed. Companies are responsible for their own calculations of tax payable, which must be declared in their tax return. Interim returns must normally be made quarterly, to coincide with advance payments of tax (see below).

Returns and payments

Companies are required to file both annual tax returns and interim tax returns.

The filing date for the interim tax return(s) depends on whether advance tax payments are being made on the basis of previous years’ results or on an estimate of the current period’s results (see below) is shown in Table 5. It will be seen that two interim returns are required if advance tax is being paid on the basis of previous years’ results.

Table 5 Basis of advance payments Due date for interim return Previous year’s results First nine months — last day of month 1

Last three months — last day of month 10 Current year’s [projected] results Last day of month 1 The filing date for the annual tax return, which must be accompanied by the financial statements, is the first day of the 10th month following the end of the tax period — normally 1 October, therefore.

Electronic filing is possible, but not mandatory.

The tax authorities are normally required to process returns within 30 days of their filing.

Advance payments

All companies are required to make advance payments of corporate income tax, unless their taxable income in the previous taxable period did not exceed LTL 1 million (EUR 289 600; USD 392 300).

Companies may opt at the beginning of the taxable period whether to base their advance payments on previous periods’ results or on the estimated results of the current period. In either case, advance payments must be made quarterly.

Under the previous-period method, the amount payable for the first three quarters is given by the formula:

Tadv = 0.25 TP-2

and for the fourth quarter by the formula:

Tadv = 0.25 TP-1

where Tadv is the advance payment for that particular quarter, TP-2 is the final tax liability for the prepenultimate taxable period and TP-1 the final tax liability for the penultimate taxable period. Thus, advance payments for the taxable year 2011 would under this method be based on the liability for 2009 in the first three quarters and on the liability for 2010 in the final quarter.


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The due dates for advance payments are the last day of the quarter in the case of the first three quarters and the 25th day of the last month of the final quarter; normally, therefore, 31 March, 30 June, 30 September and 25 December.

The final, balancing, amount of tax is due with the annual tax return; normally on 1 October of the following calendar year, therefore.

Where aggregate advance payments exceed the final liability, the excess is refunded, without interest. Where, however, the company opted for the current-year method, and the aggregate advance payments fall short of 80% of the final liability, the company is charged late-payment interest.

Penalties and interest

Late-payment interest is charged at the rate of 0.05% per day of delay, up to a maximum of 100% of the tax outstanding.

The penalty for failure to file, late filing or incorrect returns is charged not on the company but on its executives personally, at the following rates:

Table 6 Nature of default Amount of penalty First default LTL 200 — 500 Second or repeat default within 12 months LTL 500 — 1000 Tax avoidance/evasion established LTL 2000 — 4000 Value added tax The Value Added Tax Act (Pridėtinės vertės mokesčio įstatymas) of 2002 and associated regulations and decrees are intended fully to comply with EU VAT legislation.

Taxable entities

A taxable person is any person supplying taxable goods or services in the course of business. The VAT paid by a taxable person (‘input tax’) on the purchase of goods and services related to his taxable supplies may be deducted from the VAT the taxable person charges (‘output tax’) his customers.

Taxable activities

As a general rule, value added tax is imposed on all supplies of goods and services that take place in Lithuania. VAT is payable on every transaction involving the supply of goods and services for consideration, also on ‘own consumption’, the import of goods, the intra-Community acquisition of goods and on the acquisition of new means of transport by non-taxable persons in the territory of the European Union.

Place of supply, acquisition and importation

Place of supply

Where goods are dispatched or transported from one Member State to another, the place of supply is that Member State in which the dispatch or transportation of the goods commences.

The place of supply of installed or assembled goods is that Member State in which the goods are installed or assembled.

Place of acquisition

The place of acquisition is that Member State in which the dispatch or transportation of the goods ends.


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The place of acquisition of a new means of transport is that Member State in which the means of transport is registered.

Place of importation

The place of importation of goods into the territory of the European Union is that Member State in which the customs procedure for the release of goods into free circulation ends (is concluded).

Importation of goods

The importation of goods is defined in the Value Added Tax Act as the bringing-in of goods to the territory of Lithuania from a third country or territory.

A ‘third territory’ is a territory of an EU Member State to which, in accordance with Article 299 of the Treaty on the Functioning of the European Union, the Treaty does not apply, and the following territories of EU Member States:

• Germany — the Island of Heligoland, the territory of Büsingen • Spain — Ceuta, Melilla, the Canary Islands • Italy — Livigno, Campione d’Italia, the Italian waters of Lake Lugano • France — the overseas departments and • Greece — Mount Athos

The term ‘third country’ is applicable to states that are not a Member State of the European Union.

