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Income Tax in Lithuania


Personal Income Tax:

Tax year is calendar year and the return shall be filed upto 1st May of the following year.

Tax Rates:

The standard flat PIT rate is 15%.

Individual activity income is taxed depending on the amount of income received. PIT calculated at 15% flat rate on taxable income is reduced by applying a PIT credit, calculated according to special formulas. Therefore:
· 5% rate applies if income does not exceed EUR 20,000 per calendar year;

· Proportionally increasing rate ranging from 5% to 15% applies to income exceeding EUR 20,000 but lower than EUR 35,000 received per calendar year;

·15% flat PIT rate is applied to income amount of EUR 35,000 and higher received per calendar year.

Income under a business certificate (including rental income) can be received if it does not exceed the limit of EUR 45,000 the excess is taxed at a flat PIT rate of 15%.

Residency Rule:

Tax residency in Lithuania is determined by the following criteria:

· permanent residence (domicile) in Lithuania,

· individuals whose place of personal, social and economic interest is Lithuania,

· individuals staying in Lithuania for 183 days in a tax year or staying in Lithuania with or without breaks for 280 or more days during two consecutive tax years, whereby one stay in Lithuania during each of these years must be at least 90 days,

· Lithuanian citizen employed and remunerated by the Lithuanian state institutions.

For an individual to be recognized as a Lithuanian tax resident at least one of the criteria mentioned above has to be met. Double tax treaty provisions are also considered when defining an individual a resident of Lithuania.

Exempt Income:

Tax-exempt income includes:

· certain interest not exceeding EUR 500 per year,
· certain capital gains from securities not exceeding EUR 500,
· gifts from close relatives,
· gifts not exceeding the value of EUR 2,500,
· prizes from an employer not exceeding the value of EUR 200 per taxable year,
· certain allowances and compensations, insurance benefits, etc.,
· certain income from the sale of real estates.

Taxable Income:

Employment income:

Taxable monthly earnings in cash and in kind received from the principal workplace include wages, various additional payments (e.g. sickness and maternity benefits paid from social insurance), bonuses, employee stock option benefits, incentive payments, taxable allowances and other similar payments, compensation upon discharge from work (e.g. compensation for remaining vacation), gratuities, and compensation for unlawful dismissal from work.

The following income derived from employment in a Lithuanian legal entity is exempt from PIT:
· Life insurance contributions, additional (voluntary) health insurance contributions, and pension contributions paid by an employer on behalf of an employee are not considered as taxable benefits if certain conditions are met and provided that the total amount of such contributions does not exceed 25% of the employee's annual employment-related income and the recipient of such contributions is established in an EEA country.

· Certain compensations established by the local Lithuanian legislation (e.g. business trip related expense reimbursements, daily allowances if certain conditions are met).

· Income received as a prize or gift from the employer if the value does not exceed EUR 200 per tax year.

· The benefit when employer pays for railway or public transport tickets for the employee for the arrival/departure to/from his/her workplace.

· Payments made by an employer upon the death of a spouse or certain other heirs of an employee, as well as benefits paid to a spouse, children (adopted children), and parents (adoptive parents) upon the death of an employee.

· Other income determined in Article 17 of the Law on PIT.

Equity compensation:

For tax purposes, equity compensation received by an employee in kind or in cash is treated as employment-related income and is subject to PIT. The taxable amount is calculated based on the difference between fair market value of the equity granted and the amount paid for it by the employee, if any.

Business income:

An individual's business income derived from self-employment and other individual activities, including income received from rent, sale, or transfer of property related to individual activities (not taking into account objects of immovable kind) is taxed depending on the amount of income received. PIT calculated at 15% flat rate on taxable income is reduced by applying a PIT credit, calculated according to special formulas. Therefore:

· 5% rate applies if income does not exceed EUR 20,000 per calendar year;

· Proportionally increasing rate ranging from 5% to 15% applies to income exceeding EUR 20,000 but lower than EUR 35,000 received per calendar year;

·15% flat PIT rate is applied to income amount of EUR 35,000 and higher received per calendar year.

