business in lt

8/10/2019 Business in LT

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Doing businessin Lithuania

Tax guide 2013


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2 Doing business in Lithuania

Disclaimer

To the best of our knowledge, the information provided in this publication is based on thelaws and other legal acts of the Republic of Lithuania in force as of 1 January 2013Implementation of and changes to the Lithuanian legislation that were recently enacted totackle the effects of the global financial crisis are in a dynamic state. The laws may at timesappear to be internally inconsistent or in conflict with each other, and a number ofquestions may arise regarding interpretation, understanding and application of thelegislation in general, as well as in the context of specific business cases and circumstances.

This publication is for information purposes only.

We recommend the readers to seek professional advice from us, whenever decisions oninvestments or regarding business activities in Lithuania are to be taken.

Prepared by

Ernst & Young Baltic UABSubaiaus St. 7LT-01302 VilniusLithuaniaTel. +370 5 274 2200Fax +370 5 274 [email protected]/lt

Contents

Our tax services

Domestic and international directtaxes

VAT, excise and customs duties Human capital Transfer pricing

Transaction tax structuring and taxdue diligence

EU tax law and practice

Contacts

Jelena Semionova, Partner BalticsTel. +370 5 274 [email protected]

Kstutis Lisauskas,PartnerBusiness Tax Services CSE LeaderTel. +370 5 274 [email protected]

Leonas Lingis,PartnerTel. +370 5 274 [email protected]

Irmantas Misinas,Senior Manager

Tel. +370 5 274 [email protected]

Olga Savuk,Senior ManagerTel. +370 5 274 [email protected]

Egl emaitaityt,ManagerTel. +370 5 274 [email protected]

Aldona Saviit,ManagerTel. +370 5 274 [email protected]

Donatas Kapitanovas,ManagerTel. +370 5 274 [email protected]

Introduction 3 Geography

Population and languageState holidays

Abbreviations

I. Governmental structure and economic climate 4I.1. Governmental structureI.2. Economy

II. Investment environment 6

II.1. GeneralII.2. Regional and universal international trade agreementsLithuania is a signatory to

II.3. Legal regulation of import and export

III. Types of business entities 9IV. Taxation 11IV.1. International issuesIV.2. Tax administrationIV.2.1. Corporate taxesIV.2.2. Value added tax

IV.2.3. Personal income taxIV.2.4. Health insurance contributionsIV.2.5. Social insuranceIV.2.6. Other taxesIV.3. Immigration and permits

Addendum 23


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3Doing business in Lithuania

GeographyLithuania is located on the eastern coast ofthe Baltic Sea with an area of 65,303 sq.km and has common borders with Latvia inthe north (588 km), Belarus in the south-east (653 km), Poland in the south-west(104 km), and the Kaliningrad region ofthe Russian Federation, also in the south-west (249 km). The geographical centre ofEurope is 24 km to the north of Vilnius,which is the capital of Lithuania.

Introduction

AIS Automated Import SystemAES Automated Export SystemAEO Authorised economic operatorAPA Advance pricing agreement (binding ruling)ATA Carnet International customs and export-import documentBAS Business Accounting StandardsCIT Corporate income taxEC European Commission

EEA European Economic AreaEEIG European Economic Interest GroupingEU European UnionFEZ Free economic zonesGDP Gross domestic productIFRS International Financial Reporting StandardsNCTS New Computerised Transit SystemOECD Organisation for Economic Cooperation and DevelopmentPIT Personal income taxRET Real estate taxSAD Single Administrative DocumentSCE European Cooperative SocietySE Societas Europaea (a European company)

TARIC Online customs tariff databaseVAT Value added taxWTO World Trade Organisation

Abbreviations

State holidaysNew Year 1 January

Day of Reestablishment of the State of Lithuania 16 February

Day of Restitution of Lithuanias Independence 11 March

Easter and Easter Monday 31 March 1 April

International Labour Day 1 May

Midsummer Day 24 June

Day of the State (Coronation of King Mindaugas) 6 July

Assumption Day 15 August

All Saints Day 1 November

Christmas days 24 to 26 December

Minsk

St. Petersburg

HelsinkiFinland

BelarusPoland

The climate in Lithuania is maritime /continental. The average annualtemperature is +6.1C, the averagetemperature in January is 5.0C, and theaverage temperature in July is +23.0C.

Population and languageLithuanias population is under 3 million.84% are Lithuanians, 6.6% are Polish, 5.3%are Russians, and 4.1% other.

The official language is Lithuanian.


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I. Governmental structureand economic climate

I.1. Governmental structureThe Republic of Lithuania is an independentdemocratic state. The legal system of theRepublic of Lithuania is based on itsConstitution adopted in 1992 by areferendum. Pursuant to the Constitution,sovereignty shall be vested in the Peopleand shall be exercised either directly orthrough their democratically electedrepresentatives. In Lithuania, the powers ofthe State are exercised by the Seimas(Parliament), the President of theRepublic, the Government, and theJudiciary.

The supreme legislative power is exercisedby the one-chamber Seimas; its 141members are elected for a four-year termby universal, equal, direct suffrage and asecret ballot. The current Seimas waselected in October 2012. The next electionsto Seimas will take place in October 2016.

The President of the Republic of Lithuania

is the head of the state. The Presidentrepresents the Lithuanian state andperforms the functions prescribed to him/her by the Constitution and laws. Thecitizens of the Republic of Lithuania electthe President of the Republic for a five-yearterm by universal, equal and direct suffrage,by means of a secret ballot. The currentPresident of the Republic of Lithuania, H.E.Dalia Grybauskait, was elected in May2009.

In Lithuania, the supreme executive poweris vested in the Government. It is comprisedof the Prime Minister and ministers. Uponthe approval of the Seimas, the President ofthe Republic of Lithuania appoints anddismisses the Prime Minister. Upon theproposal of the Prime Minister, thePresident of the Republic of Lithuaniaappoints and dismisses ministers. Thepresent Government is made up of thecoalition of Social Democrats, Labour party,Order and Justice, Electoral Action of Polesin Lithuania and is headed by PrimeMinister Algirdas Butkeviius.

Since 1 May 2004 Lithuania is a member ofthe European Union (EU), and on 29March 2004 Lithuania joined NATO.

I.2. Economy

Type of economy

After the restoration of independence on 11March 1990, consistent and long-termreforms related to economic liberalisationand privatisation transformed Lithuaniaseconomy from a planned economy to amarket economy.

Lithuanias geographical position in theregion enables the country to be active bothfrom the north to the south and from thewest to the east directions, and to use theadvantages provided by its geographicalposition to the maximum extent possible.The Baltic region is a very importantintersection point for both transport andtrade roads in the middle of the Europeancontinent. Lithuanias geographical position

is convenient for transit; two recognisedtransport corridors of continentalimportance cross the countrys territory.The fact that Lithuania is a sea state with anice-free Klaipda port that has a moderncontainer terminal is also very important forthe development of transit. The Republic ofLithuania has a wide network of motorwayswith a high quality maintenance and repairsystem.

Lithuanias strategic objective to ensure the

endurance of its achievements made duringthe independence period has been achievedby joining the EU and NATO. In the BalticSea region, Lithuania is establishing its roleas one of the leaders in the region, inparticular by facilitating EU and NATOpolicy-making in regard to its easternneighbours, thus enhancing the securityand stability in the entire region.

Key economic indicators

Some of the key economic indicators are

presented in the Addendum.

The central bank and the commercialbank sector

The Bank of Lithuania is the central bank ofthe Republic of Lithuania. Its main purposeis ensuring price stability. The Bank ofLithuania is independent from theGovernment of the Republic of Lithuaniaand other state institutions. The Bank ofLithuania performs the following functions:it issues the money of the Republic ofLithuania; defines and implementsmonetary policy; establishes a regulatorysystem for the litas exchange rate andannounces the official litas exchange rate;manages and uses foreign reserves of theBank of Lithuania and disposes of them;performs the functions of the statestreasurer; issues and cancels licenses tocredit institutions of the Republic ofLithuania, as well as issues and withdrawspermits for establishing branches andrepresentative offices of foreign creditinstitutions, supervises their activities andestablishes the principles of financial

accounting and accounting proceduresapplicable to them; supervises the financialsecurities market; supervises credit issuersand consumer intermediaries; creates andmanages the inter-bank transfer system andestablishes requirements for theparticipants of the inter-bank transfersystem; collects data on money incirculation and banks, payment balance,Lithuanias finances and related statistics,implements standards applicable to thecollection, accountability and availability of

such statistics, and prepares the paymentbalance of the Republic of Lithuania.Currently 8 commercial banks hold licensesfrom the Bank of Lithuania; there are 12foreign bank branches and 2 foreign banksrepresentative offices, as well as 268 EUbanks providing cross-border services in theRepublic of Lithuania without a branch.Besides, the Central Credit Union ofLithuania and 77 credit unions areoperating in Lithuania.

