Board member bonus taxation in Lithuania

September, 2011

During the year 2011 Lithuania as well as other Baltic states faced a heavy challenge to combat the adverse financial situation in their country. Lithuania, followed by the crisis management plan, is trying to take the companies out of the shadow economy in order to offset the loss ensuring the stability of public finances due to the statements of Lithuanian Government.

Notably in the year 2011 the tax burden was reduced and Lithuanian Government introduced more attractive CIT rate of 15 % (instead of 20%) which corresponds to the rate in our neighbor Latvia. For dividends the tax rate remains at 20%. Therefore, Lithuania still remains attractive to the most foreign investors due to the favorable tax planning possibilities.

It is important to note that Lithuanian Tax institutions currently weights tax and other laws amendments which would overall change the financial situation in Lithuania and various businesses. One of the recent important notes that Tax inspection is drawing attention to in its letter Nr. (18.18.31.1)-R- 5728 as of September is related to the bonus taxation system to Board Members of the Companies and the Supervisory Board.

It is constituted by local tax inspection that according to local practice Companies tend to increase the annual payments to the Board Members and Members of Supervisory Board in the Companies. The increase is done in some cases related not to the scope of activities of the Board Members, but in order to pay smaller taxes in Lithuania through contributing part of the salary to the annual payment (bonus). The tax inspection is informing that additional investigations will be carried out in order to clarify if the company is involved in tax evasions.

In practice there are cases when the company contributes part of the salary to the employee through the annual payments (bonuses) according to his/her activities at the Board. This is so as the same person may be employed by the company as its employee (with labor agreement), as well as be the Board Member at the same company.

Therefore tax inspection informs that such cases will be additionally examined as to the paid out annual payments to the Board members and in case the bonuses are increased in order to evade taxes, the sum will be regarded as dividends and taxed by additional 20% tax rate or, in case it will be regarded as salary payment, all the related taxes as to the employment relations will occur (15% personal income tax and 31 % social insurance tax).

Valters Gencs

Tax Attorney & Founding Partner

Gencs Valters Law Firm, Riga

T: +371 67 24 00 90

Email: valters.gencs@gencs.eu