Import VAT is not charged on the following:

• personal property of natural persons transferring their normal place of residence from another country to the territory of the Republic of Lithuania

• the property of natural persons transferring their normal place of residence from another country to Lithuania by reason of marriage (trousseaux, household effects), also presents customarily given at the occasion of a marriage

• imported inherited property • clothing, scholastic materials and household effects representing the usual

furnishings for a student’s room and belonging to students coming to study • agricultural products imported by agricultural producers established in Lithuania

who obtained the products from properties used by them, located in a foreign county adjoining Lithuanian territory

• seeds, fertilisers and products for the treatment of soil and crops, imported by agricultural producers who have their principal undertaking in a country adjoining Lithuania, for use on properties used by them within Lithuania

• laboratory animals and biological and chemical substances intended for use in scientific research

• therapeutic substances of human origin, blood-grouping and tissue-typing reagents, human milk

• pharmaceuticals and medicinal products used in international sporting events • goods for charitable institutions • State and institutional recognition awards, other badges of honour and distinction • gifts received or intended to be offered as gifts during official visits and goods sent

by foreign state and international institutions in token of friendship and goodwill • articles intended for use by the official guests of Lithuania and their delegation

members on a visit to Lithuania • goods imported for trade promotion (samples of goods of negligible value, printed

matter and advertising material, articles to be used or consumed at international fairs or similar events)


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• articles imported for examination, analysis or test purposes • consignments sent to organisations protecting copyrights or industrial and

commercial patent rights (documents relating to objects of industrial property, applications for the registration thereof etc)

• tourist information literature • various documents and data carriers or sound recordings • materials required for the protection of goods during their warehousing and

transportation • litter and fodder necessary for animals during their transport • fuel and lubricants present in dry-land motor vehicles and required for their normal

operation • goods for the construction, upkeep or ornamentation of memorials to

and cemeteries of victims of war, genocide and occupation régimes • coffins containing bodies and funerary urns containing the ashes of deceased

persons and ornamental funerary articles • goods the customs value whereof does not exceed LTL 75, with the exception of

ethyl alcohol, alcoholic beverages, manufactured tobacco, liquid perfume, cosmetic preparations and toiletries containing ethyl alcohol

• catches of fish and fish products, also processed (manufactured) fish products (if the fish caught and fish products received are processed on the same fishing vessel) imported into ports by sea-fishing undertakings

• foreign-aid goods imported in the event of a disaster • goods that are not subject to customs duty, except for such goods on which a 0%

rate of customs duty is imposed

Intra-Community trade

Intra-Community supplies and acquisitions are those made by a Lithuanian taxable person in transactions with a taxable person established in another EU Member State. Subject to certain exceptions, intra-Community supplies are VAT-exempt with the right of deduction (i.e. zero-rated). The same régime applies to transactions with new means of transport.

If a taxable person of another Member State provides services consisting of the transportation of goods in the territory of the European Union to a Lithuanian taxable person, it is the Lithuanian customer who must account for the VAT due (‘reverse-charge principle’).

It is also the customer who must account for the VAT due, if services are rendered by a Lithuanian taxable person to a taxable person of another EU Member State. For services rendered by a Lithuanian taxable person to a non-taxable person of another EU Member State, VAT is charged and paid by the supplier of the service. There are exceptions from these rules for the following services:

• services associated with immoveable property; the reloading and storage of goods, and other services associated with transportation

• services associated with moveable (corporal) property (including valuation, repair and maintenance), except for the leasing of such property

• intermediary Agent Services in the territory of the European Union • transportation services • catering services • culture, education, sport

Exempt supplies

The following are some examples of VAT-exempt supplies:


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• the provision of healthcare and social security benefits • education, informal education in the form of various activities, provided by legal

persons in a prescribed manner • cultural and sports activities provided by non-profit organisations, such as: zoos

services, botanic gardens, circuses, libraries • film production, including subtitling • supplies by political organisations, professional associations and other partnership-

based services provided by non-profit organisations to members of the organisation where the services serve the purpose of the organisation and the only consideration for which is in the form of a membership fee

• postal services provided according to the regulations and conditions stated in the Postal Act

• information-based radio and TV services rendered by non-profit organisations • supplies by insurance and reinsurance institutions, including intermediaries • certain financial transactions • betting, raffles (lotteries) and other forms of gambling • rental of private residential accommodation • the sale of immovable property, including land, except for the first sale of unused

immovable property and sale of construction land • some other not-for-profit activities

Standard and reduced rates

The standard VAT rate is 21% while the reduced VAT rate of 9% is applicable to certain services.

Books, magazines and newspapers are taxed at 9% until 31 December 2010. From 1 January 2011, the standard rate of 21% will apply.

The export of goods and intra-Community supplies, international passenger traffic, supplies of goods and services under diplomatic and consular arrangements etc are zero-rated.

VAT registration

All Lithuanian businesses whose annual taxable turnover equals or exceeds LTL 100 000 (EUR 28 975; USD 39 200) must register for VAT. Businesses with a lower turnover may register voluntarily.

