Lithuanian tax news: progressive tax system in Lithuania

During the year 2009 Lithuania as well as other Baltic states faced a heavy challenge to combat the adverse financial situation in their country.
Lithuania, followed by the crisis management plan, increased most of the taxes in order to offset the loss ensuring the stability of public finances due to the statements of Lithuanian Government.

Notably in the year 2010 the tax burden was reduced and Lithuanian Government introduced more attractive CIT rate of 15 % (instead of 20%) which corresponds to the rate in our neighbor Latvia. Therefore, Lithuania still remains attractive to the most foreign investors due to the favorable tax planning possibilities.
It is important to note that Lithuanian Parliament currently weights tax and other laws amendments which would overall change the financial situation in Lithuania and various businesses. One of the major proposals to the laws is the introduction of progressive tax system in Lithuania.

The major debate is going on at this moment regarding progressive tax system adoption in Lithuania. On the last week of March, 2011 the proposed amendment to the PIT (Personal Income Tax) laws was approved by Lithuanian Parliament. Therefore if the proposed amendment will pass two more readings, the proposed progressive tax system in Lithuania will become enforced.

The proposed Amendment regarding the adoption of progressive tax system to the PIT law (No XIP-3038) was introduced on March 24th, 2011 Currently PIT is at 15% tax rate in Lithuania. Accordingly to the proposed amendment to the PIT law, income part, not exceeding 13900 EUR per year will be taxed at 15% tax rate. In case the income per year exceeds 13900 EUR, but does not exceed 34754 EUR will be taxed at 33% tax rate. In the event if the annual income exceeds 34754 EUR, it will be taxed at 40% tax rate.

Due to Lithuanian economical situation the project is broadly criticized.
Minimal salary in Lithuania remains the smallest one in the entire Baltic region and is of 236 EUR per month before the taxation.
Additionally to this and in accordance with presented statistical information in Verslo Zinios (one of the leading business newspapers inLithuania) there are only approx. 3000 employees in the entire Lithuanian population receiving more than 2900 EUR/month. These facts show the existence of the shadow economy in Lithuania which is believed to increase in case the progressive tax system is adopted and the tax burden will be moved to those employees, whose financial situation is still considered stable.

The amendment to the PIT law at Lithuanian parliament was presented by the social democrat party and at the first hearing 39 parliament members voted for the adoption of the project, 9 members voted against and 20 members abstained.

Valters Gencs
Tax Attorney & Founding Partner
Gencs Valters Law Firm, Riga
T: +371 67 24 00 90
Email: valters.gencs@gencs.eu