The Government Approved the Package of Tax Proposals
Today, the Government approved the package of tax proposals, which should reach the Parliament (Seimas) next week. The Minister of Finance presenting tax proposals stressed that the package aims at fairer, more balanced tax system, which will contribute to reduction of income inequality, also at encouraging businesses to grow and invest implementing the Green Agenda objectives and development of innovations as well as at creating incentives for more flexible tax payment.
“We take a targeted step towards a fairer tax system and strengthen incentives to work, invest, create preferences for high added value and the opportunity for businesses to grow, eliminating restrictive requirements. At the same time, we reject the exemptions that do not create higher value for the society by replacing them with the most modern Investment Account in the region. Also, we take care of the implementation of long-term commitments, improve social guarantees for the employed, reduce income inequality and promote competition of intellectual potential, rather than competition of forms of activity. Finally, we address the tax payment complexity issues and create more flexible and user-friendly systems”, stressed Minister of Finance Gintarė Skaistė.
Economic growth
The package of tax proposals focuses on economic growth and stimulation of investment by introducing a relief of instantaneous depreciation of fixed assets, encouraging productive investment in, for example, devices, computer hardware, software and etc.
In turn, one of the main investment promotion tools is the investment project relief allowing a 100 % deduction of investment in implementation of innovation, thus contributing to more favourable environment for businesses to invest in technological renewal. In order to continue promoting competitiveness and productivity of companies, it is proposed to extend this relief valid till the end of the year for more five years, i.e. till the end of 2028. Considering current R&D and patent box benefits, extension of the aforementioned investment project relief ensures the corporate income tax reliefs to be applied to the entire innovation chain: to research, investment and commercialization of inventions.
To maintain the target to promote the development of small business without stifling growth, a new proposal is included in the package of proposals – as the turnover of companies grows from EUR 300 thousand to EUR 500 thousand per year, the corporate income tax will gradually increase from 5 % to the standard 15 % rate, so more small companies will pay a lower corporate income tax rate and will be able to grow organically.
At the same time, other proposals are also foreseen to reduce the tax burden from the coming years to an even wider range of small companies. Among the proposals – faster depreciation of fixed assets – it is proposed to waive the limit of 10 employees and to increase the turnover threshold up to EUR 300 thousand. It is also proposed not to apply the current limit of 10 employees and for the 5 % corporate income tax rate relief. In turn, it is proposed to set a higher income threshold for companies not required to pay advance corporate income tax till now – starting from next year it is proposed to raise the income threshold up to EUR 500 thousand. Finally, from 2024 it is proposed to increase the threshold for value added tax (VAT) payers’ registration – currently it reaches EUR 45 thousand, but it is proposed to increase the threshold up to EUR 55 thousand, thus creating more space for business growth.
The package also focusses on incentives to attract talent to growing companies, so the expansion of the option relief is proposed, granting from next year the right to buy out options even if a person does no longer work in the workplace. At present, this possibility is only given for those who have worked for 3 years or more, but no longer available after the end of the employment contract.
Finally, it is proposed to extend for 5 years the proven relief for film production.
Integrity
Integrity remains one of the most important axes in the package of tax proposals approved by the Government. A complex tax system with many reservations and exceptions raises doubts of uncertainty and unfairness in the society. The package of tax proposals aims at a more transparent, clearer and fairer tax system, providing opportunities to use its potential not to start from different positions, compete in forms of activity and pay differently for the same social guarantees received, but to realise available potential and to achieve a competitive breakthrough precisely with knowledge and skills, rather than just with the reservations of the forms of activity.
In proposals related to employment relationship, the Ministry of Finance presents an ongoing long-term commitment to consistently align the non-taxable amount (NTA) of income to the minimum monthly wage (MMW). As the NTA rises for the earners of one average wage (EUR 2,045 in 2024), taxes will continue to decrease gradually. In the coming years, increasing MMW by 10 % up to EUR 924, accordingly, a 20 % increase in the NTA up to EUR 751 is foreseen. Historically, the Government, since the beginning of its term of office, has increased the MMW by 30 % and the NTA – by 56 %. Taking into account the Lithuanian labour market and the fact that 70 % of the employed currently earn up to one average wage (AW), the objective projected by the Ministry of Finance to align these two amounts over five years, will contribute accordingly to a significant reduction in the tax burden of these persons, who are about 811 thousand. This will strengthen work incentives for lower-income workers and ensure higher income as well as a reduction in income inequality. As a result of the decision to increase the MMW and the NTA, income for MMW earners after taxes will increase by EUR 76.
