Economic and Political Environment
Lithuania gained membership in the World Trade Organization and joined the EU in May 2004. Despite Lithuania's EU accession, Lithuania's trade with its Central and Eastern European neighbors, and Russia in particular, accounts for a growing percentage of total trade. Privatization of the large, state-owned utilities is nearly complete. Foreign government and business support have helped in the transition from the old command economy to a market economy.
Lithuania's economy grew on average 8% per year for the four years prior to 2008 driven by exports and domestic demand. However, GDP plunged nearly 15% in 2009 - during the 2008-09 crisis the three former Soviet Baltic republics had the world's worst economic declines.
In 2009, the government launched a high-profile campaign, led by Prime Minister KUBILIUS, to attract foreign investment and to develop export markets. The current account deficit, which had risen to roughly 15% of GDP in 2007-08, recovered to a surplus of 4% 2009 and 3.4% in 2010 in the wake of a cutback in imports to almost half the 2008 level. Nevertheless, economic growth was flat and unemployment continued upward to 17.9% in 2010.
Key economic indicators:
- Population: 3,535,547 (July 2011 est.)
- GDP (purchasing power parity): $56.22 billion (2010 est.)
- Per capita GDP: $15,900 (2010 est.)
- Real GDP growth: 0.4% (2010 est.)
- Unemployment: 17.9% (2010 est.)
- Public debt: 36.7% of GDP (2010 est.)
The Banking Environment
Lithuania has an independent central bank, the Bank of Lithuania (Lietuvos Bankas).
There are nine commercial banks and seven branches of foreign banks operating in Lithuania at present. In addition, there are 67 credit unions. There are no restrictions on residents holding foreign currency accounts both within and outside Lithuania. Approval is needed, when required by foreign currency legislation. Non-resident accounts in either domestic or foreign currency are also permitted.
Lithuanian litas (LTL)
A company is considered resident if it is registered in Lithuania. Non-resident companies are also required to register in Lithuania as permanent establishments, in order to undertake business in Lithuania. Such non-resident companies are, therefore, effectively subject to the same rates of taxation as residents on their Lithuanian profits.
Tax year year
The Lithuanian tax year generally corresponds to the calendar year. However, companies may seek permission to use a tax year that does not correspond to the calendar year. Companies are required to file annual financial statements and tax returns before the first day of the tenth month of the next tax year. Companies must also file advance returns if their taxable revenues exceed LTL100,000 (approx. EUR 29,000).
Residents – corporate entities, partnerships, and private (individual) enterprises – and permanent establishments are subject to tax on their worldwide income, at a standard rate of 15%. A special rate of 13% applies to small companies with less than ten employees and an annual turnover below LTL 500,000 (approx. EUR 145,000). Partnerships and private (individual) enterprises with less than ten employees and an annual turnover below LTL 1 million (approx. EUR 290,000) can opt to exempt the first LTL 25,000 of taxable profits.
Advance tax ruling availability
It is possible to obtain non-binding advance rulings from Lithuanian Tax Authorities. Such advance rulings serve as consultations only and thus do not prevent the Tax Authorities from changing their view upon tax audit. However, the taxpayer may be relieved from tax fines upon assessment if he has based his actions on the advance ruling.
Interest paid to controlling entities or individuals where the debt/equity ratio exceeds 4:1 is non-deductible for tax purposes. Interest is also disallowed on profit-participation (or turnover based) loans or convertible bonds. However, disallowed interest is not reclassified into a dividend for tax purposes. A controlling entity/person is defined as an entity/person that directly or indirectly holds 50% or more of the controlled entity’s shares (or otherwise participates in equity) or more than 50% of the shares are owned together with associated persons and the own holding is more than 10%. Thin capitalisation rules do not apply to financial institutions providing leasing services. The rules are also not applied when the entity proves that the transaction complies with the arm’s length principle despite the special relationship with the creditor.
The Lithuanian tax authorities are granted the right to adjust the value of transactions between related parties where the transactional value does not reflect the fair market price. The fair market value is deemed to be the amount that could be realised upon an exchange of assets between unrelated parties entering into a direct transaction. The Tax Authorities apply transfer pricing methodologies, which are set out by the respective legislation. The transfer pricing regulations are established in-line with OECD guidelines.
Capital gains tax
Capital gains of resident companies, including permanent establishments, are taxed as general taxable income at a rate of 15%. For non-residents, capital gains on the transfer or lease of immovable property in Lithuania are taxed at a rate of 10%. Capital losses may be carried forward for a five-year period beginning with the tax period following the tax period during which the losses were incurred. Capital losses arising from the sale of securities and derivative financial instruments may be carried forward for a three-year period and may only be offset against gains from the sale of securities and derivatives.
No stamp duty is levied on loan agreements.
Withholding tax (subject to tax treaties)
A withholding tax of 10% is levied on royalties derived from trademarks, licenses or business names, and paid to non-resident companies. A withholding tax of 10% is also levied on payments for copyrights and auxiliary rights, patent rights, industrial design, company name and franchise, if this income is paid to non-resident legal entities. A withholding tax of 10 % is imposed on interest payments to non-resident legal entities. A withholding tax of 10 % is also imposed on payments to non-residents upon the sale or lease of immovable property. A withholding tax of 15% is levied on dividends paid to residents and non-residents. A participation exemption applies whereby dividends paid are not subject to withholding tax provided that:
The shareholder owns more than 10% voting rights of the company.
The holding period of the shares is at least 12 months.
Withholding taxes on payments to non-residents may be subject to a lower rate, or entirely exempt, if the recipient is located in a country with which Lithuania has entered into a double tax treaty.
Lithuania has over 40 tax treaties in place. Different rates of withholding tax can apply on interest, dividends and royalties, depending on the terms of the agreement with the particular country.
All tax information supplied by Deloitte & Touche (www.deloitte.com). Data as at 1 April 2008.
The Lithuanian litas is pegged to the Euro at a rate of LTL 3.4528= EUR 1. Lithuania joined ERM II in 2004, although the pegged exchange rate remains unchanged Lithuania has no exchange controls. There are no restrictions on spot and forward foreign exchange transactions. Some banks apply lifting fees on transfers between resident and non-resident bank accounts. Cross-border transaction fees are usually applied on a per item basis, although they are sometimes applied on a proportionate basis with maximum and minimum thresholds.
Central Bank Reporting
All transactions between resident and non-resident accounts have to be reported to the Bank of Lithuania. Reporting is done monthly for companies with high volumes of such transactions and quarterly for all others.