Most important tax changes in Lithuania 2011-2012
November, 2011
During the year of 2010 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, increased most of the taxes in 2009 in order to offset the loss ensuring the stability of public finances. In 2012 the tax system is not planning to be dramatically changed. Having stable tax rates would allow business investors to plan future investment possibilities and therefore Lithuania still remains attractive to the most foreign investors.
It is important to note that in 2011 Lithuanian Parliament enforced attractive tax and other laws amendments which overall improved the financial situation in Lithuania and bettered the state of various businesses in Lithuania. First of all the corporate income tax in relation to 2009 decreased from 20 to 15%. Moreover, small businesses, which satisfy the criteria set in corporate income tax law, are paying the decreased 5% corporate income tax. Additionally to this, it is important to note that from 2009 laws set the new principle on the transfer of losses between the related persons in Lithuania as before 2009 transfer of losses between mother company and the daughter companies was not allowed.
Lithuanian institutions have also started working more efficiently in benefit of the tax payer. The company registration takes only 3 days instead of previously applied 5 day principle. Local tax administration institutions are applying online declarations.
Value added tax rate has been increased from 19% to 21% since 1st September 2009 and is expected to remain the same for the year 2012. Even though there are ongoing discussions in the Parliament to increase the VAT rate for 1 percentage point, those discussions were not materialized yet.
It is important to note that from 1st of January, 2012 Lithuanian government is suggesting to increase the threshold for registering as Vat payers in Lithuania from 29 000 EUR to 45 000 EUR in accordance with EU requirements. By this it is believed to ease the administrative burden for VAT administration making it more effective.
Additionally to this in the year 2011 VAT was decreased from 21 to 9 percent to the hotel businesses in order to attract more tourism into Lithuania and therefore increase the foreign investments. In 2011 Lithuania took the position of European Union Member states from which 24 out of 27 member states enjoys decreased VAT rates for hotel businesses.
One of the recent important notes that Tax inspection is drawing attention to is the option to return to previously applied 21 percent tax rate for hotel businesses.
The proposal is drawn by Minister of Finance I. Simonyte detailing that in 2011 companies engaged in hotel businesses did not decrease the accommodation in a hotel pricing, but rather were saving on the smaller VAT percentage. Therefore the applied 9 percent tax rate in 2011 did not bring the required results – the quality of the accommodation in a hotel remained the same, the pricing was not reduced and the saved income on smaller tax rate increased the income of the hotel businesses.
Therefore tax inspection informs that starting from 2012 the tax rate for hotel businesses will be increased from 9 to 21 percent as it was the case in 2010.
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. One of the law amendments in 2012 is that small companies employing not more than 10 employees and having annual turnover not more than 1 mln LTL (289620 EUR) will be paying only 5 % of corporate income tax. In 2011 the required turnover had to be not more than 500 000 LTL (144810 EUR) in order to enjoy smaller CIT rate. 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.
Lithuanian President Ms. Dalia Grybauskaite is very active in suggesting new law amendments to better the financial situation in the country. One of the most recent amendments from President of Lithuania side is the Draft on Amending the Law on Companies presented to Lithuanian Parliament in fall 2011.The President of the Republic of Lithuania Ms. Dalia Grybauskaite issued Decree No. 1K-785, by which she presents the draft Law on Amending the Law of the on Companies to Lithuanian Parliament.
The draft proposes amendment related to the general meeting of the shareholders and their taken decisions related to the paid annual bonuses. The annual payments to the Board are suggested not to exceed 1/3 of the profit allocated for payment of dividends. This draft is meant to minimize the tax evasion in the country and sets the grounds that annual payments should not be paid in case the dividends are not paid and the amount of the annual payments should depend on the share of profit.
The draft is also related to the other legal instruments, such as the tax inspection letter Nr. (18.18.31.1)-R- 5728 as of September which 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.
According to the law on the real estate, if real estate is used by individuals for business or individual activities with several exceptions or disposed to the legal persons for the period longer than 1 month or term less is subject to 0.3% - 1% real estate tax calculated on the value of the real estate. The council of the municipality on the territory where buildings and structures are located determines the exact rate of the tax.
Lithuanian and foreign entities owning buildings and structures located in Lithuania are obliged to pay real estate tax. The rate of the real estate tax remains unchanged and is rated at 0.3% - 1% of the taxable value of buildings and structures.
The real estate tax return should be submitted to the State Tax Authorities within one month after the date of acquisition of the real estate. Legal entities, as opposed to individuals, should pay advance installments on a quarterly basis. Both individuals and legal entities should provide an annual real estate tax return to the State tax authorities not later than 1 February of the next year.
Taxpayers are entitled to defer payment of certain taxes for a period of one month to one year. Unpaid taxes are subject to a late-payment fee behind schedule. Late payment amounts no longer increase when the late payment equals the original debt amount.
The amount of tax penalties imposed depends on the type and delay of tax non-compliance. Late filing of tax declarations results in penalties of no more than 500 LTL for the first breach. However the second breach results the increased penalty of up to 1000 LTL. If the evasion of taxes occurs – the penalty is from 2000 LTL to 4000 LTL if no criminal charges are met.
A taxpayer is allowed to make voluntary corrections to a tax declaration for a 5-year period after the payable term, if an audit by the tax administration has not been commenced. The taxpayer remains his right to apply for the voluntary corrections to tax declaration even if the audit by the tax administration was commenced, however in this case the tax authorities has the right to decline it. That results in the cancellation of any penalties pending for tax non-compliance.
All decisions of the tax authorities may be appealed to the Tax administrator, Tax Litigation Commission and Court. Decisions of tax administrator may be appealed to Tax Litigation Commission within the period of 20 days of the date the decision was received.
Valters Gencs
Tax Attorney & Founding Partner
Gencs Valters Law Firm, Riga
T: +371 67 24 00 90
Email: valters.gencs@gencs.eu