Business-Friendly Tax Regime

Tax rates in Lithuania are in general similar to those in Latvia and Estonia:

¹ Reinvested profits are tax exempt but if distributed, profits are subject to corporate income tax at a rate of 23/77. For the sake of simplicity, one could say that the Estonian corporate profit tax is in fact 23%, but it is not levied unless a distribution is made.

² From 1 July 2006 individual income tax will be reduced to 27% and from 1 January 2008 further to 24%. 


Lithuania provides for electronic online filing of tax returns and electronic communication with the tax administrators.

Financing of a Lithuanian Property Company

In terms of taxation, there is no difference between investments in partnerships and companies because Lithuanian partnerships are not transparent for tax purposes and, like companies, are liable for corporate income tax. 

Lithuanian legislation provides for an arm’s length principle to be followed in all transactions. The interest incurred on loan financing is generally treated as a tax deductible expense unless subject to thin capitalisation and transfer pricing rules.

Withholding Tax on Interest Payments

Interest income derived by foreign entities is subject to Lithuanian withholding tax of 10%, unless a more beneficial tax rate applies according to international treaties. Lithuania has concluded 40 applicable bilateral treaties on avoidance of double taxation. All the treaties are based on the OECD/UN model agreement: Armenia, Azerbaijan, Belarus, Belgium, Canada, China, Croatia, the Czech Republic, Denmark, Estonia, Finland, France, Georgia, Germany, Great Britain, Greece, Hungary, Iceland, Ireland, Italy, Kazakhstan, Latvia, Malta, Moldova, the Netherlands, Norway, Poland, Portugal, Romania, Russia, Singapore, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine, the USA and Uzbekistan.

Thin Capitalisation Rules

Starting from 1 January 2004, the principle of “thin capitalisation” is applied under Lithuanian tax legislation. Following thin capitalisation rules interest on a debt to a controlling lender in excess of a 4:1 debt to equity ratio (controlled debt) and currency exchange losses on controlled debt are not deductible unless the borrower can prove that the borrowing occurred under arm’s length conditions.

Direct Investment into Real Estate

The acquisition of real estate in Lithuania is not subject to real estate transfer tax or any stamp duties. Only registration fees of a maximum of approx. € 2,900 are incurred.

VAT

The transfer of real estate is generally exempt from VAT. In the event a property purchase is executed by VAT-registered persons in Lithuania, the parties may agree that the seller would charge VAT of 18%. The law provides for several exceptions when the seller must charge VAT of 18% in all cases, i.e. sale of buildings and structures before their commissioning or within two years following their commissioning or material improvement (so called “new” buildings). No VAT is payable for the transfer of land unless the land plot is designated for the construction of buildings or is purchased along with “new” buildings on it.

Land Lease Tax

Land lease tax is paid by those leasing land from the state and amounts to 1.5–4% of its value per year. The council of the municipality on the territory where state plots of land are used determines the exact rate of the tax. It may also reduce the tax or, provide relief from tax payment.

Land Tax

Land tax is paid by landowners. The annual tax rate amounts to 1.5% of the cadastral value of the land.

Real Estate Tax on Buildings

Lithuanian  and foreign entities owning buildings and structures located in Lithuania  are  obliged  to  pay  real  estate  tax  at a rate of 1% of the cadastral value of buildings and structures.

Individuals  owning  buildings  and structures located in Lithuania who use them  for  business  or  individual  activities  or  have transferred such buildings to legal entities for use for a period longer than 1 month or for an indefinite period are obliged to pay real estate tax of 1%, too, however with several exceptions.

Letting of Real Estate
Corporate Income Tax

Lithuanian Property Companies and permanent establishments of foreign companies are subject to Lithuanian corporate income tax at a rate of 15%, reduced to 13% if the average number of employees does not exceed 10 and income during the financial year does not exceed approx. € 145,000. The tax base is the accounting profit adjusted for tax provisions, i.e. for a rental property it is rental income less tax-deductible operating expenses. 

In particular, depreciation on buildings counts as a tax-deductible expense. The straight line depreciation or the declining balance method should be applied when calculating the depreciation of residential and other buildings. Residential buildings should be depreciated during a period not shorter than 20 years using the straight line method. New buildings (i.e. completed or renovated after 1 January 2002) other than residential are written off over a period of eight years or longer, either on the straight line basis or using the declining balance method. Other buildings and structures can be depreciated during a period not shorter than 15 years straight line only. Land is not depreciated for tax purposes. 

