On 31 May 2018, Lithuania joined the OECD. Since Lithuania started negotiations to join OECD there have been some changes in treatment to comply with the base erosion and profit shifting recommendation package. Although Lithuania’ economics growth is one of the fastest among OECD countries, many changes must occur in the future. The following steps have been taken and these are the latest updates.
Social insurance taxes will be paid by the insured person
A year ago, a new Labour Code came into effect and it was the first step in making the Lithuanian labour market more liberal. The latest changes have been made to make it even more innovative and attractive to investors - duty to pay social insurance taxes has been transferred to employee. Until now social insurance taxes were paid by employer. On the other hand, every current employment contract must be changed. The law has obligated wages to rise for all employees by 1.289 (gross) times before the new regulation comes into effect. Effectively, the amount of money that an employee will get mostly will be the same. Yet after the new regulation comes into effect the burden of paying social insurance taxes will be taken off employers. This will mean employees will manage to get higher wages (gross) and it should help fight tax evasion.
New data protection requirements
On 25 May 2018, Data Protection Directive 95/46/EC (Directive) was replaced by the General Data Protection Regulation (GDPR). GDPR is directly applicable in each member state of the EU, including Lithuania. Related to these changes, the new wording of the Republic of Lithuania’s Law on Legal Protection of Personal Data came into effect on 16 July. In the light of GDPR, investors should review and decide the location for information used by their tax and accounting team to ensure tax and accounting solutions are GDPR compliant. In the case of mismatches, the State Data Protection Inspectorate may set fines (up to 4 per cent of the total worldwide annual turnover of the preceding financial year depending on the mismatch).
Taxable profits may now be reduced by 100 per cent in the case of investment projects
The highest percentage reduction on taxable profits used to be 50. To be eligible for the new 100 per cent relief, an entity has to purchase new assets to start new activities or expand current ones. The costs incurred during these acquisitions can be used to reduce taxable profits. Assets purchased cannot be older than five years and must be used for at least three years. The period in accordance with the procedure was extended by five years - until 2023. Thanks to these amendments, the environment for investing in Lithuania should become more attractive. This kind of taxable profits reduction is also flexible - where the amount of costs incurred exceeds the amount of taxable profits calculated for a tax period, the costs exceeding this amount may be carried forward to reduce the amounts of taxable profits calculated for the four subsequent tax periods, respectively reducing the amount of the costs carried forward.
Taking steps towards cooperation between science and business
By adopting the new Technology and Innovations Law Lithuania began a reform of innovations. The aim of the reform is cooperation between business and science. The new law determines institutions’ responsibilities for reaching common aim - more innovative business. A host of institutions is being created to work on the matter - to prepare a model of financial and intellectual assistance for both sides. The provisions of the law make prerequisites for the establishment of a state innovation promotion fund that will provide support to science and study institutions and innovative businesses, and promote their sustainable cooperation.
Following OECD recommendations
After the 2018 OECD Economic survey on Lithuania, one of the recommendations was to raise immovable property taxes but exempting low-income workers. The current situation is that basically vast majority of immovable property is not taxed. Zero per cent tariff relief is granted to all immovable property under €220,000 (if the property is above this amount the tariff is 0.5 per cent). In the light of OECD recommendations, taxes were raised for properties whose value exceeds €300,000 and €500,000, respectively to tariffs of 1 per cent and 2 per cent.
Changes in tax administration
Right to information: the tax administrator has a right to get information from entities about their assets, profit, expenses and activities. This right was extended - now the tax administrator can demand information not only from entities but also from a direct beneficiary. It means that the owner of the entity has a duty to comply with the tax administrator’s demands concerning information about his or her assets, profit, expenses and activities.
Right to review and recalculate taxes: the period of time in which the tax administrator has a right to review taxes was shortened to three years (it used to be five). However, in some cases (eg, personal income tax, VAT payments) the period for rechecking could be lengthened to five or 10 years.
These amendments will come into effect on 1 January 2020.
Changes in liability regulation
If tax evasion is ascertained during a tax inspection, then between 10 per cent and 50 per cent of the amount of tax that the subject was trying to avoid will be set as a fine (current order). A new regulation has added stricter liability for those who cannot justify concealing income, and are aiming to avoid tax. In this case the fine would be calculated at between 50 per cent and 100 per cent of the amount of unpaid taxes. A further rule applies to both liabilities - if the offence reoccurs repeatedly during the past five years, then the fine is doubled.
In the case of a false declaration of a submission to the tax administrator about profit, income or assets, when performed intentionally seeking to avoid taxes (the amount of taxes that has to be paid does not exceed €5,000) - liability has become stricter. For this kind of violation the fine used to be between €150 and €600; currently the fine would be from €500 to €6,000.
Potential government plans for 2019
According to the government, the innovation reform plan will be one of the major aims for 2019 and beyond. Planned steps are in effect and during coming years states’ donation policy towards innovations will be relooked and new priorities formed. New priorities should lead to a new financial instrument to establish an infrastructure of technological centres. A new ‘post-investment services’ strategy will then be set up for inbound investors. It has not been specified what the strategy will include. However, the aim of the innovation reform is to attract investment, thus reliefs and support for investors may well be considered as options.
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