Tax Planning: Personal Income Tax in Lithuania

During the economic crisis a question of costs optimization has become one of the top ones. Consequently, many people started searching for tax planning opportunities in order to move their tax burden to lower tax countries. For example, general personal income tax rate in Lithuania is 15% which many people would find attractive.

As a rule, tax residents pay personal income tax on their worldwide income, therefore some of them are willing to become tax residents of a country were tax rate is lower. Individual is considered as a tax resident if he satisfies one of the below mentioned criteria:

■ Person has a permanent residence/domicile in Lithuania;

■ Social and economic interests are in Lithuania;

■ Person stays 183 or more days in Lithuania during taxable period;

■ During the 2 years person stays more than 280 days in Lithuania.

Residence/domicile in Lithuania is considered such where individual lives mainly de facto and where he plans to live, and where he is related to. Individual should live in such residence permanently and not only during short periods. Individual should live in such residence de facto – it is not sufficient just to have a possibility to live there.

Nevertheless, individual which is not considered as tax resident according to the aforementioned rules might apply to Lithuanian Tax Office and ask to recognize him as a tax resident if during taxable period his income the source whereof is in Lithuania composes more than 90% of his income received during taxable period, with an exception of non-taxable income.

Lithuanian tax resident shall be taxed only on income sourced in Lithuania if such individual:

1. Is considered as Lithuanian resident because he stays more than 183 days during taxable period or during the 2 years person stays more than 280 days in Lithuania; and
2. Is not a citizen of Lithuania; and
3. At the same taxable period is considered a resident of a foreign state with which Lithuania has double taxation avoidance treaty and Lithuanian Tax Office receives such confirmation from that foreign state Tax Office.

The aforesaid rule is an exception to the general rule and means that even though individual is considered a Lithuanian tax resident provided that he fulfills certain conditions, he shall be taxed only on income sourced in Lithuania.

Moreover, in order to avoid double taxation exemption method in Lithuania is used for tax residents: income (except interest, dividends and royalties) received by resident in EU state or state with which Lithuania has a double taxation avoidance treaty, provided that income tax has been paid on such income in that foreign country, is not taxable in Lithuania. However, for interest, dividends and royalties in the aforesaid case a credit method would apply, meaning tax paid abroad may be deducted from tax payable in Lithuania. On income received from other countries (except target territories) the credit method would be applicable as well.