Lithuania anticipates joining the Euro zone

in 2015, which will lead to a transfer ofsome of the above-mentioned functions tothe European Central Bank.


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Insurance and insurance supervisionsystem

Supervision of the insurance business in theRepublic of Lithuania is exercised by theBank of Lithuania. Its main objective is toensure protection of the rights and interestsof the insured, beneficiaries and thirdparties by exercising supervision of theparticipants of the insurance market. TheBank of Lithuania reviews documents,issues licenses for insurance activities aswell as permits to insurance companies andinsurance brokers, controls the complianceof the insurance market participants withlaws and other legal acts, regularly inspectsthe financial capacity of insurancecompanies and issues legal acts regulatingthe activities and supervision of insurancecompanies and insurance brokers. Currently25 insurance companies including 10 lifeassurance and 15 non-life assurancecompanies are operating in Lithuania. Thereare also 15 branches of foreign insurancecompanies in Lithuania, besides, a large

number of foreign insurance companieshave registered activities in Lithuaniawithout formal establishment.

Currency

The official currency in the Republic ofLithuania is the litas (1 litas is equal to 100Lithuanian cents). From 1 April 1994through 1 February 2002, the litas waspegged to the US dollar. Since 2 February2002, the litas is pegged to the euro and

the official exchange rate is 3.4528 litas for1 euro. The decision to peg the litas to theeuro was made considering the fact thatLithuanias economy was becomingincreasingly related to the economy of theEU.

All litas issued into circulation by the Bankof Lithuania are backed 100% by gold andforeign currency reserves of the Bank ofLithuania. Litas are exchanged to theanchor currency and the anchor currency isexchanged to litas at a fixed rate without

any restrictions.

The Bank of Lithuania exercises anexclusive right to put money into circulationor withdraw it from circulation. The Bank ofLithuania establishes the nominal value ofmoney to be put into circulation, itsidentification, security and validity marks,arranges for banknote printing and coinminting as well as their storage. Banknotescurrently in circulation include 10, 20, 50,100, 200, and 500 litas banknotes, whilecoins in circulation include 1, 2, and 5 litascoins as well as 1, 2, 5, 10, 20, and 50cents coins.


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II. Investment environment

II.1. General principlesThe legal system of the Republic ofLithuania recognises the generally acceptedprinciples of the legal regulation ofinvestments. The principle of equaltreatment means that both Lithuanian andforeign investors are subject to equalbusiness conditions pursuant to the Law onInvestment as well as other legislation. Theprinciple of equal protection means that thelaws of the Republic of Lithuania protectrights and lawful interests of both local(Lithuanian) and foreign investors.Attention should also be paid to the factthat the Republic of Lithuania applies theprinciple of free access to all sectors ofeconomy. Foreign investment is permitted inall lawful commercial-economic activities,subject to the restrictions prescribed by thelaws of the Republic of Lithuania. The Lawon Investment establishes that foreigninvestment is prohibited in the areasguaranteeing state security and defence(except for the investments from economic

entities compliant with the European andTrans-Atlantic integration criteria selectedby Lithuania, subject to the State DefenceCouncils consent). Certain legalrestrictions are applied to foreigninvestment with regard to acquisition ofland into ownership.

During the negotiations for EU accession,Lithuania achieved a 7-year transitionperiod (which ended in 2011) with respectto the acquisition of agricultural land by

foreigners. However, following the requestlodged by Lithuania, the EC decided toextend the period to the end of June 2014.

International treaties

The Republic of Lithuania has concluded 50bilateral international treaties concerningpromotion and mutual protection ofinvestments. Usually such treaties establisha more favourable investment treatment ona mutual basis. It should be noted that mostof the treaties on investment promotion andprotection do not provide for an obligationof the Republic of Lithuania to expandtreatment, incentives or privileges in

respect of regulated investments providedfor in a common market, customs union,economic union, free trade zone or aregional economic development agreementthat the country belongs to or may belongto in the future, or to expand the provisionsof a current or future agreement regardingdouble taxation with a third country.Moreover, the Republic of Lithuania hasalso concluded 48 bilateral treaties onavoidance of double taxation of income andcapital and prevention of tax evasion. Thesetreaties provide for certain tax benefits for

foreign investment in the Republic ofLithuania.

Investment types

The Law on Investment provides for thefollowing types of foreign investment in theRepublic of Lithuania:1. Establishment of an undertaking,

acquisition of capital or a part thereof ofan undertaking registered in theRepublic of Lithuania

2. Acquisition of any type of securities3. Building, acquisition of fixed assets or

increase in their value4. Lending funds or other assets to

undertakings where the investor owns apart of the capital entitling it to controlthe undertaking or exert a considerableinfluence upon it

5. Conclusion and implementation ofconcession, leasing contracts andcontracts of partnership between thegovernment and the private sector

Investment protection and

guarantees

The laws of the Republic of Lithuaniaprotect investors rights and lawful interests.The laws of the Republic of Lithuaniaprovide that an investor has the right tomanage, use and dispose of an object ofinvestment and, upon payment of the taxesprescribed by the laws of the Republic ofLithuania, to convert the profit owned byhim into foreign currency and transfer it

abroad without any restrictions. Damageinflicted upon the investor by unlawfulactions of state or local authorities and their

officials are compensated according to theprocedure established by the laws of theRepublic of Lithuania.

Foreign investment is subject to protectionin case of expropriation, i.e. an object ofinvestment may be seized (expropriated):

Only according to the procedureprescribed by laws

Only for public needs Only for just compensation

Foreign investors are granted the right to

legal protection in case of violation of theirrights and lawful interests. Investmentdisputes between foreign investors and theRepublic of Lithuania are resolved uponagreement of both parties, by the courts ofthe Republic of Lithuania, internationalarbitration institutions or other institutions.In case of investment disputes, foreigninvestors have the right to directly addressthe International Centre for Settlement ofInvestment Disputes. The Law onInvestment provides for the types of

investment incentives; however, suchinvestment incentives are only applicable tothe extent they are not in conflict with theEU legislation regulating state aid.

II.2. Regional and universalinternational trade agreementsLithuania is a signatory to

As of 1 May 2004 upon Lithuaniasaccession to the EU, Lithuania has takenover the EU contractual relations with third

countries and international organisations.Lithuania has also terminated all the freetrade agreements concluded before themembership in the EU in order to guaranteeimplementation of unified free trade.

Lithuania is a member of the WTO.

II.3. Legal regulation of importand export

Principles of customs regulation

Being a member of the EU Lithuania hasharmonised its customs legislation inaccordance with the EU customs law.


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Membership in the EU implies applicationof common rules at external borders ofthe union and prohibits applying customsduties or quantitative restrictions onimport and export between MemberStates. The common rules comprisecommon tariff and all aspects of tradepolicy, such as preferential trade, healthand environmental controls, the commonagricultural and fisheries policies as wellas integrated external trade policymeasures. Membership in the EU and inthe World Customs Organization prevents

Lithuania from introducing discriminatoryinternal taxation or licensing policies andlimits Lithuanias possibility toindependently introduce customs duties orquantitative restrictions on import andexport.

General rules on import and export

procedures

As a general rule, goods imported intoLithuania from third countries or exported

out of the country should be declared byproviding customs with the SingleAdministrative Document (SAD). Currently,there are no duties on goods exported fromthe EU, although they can be introduced inresponse to the market conditions.

Usually, customs duties become payableupon import of goods into the EU, exceptwhen goods originate in a preferencecountry or qualify for temporary suspensionof customs duties. Customs duties should

not be paid for the goods, which are undertransit or other customs procedure and arenot released for free circulation. Exemptionfrom customs duties on import is providedto such goods as personal belongings ofindividuals who are changing their place ofresidence and moving from a third countryto the EU, items imported in the case ofmarriage, parcels of a low value for non-commercial purposes, equipment related toeducation, science and culture, goodsintended for charity and philanthropicorganisations as well as items imported for

trade promotion, etc.

Import of goods to Lithuania is also subjectto other taxes, such as 21% of VAT andexcise duties applied to ethyl alcohol oralcoholic beverages, processed tobacco,energy products and electricity.

Summarised information on tariff and non-tariff regulations (e.g., licenses) applied onimports and exports to the EU is provided inthe TARIC database, which is accessible on-line. Lithuania has implemented a databasesimilar to TARIC named LITAR, which inaddition provides data on VAT and excise

duties to be paid upon the import of goodsto Lithuania. To apply the databases, thecode of the Combined Nomenclature of thegoods imported or exported should beentered.