No threshold applies to foreign taxable persons; they are to register as soon as they are engaged in taxable transactions in Lithuania.

Non-deductible input VAT

A taxable person is not entitled to deduct input VAT if the relevant goods or services were purchased for a purpose other than business. VAT paid on the purchase of petrol for a car used for the taxable person’s business is deductible from output VAT.

VAT returns

The taxable period is one calendar month for companies and six months for natural persons. A company may apply for a taxable period of six months if its taxable turnover in the previous tax year did not exceed LTL 200 000 (EUR 57 925; USD 78 450). A company may apply for a non-standard tax period not longer than 60 days to comply with its controlling foreign unit’s VAT-return requirements. The beginning of the first VAT tax period must coincide with the first calendar day of the year and the end of the last tax period must coincide with the last calendar day of the year.

The VAT return is due:


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January 2011

• if the taxable period is one month: before the 25th of the next month • if the taxable period is six months: before the 25th day of the first month after the

end of the period • if the taxable period is other than the above: within 25 days of the end of the

period

The return may be submitted in hard copy or electronically.

Payment of VAT

The positive difference between output VAT and deductible input VAT as shown on the VAT return must be paid no later than the 25th day of the month following the taxable period. An excess of input tax is refunded.

VAT refunds for foreign taxable persons

Taxable persons established in other EU Member States or outside the European Union (subject to reciprocity conditions) are also entitled to claim VAT refunds in Lithuania.

A foreign taxable person can receive a refund of Lithuanian VAT according to the procedure and conditions set out below:

• the taxable person must not be engaged in economic activities in Lithuania such that he should be registered for VAT in Lithuania

• the taxable person has not performed taxable transactions in Lithuania for which he was required to register

• the VAT must actually have been paid

Starting from 2010 a foreign taxable person established elsewhere in the European Union must apply for the refund of VAT paid in Lithuania electronically to the tax authorities of his Member State of establishment.

The minimum amount for which a claim may be made is:

• if the refund is claimed for a period of three months or more, but less than one calendar year, the total amount refundable must be not less than LTL 1380 (EUR 400; USD 550);

• if the refund is claimed for one calendar year or for the remaining part of a calendar year (the last three months of the calendar year), the minimum amount is LTL 170 (EUR 50; USD 65).

VAT is not refundable:

• on the acquisition of unused real property and services received in relation to the construction, reconstruction, renovation, restoration or repair of real property

• if the invoice does not conform to the legal requirements • for goods purchased and services received for personal use • to travel companies and agencies operating under the Tour Operators’ Margin

Scheme (TOMS)


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January 2011

5. TAXES ON INDIVIDUALS Income tax Individuals, resident for tax purposes in Lithuania, are subject to the personal income tax (gyventojų pajamų mokestis) on their worldwide income. Non-residents are subject to Lithuanian income tax on their Lithuanian-source income only. The taxable period is the calendar year.

Territoriality and residence

Under the Personal Income Tax Act (Gyventojų pajamų mokesčio įstatymas), an individual is considered to be a resident for tax purposes in Lithuania if that person meets at least one of the following conditions:

• the individual has a permanent abode (nuolatinė gyvenamijo vieta) in Lithuania or • is physically present in Lithuania for at least 183 days in a 12-month period or • the individual was present in Lithuania for at least 280 days in two consecutive tax

periods during one of which he or she was present for more than 90 days or • is a citizen of Lithuania and is employed abroad in the service of the Lithuanian

Government.

Structure of income tax

Personal income tax takes one of four forms:

• salary tax charged on income from employment • lump-sum tax on revenue from a business • tax on income from a business where not liable to corporate income tax and not

payable under the lump-sum régime and • tax on other sources of income

The Personal Income Tax Act provides that taxable income is all income received in cash, in kind or in services. The Act does not specify what forms of income, other than income from employment, are taxable. However, the law directly or indirectly provides that the following are taxable:

• income from individual work, from a contract for services and from an activity as a commercial agent or broker

• income from a farming or fishing enterprise (where not subject to corporate income tax)

• income from a partnership, from the distributed surplus of an agricultural-services cooperative, and from the distributed profits of various forms of cooperative

• income from the liquidation or reorganisation of a company, cooperative association, organisation, association or foundation;

• income from the leasing or rental of immovable property • income from the subletting of property • income from the leasing of movable property • income from intellectual property and the rights thereto • income from capital, including capital gains, dividends, interest etc • gifts from persons other tan relatives exceeding a certain value • any other income that is not exempt income

Non-taxable/exempt income

Major types of exempt income are:


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January 2011

• income of a natural person from his or her individual undertaking subject to corporate income tax

