American entrepreneur John Rockefeller once said that one should be afraid of not big expenses but of small incomes. There is indeed some truth in it. However, this statement does not apply to business taxation. It is the owners’ natural desire to work with a low tax burden.
The Republic of Lithuania, like some other EU countries, has a fairly favourable business taxation environment. We will tell you what taxes for business are in force in Lithuania in 2020, how the tax conditions for small and large businesses differ, as well as which industries fall into the category of preferential taxation.
All companies registered in the country are considered tax residents of the Republic of Lithuania. The following taxes for companies are in force in Lithuania in 2020:
- Corporate income tax;
- Value added tax (VAT);
- Dividend tax;
- Personal income tax;
- Social security tax for employees;
- Social security tax for the company;
- Real estate tax.
The interest rate for each tax may differ depending on the industry and ownership type. Let’s take a closer look at taxes in Lithuania for legal entities.
Income tax in Lithuania is paid by commercial companies, as well as non-profit organisations if they gain profit from trading activities. The standard corporate income tax rate in the country is 15%. For example, companies registered as UAB (Closed Joint Stock Company) have to pay such income tax. Most of the enterprises in Lithuania are registered exactly as UAB since it is considered the best option in terms of reporting, taxation and the specifics of doing business.
Another important point regarding income tax. Companies registered in the territory of Lithuania pay tax on income received not only in the country but also in other countries where the company operates. It means if a company is registered in Lithuania but, for example, sells its goods or services in the EU, then the company in Lithuania has to pay income taxes based on the total income. As for non-resident companies, they deduct tax on income received in Lithuania. Treaties on the avoidance of double taxation also matter here. We will talk about them in more detail later in the article.
Lithuania also has some special conditions for small businesses: enterprises registered as MB (small partnership) or II (individual enterprise) have a preferential tax rate on income of 5%, though subject to a number of requirements. Such companies shall have up to 10 employees, and the annual turnover of the company shall not exceed LTL 1 million (about EUR 300 thousand). There is also a preferential taxation condition for small enterprise shareholders:
- the shareholder has to own only one company on the last day of the tax period;
- or have no more than 50% of shares in another company.
Income from dividends in Lithuania is taxed at the standard rate of 15%. However, there are cases when dividends are not taxed:
- when a company receives dividends from a subsidiary, if the parent company holds 10% of the shares or more of the subsidiary during the year;
- if dividends are received from a company registered in one of the EU countries.
Relatively low VAT for enterprises in certain industries is one of the reasons why foreign investors open and expand business in Lithuania. The standard VAT tax rate is 21%. However, there are a number of preferential industries with lower value added tax.
- 9% VAT is paid by companies selling important food products, books, periodicals, as well as passenger transportation and food importing companies.
- 5% VAT is paid by pharmaceutical companies, as well as by companies that supply electricity, gas and heat communications to houses and other buildings.
- 0% VAT rate is valid for enterprises engaged in the export of social goods and services, as well as for companies providing insurance and financial services.
- Companies that are engaged in cinema production pay value added tax in full, though not on the entire amount of income but its fourth part (from 25% of income);
- Research and development companies pay 50% VAT on profits.
From January 2019, new tax rules came into force in Lithuania. The tax reform combined employer and employee taxes. A similar system of taxation of businesses and employees operates in Ireland.
This made it possible to increase the wages of employees and, at the same time, reduce the tax burden on business. As a result, the business received a reduction in tax rates and pays a 1.45% contribution to Sodra, a 0.16% contribution to the Guarantee Fund and 0.16% to the Long-Term Employment Benefits Fund. Companies raised their pre-tax wages in response. Taxes for individuals (employees) have also been increased with the level of wages.
Individuals working for companies in Lithuania pay the following taxes starting from 1 January 2019:
- 20% income tax for those whose annual income does not exceed 84 average wages.
- 27% personal income tax will be paid by individuals with income above 84 average wages in 2020 and above 60 average wages in 2021.
- 19.5% social security tax (VSD).
- Additional contribution to the Pension Fund is about 2%.
It is worth noting that self-employed individuals will be subject to 15% income tax.
Lithuania has signed 55 treaties on avoidance of double taxation with the EU countries and others (e.g. India, Georgia, Ukraine). It means that:
- If you are a resident of Lithuania and you have paid tax on a certain income in a partner state which you have a treaty with, you do not need to pay tax on that income in Lithuania. The exception to this rule is income from dividends, royalties and interest. In such cases, the tax will be calculated according to a certain scheme.
- If you are a resident of the country and have paid income tax to a state, with which a treaty on avoidance of double taxation in Lithuania has not been signed, then there is a way to avoid paying taxes in the Republic of Lithuania. To do this, you need to submit a document issued and approved by the tax service of another state to STI. It will confirm that income tax has been paid.
- If in the country where the resident of Lithuania made an income, it is not taxed by law, then the income business taxes must be paid in Lithuania.
We hope you will find useful information about business taxation in Lithuania. If you would like to receive professional advice on the potential taxation of your business in Lithuania, leave a request on the website, and the Lano Solutions team will help you understand the peculiarities of the country’s modern legislation.