Risk-based customs control

Customs administration exercises modernrisk analysis methods and audit basedcontrols to control the cross-border flow ofgoods. The purpose of using risk

management is to aim Customs controlactivities at risks rather than at randomlyselected goods or declarations. Customsauthorities should complete the risksanalysis prior to arrival of the goods andselect goods or economic operators to bechecked based upon commonly agreedstandards, risk criteria or common prioritycontrol areas. The measures that theeconomic operators themselves havetaken to prevent risks in their businessprocesses should also be taken into

account.

Pre-arrival and pre-departure

declaration

In order to enable proper risk analysis andappropriate risk-based controls, anobligation for economic operators toprovide pre-arrival and pre-departureinformation to customs authorities for allthe goods brought into or out of theterritory of the EU is in force. Pre-arrival andpre-departure information should be

submitted electronically as summary entryor exit declarations. Paper-baseddeclarations will be permitted only in certain

exceptional circumstances (in cases whenthe electronic system of the customs or ofthe person submitting the pre-arrivaldeclaration is out of order). The time limitfor lodging a summary declaration shoulddepend on the means of transport crossingthe border (e.g., in the case of railwaytransport, the entry summary declarationshould be lodged at least 2 hours prior toarrival at the customs office of entry).Summary declarations will not be requiredfor such goods as letters, postcards,electrical energy, goods entering by

pipelines, goods contained in travellerspersonal luggage, goods covered by ATACarnets, etc.

Electronic customs

To facilitate import or export proceduresand to reduce compliance costs as well asthe time spent for customs clearance, theEuropean Parliament and the Council haveintroduced a decision on a paperlessenvironment for customs and trade.

Lithuania has already implemented the NewComputerised Transit System (NCTS), the1st phase of the Automated Import System(AIS) and the 2nd phase of the AutomatedExport System (AES). AES enables the fullcontrol of export operations via theelectronic exchange of information onexports between customs offices replacingthe paper copy No 3 of the exports return.

From 1 January 2008 it is possible tosubmit customs declarations in Lithuania

electronically, without providing theCustoms authorities with paper documents;however, documentary evidence forcustoms procedures should still be retainedfor 10 years.

In 2011 full implementation is expected ofthe EU Customs Information Portal foreconomic operators to access informationrelated to import and export requirementsand Single Electronic Access Point to enableeconomic operators to lodge electronicallyall the information required by customs and

non-customs legislation for EU cross-bordermovements of goods at once.


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Authorised economic operator (AEO)

Lithuania, as well as other Member States,should grant the status of AEO to anyeconomic operator that meets the commoncriteria relating to the operators controlsystems, financial solvency and compliancerecords. AEO status confers the right tobenefit from the simplification of customscompliance, customs controls or both. Thestatus once granted by one Member State,should be recognized by the other MemberStates. If the economic operator performsits customs activities or a part of them inLithuania, the application for AEO statuscan be lodged to the Customs Departmentof Lithuania from 1 January 2008. As of 1January 2013, AEO status certificates wereissued to 22 companies established inLithuania.

II. Investment environment


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PrinciplesThe principle of personal freedom toengage in economiccommercial activitiesmeans that natural persons in Lithuaniamay engage in economic activity with orwithout incorporating a company. All thelegal entities (except for personalcompanies and partnerships) are limitedliability legal persons liable for theirobligations by the assets owned by ortrusted to the company, thus ensuring theprinciple of separation of the assets of alegal entity from the assets of itsincorporators and owners. The principles offreedom of companies to establish branchesand representative offices and enter intoassociations are also ensured in Lithuania.

The following entities with the status oflegal persons may be presently establishedin the Republic of Lithuania:

Public or private limited liability company Individual (personal) enterprise Partnership (general or limited)

Micro company Professional law partnership Agricultural company Co-operative company European company European economic interest grouping European co-operative company Public legal entities (state enterprise,

municipal enterprise, etc.)

Registration of entities

All entities together with all other legalpersons are registered with a unifiedRegister of Legal Persons of the Republicof Lithuania administered by the StateEnterprise Centre of Registers. A legalentity registered with the Register of LegalPersons is issued a certificate of a legalperson of an established form and allocateda legal persons code.

Public and private limited liability

companies

Public and private limited liability companies(hereinafter jointly referred to ascompany) are enterprises the authorised

III. Types of business entities

capital of which is divided into shares. Theyare limited liability private legal persons andtheir assets are separated from theirshareholders assets. The company is liableunder its obligations only by its own assets.Shareholders are liable under the companysobligations only within the amount, whichthey must pay for shares. The authorisedcapital of a public company may not belower than LTL 150,000 (approximatelyEUR 43,000). Its shares may be distributedand traded publicly. The authorised capitalof a private company may not be lower than

LTL 10,000 (approximately EUR 2,900). Itmay have less than 250 shareholders.

The general meeting of shareholders is thesupreme body in a company; its othermanagement bodies are the supervisorycouncil, the board and the manager. Themandatory bodies of a company are thegeneral meeting of shareholders and themanager.

Personal enterprises

An individual enterprise is owned by a singlenatural person. The owner of an individualenterprise may not own another individualenterprise. An individual enterprise is alegal person of unlimited liability and itsassets are not separated from its ownersassets. The owner is liable for theobligations of the enterprise with all of hisproperty. The Civil Code, the Law onIndividual Enterprises and other laws, aswell as the regulations of the individual

company regulate the establishment,liquidation and activities of individualenterprises.

Partnerships

Partnerships may be general and limited. Ageneral partnership is an enterprise ofunlimited liability established on the basis ofa partnership agreement by joining theproperty of several natural or legal personsinto the joint and several ownership in orderto engage into economiccommercial

activities with the common name of thefirm.

The limited partnership is also a legalperson of unlimited liability; however, itsassets are not separated only from theproperty of the general members thereof.The general members of the limitedpartnership are jointly and severally liablewith all of their property for the obligationsof the limited partnership, also after itsliquidation, whereas limited members areliable only for the share of their propertythat is transferred for the joint activity ofthe partnership under the agreement.

Micro company

A micro company is a limited liability legalentity that can only be established bynatural persons; the number of founderscan be up to 10 persons. The microcompany is intended to promote smallbusiness; therefore, in order to establish amicro company, there is no statutory capitalrequirement, also, contributions in kind arepermitted.

State and municipal enterprises

State or municipal enterprises are limitedliability legal persons the assets whereofare owned by the Republic of Lithuania or arespective municipality. State and municipalenterprises manage, use and dispose of theenterprise assets by the right of propertytrust. The purpose of state and municipalenterprises is provision of public services,manufacturing products and otheroperations in order to meet public interests.

State and municipal enterprises are publiclegal persons.

Cooperative companies

A cooperative company is an enterpriseestablished by natural and/or legal personsaccording to the procedure prescribed bylaws in order to satisfy the economic, socialand cultural needs of its members. Itsmembers contribute funds to form itscapital, share risks and benefits accordingto the turnover of the goods and services of

its members with the cooperative companyand they are actively involved in themanagement of such company.


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Agricultural companies

An agricultural company is an enterpriseestablished by natural and legal personsunder an incorporation agreement, whereincome from agricultural production andservices rendered to agriculture constituteover 50% of the total income from salesduring the business year. There are twogroups of persons participating in thecompanys management: members andstakeholders. An agricultural company musthave at least 2 members. An agriculturalcompany is a limited liability legal person. Itmay be founded by Lithuanian and foreignnatural and legal persons. An agriculturalcompany members meeting is the supremebody in the company. An agriculturalcompanys management bodies are theboard and/or the administration.

European company

A European company (SE or SocietasEuropaea) is a limited liability legal person

established within the territory of theCommunity as a public limited liabilitycompany. Its purpose is to merge or form aholding of companies governed by the lawof different Member States. SE with theregistered office in Lithuania shall besubject to the legal regulations of theRepublic of Lithuania mutatis mutandisregulating the activities of public limitedliability companies, unless stipulatedotherwise in specific legislative acts.

The subscribed capital of an SE may not beless than kEUR 120. Lithuanian public andprivate limited liability companies mayincorporate an SE. An SE comprises ageneral meeting of shareholders, asupervisory council (or another supervisingbody), a board and a manager. Theobligatory bodies are the general meetingof shareholders and the manager.Employees of an SE are entitled toparticipate in the management of the SEand in adoption of decisions vital to theoperations of the company.

European economic interestsgrouping (EEIG)

EEIG is an unlimited liability private legalperson. The purpose of EEIG is to facilitateor develop economic activities of membersand to improve or increase the results ofthose activities: an EEIG may not carry outprofessional activities in respect of thirdpersons, hold shares of any kind in anotherundertaking, exercise, directly or indirectly,a power of management or supervision overits members activities, and employ morethan 500 persons.Both private and public legal persons as wellas other organisations with the registeredoffice within the territory of the Community,and private persons engaged in industrial,commercial, craftsmanship and agriculturalactivities or provision of professional orother services in the EU may incorporate anEEIG. At least two promoters operating indifferent EU Member States must establishan EEIG. The bodies of EEIG are the meetingof members and the manager.