Income under a business certificate (including rental income) can be received if it does not exceed the limit of EUR 45,000, the excess is taxed at a flat PIT rate of 15%.

Capital gains:

Taxable income derived from the sale of property is calculated as the difference between the sale price and the acquisition price and the taxable gain is subject to a 15% PIT rate.

The following capital gains are tax exempt:

· Profits from transfer of financial instruments or realisation of derivatives not exceeding EUR 500 per tax year.

· Income from the sale of housing (including land) located in an EEA member state if the individual’s place of residence was declared there during the last two years prior to the sale. If the place of residence was declared for a shorter period but income received from the sale was invested into the acquisition of another housing located in one of the EEA member states in one year after the sale and the place of residence was declared there accordingly, such income would also be treated as non-taxable.

· Income from the sale or other transfer of movable property that is legally registered in Lithuania or within an EEA member state if the property was acquired more than three years prior to its sale or other transfer.

· Income from the sale of immovable property (except for housing as indicated above) if the property was acquired more than ten years prior to its sale.

· Capital gains not exceeding EUR 2,500 during the tax period.

Dividend income:

Dividends are subject to a flat 15% PIT rate.

Interest income:

The following interest income is tax exempt:

· Starting from 2018, interest income received on consumer credits granted via peer-to-peer lending platforms or funds lend via crowdfunding platforms in Lithuania or in another EEA country is non-taxable, provided that the amount does not exceed EUR 500 per calendar year.

· Interest received on (i) government or municipal bonds of the member states of the EEA and (ii) deposits kept in banks and other credit institutions of the EEA member states if the government or municipal bonds are acquired or the contracts of deposits are concluded before 31 December 2013.

· Interest received on non-equity securities if such securities (i.e. corporate bonds) are acquired before 31 December 2013 and started to be redeemed not earlier than 366 days after the date of issue.

· When the contracts of (i) deposits kept in banks and other credit institutions (not necessarily in the EEA member states) are concluded or (ii) non-equity securities or (iii) non-equity government securities (i.e. government or municipal bonds, not necessarily of the EEA member states) are acquired after 1 January 2014, the tax relief is applied only to the amount of such interest that does not exceed EUR 500 per tax year.

Rental income:

Income derived from rent is subject to a flat 15% PIT rate.

Deductions from Income:

Employment expenses:

Employment-related expenses are not deductible from individual employment compensation.

Personal deductions:

The following expenses incurred by Lithuanian tax residents over the tax period may be deducted from taxable income:

· Life insurance premiums paid for one’s own benefit or for the benefit of a spouse, minor children, or disabled children if the life insurance company is registered in an EEA member state or Organisation for Economic Co-operation and Development (OECD) member country.

· Pension contributions paid to pension funds established in EEA member states or OECD member countries for one’s own benefit or for the benefit of a spouse, minor children, or disabled children.

· Payments for vocational training or studies, only if during such studies the first university degree and/or the first relevant qualification is obtained, including postgraduate studies (the loan amount repaid over the tax period may be tax deductible).

The total amount of deductible expenses specified above is limited to 25% of the taxable income (subject to 15% of PIT) during the calendar year. The total deductible life insurance premiums and pension contributions amount should not exceed EUR 2,000.

Standard deductions:

A monthly tax-exempt amount (TEA) is applied only to employment-related income of Lithuanian tax residents, as follows:

· A TEA of EUR 380 per month is applied to individuals whose employment-related income does not exceed an amount of one minimum monthly salary that was in force as of 1 January of the current tax year (EUR 400 for 2018).

· If employment-related income exceeds an amount of one minimum monthly salary that was in force as of 1 January of the current tax year, a monthly TEA is calculated according to the following formula:

·  Monthly TEA = 380 - 0.5 x (an individual’s employment-related income per month - one minimum monthly salary that was in force as of 1 January of the current tax year, i.e. 400).

