Tax Regime

Corporate Income Tax

The standard corporate income tax rate was reduced from 20% to 15% with effect from 1 January 2010. Taxable profit of small entities (i.e. entities whose average number of listed employees does not exceed 10 and whose income does not exceed LTL 500,000 (EUR 144,810) within the tax period is subject to corporate income tax at 5%, with certain exceptions.

Entire income Lithuanian companies of sourced inside and outside Lithuania and entire or a part of particular income of controlled foreign entities is subject to tax.

Foreign companies are liable to tax only their income received from activities carried out through permanent establishments in Lithuania and other income sourced in Lithuania, such as:

• interest;

• dividends;

• royalties;

• proceeds from rent/sale of immovable property;

• annual payments to the Board and Supervisory Board members, etc.

A permanent establishment means a fixed place of business in Lithuania through which activities of a foreign entity are carried on. A foreign entity is deemed to carry on its activities through a permanent establishment, if at least one of the following criteria is met:

• activities in Lithuania are permanent; or

• activities are carried on through a dependent agent, or

• a building site is used, a construction, assembly or installation project is performed in Lithuania, or

• installations or structures for prospecting or extracting natural resources are used in Lithuania including wells or vessels used for that purpose.

Capital gains are treated as ordinary business income and are subject to corporate income tax at the standard rate. Capital gains on transfer of shares are exempt from tax, provided that:

• a Lithuanian company or a foreign entity acting via its permanent establishment is transferring shares of an entity which is registered or otherwise organized in the European Economic Area (EEA) member state or in another country with which Lithuania has concluded a treaty for avoidance of double taxation; and

• the company holds over 25% of shares in the aforementioned entity for a period not shorter than two years (whereas in case of reorganisation the period is three years).

For the purpose of calculation of taxable income, ordinary business expenses may be deducted. However, certain restrictions are applied.

Tax losses can be carried forward for an unlimited period of time. Losses incurred from disposal of securities can be carried forward for a period of five years and can only be offset against income of the same nature.

The following relieves are available:

• Tax relief for investment projects. Entities carrying out investment projects are entitled to reduce their taxable profit by up to 50% by the actually incurred acquisition costs of fixed assets meeting certain requirements. Depreciation (amortisation) expenses of such fixed assets shall be deducted in a common manner. Taxable profit can be reduced by the above-mentioned costs only if they are incurred during the period of 2009 – 2013. The costs exceeding the above-mentioned 50% limit can be carried forward for 4 years.

• Tax relief for Research and Development. Expenses, except for fixed assets’ depreciation (amortisation) expenses, incurred for Research and Development purposes can be deducted three times within the tax period when they are incurred, provided that Research and Development works performed are related to ordinary business activities.

• Operating tax losses incurred after 1 January 2010 can be transferred from one company to another within the same group of companies if certain conditions are met.

WITHHOLDING TAX

Withholding Tax on Dividends

The general rule is that dividends paid to foreign/Lithuanian entities are subject to withholding tax at the rate of 15%.

A participation exemption rule applies to dividends paid to parent companies holding not less than 10% of voting shares in the distributing company for a continuous period of at least 12 successive months. The exemption only applies if the profit was subject to corporate income tax, except for when the payer is established in a free economic zone and the recipient of the dividends is a non-resident corporate shareholder. The 12-month holding period requirement does not have to be met at the moment of the dividends’ distribution.

The participation exemption does not apply if the recipient of the dividends is established or otherwise organized in an offshore jurisdiction included in the special blacklist drawn by the Ministry of Finance.

Dividends paid to Lithuanian or foreign individuals are subject to tax at the rate of 15%.

Withholding Tax on Royalties, Interest, Sale and Rent of Real Estate

Interest & Royalty Directive was implemented in the Lithuanian domestic tax legislation. However, Lithuania was granted a transitional period of 6 years. Currently royalties paid to related parties that are EU tax residents are subject to 10% withholding tax, however, the rate will be reduced to 0% with effect from 1 July 2011.

Taxation of interest is more favourable according to local legislation which establishes that with effect from 1 January 2010 interest paid by Lithuanian companies to foreign companies established in the EEA and in countries with which Lithuania has a treaty for avoidance of double taxation, are not subject to withholding tax in Lithuania and no holding requirements are applied.

Income from sale of real estate located in Lithuania and received by a non-resident company (except for income received through its permanent establishment in Lithuania) is subject to 10% tax on gross proceeds, with a possibility to apply to the tax authorities for a re-calculation of tax in respect of capital gains only. Income from lease of real estate, received by a non-resident company is subject to 10% withholding tax with no deductions.

PERSONAL INCOME TAX

The standard personal income tax rate is 15%. However, the rate of 20% is applied to income from distributed profit (dividends, etc.).

Sale and Lease of the Real Estate

Lithuanian and foreign individuals are liable to tax capital gains from sale of real estate at 15%. However, capital gains from sale of private real estate located in an EEA member state are exempt if the property was owned for more than 3 years before the sale for non-commercial purposes.