European cooperative society (SCE)

A cooperative society may be set up withinthe territory of the EC in the form of an SCEon the conditions and in the manner laiddown in the regulations set forth in the legalacts of EU and Lithuania. An SCE has as itsprincipal object the satisfaction of itsmembers needs and/or the development oftheir economic and social activities, inparticular through the conclusion of

agreements with them to supply goods orservices or to execute work of the kind thatthe SCE carries out.

An SCE may be formed by natural or legalpersons. The subscribed capital cannot beless than EUR 30,000. The subscribedcapital of an SCE is divided into shares. Amember of an SCE is liable only to theamount he has subscribed, unless otherwiseprovided by the statutes of the SCE whenthe SCE is formed. The bodies of the SCEare the general meeting of members and

either a supervisory body and amanagement body (two-tier system) or anadministrative body (one-tier system)

III. Types of business entities

depending on the form adopted in thestatutes.

Branches and representative offices

of enterprises

In Lithuania, enterprises (including foreignenterprises) may establish their branchesfor performing some elected or all functionsas well as representative offices which havethe right to represent and protect theinterests of the legal person, to concludeagreements and perform other actions on

behalf of the company that established therepresentative office, to execute export andimport operations, but only between therepresentative office and foreign legalpersons or other organisations whichestablished the representative office orbetween such representative office andenterprises, institutions or organisationsrelated to it. It should be noted that neitherthe branch nor the representative office hasthe status of an independent legal person.To implement certain aims, several

enterprises may also join into associations.


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IV. Taxation

IV. Taxation

IV.1. International issues

Treaties on avoidance of double

taxation

Lithuania has concluded approximately 50applicable bilateral treaties on avoidance ofdouble taxation. All the treaties are basedon the OECD/UN model agreement:

1 Armenia2 Austria3 Azerbaan4 Belarus5 Belgium6 Bulgaria7 Canada8 China9 Croatia10 Czech Republic11 Denmark12 Estonia13 Finland

14 France15 Georgia16 Germany17 Greece18 Hungary19 Iceland20 India21 Ireland22 Israel23 Italy24 Kazakhstan25 Kirghizstan

26 Korea

27 Latvia28 Luxembourg29 Macedonia30 Malta31 Mexico32 Moldova33 Netherlands34 Norway35 Poland36 Portugal37 Romania38 Serbia39 Russian

Federation40 Singapore41 Slovak Republic42 Slovenia43 Spain44 Sweden45 Switzerland46 Turkey47 Ukraine48 United Kingdom49 United States50 Uzbekistan

Investment and tax benefits

Free economic zones (FEZ)

Lithuanian and foreign enterprises may

develop their business in FEZ. FEZ

enterprises may enjoy the following

incentives:

If capital investments reach the amount

of EUR 1 million, and at least 75% of the

companys income during the tax periodthat the limit of EUR 1 million was

reached in consisted of income from

manufacturing, processing, warehousing

activities performed within the zone,from wholesale of goods warehoused

within the zone or provision of services

related to the activities carried out on

the territory of the zone, the company is

granted exemption from profit tax for

the first 6 tax periods (years), whereas

in the subsequent 10 tax periods

(years) it is subject to a 50% reduction

in corporate income tax

Dividends earned by investors from

investments into a FEZ are exempted

from profit tax

Exemption from VAT on goods and

services supplied in a FEZ, and

exemption from real estate tax may be

applicable irrespective of the amount of

the investment in a FE

Small enterprises

An enterprise with gross income below LTL

1,000,000 (approximately EUR 290,000)

during a tax year and with the average

number of employees not exceeding 10 has

the right to apply a 5% corporate income tax(the standard rate is 15%). A non-profit

company with income from business

activities not exceeding LTL 1 million

(approximately EUR 290,000) per tax year

has the right to apply zero corporate income

tax rate to the amount of LTL 25,000

(approximately EUR 7,000) and a 15%

corporate income tax rate to the remaining

amount of profit.

Shipping entities

Income received by a shipping entity from

international carriage by sea-going vessels

and activities directly related thereto may

be taxed with a fixed-rate corporate income

tax in case it meets the requirements

defined in the provisions of the Law on

Corporate Income Tax (Law on CIT). After

a shipping entity acquires the right and

chooses to pay a fixed-rate corporate

income tax, the chosen rate shall be applied

for a period not shorter than until 31

December 2016.

Fixed corporate income tax is calculated

with respect to net tonnage of the fleet by

applying the 15% corporate income tax rateto the tax base without any deductions.

Scientific research and experimental

development

When calculating corporate income tax, the

scientific research and experimental

development costs, except for depreciation

or amortization costs of fixed assets, could

be deducted three times from income for

the tax period during which they were

incurred, if the performed scientific

research and/or experimental development

works are related to the usual or intended

activities of the entity that generate or will

generate income or economic benefit.

Relief from corporate income tax for

investments

Since 2009 the provisions of the Law on

CIT allow reducing the taxable profit (up to

50%) by expenses which were actually

incurred in the acquisition of investment

assets. If the expenses to acquireinvestment assets exceed 50% of the

taxable profit, the part of expenses

exceeding 50% can be carried forward for

the next four taxable periods. This relief

may be applied to the expenses which were

incurred during the taxable periods of

2009-2013.

The investment project means investments

into certain categories of fixed assets,

which are required for manufacturing or

supply of new products (services),increasing the production volumes,

implementation of a new process of

production (supply of services), essential

changes of an existing process (part of the

process), implementation of new

technologies, which are protected by

international patent law. The investments

with the intention to replace the existing

fixed assets with similar ones cannot be

treated as an investment project.

Income earned by a Lithuanian entitythrough its permanent establishment

Starting from the year 2010 an exemption


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method is applied instead of a creditmethod in order to avoid double taxation oncertain income earned by a Lithuanianentity through its foreign permanentestablishment, i.e. income from businessactivity earned through a Lithuanian entitysforeign permanent establishment is notattributable to the entitys tax base if thebelow criteria are met:

Permanent establishment is establishedin a member state of the EuropeanEconomic Area (EEA) or in a countryLithuania has an applicable treaty on

avoidance of double taxation with; and This income is subject to CIT or an

equivalent tax in the respective country

Other incentives and reliefs

The majority of municipalities in Lithuaniaoffer land tax reliefs and in some casesprovide financial aid to businesses forcreating new jobs.

The real estate tax in Lithuania varies from

0.3 to 1% of the taxable value (startingfrom the year 2014 up to 3%).Municipalities may apply the tax rate withinthese limits.

Enterprises with 40% or more employeesbelonging to target groups (disabledpeople, long-time unemployed, etc.) maybenefit from 0% corporate income tax rateand other tax incentives.

Entities engaged in agricultural activities

earning more than 50% of income fromthese activities, are subject to taxation at0% corporate income tax rate.

Accounting and audit

Apart from certain exceptions applied tosmall and/or unlimited liability enterprises,accounting must be based on the accrualprinciple. The Bank of Lithuania requiresthat banks in Lithuania should presentaccounts according to the IFRS. From 1January 2004 the majority of the Business

Accounting Standards (BAS) (based onIFRS and the EU directives) came into forceand apply to most business entities.

Consolidation is mandatory starting from 1January 2004.

Enterprises may choose to present accountsaccording to IFRS or BAS. Enterpriseswhose securities are traded in regulatedmarkets shall present financial statementsaccording to IFRS.

Audit is mandatory for all public and privatecompanies meeting two of the three belowlisted criteria:

Revenues from sales exceeded LTL

12,000,000 (approximately EUR3,500,000) over the past accountingyear

Over the accounting year, the averagenumber of employees was at least 50

Assets on the balance sheet exceededLTL 6,000,000 (approximately EUR1,700,000)

IV.2. Tax administration

It is necessary to follow all the applicable

Lithuanian requirements for accounting andbookkeeping of other enterprisedocuments. Documents must be kept inLithuanian. If necessary, documents may bekept in two languages. Documents mustcontain certain mandatory data of theparties to the transaction. Invoicingprocedures have been harmonised with theEU directives: electronic invoices may beused, the buyer may issue invoices, and afavourable procedure of invoice storage hasbeen introduced. If mandatory data is

missing, such documents are notrecognised for tax purposes.

Starting from the year 2012 tax payershave a right to apply for a binding ruling orfor an advance pricing agreement (APA). Ifthe tax administrator, after analysis ofapplication, decides to approve theproposed application of the tax legislationprovisions to the forthcoming transaction,then the tax administrator undertakes toadhere to the ruling or APA, when reviewingwhether this tax payer correctly charges,

reports and pays taxes as defined in theruling or APA.

The ruling or the APA shall be applicable forthe period no longer than 5 years.