• income from Lithuanian or other EU or EEA state government bonds • scholarships paid by the state or by approved institutions • income obtained as a result of inheritance • monetary and non-monetary prizes and awards received in competitions and

contests: unlimited if received from the Olympic Committee, international

associations or federations or members of a federation (local federation) LTL 700 (EUR 205; USD 275) if the individual is an employee of the issuer of

the prize up to six times LTL 700 received during a tax period for prizes received from

the same person, other than any of the above persons • alimony • income from the sale of immovable property located in the European Economic

Area, if for at least two years before the sale the property was the registered private residence of the owner

• compensation for non-pecuniary damages awarded by the courts • income from the sale of shares acquired before 1999 • income from gifts from individuals:

in full if the taxpayer and the donor are close relatives up to LTL 8000 (EUR 2325; USD 3150) in all other cases

• benefits paid to an employee’s family in the event of his or her death • grants, benefits, allowances paid from a state fund

The family unit

There is no joint income taxation for married couples in Lithuania. Individuals are taxed separately. However, tax deductions are allowed for children or other persons under the care of the taxpayer.

Taxation of employment income

Employment income consists of wages, salaries, bonuses, single or systematic compensation and other income and benefits that an employee receives as a result of his or her current or previous employment with a company, cooperative association, European Company, European Cooperative Association, European Economic Interest Grouping, state or local-authority institution, association, foundation, individual undertaking, farming or fishing enterprise, or organisation, or from a natural person (including a sole trader), also remuneration for a job in the civil service, and as a consideration for the performance of any other type of a contract of employment, and benefits. Employee benefits include cost of living allowance, the use of a company car, medical care, lunch vouchers, benefits received on stock options etc.

Employment income also includes fees for services as a director, or an executive on a supervisory board, and the remuneration of an elected or appointed officeholder.

Benefits are either valued at their market value or at the cost to the provider. Certain employee benefits/allowances are exempt from taxation. These include:

• reimbursements for business-related expenses • premiums paid by the employer on the employee’s behalf to an approved pension

plan or with-profits life policy, provided they do not exceed 25% of the employee’s gross salary

• gifts up to LTL 700 per year


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January 2011

There is no standard deduction for employment-related expenses.

Foreigners working in Lithuania for a non-Lithuanian employer must register with the tax authorities and either the employer or the foreigner must, on a monthly basis, pay personal income tax based on the monthly salary.

Foreign nationals with an employment contract with a Lithuanian employer are fully and immediately liable to Lithuanian income tax and social security contributions, subject to any contrary provisions in a double tax treaty, social security agreement or the EC Social Security regulations.

Pensions

Pensions from private pension funds (subject to certain conditions) and state pensions are exempt.

Salary (withholding) tax

Employers must withhold income tax and social security contributions from the employee’s salary and wage payments.

Taxation of personal business income

Income from a business, when not subject to corporate income tax, is taxed in one of two ways:

• by a lump-sum payment varying according to the turnover of the business, or • at the standard rate on income minus expenses

Income from a business

A business (economic activity) for this purpose includes any activity, the purpose of which is to manufacture goods, perform work, carry on a trade, or provide services, for consideration. It also includes any activity connected with a contract for services, a profession, the management of immovable property, the business of a commercial agent, a broker and a sole trader, as well as the taxpayer’s individual undertaking (including farming and fishing enterprises).

An individual is regarded as carrying out an economic activity if he or she seeks to gain a profit over continuous periods from engaging in:

• any type of commercial or manufacturing activity • an individual creative or other professional activity • an individual sports activity • individual performance activities

Lump-sum taxation

An individual is subject to lump-sum taxation only if he or she is engaged activities for which a business certificate (verslo liudijimas) is required. The list of activities is determined by the Lithuanian Government, and at the moment contains about 100 items, and includes hairdressing, handicrafts and translation work.

The exact amount of the lump-sum is based on a number of factors specific to the business and the rate is set by the relevant local-authority. The amount of tax cannot be lower than 15% of 12 minimum monthly salaries (i.e. currently no lower than LTL 1440); exceptions are made for disabled persons and traditional cultural activities.

In will be possible for 2011 to obtain a business certificate for one month and to pay the tax (not less than 15% of the minimum monthly salary) accordingly. For 2012 the previous 12-month basis will apply once more.


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January 2011

The income-minus-expenditure basis

Personal business is taxed on the income-minus-expenditure basis, where lump-sum taxation is not applicable. Income is calculated on a cash basis, i.e. only income actually received, while expenses are deducted on an accruals basis. Any taxpayer who employs fixed assets in the course of his or her business or whose turnover exceeds LTL 100 000 (EUR 28 975; USD 39 250) and who is obliged to register for VAT must prepare accounts on an accruals basis.

Losses

Taxpayers on the income-minus-expense basis may carry losses forward for an unlimited period.

Taxation of investment income

Dividends

Dividends received by natural person are taxed at 20%.

Interest

As from 2010 interest and similar income is taxed at 15%

Interest from mortgage bonds and interest from government or local-authority bonds from Lithuania or another EU Member State or an EEA state is exempt.

