As seen in the Euronews article “Unicorn hub? Here’s why Lithuania attracts so many fintech companies | Euronews,” Lithuania ranks fifth for tax competitiveness according to the 2024 International Tax Competitiveness Index (ITCI). Additionally, the Business-Friendly City Perception Index by Emerging Europe has crowned Vilnius the most business-friendly city in emerging Europe. What is the secret behind these excellent numbers?
Lithuania’s tax system is structured to align with European Union (EU) regulations, offering a transparent and investor-friendly environment. The system encompasses various taxes, including personal income tax, corporate tax, value-added tax (VAT), and social security contributions, each playing a vital role in the country’s fiscal framework.
Lithuania’s taxation framework is designed to support economic growth while ensuring compliance with EU standards. The system provides certain tax incentives to attract foreign investment and stimulate business development. For instance, companies investing in research and development (R&D) activities may benefit from tax deductions, promoting innovation within the economy.
As of 2024, personal income tax rates in Lithuania are structured as follows:
You can find more information here: PwC Tax Summaries.
These rates apply to various forms of income, including employment earnings and payments to board members. Social security contributions are also deducted from gross income, affecting the net take-home pay of employees.
The corporate tax rate in Lithuania is set at 15%, applicable to most businesses. However, credit institutions are subject to a higher rate of 20%.
You can find more information here: Grant Thornton.
The government offers tax incentives to encourage investment, particularly in sectors like technology and manufacturing. For example, small companies may benefit from a reduced tax rate of 5% under certain conditions, fostering the growth of small and medium-sized enterprises (SMEs).
Lithuania imposes a standard VAT rate of 21% on goods and services. Reduced rates of 9% and 5% apply to specific items, such as books, periodicals, and certain pharmaceuticals. Additionally, excise duties are levied on products like alcohol, tobacco, and energy, contributing to the country’s indirect tax revenue.
Property tax in Lithuania is levied on real estate owned by individuals and entities. The tax rate ranges from 0.3% to 3% of the property’s value, depending on the municipality and the property’s use. There are no specific wealth taxes; however, certain luxury items may be subject to higher excise duties.
Both employers and employees are required to make social security contributions. Employees contribute 19.5% of their gross salary, while employers contribute an additional 1.77%.
You can find more information here: Grant Thornton.
These contributions fund various social benefits, including pensions and healthcare, and are deducted from the employee’s gross income, impacting the net salary received.
An individual is considered a tax resident in Lithuania if they meet any of the following criteria:
Tax residency determines the scope of taxable income, with residents taxed on their worldwide income and non-residents taxed only on Lithuanian-sourced income.
Tax residents are required to file annual tax returns by May 1st of the following year. The process involves reporting all taxable income and calculating the tax liability. Necessary documents include income statements and records of deductible expenses. Late filings may result in penalties, emphasizing the importance of timely compliance.
Lithuania has established double taxation treaties with numerous countries to prevent the same income from being taxed in both jurisdictions. These treaties facilitate cross-border trade and investment by providing clarity on tax obligations. Major partner countries include Germany, the United States, and the United Kingdom.
Withholding tax applies to certain types of income paid to non-residents, such as dividends, interest, and royalties. The standard withholding tax rate is 15%, but this may be reduced or exempted under applicable double taxation treaties. Entities making such payments are responsible for withholding and remitting the tax to the authorities.
Understanding the Lithuanian tax system is crucial for individuals and businesses operating within the country. The structured framework, aligned with EU standards, offers clarity and opportunities for taxpayers, contributing to a stable and attractive environment for investment and economic activity.
Invest Lithuania is here to keep you informed about the latest news, opportunities, and developments shaping Lithuania’s business landscape. If you have any questions or would like more details, feel free to contact us—we’re here to provide the insights you need.