Losses may only be claimed as tax deductible for Lithuanian corporate income tax. It is thus possible for Lithuanian companies and permanent establishments of foreign investors to carry forward losses for five years. The only exception to this rule is losses incurred as a result of disposal of securities or derivative financial instruments that are calculated separately and may be carried forward for three years by deducting them from the future gains from disposals of securities and/or derivative financial instruments. It is not possible to carry back losses in Lithuania.

Entities not resident and not constituting a permanent establishment in Lithuania are subject to Lithuanian corporate income tax at a rate of 10% on rent and lease payments.

Temporary Social Tax

Since 1 January 2006 a temporary social tax was introduced for two years. The taxable base of social tax is the same as that of corporate income tax. In 2006, taxable profit is subject to temporary social tax at a rate of 4% and in 2007 at a rate of 3%.
Individual Income Tax
Income from the lease of immovable property located in Lithuania derived by either Lithuanian residents or non-resident individuals is treated as income sourced in Lithuania and taxed at a rate of 15%. On the other hand, if a Lithuanian resident exercises individual activities of real estate lease, income derived from the lease is taxed either at a rate of 15% or 33% if allowable deductions are made. It should be mentioned that the rate of 33% will be reduced to 27% from 1 July 2006 and to 24% from 1 January 2008.

VAT

Letting and leasing of real estate is generally VAT exempt. However, VAT is payable with regard to residential premises if they are rented out for two months or less, and on financial leases on new buildings. Furthermore, entrepreneurs and companies may opt for 18% VAT if the real estate is rented to a VAT-registered payer (another entrepreneur or company). Charging VAT on the lease of real estate is normal practice in Lithuania and secures input VAT deduction.

Sale of Real Estate
Capital Gains

A non-resident company selling real estate in Lithuania is liable for corporate income tax at a rate of 10%. The tax is levied on income without taking expenses into account. Afterwards a non-resident company may apply to the Lithuanian State Tax Authorities for recalculation of tax on capital gains taking into account the acquisition value of the real estate. 

A Lithuanian property company and a permanent establishment of a foreign company are subject to a standard corporate income tax of 15% or 13% and a temporary social tax (in 2006 – 4%, in 2007 – 3%) for capital gains on the sale of real estate. Capital gains and losses are calculated by subtracting the acquisition costs and related expenses from sales proceeds. 

Individual Income Tax

The proceeds derived by a non-resident individual from the disposal of real property are taxed at source at a rate of 15%. A non-resident individual could have the right to apply to the State Tax Authorities for the adjustment of income tax on the property sold, i.e. to have income tax adjusted by deducting the expenses from the proceeds derived. The same taxation regime is applicable for residents of Lithuania.

VAT

The transfer of real estate is generally exempt from VAT, with an established option for a taxable person to charge or not VAT of 18% in the event the property is sold to VAT-registered persons. VAT of 18% is only incurred if the real estate for sale comprises “new” buildings and the land they are built on or the sold plot of land is designated for the construction of buildings. 

Profit Repatriation
Taxation of Dividends

Lithuania levies a 15% withholding tax on dividend distributions to foreign shareholders. Withholding tax on dividend distributions does not apply if the foreign corporation holds an investment of more than 10% in the Lithuanian property company for at least twelve consecutive months and the profit distributed is taxed at a standard rate of corporate income tax. 

Withholding tax at a rate of 15% also applies for dividends received by individuals, residents or non-residents of Lithuania.

Liquidation and Return of Capital

In the event the company being liquidated transfers assets to its shareholders, this type of distribution is treated as a sale of assets, subject to 15% corporate income tax on the capital gains, which are calculated as the market value of assets less the acquisition value of shares.

On the other hand, cash transferred to the shareholders as a result of reduction of authorised share capital is treated as a distribution of profits, i.e. dividend payment, to the extent when such payment exceeds monetary and non-monetary contributions into a Lithuanian company.
Sale of Shares in a Lithuanian Property Company

Any disposal of shares of a Lithuanian company by a non-resident individual or a foreign company does not fall within the scope of income sourced in Lithuania and consequently is exempt from taxation under Lithuanian tax legislation.

Income tax on a capital gain derived from the sale of shares by an individual resident of Lithuania is taxed at a rate of 15%, with the exception of (I) shares acquired before 1 January 1999, or (II) shares held for more than 366 days, if the individual was a minor shareholder (holding not more than 10% of the corporation’s shares) for the three years prior to the tax year when the shares are sold.

Planning Investment

Numerous changes in important areas for commercial real estate investment such as tax frameworks, accounting or real estate law have to some extent already been made or are planned for the near future. Now is the time to plan investment structures and models in light of the new regulations planned, and to determine strategies for the future. However, your attorney and tax advisor should always be consulted on the risks and effects of whatever steps you decide on.