Royalties

Income from the use or right to use intellectual property is taxable at the standard rate. This includes income from patents, literary and artistic copyrights, know-how etc

Property income

Income from the exploitation of movable or immovable property is taxable for both residents and non-residents. The tenant is obliged to withhold personal income tax.

Capital gains

There is no separate taxation of capital gains: qualifying gains are taxed at the standard rate of 15%.

Taxation of other income

Gambling and prize money

Prizes from lotteries and gambling, which exceed the costs related to obtaining them, are taxable.

If the prize or its value exceeds LTL 320 (EUR 93; USD 125), the organisers or providers must withhold personal income tax.

Deductions and allowances

There are only limited deductions available under Lithuanian law, available to permanent residents of Lithuania. Some examples are:

• life-insurance premiums of the individual and his family (spouse, children) under a with-profits policy

• contributions to pension funds • mortgage interest on a loan to acquire or construct a home (for loans issued before

1 January 2009) • educational expenses towards the acquisition of a university degree or professional

qualification


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January 2011

The total deduction cannot exceed 25% of the taxable income. In addition the deduction is allowed only from the personal income of a permanent resident.

Personal allowances

Taxpayers have a personal allowance that is granted against employment income only. Each month, employees are entitled to an allowance (a tax-free amount) of LTL 470, provided that their employment income does not exceed LTL 800 (EUR 230; USD 315).

Where the monthly income exceeds LTL 800, the allowance is tapered down, according to the formula:

A = 470 — 0.2 (I — 800)

where A is the amount of the allowance and I is the income. Thus, the allowance is reduced to zero where the monthly income is greater than LTL 3149 (EUR 900; USD 1225).

However, at the end of the tax year, there is a recapitulative review, which takes into account the taxpayer’s entire taxable income of the year, including investment income and self-employment income. If applying the above formula thus restated:

A = 5640 — 0.2 (I — 9600)

results in a lower figure, the excess allowance is recaptured. The allowance will be zero where income amounts to LTL 37 800 (EUR 10 950; USD 14 825) or more.

There is also a child allowance, in respect of children under 18 (or older, if attending full-time education). The amount of the allowance per month is given by

A = 100 + 200(n — 1)

where A is the amount of the allowance and n the number of children. The allowance may be split equally among the parents or claimed by one parent only.

The taxation of non-residents

The Personal Income Tax Act specifies the taxable Lithuanian-source income of a non-resident as follows:

• income from individual activities carried on from a fixed base and income received in foreign countries and attributed to said fixed base, in the event such income relates to the activities of a non-resident carried on from a fixed base in Lithuania

• interest • income from distributed profits • income from distributed profits and annual bonuses to directors • rental income from Lithuanian immovable property • royalties • income incidental to employment relations or relations in their essence

corresponding to employment relations • income from sporting activities, including income connected directly or indirectly

with those activities, irrespective of whether it is paid directly to the sportsperson or to a third person acting on behalf of the sportsperson

• income from performing activities, including income connected directly or indirectly to those activities, irrespective of whether paid directly to a performing artist or a third person acting on behalf of the performing artist

• income from the sale or other transfer of ownership of movable property where such type of property is subject to registration under the legal acts of the Republic of Lithuania and also from the sale or other transfer of ownership of immovable property located in Lithuania

There are no special schemes for expatriate employees.


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Withholding taxes

The standard rates of 20% (dividends) and 15% (other types of income) are imposed on the income of non-resident individuals. In all cases where there is a withholding tax, it is final and consequently, in most cases, the non-resident is relieved from the obligation to file a tax return. Tax treaties may reduce or eliminate the withholding tax.

Tax rates

With the exception of dividend income, which is taxable at 20%, all other taxable income and gains are taxed at a single flat rate of 15%.

Returns and payments

A good deal of tax is withheld at source and in all cases such withholding is final, and if the taxpayer has only income subject to withholding, he or she is not normally required to file a tax return.

Income subject to withholding is the following:

• income from a Lithuanian entity, income from the Lithuanian permanent establishment of a foreign entity and income from the fixed base in Lithuania of a non-resident, except for:

income and prizes from lotteries and games of chance income from independent activities not listed below

• income of athletes, entertainers and performers (whether received directly or indirectly via a third person) from a Lithuanian entity, the Lithuanian permanent establishment of a foreign entity or from the fixed base in Lithuania of a non-resident

• income from the sale of woodland, standing timber, non-precious metals etc

For the capital gains of non-residents, see under ‘Non-residents’ below.

An individual whose only source of income is from employment, and individuals who do not wish to claim deductible expenses, are not required to file a tax return.

Where tax returns need to be filed, the normal filing date is 1 May of the following calendar year. The individual is required to self-assess.

