When setting up a business in a foreign land, one of the main hurdles to overcome is to thoroughly understand the legal and tax environment in which your venture will be operating. To do so successfully, you might want to avoid solely relying on Google for answers.
For some professional and credible advice, we invited Mantas Juozaitis, an experienced legal advisor and lawyer, to guide you through the topic. Mantas covers foundational tax matters for different legal entities when expanding your current business or opening a newly-launched one in Lithuania.
Let’s start by laying some solid ground with some facts and figures on how the local business landscape is doing.
Within the past decade, the capital Vilnius has been positioned as the up-and-coming tech hub. Favourable conditions in the banking and startup scene attracted some global players and gave rise to many industries, and particularly to two sub-sectors: mobility and fintech.
According to Trading Economics, Lithuanian GDP is expected to reach 57.50 billion by the end of 2020. Compared to some Western countries, it’s not a massive number. Still, having in mind the country’s size, niche industries and steady growth predicted for the coming years—this makes a promising difference if you’re an entrepreneur.
When we look at the ease of doing business score, Lithuania ranks in the 11th position, indicating a 3-point upturn. On top of that, in the last few years, new laws and tax-release initiatives had contributed to encouraging new ventures. These include local corporate tax rate being the third-lowest among the EU members and personal income as the second-lowest tax.
Some say that a company is as good as its team. With over a dozen universities and colleges located in Vilnius, the concentration of highly-educated, English speaking, and yet fair-priced talent is dense. Only within the IT sector, over 21,000 specialists are residing in the capital area.
Taken altogether, Vilnius presents steady development rates and skilled workforce that an entrepreneurial mind would look for. A guide below serves as a general roadmap, considering different types of businesses and their corresponding taxes in Lithuania.
Setting up a business
Mantas: Among the initial decisions an investor needs to make is to determine what type of legal presence in Lithuania is the most suitable for the intended purposes.
One could choose between incorporating a local legal entity, acting through an agent, or branch, which does not have the status of a separate legal entity.
Different forms of legal entities
- Small Partnership (MB) is a limited liability company with no share capital and has reduced accounting requirements. A member of MB may act as a director of MB under the civil contract (as opposed to a labour agreement) and escape an obligation to pay Social Insurance and Health Insurance contributions.
- Private limited liability company (UAB), a traditional limited liability company with a minimal share capital of EUR 2,500.
- Public limited liability company (AB) is a limited liability company with a minimal share capital of EUR 25,000, and its shares can be traded in a public stock exchange.
- Individual enterprise (IĮ) is an unlimited liability company where the owner of the entity is fully liable for all the obligations of the company. There are no share capital requirements. However, the owner can only have one such entity.
- Agricultural Company (ŽŪB) is a limited liability entity intended for the agricultural business. It must have at least 2 members and at least 50% of its income should be generated by agricultural activities.
The taxation of all these entities is rather similar, including general Corporate Income Tax (“CIT”) which is 15% and it applies to all of them. Some may be eligible for special taxation, applicable to the micro-companies. In such a case, they would pay 0% CIT during the first year and only 5% CIT afterwards.
The company is eligible for this special regime if its annual income does not exceed EUR 300,000 and the number of employees is 10 or less. As a Controlling Person of such an entity, one can’t control other companies.
For a foreign investor, a simple private limited liability company (UAB) is usually the best choice since it can be incorporated relatively quickly. Also, share capital is not that big, and liability is separated from that of the shareholders.
There is also an option to incorporate a company or move the existing company to a Free Economic Zone (“FEZ”). This way, a company would pay 0% CIT during the first 10 years and 7.5% CIT for six years afterwards. A company can achieve that if it is a production company and it invests at least EUR 1 million in the FEZ and earns at least 75% of its income from the business conducted in the zone.
Requirements for the service companies are much lighter—the company must invest at least EUR 100,000 in the FEZ, have at least 20 employees in the zone and earn at least 75% of its income from the business conducted there.
If income is earned by a foreign business entity through a permanent establishment in Lithuania, their activity is subject to CIT in Lithuania. This counts as if a company has earned as a Lithuanian legal entity.
Types of taxes
Mantas: Besides the Corporate Income Tax mentioned above, there are other taxes that should be considered by the investors:
- Withholding CIT – income received by foreign shareholders may be subject to a withholding tax in Lithuania. The withholding tax on dividends paid to a non-resident entity is 15% unless the rate is reduced under a tax treaty. Dividends are exempt from CIT if the parent company holds at least 10% of the shares of the payer company for at least 12 months. This exemption does not apply if payments are made to a listed offshore jurisdiction.
- Personal Income Tax – a specific type of income received by foreign individuals from sources in Lithuania may be subject to Lithuanian Personal Income Tax. Such income is: interest, dividends, royalties, rent from real estate located in Lithuania, employment income, sportspeople and artists income, income from the sale of local real estate or movable property, subject to registration in Lithuania, compensation for the infringement of intellectual property. These tax rates vary from 5% to 32%.
- Employment-related taxes – those include Social Security, Health Insurance and Guarantee Fund contributions. The exact rates vary depending on the amount of salary – the tax system is progressive. For example, if an employee received EUR 1000 after taxes, all the taxes paid by the company and the employee will amount to EUR 620. Consequently, the monthly cost of such an employee for the company will be EUR 1620 (tax burden about 38%). If the employee receives EUR 500, the total cost of the employee will be EUR 729 (tax burden about 31,4%). If the employee receives EUR 3000, the total cost of the employee will be EUR 5047 (tax burden about 40,5%).
- Real estate taxes – a progressive tax rate (from 0% to 3% of the property’s value) is applied to individuals owning real estate. Legal entities shall pay the real estate tax at a rate from 0,5% to 3%. Land owned by the companies and individuals is subject to a Land Tax at a rate from 0,01% to 4% depending on the municipality and the condition of the land. For example, in Vilnius city, a Land Tax is 4% for the Land that is neglected by the owner and 0,12% for all the other land.
Legal and tax advisors
Mantas: If you think of establishing a business in Lithuania, you should not rely solely on online research. A trusted advisor is a must. As everywhere, taxation is very complicated and tends to change rapidly. A good advisor may be able to offer an optimal solution and save you a lot of money and headache.
When aiming for smaller to medium size law firms in Vilnius, they are all likely to offer their services at a reasonable price. You should not be afraid to ask for a fixed price for a particular task; that way, you can have peace of mind regarding expenses and quality of advice.
VP: Thank you, Mantas, for taking time off of your busy schedule and helping us come to grips with local taxes. For those looking for legal or tax-related advice, you can get in touch with Mantas here.