Another good news is that the current 32 % progressive rate will be replaced by high income taxation, thus encouraging the attraction of higher-wage talent.
The recommendations of the Organisation for Economic Co-operation and Development (OECD) suggest that Lithuania should bring the taxation of individual activities closer to the taxation of income from employment relationship, since currently the system leading to different taxation of the same amount of income according to the forms of activity does not comply with the principle of equity.
For those engaged in individual activities, due to changes in the taxation of individual activities – the foreseen milestone of reduced PIT rate and the profit threshold of up to EUR 15 thousand– for 85 % the situation will not change substantially. Meanwhile, changes in the PIT rate and the tax credit (corresponding to the NTA in the employment relationship) will not affect the earners of up to EUR 15 thousand of taxable income (profit) per year. However, individuals are entitled to unemployment benefit – lessons learned from the pandemic do not allow to leave individuals engaged in individual activities without unemployment insurance.
According to the latest data of the State Tax Inspectorate (STI), 214 thousand people have declared income of EUR 1.143 billion from individual activities in 2022. Where, 197.2 thousand people, or 91.8 per cent, earned up to EUR 15 thousand of taxable income (profit) (EUR 1,250 per month) and declared EUR 457 million per year. Moreover, 13, 830 thousand people earned from EUR 15 thousand to EUR 35 thousand of taxable income (profit), declared – EUR 302.8 million. Meanwhile, changes would be fully applied to earners of more than EUR 35 thousand (EUR 2,916 per month) taxable income per year, who declared EUR 383.6 million. The number of such persons is 3, 770 (1.75 %).
At the same time, it is noted that the situation for even 84 % of business license holders will remain unchanged.
The biggest changes will affect high-income earners. The package of proposals approved by the Government notes that it is proposed to aggregate all types of income and to apply special additional taxation to high income instead of the different progressive rates currently in place.
Taking into consideration the proposals received, high income taxation ceiling have been updated: for the share of annual income exceeding 60 AW (more than EUR 101 thousand) a 5 % PIT rate is applied, while for the share of annual income exceeding 180 AW (more than EUR 303 thousand) a 7 % PIT rate is applied. Special additional rates will be paid by twice as many people as they have paid so far (from 8 thousand now to 16.5 thousand after the changes (i.e. 0.8 % of all taxpayers), while for high income the gap between employment relationship and capital income taxation is reduced.
SODRA tax bases are being harmonised, social insurance contributions to SODRA are calculated from 90 % of profits. At the same time, the ceiling, from which the benefits are no longer calculated, is harmonised for everyone up to 60 AW.
Financial independence of local governments
The package of tax proposals shifts to a traditional real estate (RE) tax on the RE object rather than the total amount of their values. After listening to the proposals, it is proposed not to tax the first-time home of up to a 1.5 median in a particular municipality – as the median increases, the circle of people who will not pay the RE tax expands – two thirds of the owners of the first-time home will not have to pay the RE tax, and the average tax will be about EUR 16 per year. The exceptional feature of the tax – revenue from the tax accrues to municipalities –financial independence of the local government is increased and the capacity to invest in public infrastructure is strengthened – municipalities receiving the tax paid by residents will have more opportunities to expand educational, health, social and other public services provided to them, to take care of infrastructure and thus to add value to residents’ property.
The project responds to the recommendations made by international organisations to Lithuania for a number of years concerning taxes that are more conducive to economic growth, e.g. the introduction of the real estate tax.
Investment Account – the most ambitious in the region
One of the most important initiatives is the presented Investment Account instrument, one of the most ambitious in the region. It is proposed not to limit the amount of the contribution, as well as not to limit the desired amount of investment accounts or their or geography, it is important that the country where the account is opened has signed a double taxation agreement with Lithuania allowing for sharing information. It is also planned to cumulate profits and losses from different investment operations, with the carry- forward possibility, and to tax the return/profit received through the Investment Account only at the time of withdrawal of funds.
You can find the full package of tax proposals here.
Last updated: 29-06-2023
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