Non-residents’ capital gains

Capital gains derived by non-residents are taxable if they arise from the alienation of registrable movable property or from the alienation of immovable property. Where the purchaser is a Lithuanian legal person, it is required to withhold 15% tax on the alienation proceeds. Where the purchaser is a natural person or foreign entity, there is no withholding. In such cases, the non-resident vendor must file a return. All non-residents deriving taxable gains may file a return if they wish to claim deductible expenses (i.e. pay tax on the amount of the gain and not on the proceeds). Such returns must normally be filed within 25 days of the receipt of the proceeds of alienation.

Appeals

The appeal procedure is identical to that for corporate taxpayers (see Chapter 3).

Gift tax Lithuania does not have a specific tax on inheritances and gifts. Some gifts may be liable to income tax, however. See above.

Inheritance tax This tax (paveldimo turto mokestis) is payable by natural persons who are the transferees (the recipients of the inherited property).


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Territoriality and scope

Lithuanian-resident transferees are taxable on the transfer of property wherever it may be situated. Non-residents are taxable on transfers of Lithuanian-situs registrable movable property or immovable property only.

Exempt transfers Transfers from the following are exempt:

• spouses • children (including adopted children) • parents (including adoptive parents) • guardians and custodians • wards and foster children • grandparents • siblings • the State

Transfers from any transferor are exempt if they do not exceed LTL 10 000 (EUR 2900; USD 3925).

Rates of tax

The rate is 5% if the value of the inheritance is less than LTL 500 000 (EUR 144 800; USD 196 150) and 10% otherwise.

Revenue from inheritance tax accrues to local authorities. They have the power to reduce the tax or waive it altogether, at the expense of their budgets.

Wealth tax There is no wealth tax in Lithuania.


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January 2011

6. OTHER TAXES Immovable property tax This tax (nekilnojamojo turto mokestis) is payable by natural and legal persons on any property used for commercial activities. The rate varies from 0.3% to 1.0% of the taxable value of the immovable property, depending on the local authority on whose territory the immovable property is located. The taxable value is based on the the average market value of the land assessed on a broad and general basis depending on its location and use.

The tax is payable in quarterly instalments, due by 31 March, 30 June, 30 September and 1 February, and is a deductible expense against corporate income tax.

Land tax This tax (žemės mokėstis) is charged at the rate of 1.5% of the taxable value of the land is payable by the owner. The tax due is notified to the owner before 1 October and should be paid by 1 November. This is a local tax.

National natural resources tax This tax (mokestis už valstybės gamtos išteklius) is payable by persons exploiting publicly owned natural resources, such as water, land and the environment. A different tax rate is applicable to various objects.

Petroleum and gas tax This tax (naftos ir dujų išteklių mokestis) is payable by persons exploiting gas and oil resources in Lithuania or in its offshore waters. The tax for sites the exploitation of which began before 1 July 2003 is 20% of the previous quarter’s average sales price, and is between 2% and 16% if exploitation of the site started after 1 July 2003 (the rate depends on the quantity of products extracted per year). A 9% tax is due for sites that were discovered and explored by the state or with the use of state funding.

Tax on environmental pollution This tax (mokestis už aplinkos teršimą) is payable by persons engaged in economic activities and using polluting objects.

Vehicle taxes Lithuania does not yet have a specific vehicle tax based on mass, CO2 emissions or any other criterion. However, there are plans to introduce a similar tax mainly based on CO2 emissions.

A company car used by an employee is taxable as a benefit in kind.

Road-user tax Lithuania charges a road-user tax (kelių naudotojo mokestis) on commercial vehicles, including buses and lorries, driven on highways A1 and A18. The country of registration of the vehicle is irrelevant. The tax is levied on the vehicle and not on the driver, but by law the driver is responsible for paying the tax, which depends on the type of vehicle, but cannot be less than LTL 20 per day. Tickets are available for 1, 7 or 30 days or a whole year. A penalty ranging from LTL 600 to LTL 2600 may be imposed for each infringement.

Excise duties The excise duty (akcizo mokestis) legislation regulates the harmonised excise duties on alcoholic beverages, tobacco, energy products and electrical energy.


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General provisions

For a warehouse-keeper, an approved trader and a tax representative the taxable period is one calendar month.

The person liable to pay the duty is:

• the importer • a warehouse-keeper, in the cases prescribed by law • the registered trader, non-registered trader, distance seller or representative of a

dutiable person as prescribed by law • a person who brings into the Republic of Lithuania or receives from another Member

State excisable goods that have already been released for free circulation in another Member State or

• any other person prescribed by law.