Fines currently applicable in case ofviolations are 10 50% of the amount of taxunderpayment. It is notable that a taxdispute may be a long and expensiveprocess, as it usually requires judicialproceedings.

Transactions with associated persons

and price adjustment

Tax laws are strict about transactions withassociated persons located both inLithuania and abroad. Therefore, it isadvisable to maintain arms length businessrelations based on market prices.Lithuanian entities, which (i) under the lawsubmit annual financial statements and (ii)the sales proceeds of which exceed LTL10,000,000 (approximately EUR2,900,000) in the year prior to the yearwhen the transaction with associatedparties took place, are obliged to keep

documentary evidence of the transactionvalue. The Tax Inspectorate may recalculatethe tax base and redefine the transactionitself for tax purposes, if it has grounds tosuspect intentional tax evasion. On 1January 2004 OECD guidelines for transferprices were adopted.

IV.2.1. Corporate taxes

Residents and registration of

taxpayers

Both Lithuanian and foreign taxable entitiesregistered in Lithuania must pay taxes inLithuania on profits and capital gainsearned both in Lithuania and abroad.Withholding taxes paid abroad and notexceeding the tax payable in Lithuania onforeign income may be credited. Moreover,reliefs may be applied according toapplicable international treaties.

Enterprises without a residence in Lithuania(non-residents) are subject only to a few

taxes and only in regard to certain incomeoriginating in Lithuania (see chapterWithholding taxes).

IV. Taxation


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An enterprise is considered to be a residentof Lithuania if it was incorporated andregistered in Lithuania. An enterpriseregistered with the Register of LegalPersons is automatically registered as ataxpayer, health insurance and socialsecurity contributions payer within 2business days. After receiving theannouncement from the district state taxinspectorate about the entitys registrationwith the Register of Tax Payers, a specialform must be filled in and submitted to thedistrict state tax inspectorate regarding

additional information about the entity andits structural subdivisions including theinformation regarding the entityspermanent establishments abroad (if any).An entity registered with the Register of TaxPayers is provided with a tax payeridentification number.

Any changes in the data presented uponregistration of the enterprise must bereported within 5 business days.

Permanent establishment

A foreign enterprise is considered to have apermanent establishment in Lithuania if:

It is permanently engaged incommercial activity in Lithuania or

It is engaged in commercial activitythrough a dependent agent or

It uses a construction site, building,construction, equipment, etc., or

It uses equipment or construction,including bores or ships, for exploration

and extraction of natural resources

Usually permanent establishments aresubject to the same tax requirements asother enterprises with certain exceptions(deduction of administrative expenses ofthe head office, etc.). No tax is applied onrepatriated profit of branches (permanentestablishments).

Starting from the year 2010 an exemptionmethod is applied instead of a creditmethod in order to avoid double taxation on

certain income earned by a Lithuanianentity through its permanent establishment,i.e. income from economic activity earned

through Lithuanian entitys permanentestablishment is not attributable to theentitys tax base if the below criteria aremet: The permanent establishment is

established in a Member State of EEA orin a country Lithuania has an applicabletreaty on avoidance of double taxationwith and

This income is subject to corporateincome tax or another similar tax in therespective country

Having in mind that this income would notbe subject to corporate income tax inLithuania, a Lithuanian entity, whilecalculating its annual payable corporateincome tax in Lithuania, will not be able todeduct the amount of corporate income taxpaid by its permanent establishment in aforeign country. In addition to this, since thecorporate income tax payable in a foreigncountry by the permanent establishmentwould be calculated taking into account itsexpenses incurred from the economic

activity, such expenses would be treated asnon deductible expenses for the Lithuanianentity.

Taxation of partnerships and personal

enterprises

Partnerships and personal enterprises areconsidered taxpayers and are taxed at thesame rates as companies. Partnerships arenot transparent for tax purposes.

Financial and tax year

The financial and tax year coincide with thecalendar year. However, a different tax yearmay be established taking into account thepeculiarities of the taxpayers activity. Ataxpayer, upon the consent of the TaxInspectorate, may have a different12-month tax year, if this is necessary dueto the seasonal nature of activity or if thegroup, to which the taxpayer belongs,applies a tax year different from a calendaryear.

Tax rate

The standard profit tax rate applied to legalentities is 15%. The available tax benefitsand reliefs are listed above, in theInvestment and tax benefits chapter.

Calculation of taxable profit

General principles

Taxable income is calculated by subtractingnon-taxable income (e.g., receivedinsurance payments, forfeits, etc.),deductible expenses and deductibleexpenses of limited amount from theaccounting profit.

Expenses may be deducted if they areincurred in the ordinary business activityand are necessary to earn revenues orreceive economic benefit provided thatdocumentary evidence is presented.

Starting from the year 2010, expenses

incurred for the benefit of employees couldbe attributed to deductible expenses forcorporate income tax purposes if suchbenefits are subject to personal income tax.Deductible expenses of limited amount areallowed only if they do not exceed a certainlimit and consist of the following:depreciation and amortisation, businesstrips, representation expenses, provisionsfor bad debts, expenses incurred for thebenefit of employees or their familymembers which are not subject to personal

income tax, and similar. Sponsorship(except payments in cash exceedingapproximately EUR 9,000 to one recipientof sponsorship) reduces taxable profittwice, provided it does not exceed 40% ofthe taxable profit. Scientific research andexperimental development costs can bededucted three times from income in thetax period during which they were incurred,if the scientific research and/orexperimental development worksperformed are related to the ordinary orintended activities of the entity that

generate or will generate income oreconomic benefit.


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IV. Taxation

Non-deductible amounts include dividends,limited deductions in excess, costs incurredoutside of the usual business operations orinappropriately documented. Lossesincurred in transactions with relatedpersons may not be deducted from taxableincome if the market price was not applied.

Starting with the year 2010, bonuses paidto the members of Board of Directors orSupervisory Board are attributed to tax-deductible expenses.

Payments to tax havens may be deductedonly in case the Lithuanian enterprise canprove that certain conditions evidencing theeconomic basis of the transaction were met.

Other taxes (e.g., social insurancecontributions, real estate tax, etc.) are alsodeducted from taxable income.

Thin capitalization

Interest is generally deductable on

accruals basis, if the borrowing financesthe business and is at arms length.Following the Lithuanian thincapitalization rules, interest onshareholder and related party loans isdeductible; however, interest oncontrolled debt as well as currencyexchange losses on controlled debt arenot deductible. A controlled debt existswhen there is a debt to a controllinglender, and debt to equity ratio exceeds4:1 (only the exceeding part is treated as

controlled debt). The ratio is computedas of the end of the relevant tax year, butthe equity does not include the result forthat year. A controlling lender is one thatcontrols, directly or indirectly, eithermore than 50% of the shares of theborrower alone, or more than 10% aloneand more than 50% together with relatedpersons. Members of the group of acontrolling lender are also controllinglenders. If the borrower can prove thatthe borrowing occurred under armslength conditions, thin capitalization

rules will not be applied.

Depreciation and amortisation

The object of depreciation (amortisation)may be a certain unit of assets or a groupof identical units. Three depreciationmethods are applied: straight-line,accelerated and production (the lattertwo are applicable only to certain types ofassets).

The selected depreciation method isapplied to all the assets of the same typeand may be changed only under certaincircumstances. The rates depend on theuseful life of the asset and may notexceed the maximum rates established bythe laws (minimum rates are notestablished):

Intangible non-current assets also includethe amounts directly paid for the higher orcollege-level education and/or qualificationof individuals, who are not employed in thatentity provided that such education and/orqualification is required by the entity toearn income. Only educationalestablishments of EEA states and foreigncountries, which have concluded treatiesfor the avoidance of double taxation with

Lithuania, will qualify for the CIT purposes.The entity shall begin to amortize theexpenses upon employment of the said

individual; the amortization period is 4years.

Losses

Losses for the tax period, except for thelosses incurred as a result of disposals ofsecurities and/or derivative financialinstruments, may be carried forward for anunlimited period of time, but such carryingforward shall be terminated if the entityceases its activities that gave rise to thelosses except for reasons beyond its

control. Losses incurred as a result ofdisposal of securities and/or derivativefinancial instruments may be carriedforward no longer than for 5 consecutivetax periods, starting from the tax periodfollowing the tax period during which thelosses were incurred. This limitation doesnot apply to financial institutions. In case oftransfer or reorganization of an entity, taxlosses, which were incurred by the acquiredentity during the accounting period, can becarried forward by the acquiring entity if

certain criteria are met.

