REI transactions usually involve the following taxes:


Corporate Income Tax

The standard rate of the corporate income tax applicable to Lithuanian entities and permanent establishments (PE) of foreign entities is 15 percent. The reduced rate of 13 percent is applied if the average number of employees of the Lithuanian entity or the PE of a foreign entity does not exceed 10 and income of such entity during the financial year does not exceed LTL 500,000 (approx. € 145,000). Income received from the lease of the real estate located in Lithuania, also capital gains from the sale of the real estate or securities are considered ordinary business income and are subject to the corporate income tax.

Starting from 1 January 2007, tax exemption is allowed on capital gains received from the sale of shares of the entity, which (i) is registered or otherwise established in the state of European Economic Area or in the state with which Lithuania has an effective double taxation treaty, and (ii) is a payer of a corporate income tax or identical tax, and the entity selling the shares has been the owner of more than 25 percent of the total number of shares in that legal entity for not less than 2 years.

 

Lithuanian entities and the PE of foreign entities have the right to carry forward losses for 5 consecutive years for the purpose of corporate income tax. The exception to this rule is losses incurred due to the disposal of securities and/or derivative financial instruments. Losses incurred due to the disposal of securities and/or derivative financial instruments can be carried forward to the next tax year but may be covered only with income generated from disposals of securities and/or derivative financial instruments.

 

The part of the capital lent by a controlling lender to a Lithuanian entity for remuneration, which exceeds the proportion 4:1 of the lent capital and fixed capital*, is deemed to be the controlled lent capital to the Lithuanian entity. The interest paid for the use of the controlled lent capital is considered to be unrelated to the earning of income and thus, non-deductible. The above rules will not apply if the Lithuanian entity proves that the same loan would be provided under the same conditions between independent (not related) persons.

 

All transactions between related parties should be effected at an arm’s length. In other words, transactions should be made under such conditions, as if the transaction companies were not associated (“third parties”). If the transaction is not effected at an arm’s length, the tax authorities have the right to adjust the prices of such transaction.

 

The taxable base of the social tax is the same as of the corporate income tax. In 2006, the tax rate was 4 percent, and in 2007 – 3 percent.

 

Capital gains received by a foreign entity otherwise than through its PE in Lithuania from the sale of the real estate located in Lithuania, as well as income received from the lease of the real estate or interest received from the source in Lithuania are subject to withholding tax at a rate of 10 percent. Lithuanian entity making such type of payments to a foreign entity is obliged to withhold 10 percent of the total payment. A foreign entity, having received income for the real estate sold has a right to apply to the Lithuanian tax authorities for re-calculation of the withholding tax paid on a net basis, i. e. The withholding tax should be re-calculated on the capital gains received.
Capital gains generated by a foreign entity in Lithuania from the sale of shares otherwise but through its PE are not subject to taxation.

 
* The fixed capital of the Lithuanian entity means its equity capital on the last day of the tax period, excluding the financial results of

 
Withholding Tax on Dividends

If dividends are paid by a Lithuanian entity to a legal entity (either Lithuanian or foreign entity), such dividends are subject to the withholding tax at a rate of 15 percent, unless the participation exemption is applied. That is, the dividends paid to a legal entity are tax exempt if a legal entity has been holding continuously, at least for 12 months, including the date of distribution of dividends, the shares carrying more than 10 percent of the total number of votes in the Lithuanian legal entity (payer of dividends). The exemption is not applied in case the recipient of dividends is established or otherwise organized in a tax heaven country or the payer of dividends is not subject to taxation at the 15 percent or 13 percent  corporate income tax rate in Lithuania (except for the cases when the payer of dividends is established in a free economic zone).
If dividends are paid by a Lithuanian entity to individuals (either residents or non-residents), such  dividends are subject to personal income tax at a rate of 15 percent.

 

Income received either by a tax resident or non-tax resident of Lithuania from the sale of real estate located in Lithuania (starting from 1 January 2007 – in a member state of the European Economic Area), which is not related to his individual activity and such real estate is acquired at least three years prior to its sale, is not subject to taxation. If the real estate is sold within a period of three years after its acquisition, the capital gains received are subject to personal income tax at a rate of 15 percent.