The TEA is proportionally reduced for larger amounts of income, and if income amounts to or exceeds EUR 1,160 per month, no TEA is applied.

The annual TEA shall be applied to the total annual income received by the individual. In cases where an individual receives additional income to the salary income (or salary increases during the year), corrections are made at the end of the year (when filing the annual income tax return). The calculation is made taking into consideration the annual taxable income, including non-taxable income received for the work performed in the country Lithuania has a DTT concluded with and accordingly taxed in such a country. Also, income from individual activities derived under business certificates is not included in the calculation of the annual TEA.

The annual TEA can be applied to Lithuanian tax non-residents only at the end of the tax period by submitting the annual PIT return, provided their annual gross income does not exceed EUR 13,920.

The additional TEA was revoked and replaced by children allowances starting from 2018. For all children the Lithuanian Social Security Authorities pay EUR 30 per month per child from birth to 18 years of age or older, if they study according to a general curriculum until they reach the age of 21. The additional children allowances are also possible for families receiving certain low amounts of income, having 3 or more children, etc.

Personal allowances:

There are no personal allowances available in Lithuania.

Business expenses:

Expenses incurred for the purpose of receiving income from individual activities by self-employed individuals are tax deductible. There are two options to deduct expenses from income received/earned during the tax year:

·  It is possible to deduct the actual expenses incurred by individuals while performing individual activities; however, such expenses have to be supported by relevant substantiating documents.

· Alternatively, it is possible to deduct 30% of income received/earned, and no supporting documents are required.

Losses:

In certain cases, individuals performing individual activities can carry forward the losses for an unlimited period of time, until the activity that resulted in such losses is terminated.

Generally, losses resulting from the sales of shares and other financial instruments can reduce the profits earned from such sales during the same tax year (certain restrictions apply). However, losses resulting from other sales of property (e.g. immovable property) do not reduce the taxable base of other sales transactions of such property. Moreover, it is not possible to carry forward losses resulting from capital gains.


Corporate Income Tax:

Profit tax:

Under the Law on Profit Tax, Lithuanian companies are subject to profit tax on their worldwide income. Lithuanian (resident) companies are defined as enterprises with the rights of legal persons registered in Lithuania. For purposes of the profit tax, Lithuanian companies include companies formed in Lithuania and companies incorporated in foreign countries that are registered in Lithuania as branches or permanent establishments.

Profits of Lithuanian companies earned through permanent establishments in the EEA or in tax treaty countries are exempt in Lithuania if the profit from activities carried out through these permanent establishments is subject to corporate income tax or equivalent tax in such countries.
Foreign (nonresident) companies, which are defined as companies not incorporated in Lithuania, are subject to profit tax on their Lithuanian-source income only.

A foreign enterprise is deemed to have a permanent establishment in Lithuania if it satisfies any of the following conditions:

· It permanently carries out activities in Lithuania.

· It carries out its activities in Lithuania through a dependent representative (agent).

· It uses a building site or a construction, assembly or installation object in Lithuania.

· It uses installations or structures in Lithuania for prospecting or extracting natural resources, including wells or vessels used for that purpose.

International telecommunication income and 50% of income derived from transportation that begins in Lithuania and ends in a foreign country or that begins in a foreign country and ends in Lithuania are considered to be income received through a permanent establishment if such activities relate to the activities of a foreign enterprise through a permanent establishment in Lithuania.

Tax rates:

The standard profit tax rate is 15%.

A 5% rate applies to small entities with annual income not exceeding EUR300,000 and an average number of employees that does not exceed 10 for the tax year.

A 5% rate applies to the taxable profit of agricultural entities. An entity is deemed to be an agricultural entity if more than 50% of its income is derived from agricultural activities.