Group loss relief

Based on the new provisions of theLithuanian Law on CIT applicable since2010, an entity is entitled to transfer thetax losses incurred starting from the year2010 and the following tax periods toanother Lithuanian group entity and reducethe taxable profit if certain criteria are met.A foreign entity is allowed to transfer its

losses to a Lithuanian entity if the followingconditions are met: The foreign entity is treated as a

resident for tax purposes in a memberstate of the EU

The foreign entity is not allowed to carryforward its losses in accordance with thelegislation in the country of residence

Tax losses transferred were calculated(recalculated) under the provisions ofthe Lithuanian Law on CIT

Capital gains

Capital gains and losses are calculated bysubtracting the acquisition costs and relatedexpenses from sales proceeds.

Used forordinarybusiness

Used forscientificresearch andexperimentaldevelopment

Type of asset Time (year)

Intangibleassets

315 2-15

New buildingsand premises

8 8

Otherbuildings andpremises

15-20 15-20

Computerequipment

3 2

Vehicles 4-10 4-10

Machinery andequipment

5-15 2-15

Other assets 4-6 2-6


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Gain (loss) received from other sourcesthan transfer of securities and derivativefinancial instruments is viewed as operatingprofit or loss and taxed according to therespective procedure. Losses from disposalsof securities and derivative financialinstruments may be carried forward for 5years to offset gains derived from disposalsof such items. Capital gains on the sale ofshares of the company registered ororganized in another way in a EEA countryor another tax treaty country are exemptfrom tax if the following conditions are met:

Shares have been held for at least 2years and more than 25% of thecompanys shares have been heldthroughout that period or

Shares are transferred according to theprovisions of the law regulatingreorganizations and more than 25% ofthe shares were held for at least 3 years

In case the seller transfers shares to theissuer of those shares, the above taxprivilege cannot be applied.

Losses from disposal of shares ofsubsidiaries registered in an EEA country orin another tax treaty country, if shares havebeen held for at least 2 years and theholding represents more than 25% of thecompany throughout that period, cannot becarried forward, but can be offset againstthe capital gains derived from disposals ofsecurities and derivative financialinstruments.

Dividends

A 15% tax is applied to dividends receivedboth from Lithuanian and foreignenterprises. Withholding tax deducted andpaid by a foreign enterprise from thedividends of a Lithuanian company may becredited against the Lithuanian enterprisesincome tax. Dividends received fromLithuanian and foreign enterprises shall notbe taxed if the recipient thereof has ownedno less than 10% of the shares for at least12 months (participation exemption rule).

The recipient may consider such dividendsas non-taxable income in Lithuania.

A non EEA country entitys profit distributedto individuals is taxed with 15% if the belowconditions are met:

Profit was earned in 2009 andsubsequent periods and

Profit was not taxed or taxed with 0%corporate income tax due to certain taxprivileges set in the Law on CIT and

Profit was not earned by an agriculturalcooperative society

Controlled foreign enterprises

Profit of controlled enterprises located incountries or areas where taxes are below75% of the Lithuanian tax rate (which is15%) is added to the taxable profit of thecontrolling Lithuanian enterprise and taxedat the standard profit tax rate. A part ofprofit generated by an EEIG is also added tothe profit of the Lithuanian companyparticipating in the EEIG.

Return terms and payment

During a calendar year, taxpayers must payadvance corporate income tax on aquarterly basis: by the last day of eachquarter of the tax period. For the lastquarter of the tax period it must be paid bythe 25th day of the last month of the saidquarter. The taxpayers must submit twoadvance income tax returns: by 31 Januaryand by 31 October, while the annual taxreturn has to be submitted by 1 June of thefollowing year. The final adjusted amount ofincome tax has to be paid on the following

business day after 1 October.

Income tax is paid in advance: For a period of nine months based on

the corporate income tax paid for theyear before the previous year

For a period of three months based onthe corporate income tax paid for theprevious year

Newly established enterprises are notrequired to pay advance income tax untilOctober of the following year after the

enterprise was established. Advancepayments are not mandatory if the profit ofthe enterprise does not exceed LTL

1,000,000 (approximately EUR 290,000)for the previous year. Advance income taxmay be computed on the grounds offorecasted corporate income tax; however,the amount of advance income tax over atax year has to be not less than 80% of theannual income tax.

Withholding tax

Apart from dividends (see above), certainother income of non-residents originating inLithuania is taxed with a 15% withholding

tax:Income from distributed profit

Income from the sales, other transferinto ownership or lease of propertyimmovable by nature located on theterritory of the Republic of Lithuania

Income from performers activities andsports activities in the Republic ofLithuania

Annual payments to supervisory boardmembers

Certain income of non-residents sourced inLithuania is taxed with a lower 10%withholding tax:

Interest, except for interest on securitiesissued by the Government oninternational financial markets, interestaccrued and paid on deposits, andinterest on subordinated loans, whichmeet the criteria set down by the Bankof Lithuania

Royalties Compensations for violations of

copyrights and ancillary rights

It should be noted that starting from theyear 2010 interest income of the entitiesestablished in the EEA country or a taxtreaty country are exempt from taxation.

A foreign enterprise operating in a countrythat has a treaty with Lithuania on theavoidance of double taxation may apply fortax relief, provided that it meets thefollowing requirements:

Along with the request to apply reliefs

provided for in the treaty, it presents aresidence certificate (standard form)endorsed by the foreign tax authority


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IV. Taxation

The recipient of income is the beneficialowner of the income The transaction is carried out at arms

length The income was not received via its

permanent establishment or permanentbase in Lithuania

If the Lithuanian Tax Inspectorate requestsadditional information, such documentsmust be presented.

Tax overpayment may be returned to non-

residents (under a standard request form).

The Lithuanian enterprise is responsible forcomputation and payment of withholdingtaxes. Moreover, the Lithuanian enterprisemust present to the territorial taxinspectorate a standard monthly statementon the amounts paid and the tax deducteduntil the 15th day of the following month.Sanctions are applied, if the Lithuanianenterprise fails to compute withholding taxor reduces taxes without a foreign residents

certificate.

IV.2.2. Value added tax (VAT)

Registration for residents

Residents (both individuals and legalentities) must register as VAT payers, iftheir income from economic activities overa period of 12 months exceeds LTL155,000 (approximately EUR 45,000).There is no threshold for voluntary

registration.

Farmers subject to a compensatory VATrate, taxable persons engaged in activitiesexempt from VAT (e.g., insurancecompanies) or Lithuanian non-taxable legalpersons (e.g., state institutions, public legalpersons) must register as VAT payers whenthe value of goods purchased from other EUMember States during the current orprevious calendar year exceeded LTL35,000 (approximately EUR 10,000).

The registration for VAT is also applicable tocollective investment undertakings, whichdo not have legal entity status, but act as

investment funds (e.g., real estateinvestment fund). The managementcompany, managing the investment fund issolidarily responsible for the fulfilment ofVAT obligations.

Lithuanian and foreign enterprises

Enterprises and natural persons without aresidence in Lithuania must register for VATor designate a fiscal agent in case they aregoing to engage in an activity in Lithuania,which is subject to VAT. The requirement to

designate a fiscal agent is not applicable totaxable persons established in other EUMember States who may be directlyregistered for VAT in Lithuania.

EU undertakings engaged in distancemarketing in Lithuania, i.e. bringing goodsinto Lithuania from another Member Stateand supplying them to private persons,taxable persons engaged in VAT-exemptactivities (e.g., insurance companies), orlegal persons that are not taxable persons

(e.g., state and municipal institutions)must register for VAT if their sales incomefrom distance marketing in Lithuaniaexceeded LTL 125,000 (approximately EUR36,000) during the current calendar year.

Foreign taxable persons are not obliged toregister for VAT in Lithuania if they areengaged in supply of goods or provision ofservices that are VAT exempt within theterritory of the country, that are not subjectto VAT or are zero rated. However, in certain

cases even if an undertaking is engaged inzero-rated activities on the territory ofLithuania, e.g., in supply of goods wheregoods are supplied for temporary storage ofthe customs, brought into a free zone or afree warehouse, or to a VAT reliefwarehouse, the foreign undertaking issubject to registration as a VAT payer.However, in some cases when a foreigntaxable person seeks to recover VATincurred in Lithuania, VAT registration couldbe compulsory (if input VAT could not berecovered via VAT refund procedure).

There is a possibility for persons of thirdcountries engaged in the provision of

services to non-taxable persons of the EUMember States by electronic means toregister for VAT in Lithuania, except for thecases when they have already beenregistered for VAT in another EU MemberState.

Starting from 1 January 2010, according tothe Lithuanian Law on VAT, foreign personsexporting goods from Lithuania subject to0% VAT or supplying goods imported from acustoms warehouse subject to 0% VAT mustregister for VAT in Lithuania.

Place of supply of services

Starting from 1 January 2010, the new rulefor the place of supply of services isdetermined. The rule provides that theplace of supply of services to foreigntaxable persons is the country, where thepurchaser is established. In case of thesupply of services to a taxable foreignpersons fixed establishment, which is inLithuania, the place of supply of services is

Lithuania where the fixed establishment isestablished.