Income received either by a tax resident or non-tax resident of Lithuania from the sale of real estate located in Lithuania (starting from 1 January 2007 – also in the member state of the European Economic Area), which is used in his individual activity, is subject to personal income tax at a rate of 15 percent provided that allowable deductions are not made, or at a rate of 27 percent (starting from 1 January 2008 – 24 percent) if allowable deductions are made.

Income received either by a tax resident or non-tax resident of Lithuania from the lease of real estate located in Lithuania is subject to personal income tax at a rate of 15 percent.

 

Capital gains received by a tax resident of Lithuania are not subject to taxation upon the sale or other transfer of securities, if securities are acquired before 1 January 1999, or the holder of securities has held them for more than 366 days before selling them and the holder did not own more than 10 percent of the outstanding securities of the legal entity (issuer of the securities) during a three-year period prior to the sale of securities. The tax relief will not apply if the securities are sold or otherwise transferred to the issuer of securities. If the tax relief is not applicable, capital gains will be subject to 15 percent personal income tax.

Capital gains received by a non-tax resident of Lithuania from the sale of securities are not subject to taxation in Lithuania.

 

Lease of real estate is VAT exempt except for the lease of (i) residential premises for a term not exceeding two months, and (ii) premises, parking sites/lots,  garages for parking or keeping of any means of transport or other property with a similar function.

A VAT taxable person has a right of option for calculation of VAT on lease of the real estate, which is exempt from VAT, but only in the case where the real estate is leased to a VAT payer. Once chosen, the latter option should be applied for at least two years.

Sale or other transfer of the buildings or part thereof (with the exception of new buildings or part thereof) is exempt from VAT. A new building is defined as a building of unfinished construction as well as a building of finished construction before expiry of 24-month period calculated as from the completion of the works of construction or material improvement of the building.

Exemption from VAT is granted to the sale or any other transfer of a land plot, with the exception of (i) the land plots that are being transferred together with new buildings (or part thereof) and (ii) the land plots developed for the construction of new building thereon (regardless of whether or not the actual construction works are carried out on such land plot).

A VAT taxable person has a right of option for calculation of VAT on the sale of the real estate, which is exempt from VAT, but only in the case where the real estate is sold or leased to a VAT payer. Once chosen, the latter option should be applied for at least two years.

 

Real estate tax is imposed on the real estate (except for land) located in Lithuania and owned by (i) Lithuanian or foreign entities or (ii) Lithuanian or foreign individuals, when the latter use real estate for their business or individual activities, or transfer real estate for use to the legal entities for a period longer than 1 month. When the real estate is transferred to a legal entity for its use, the obligation to pay and declare the real estate tax arises for that legal entity. The annual rate of the tax is set every year by the local municipalities in the range of 0.3 percent–1 percent of the taxable value of the real estate. The taxable value is deemed a market value determined during the massive evaluation by the Lithuanian Real Estate Register and which is normally substantially lower than the actual market value. Corporate tax payers have to pay advance instalments on a quarterly basis, while the individuals have to pay the real estate tax by the 1st of February following the tax year.

 

Land tax is imposed on the land owned by the legal entities and individuals. The annual rate of the tax in question is 1.5 percent of the taxable value of the land determined by the Lithuanian tax authorities.

 

The annual rate of the State-owned land lease tax varies from 1.5 percent to 4 percent of the taxable value of the land, which is calculated according to the methodology approved by the Lithuania Government. The particular annual rate of this tax and the terms of its payment are being established by the councils of respective municipalities within the territory whereof the land plot is located.



Lideika, Petrauskas, Valiunas ir partneriai
LAWIN
Jogailos st. 9/1, LT-01116 Vilnius, Lithuania
Tel. +370 5 268 1888
Fax +370 5 212 5591
vilnius@lawin.lt, www.lawin.lt