Income received by Lithuanian and foreign residents from lease of private real estate located in Lithuania is subject to tax at the rate of 15%.

Disposal of Securities

Lithuanian residents are liable to tax capital gains from the disposal of securities at 15%. However, gains on disposal of securities are exempt, provided that:
securities were acquired more than 366 days before their sale and the individual owned not more than 10% of securities for three years preceding the tax year during which the securities are sold. The exemption does not apply if the securities are sold or otherwise transferred to the issuer of securities; or
the securities were acquired before 1 January 1999.

Sale of shares by a non-resident individual is out of the scope Lithuanian taxes.

VALUE ADDED TAX (VAT)

A Lithuanian entity/individual must register for VAT purposes if turnover exceeds LTL 100,000 (approx. EUR 29,000) for a period of 12 successive months. This threshold, however, is not applied to foreign entities/individuals which should apply for registration from the commencement of their activities in Lithuania. Registration is completed within 7-12 business days. Retrospective registration is not possible.

Taxable persons of other Member States may register either directly, or through their subdivision/fiscal agent in Lithuania. Other foreign companies are obliged to appoint a fiscal agent for VAT registration purposes.

Sale of Real Estate

As a general rule, sale of new buildings(in use for less than two years after their construction), land for construction or land with new buildings is subject to VAT at the standard rate of 21%. Sale of buildings used for more than 2 years after their completion or material improvement is VAT-exempt, with an option to tax.

In case of exempt transactions, a Lithuanian VAT payer has an option to tax sale of real estate, including land if the real estate is sold or rented to another Lithuanian VAT payer being a taxable person which performs business activities. The option applies for a period of not less than 24 months. The option should be reported to the tax authorities.

Lease of Real Estate

Lease of real estate (buildings and land) is VAT-exempt, with an exception for residential premises for a term not exceeding 2 months and premises for parking or keeping of any means of transport or similar property. A VAT payer has an option to tax, as well.

In case of exempt transactions, a VAT payer has the right to opt for taxation so that VAT is charged on lease of the property to VAT payers that are taxable persons performing economic activities. To the extent that the company exercises this right in respect of one lease, it will automatically apply to all lease agreements with VAT payers that are taxable persons for the following 24 months. The option should be reported to the tax authorities.

REAL ESTATE TAX

Real estate tax is levied on the value of immovable property owned by both Lithuanian and foreign legal entities. Immovable property owned by individuals and used for commercial purposes is also subject to real estate tax. However, the tax is not levied on personal property such as residential premises, garages, farms, etc. provided that the premises are not used for business activities by the individual or are not used by legal entities under specific conditions, e.g. a rent agreement signed with the individual.

The real estate tax rate ranges from 0.3% to 1% depending on local municipalities.

The taxable value is deemed to be the average market value determined by mass valuation according to the main purpose and location of the property, or the replacement value in respect of some specific types of real estate. Taxpayers may request for application of a value obtained from an independent valuator if the value under this approach differs from the average market value or the replacement value by more than 10%.
Exemptions may apply, e.g. to property owned by religious organisations, charity funds or real estate located in free economic zones.

The taxable period is a calendar year. Real estate tax returns must be filed and tax due must be paid before the 1st February of the next year. Advance real estate tax payments are made by legal entities 3 times per year. Each payment consists of ¼ of the annual amount.

LAND TAX

Private land owned by companies and individuals is subject to annual land tax at 1,5% of the value of the land located in Lithuania. The taxable value is determined according to the rules established by the Government of Lithuania.

The taxable period for land tax is a calendar year and the tax due has to be paid by the 1st November of the following year.

STATE-OWNED LAND LEASE TAX

Lithuanian and foreign companies which use state-owned land for their economic activities are subject to land lease tax. The minimum tax rate is 1,5% and the maximum rate is 4% of the value of the land. The actual tax rate is established by municipalities.
 
The taxable period for land lease tax is a calendar year. Municipalities establish the tax payment deadlines.

FREE ECONOMIC ZONES

Free Economic Zone („FEZ“) is a territory designated for the purpose of economic-commercial and   financial activities within which entities are provided with preferential economic and legal conditions of operation. Each FEZ is established by a separate law. Currently, there are two FEZs – one in Kaunas and the other in Klaipėda.

The zone enterprises can be involved in trade, production and export, banking or other activities. However, retail trade is permitted only to the extent that it serves to satisfy internal needs of the FEZ.

Incentives for zone enterprises are as follows:

• for companies that have invested more than LTL 3,4 million (EUR 1 million): exemption from corporate income tax for 6 years following the date of investment and a 50% discount reduction for the following 10 years;

• no taxes on dividends paid to foreign investors;

• no real estate taxes;

• no excise tax on goods imported;

• 0% VAT is imposed on goods imported to or placed in a FEZ.

Simplified customs and administration procedures applicable to the zone enterprises are also available.