In case of the supply of services to a non-taxable person, the rules in place before2010 are applied (i.e. the place of supplyof services is the country of the supplier).When a taxable foreign persons fixedestablishment supplies services to a non-taxable person, the place of supply is thecountry where the fixed establishment isestablished. Considering the nature of some

services, in certain cases the specific rulesare applied (services related to propertyimmovable by its nature, services relating tocultural, artistic, sporting, scientific,educational, entertainment or similaractivities, short-term car rent, transport andancillary transport services, suppliedoutside the EU, etc.). It has also been laiddown in the law, that a reverse chargemechanism should be applied to certainservices supplied to Lithuanian taxablepersons by foreign taxable persons that arenot established in Lithuania.


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Call-off stock simplification

A non-resident entity is not required toregister for VAT purposes in Lithuania ifgoods are transported or dispatched fromanother EU Member State to Lithuania anddelivered to the warehouse of a taxableperson identified for VAT purposes inLithuania but not supplied straight to theLithuanian taxable person. In order to applya simplification, a taxable person ofLithuania should overtake title to the goodswithin 12 months after the delivery andgoods should be used only for the economicactivities of this taxable person. Theobligation to charge VAT under a reversecharge mechanism falls to a Lithuaniancustomer receiving the goods upon theirdelivery to Lithuania.

Tax rates

The standard VAT rate is 21%. During thetransitional period till 31 December 2013the reduced 5% rate is applied to medical

products and medical purposes products,subject to full or partial compensation fromthe state medical insurance budget.Starting from 1 January 2013, the 5% rateis also applied to equipment for disabledpersons technical assistance, as well as torepairs of such equipment.

Reduced 9% VAT rate is applied: For heating and hot water supplies to

residential premises until 31 December2013.

For supply of books and printed non-periodical materials, as well as journalsand magazines (except the onescontaining erotic, violent, unethical ormore than 4/5 of advertising material).Reduced 9% VAT cannot be applied forpromotional publications.

For passenger transport services onregular routes listed by the Stateinstitutions, including transport ofluggage of the passengers on suchroutes.

A 0% VAT rate is applicable to goodsexported from the EU as well as transportand other services directly related to the

export of these goods, goods transported ordispatched within the EU (assuming asubsequent reverse charge in anotherMember State), transport of goodsimported into the EU and other servicesrelated to the import of those goods,insurance and financial services directlyrelated to export of goods, goods placedunder temporary storage, goods supplied tofree economic zones, goods placed fortemporary import under relief from customsduties, processing under customs control,etc.

VAT exemptions

VAT exemptions apply to health care, social(e.g., nursing) services rendered byauthorised persons, cultural and sportservices rendered by non-profit seekinginstitutions, education services, postalservices, insurance and reinsuranceservices, except insurance of exportedgoods, financial services, gambling andlotteries, etc.

Special cases for supplies subject to

VAT

Self-production or essential improvement ofreal estate is treated as subject to VAT.Under certain circumstances, transfer ofgoods free of charge is also subject to VAT.

Sale of real estate older than 24 monthsand rent of real estate is exempt from VAT,except when the supplier has opted to

calculate VAT on the transactions whensupplying to a VAT registered taxableperson. Once the option has been made,VAT should be charged on all the respectivetransactions for at least two years.Analogous rules are applicable whileselecting VAT taxation on certain financialservices.

There are special cases when a supply ofgoods or services is taxed under a specialVAT scheme, e.g., services related totourism, second-hand items.

VAT deduction

Input (import) VAT is subject to VATdeduction, unless it is related to non-business or VAT exempt supplies of goodsor services. There are a few cases when VATdeduction is prohibited or restricted (e.g.,25% of input VAT on entertainment or inputVAT on acquisition and hire of vehiclesdesignated for not more than 8 peopleexcluding the driver, etc.). Input VATrelated to supply of goods or servicesoutside Lithuania may also be deducted,provided that such goods or services wouldbe subject to VAT if they were supplied inLithuania.

If a taxable person makes both taxable andexempt supplies, input VAT should not berecovered in full. First of all input VAT has tobe attributed to taxable and non-taxableactivities, and only when it is impossible, apro rata calculation may be used. Using prorata, the amount of input VAT to recover iscalculated based on the percentage of the

actual recovery amount of the previousyear. Input VAT is fully recovered if theshare of non-taxable activities does notexceed 5%.

Adjustment of input VAT

Input VAT should be adjusted when theassets are no longer used for taxableactivities or the share of non-taxableactivities exceeds 5%. Input VAT related toreal estate should be adjusted for a period

of 10 years. Input VAT of other types oftangible assets for which the requirementof at least 4 years of depreciation has beenestablished for profit tax purposes shouldbe adjusted for a period of 5 years.

VAT returns and payments

Monthly VAT returns must be filled in andVAT must be paid by the 25th day of thefollowing month.

Advance VAT must be paid by those VAT

payers the average payable VAT of whichexceeds LTL 10,000,000 (approximatelyEUR 2,900,000) in 3 consecutive months.


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IV. Taxation

In case when the share of non-taxableactivity exceeds 5%, the annual VAT returnmust be presented by 1 October of thefollowing year.

Members of international groups mayrequest a different than monthly VATperiod, if the group applies such a period.

VAT payers supplying goods or services toanother Member State when the place ofsupply according to the criteria determiningthe place of supply is the other Member

State must present the EC Sales List ongoods and services on a monthly basis.

VAT refund

There are two ways to claim for a refund ofVAT incurred in the EU. These are known asthe Directive 2008/9/EC and 13th Directiveclaim procedures. Which procedure is useddepends on where the business isestablished. If the business is established inthe EU, the Directive 2008/9/EC procedure

should be used. If the business isestablished outside the EU, the 13thDirective procedure should be used.

Foreign businesses established in the EU

Starting from 1 January 2010, thesimplified VAT refund procedure has beenimplemented. Taxable persons establishedin EU Member States who do not have afixed establishment in Lithuania, via whichthe economic activity is carried out (in case

of a natural person permanent residence),may apply for Lithuanian VAT refundthrough the tax administrators of thecountries where they are established byusing the electronic VAT refund systemoperating in those other Member States.After checking the status of the VAT payers,the tax administrators of the establishmentcountries forward the applications to therelevant Member States. There is no needto submit the hard-copy applications to theLithuania Tax Authorities for the purpose toget VAT refund from Lithuania. Moreover,

there is no need to provide VAT certificatesand original invoices when applying for arefund. However, the Tax Authorities have a

right to demand that the copies of invoicesare submitted electronically.

Lithuanian input VAT can be refunded onlywhen incurred on goods or servicesintended for business activities (e.g., fuel,accommodation). VAT is refunded to the EUtaxable persons if the acquired goods orservices for which VAT was paid areintended to be used in economic activities,which grant the right to VAT deduction inthe countries where the persons areestablished. VAT cannot be refunded in

cases like passenger car lease, taxi services,entertainment (for taxable persons of otherEU Member States 75% of VAT onentertainment expenses can be refunded).

The minimum claim period for VAT refund isthree months, the maximum is 1 year. Theminimum claim amount for a period of lessthan 1 calendar year is LTL 1,380 (EUR400), for an annual claim or the claim forthe remaining part of the calendar yearshorter than 3 months the minimum

amount is LTL 170 (EUR 49). The deadlinefor VAT refund is 30 September of the yearfollowing the year when input VAT wasincurred.

The decision to satisfy or reject theapplication for VAT refund must be adoptedduring a period of 4 months. If additionalinformation and/or documents arerequested once or several times, period tomake the decision may be extended up to 8months.

Foreign businesses established outside the

EU

VAT on the goods and services acquired inLithuania and used for the entitys businesspurposes is refundable for taxable personsnot established in the EU that do notperform any taxable transactions inLithuania based on the reciprocity principle(i.e. VAT paid in Lithuania is refundable tothe persons established in the country,which allows Lithuanian taxable persons to

apply for a refund of VAT incurred on theterritory of that country).

The following documents need to besubmitted to the tax authorities by 30 Juneof the year following the year when theinput tax was incurred:

Application for refund stating that theapplicant has not performed taxabletransactions in Lithuania during theperiod the refund is requested for

Legally approved power of attorney, if afiscal representative has been appointed

VAT invoices and/or import SADsoriginals and copies

Legally approved certificate of

registration for VAT purposes of anapplicant

The claim periods and limits are the sameas described above in section Foreignbusinesses established in the EU above.