Entities registered and operating in a free economic zone benefit from 100% exemption from profit tax for 6 years and a further 50% reduction in profit tax for an additional 10 years if they satisfy either of the following conditions:

They make investments in fixed assets of at least EUR1 million, and at least 75% of their income is derived from the following activities:

· Production
· Processing
· Storage
· Manufacturing of aircraft and spacecraft and related equipment
· Repair and maintenance of aircraft and spacecraft and services related to such activities
· Computer programming activities
·  Computer consulting activities
· Management of computer equipment
· Other information technologies and computer services activities
· Data analytics
·Web servers (hosting) and related activities
· Call center activities
· Wholesale trade in goods stored in the zone and services related to such activities

They make investments in fixed assets of at least EUR100,000, their average number of employees is no less than 20, and at least 75% of their income is derived from the following activities:

· Accounting

· Bookkeeping

· Consulting activities (except audit, accounts examination and fairness confirmation)

· Administrative services

· Human resources activities

· Architecture, engineering activities and services related to technical consulting activities (except the controlling of construction works and the making photos of locations)

The above benefits are not available to credit institutions and insurance companies.

Currently, seven free-economic zones are located in Akmenė, Kaunas, Kėdainiai, Klaipėda, Marijampolė, Panevėžys and Šiauliai.

Social enterprises, which have 40% or more employees included in target groups (for example, disabled individuals and long-term unemployed), are eligible for a 0% tax rate. In addition, the entity may not perform the activities included in the list of unsupported activities (for example, hunting, and alcohol and tobacco production) of social enterprises.

Nonprofit entities are subject to profit tax if they engage in business activities. If the annual business income of a nonprofit entity does not exceed EUR300,000, a 0% tax rate applies to the first EUR7,250 of taxable profit. The remaining part of the taxable profit is subject to tax at a rate of 15%. Income received from activities carried out to satisfy public interests that is intended to be used for the funding of such activities is not considered income received from business activities of nonprofit entities.

Entities engaged in international transportation by ships or in a directly related activity can elect to be taxed on a special tax base related to the net tonnage of their fleet. The tax on such entities is calculated by applying the 15% corporation tax to the net tonnage instead of the taxable profit of the entities.

Capital gains:

Capital gains are included in taxable profit and are subject to tax at the regular profit tax rate, except for gains and losses derived from disposals of securities and derivatives. Gains and losses on securities and derivatives are included in a separate tax base that is subject to tax at the regular profit tax rate. A capital gain derived from the sale of shares of a company registered in an EEA country or in a tax treaty country is exempt from tax if the shares have been held for an uninterrupted period of at least two years and if the holding represents more than 25% of the shares of the company throughout that period.

The exemption mentioned above does not apply if the shares are transferred to the issuer of the shares.

Capital gains derived from the transfer of shares in a reorganization or from another transfer specified in the law is exempt from tax if the shares have been held for an uninterrupted period of at least three years and if the holding represents more than 25% of the shares of the company throughout that period.

Administration:

Tax year:

The tax year is the calendar year. Companies may request permission to use a different 12-month tax year, which must be used continuously.

Profit tax:

Companies must file profit tax returns with the tax inspectorate by the 15th day of the 6th month following the end of the tax year.

Companies must make quarterly advance payments of profit tax by the 15th day of the last month of each quarter. The law specifies two methods that companies may choose to calculate their advance profit tax. The chosen method must be applied consistently throughout the year, but it can be changed once in the tax year. The following are the specified methods:

·The results of prior financial years. The advance payments for the first six months are calculated based on the profit tax for the year before the preceding year. Each of these advance payments equals 25% of the profit tax for such year. For the 7th through 12th months of the tax year, the advance payment equals 25% of the profit tax calculated for the preceding tax year.

·The forecasted profit tax of the current year. Each of the advance payments equals 25% of the forecasted profit tax for such year. However, the total of the advance profit tax payments made during the tax year must total at least 80% of annual profit tax.
·
If companies choose to pay the advance profit tax based on the results of prior financial years, they must file two profit tax advance payment returns. The first return covers the first 6 months of the tax year and must be filed by the 15th day of the 3rd month of the tax year. The second return covers the last 6 months of the tax year and must be filed by the 15th day of the 9th month of the tax year.