The relevant excise duty must be paid together with the return, no later than 15 days after the end of the tax period. Table 7 Rates of excise duty Product Rate of duty Wine not exceeding 8.5% alcohol by volume LTL 53 per hectolitre Wine exceeding 8.5% alcohol by volume LTL 198 per hectolitre Fermented beverages other than wine not exceeding 8.5% alcohol by volume

LTL 58 per hectolitre

Fermented beverages other than wine exceeding 8.5% alcohol by volume


Intermediate alcoholic products not exceeding 15% alcohol by volume


Intermediate alcoholic products exceeding 15% alcohol by volume


Ethyl Alcohol LTL 3200 per hectolitre Beer LTL 8.50 per hectolitre per degree of alcohol

of finished product Coal LTL 26 per 1000 kilograms Coke and lignite LTL 31 per 1000 kilograms Unleaded petrol LTL 1500 per 1000 litres Leaded petrol LTL 2000 per 1000 litres Diesel1 LTL 947 per 1000 litres Paraffin LTL 1140 per 1000 litres Heavy fuel oil, orimulsion LTL 52 per 1000 kilograms Marked oil products for heating purposes LTL 73 per 1000 litres Natural gas LTL 758 per 1000 cubic meters Petroleum gas and gaseous hydrocarbons LTL 1050 per 1000 kilograms Biofuels2 Electricity LTL 3.5 per 1 megawatt-hour Other smoking tobacco LTL 111 per kilogram Cigars and cigarillos LTL 38 per kilogram Cigarettes LTL 132 per thousand + 20% MRP3

Notes 1 Diesel fuel intended to be used in agriculture by agricultural entities, agricultural science,

study and educational institutions possessing teaching (experimental) farms, pond fisheries and other internal waters fisheries are exempt from exercise duty.

2 Standard duty rates on fuels containing biological-origin components are reduced by the percentage of the biological-origin components in the total mass of the product.

3 MRP = maximum retail price


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January 2011

Customs duties Customs duties (muitai) are imposed on goods imported from a non-EU country, in accordance with the Common EU Customs Tariff. The rates vary with the type of goods.

Tax on lotteries and games of chance This tax (loterijų ir azartinių lošimų mokestis) is payable by persons operating premises or facilities for gambling and games of chance. The tax period is the calendar quarter and the tax rates are:

• lotteries — 5% based on the nominal value of the tickets sold • bingo, totalisators and betting — 15% of the stakes • class B gaming machines — LTL 300 (EUR 85; USD 120) per machine per calendar

month • class A gaming machines — LTL 800 (EUR 230; USD 315) per machine per calendar

month • roulette, card or dice tables — LTL 6000 (EUR 1735; USD 2350) per table per

calendar month

The ad valorem taxes are payable within 15 days of the end of the tax period (quarterly); fixed-sum taxes are paid monthly within 5 days of the beginning of the month.

Sugar-sector taxes These are charged under Council Regulation (EC) No 318/2006 of 20 February 2006 on the common organisation of the markets in the sugar sector.


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7. SOCIAL SECURITY CONTRIBUTIONS Introduction There are three basic types of mandatory social security contribution — social security contributions proper, health insurance contributions, and guarantee fund contributions (these last are payable by employers only).

Employee contributions Employers deduct employees’ contributions from their salary and wage payments. Employees are liable to make contributions to two funds, as follows:

Table 8 Fund Contribution rate (%) Pension fund 3.0 Health fund 6.0 Total 9.0 Employer’s contributions Employers bear the principal part of contributions to the social security funds. These contributions are as follows:

Table 9 Fund Contribution rate (%) Pension fund 23.3 Unemployment fund 1.1 Health fund 3.0 Maternity and sickness fund 3.4 Guarantee fund1

0.18 — 0.90 Total 30.98 — 31.70

Notes 1 Varies according to the nature of the

Self-employed contributions Self-employed individuals are subject to a complex system of payments. The basic rate is 35.3% (consisting of 26.3% to the pension fund and 9% to the health fund). Before 1 July 2010, contributions of 2.2% were also payable to the maternity and sickness fund. The contributions are based on the individual’s taxable income (subject to a minimum income of LTL 800 per month). However, farmers and athletes and entertainers pay at different rates, and persons with a business certificate pay minimal contributions.

APPENDIX

Double taxation agreements Income and capital tax treaties

Lithuania has income and capital tax treaties with the following jurisdictions:

Armenia Greece Portugal Austria Hungary Romania Azerbaijan Iceland Russia Belarus Ireland SerbiaBelgium Israel Singapore Bulgaria Italy Slovakia Canada Kazakhstan Slovenia China Korea Spain Croatia Latvia Sweden Czech Republic Luxembourg Switzerland Denmark Macedonia Turkey Estonia Malta Ukraine Finland Moldova United Kingdom France Netherlands United States Georgia Norway Uzbekistan Germany Poland

A treaty has been signed with Kyrgyzstan, but this is not yet in force.

Estate tax treaties

Lithuania has no estate tax treaties.

Social security treaties

As a member of the European Union, Romania operates the EC Social Security Regulations Nos 883/04 and 987/09 as concerns the interaction between its social security system and that of other Member States. The previous Regulations, Nos 1408/71 and 574/72 still apply as between Lithuania and Iceland, Liechtenstein, Norway and Switzerland.