IV.2.3. Personal income tax(PIT)

Individuals

A natural person is considered to be a taxresident of Lithuania if:

His/her place of residence is in Lithuaniaor

The centre of his/her personal, social oreconomic interests is in Lithuania or

During a tax year he/she spends 183days or longer in Lithuania or

He/she spends 280 or more days inLithuania in consecutive years andspends 90 or more days in Lithuaniaduring one of those years or

He/she does not meet the abovementioned criteria, but he/she is acitizen of Lithuania who receivesremuneration under an employmentagreement or agreement which inessence corresponds to an employmentagreement or whose costs of living inanother country are covered from thestate or municipality budget

Income earned by a Lithuanian tax residentin any country is taxed in Lithuania. Theobject of income tax of a tax non-resident is

income earned through his/her permanentestablishment and other income originatingin Lithuania: interest, income from


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distributed profit and annual payments tosupervisory board members, rent of realestate located in Lithuania, sale of movableand immovable property located inLithuania subject to mandatory registrationin Lithuania, employment income, incomeof sportspersons and performers, royalties,including copyright, compensation forviolations of copyrights. Income isrecognized at the moment of its actualreceipt, except particular cases when aperson is engaged in individual businessactivity.

Income (except for interest, dividends androyalties) received by a resident ofLithuania in a foreign country, which is aMember State of the EU or with whichLithuania has concluded a treaty for theavoidance of double taxation and brought itinto effect, shall not be subject to incometax in Lithuania, provided income tax orequivalent tax has been paid on suchincome in that foreign country. Also, aresident of Lithuania may deduct the

amount of income tax or equivalent tax paidin a foreign country during the relevant taxperiod from the amount of income notmentioned above.

The taxable period coincides with thecalendar year.

Non-taxable income

Income tax is not applied to: Death allowances paid to the spouse,

children (adopted children) and parents(foster parents) Life insurance payments under

agreements concluded before 1 January2003 for at least 10 years

Income received from the sale ofmovable property requiring legalregistration or immovable property(only in some cases)

Certain other income listed in the Lawon PIT

Income of A and B classes

As a rule, income of A class includes incomereceived from Lithuanian enterprises,

foreign enterprises through theirpermanent establishments and non-residents of Lithuania through theirpermanent base (except for certain otherexceptions determined by the law), alsosome kind of income received from aLithuanian resident. Tax on such kind ofincome has to be calculated and paid by theparty which makes the payments. Income ofB class includes all other income notincluded in A class. The tax is calculatedand paid to the budget by the recipient ofsuch income or the recipients authorized

person.

Income in kind

Income in kind is recognized based on thevalue of assets or services received or usedfree of charge or at a privileged price, etc.,apart from the below mentioned cases.

The provisions of the Law on PIT describethe income which should not be treated asincome in kind:

Compensations for health treatmentcosts received from the employer if thisis the employers obligation according tolegal acts

Benefit such as clothing, shoes, workequipment, other items received by theemployee form the employer and usedonly for work functions

Benefit such as payment by a third partyfor the education of an individual

PIT, social security and mandatoryhealth insurance payments paid by

another person on behalf of anindividual

When an employee receives income notfrom the employer, but form anotherperson related to the employer or when theemployees family member (not theemployee himself) receives income in kindfrom the employer, such income should alsobe treated as employment income.

Tax rates

PIT rate is 15% for most types of income.However, a 20% rate is applied to dividendsand income tax of 5% is applied to the

income received from individual businessactivity (except income from professionalactivity and income from securities andderivative financial instruments).

Income received as salary from a

Lithuanian source

Natural persons employed in Lithuanian-registered enterprises are subject to thestandard income tax of 15% on their salary.Salary includes all income related to labourrelations, including fringe benefits, minus

monthly non-taxable income amount (ifsuch amount is applicable). Apart from thebase salary and bonuses, all kinds ofpayments are usually subject to thestandard personal income tax rate of 15%.Certain amounts in certain cases are nottaxed, e.g., daily allowances for businesstrips within the set standards. The employermust withhold income tax from theemployees salary.

Non-taxable income amount

The maximum monthly non-taxable amountis LTL 470 (approximately EUR 136) whichcould be applied if employment incomedoes not exceed LTL 800. If such incomeexceeds LTL 800, the monthly non-taxableamount shall be calculated according to thefollowing formula:

470 0.2 * (X 800)

where X is the employees monthly gross

salary. When the calculated non-taxableamount of income is negative, it shall beconsidered to be 0.

Specific more generous non-taxableamounts apply to disabled persons or thosewho have reached retirement age andrequire special care, etc.

The additional non-taxable amount isapplied to individuals raising a child orchildren of age not exceeding 18 or older ifthey attend a full-time comprehensive

school, and it shall not depend on theincome received by the individual.


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IV. Taxation

Income received as salary from aforeign source

Natural persons, whose employers areenterprises without a permanentestablishment in Lithuania, must payincome tax on all income earned inLithuania by applying a 15% rate. Anyadditional payments to the employee(except for certain non-taxable amounts)are added to his/her taxable income andtaxed respectively.Expenses deductible from personal

income

The expenses which could be deductedfrom personal income:

Cumulative life-insurance premiums paidon the residents own behalf, on behalfof the spouse, minor children

Pension contributions to pension fundson own behalf and on behalf of thespouse and minor children

Tuition for university education oracquisition of qualification, if the first

university education or professionalqualification is acquired

The total deducted amount may not exceed25% of the taxable income reduced by otheravailable deductions.

Expenses are deducted only from a taxresidents personal income while calculatingincome tax for the tax period for thepurposes of submitting the annual incometax return.

Income from disposals of real estate

Upon disposal of real estate which was notused in business activities of an individual,the acquisition price as well as compulsorytaxes related to the sale or other transfer ofsuch real estate determined by the Lawmay be deducted.

Individual business activity

Income from individual business activity is

subject to a 5% income tax (except forincome from professional activity which issubject to a 15% income tax) which could

be reduced by allowed deductions. A personengaged in individual business activityunder a business certificate pays a fixedincome tax, which cannot be lower than theincome tax that would be payable on 12minimal monthly salaries. Municipalities areallowed (when certain conditions are met)to reduce the fixed income tax on incomereceived from individual activity.

Tax losses incurred from an individualbusiness activity may be carried forward foran unlimited period of time if the income

from individual business activity isrecognized on accrual basis (with certainexceptions).

A person engaged in individual businessactivity may choose to recognize 30% ofincome received from that activity asallowed deductions. This rule cannot beapplied if a person receives remunerationfrom the employer. If the person whoperforms individual activity decides to applythe aforementioned rule, he/she does not

have the obligation to keep the documentsproving allowed deductions.

Tax returns and terms

A tax resident who received income duringa tax period of either A class or B classmust submit an annual income tax return bythe 1st of May of the following year. A taxresident must pay the difference in incometax between the amount specified in his/herannual income tax return and the amount

paid (withheld) during the tax period bythe 1st of May of the following year.

The annual income tax return may bechosen not to be filed by a tax resident who:

Is not going to exercise his/her right todeduct annual tax exempt amount oradditional tax exempt amount and

Is not going to exercise his/her right todeduct incurred expenses from incomeand

Over a tax period received only incomeof A class that is related to employment

relations

A person engaged in individual activityunder a business certificate or who hasregistered his individual activity is obliged tosubmit his annual income tax return even ifhe/she did not earn any income from theindividual business activity.

A Lithuanian non-tax resident must pay thetax and submit his/her income tax returnnot later than within 25 days after thereceipt of income.

Taxation of inherited property

Inheritance tax is applied to both Lithuanianand non-Lithuanian residents (unlessinternational treaties provide otherwise).The tax object of a Lithuanian permanentresident is inherited property movable,immovable, securities and cash. The taxobject of a non resident is inherited movableproperty requiring legal registration inLithuania as well as immovable propertylocated in Lithuania.

The rates of inheritance tax applied toinheritors is 5% when the taxable value isless than LTL 0.5 million (approximatelyEUR 145,000) and 10% when the taxablevalue exceeds LTL 0.5 million. Closerelatives, such as children, parents, spousesand certain other persons, may be exemptfrom this tax. Inherited property valuedbelow LTL 10,000 (approximately EUR2,900) is not subject to tax.

IV.2.4. Health insurance

contributionsThe employees gross salary is subject tomandatory health insurance contributionsof 6% and the employer has to withhold thistax. The employer also has to pay 3%mandatory health insurance contributionson top of the employees gross salary. Thesame principles are applied to incomeowners of the individual enterprises andgeneral partners of partnership, alsoroyalties and income received from sportsor performance. Annual mandatory healthinsurance contribution of authors,sportsmen and artists on income, which wasreceived by a resident who does not receive


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any employment related income, iscalculated from 50% of received incomeamount but shall not exceed the amount of48 insurable income values set by theGovernment per year (currently LTL71,424). Individuals engaged in individualbusiness activities pay 9% of the mandatoryhealth insurance contributions based on theminimal monthly salary. Annual mandatoryhealth insurance contribution on theirincome i