If the advance profit tax payment is based on the forecasted profit tax of the current year, the profit tax advance payment return must be filed by the 15th day of the 3rd month of the tax year.

Newly registered enterprises in their first tax year and enterprises with taxable profit not exceeding EUR 300,000 in the preceding tax year are not required to make advance payments of profit tax.

Any balance of tax due for a tax year must be paid by the 15th day of the 6th month following the tax year. If the total of the advance payments exceeds the tax due for the tax year, a company may obtain a refund or apply the excess to future taxes. Taxes must be paid in euros.


Withholding taxes:

Withholding taxes together with returns for such taxes must be submitted to the tax inspectorate by the 15th day of the month following the month in which the taxes are withheld.

Withholding taxes:

Withholding tax at a rate of 10% is imposed on the following types of payments to nonresident companies:

· Interest
· All types of royalties
· Compensation for violations of copyrights or related rights

Interest paid to an entity registered in an EEA country or in a tax treaty country is exempt from tax.

Royalties, payments for know-how and compensation for violations of copyrights or related rights are exempt from withholding tax if the criteria stipulated in the Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different member states are met.

Withholding tax at a rate of 15% is imposed on the following types of payments to nonresident companies:

· Dividends (for further details, see Dividends)

· Payments with respect to the sale, rent or other transfer of immovable property located in Lithuania

· Payments for performance and sport activity in Lithuania

· Directors’ fees to members of the Supervisory Board

Dividends:

Dividends received from Lithuanian and foreign companies are subject to corporate profit tax at a rate of 15%. The 15% tax on dividends paid by Lithuanian companies is withheld at source.

For dividends paid by Lithuanian companies to other Lithuanian companies, profit tax for the preceding tax year is reduced for the company receiving dividends by the withholding tax calculated on the dividends. However, the amount of the reduction may not exceed the amount of profit tax for the preceding tax year. The amount of the withholding tax not used to reduce the preceding year’s tax may be set off against other taxes or refunded by the tax authorities. Payers of dividends must pay the withholding tax on the dividends to the tax authorities by the 15th day of the month following the month of payment of the dividends.

Lithuanian resident companies receiving dividends from foreign companies must pay the tax on the dividends to the tax authorities by the 15th day of the month following the month of receipt of the dividends.

Under the participation exemption rule, dividends are not subject to profit tax if the recipient is a company (not located in a tax haven) that holds at least 10% of the shares of the payer of the dividends for a period of at least 12 months. The participation exemption does not apply to dividends distributed to individuals from the following types of profit:

· Profits that were subject to a 0% tax rate
· Profits that were reduced by investment relief
· Profits that were not taxed because of specific exemptions indicated in the law

Dividends paid by foreign companies to Lithuanian companies are not subject to tax if the company paying the dividends is registered in an EEA country and if the company’s profits were subject to corporate profit tax or an equivalent tax.

The participation exemption also applies to the following:

· Dividends that are attributed to the permanent establishment of a foreign company in Lithuania

· Cash payments made to reduce the company’s capital that was formed using the company’s earnings

The above-mentioned participation exemptions for dividends paid by Lithuanian companies to foreign companies and the dividends received by Lithuanian companies from foreign companies may be denied under a general anti-abuse rule, which provides that the participation exemption may be denied for entities or a group of entities if the main purpose or one of the main purposes of the arrangements that were put in place was to obtain a tax advantage.

Foreign tax relief:

In general, a foreign tax credit may be claimed in an amount not exceeding the amount of Lithuanian profit tax payable on the foreign income. Special rules apply to particular types of income, unless a double tax treaty provides otherwise.

The exemption method is applied to profit from activities carried out through permanent establishments of Lithuanian entities in EEA countries or in tax treaty countries if profit from activities carried out through these permanent establishments is subject to corporate income tax or equivalent tax in such countries.




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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.


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This blog is Created by CA Anil Kumar Jain.