Lithuania also has bilateral social security agreements with the following countries:

Belarus RussIa United States Canada Ukraine

Withholding tax rates under treaties The Table below shows the rates of withholding tax on outgoing dividends, interest and royalties granted under Lithuania’s double tax treaties.

Country Dividends Interest (%) Royalties1 (%)

Individuals,

non-qualifying companies (%)

Qualifying companies2 (%)

Armenia 15 5 10 5/10 Austria 15 5 10 5/10 Azerbaijan 15 5 10 10 Belarus 10 10 10 10 Belgium 15 5 10 5/10 Bulgaria 10 0 10 10 Canada 15 5 10 10 China 10 5 10 10 Croatia 15 5 10 10 Czech Republic 15 5 10 10 Denmark 15 5 10 5/10 Estonia 15 5 10 10 Finland 15 5 10 5/10 France 15 5 10 5/10 Georgia 15 5 10 10 Germany 15 5 10 5/10 Greece 15 5 10 5/10 Hungary 15 5 10 5/10 Iceland 15 5 10 5/10 Ireland 15 5 10 5/10 Israel 15 5/10 10 5/10 Italy 15 5 10 5/10 Korea 10 5 10 5/10 Kyrgyzstan3 15 5 10 10 Latvia 15 0 0 0 Luxembourg 15 5 10 5/10 Macedonia 10 0 10 10 Malta 15 5 10 10 Moldova 10 10 10 10 Netherlands 15 5 10 5/10 Norway 15 5 10 5/10 Poland 15 5 10 10 Portugal 10 10 10 10 Romania 10 10 10 10 Russia 10 5 10 5/10 Serbia 10 5 10 10 Singapore 10 5 10 7.5 Slovakia 10 10 10 10 Slovenia 15 5 10 10 Spain 15 5 10 5/10 Sweden 15 5 10 5/10 Switzerland 15 5 10 5/10 Turkey 10 10 10 5/10 Ukraine 15 5 10 10 UK 15 5 10 5/10 USA 15 5 10 5/10 Uzbekistan 10 10 10 10 Notes

1 In the majority of cases, the 5% rate applies for the use of industrial, commercial, or scientific equipment.

2 The reduced rate applies to a company owning at least 25% of the capital or voting rights in the Lithuanian company; no holding period is required. There are other conditions in some cases.

BDO MEMBER FIRM OFFICES

BDO Member Firms have offices in the following countries and territories:

Algeria Greece Peru Angola Guatemala Philippines Argentina Guernsey Poland Aruba Hong Kong Portugal Australia Hungary Qatar Austria India Reunion Azerbaijan Indonesia Romania Bahamas Ireland Russia Bahrain Israel St Lucia Belarus Italy St Maarten Belgium Jamaica St Vincent Bolivia Japan Saudi Arabia Botswana Jersey Senegal Brazil Jordan Serbia British Virgin Islands Kazakhstan Seychelles Bulgaria Kenya Singapore Cambodia Korea Slovakia Canada Kosovo Slovenia Cape Verde Latvia South Africa Cayman Islands Lebanon Spain Chile Liechtenstein Sri Lanka China (PRC) Lithuania Suriname Colombia Luxembourg Sweden Comoros Macao Switzerland Costa Rica Madagascar Tanzania Croatia Malaysia Thailand Curaçao Malta Trinidad & Tobago Cyprus Mauritius Tunisia Czech Republic Mexico Turkey Denmark Morocco Turkmenistan Dominican Republic Mozambique Uganda Ecuador Namibia Ukraine Egypt Netherlands United Arab Emirates El Salvador New Zealand United Kingdom Estonia Nigeria United States Finland Norway Uruguay France Oman Venezuela Georgia Pakistan Vietnam Germany Panama Zambia Gibraltar Paraguay Zimbabwe

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Tax & Legal or BDO Auditas ir Apskaita to discuss these matters in the context of your particular circumstances. BDO Tax & Legal, BDO Auditas ir Apskaita, their partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

BDO Tax & Legal, a Latvian Partnership, and BDO Auditas ir Apskaita, a Lithuanian UAB, are each a member of BDO International Limited, a UK company limited by guarantee, and form part of the international BDO network of independent member firms.

BDO is the brand name for the BDO network and for each of the BDO Member Firms.

CONTACTThis publication has been prepared by BDO Tax & Legal, a law firm in association with the Latvian member firm of BDO.

BDO Tax & Legal Alberta iela 1-2Riga, LV-1010LatviaTel: +371 6 722 2237www.bdolegal.lv

International Tax Coordinator:Jānis ZelmenisE-mail: [email protected]

LithuaniaBDO Auditas ir Apskaita Kęstučio g. 58-5LT-44304 KaunasLithuaniaTel: +370 37 320 390www.bdo.lt

International Tax Coordinator:Otlija KožemiakoE-mail: [email protected]