Is Lithuania a Tax Haven? Offshore Jurisdiction Review

Overview

Lithuania, a full member of the European Union, is sometimes considered as a tax haven due to its favorable taxation policies for corporations. The appeal for businesses lies in the reasonably low setup and maintenance fees, alongside a corporate tax structure that potentially offers benefits for owning an EU-based company in Lithuania. This has positioned Lithuania as an attractive destination for businesses looking to leverage the advantages of EU membership while enjoying lower tax rates.

Tax policies within Lithuania are structured to foster a business-friendly environment. These policies encourage investment and economic growth, making the country a competitive player in the European market. Lithuania's economic strategy and its approach to taxation are designed to align with both national interests and compliance with international standards set by organizations like the OECD.

Key Takeaways

• Lithuania is recognized for its business-friendly taxation policies within the EU.
• The country's tax system is designed to be competitive and attract foreign investment.
• Lithuania adheres to international tax standards, balancing national benefits with global compliance.

Is Lithuania as a Tax Haven?

The Baltic nation of Lithuania is one of the top offshore corporate tax havens in Europe. The main attractions of Lithuania as a tax haven are its comparatively low corporate and personal taxes by European standards, its solid reputation as a fully-fledged member of the EU, and the economic opportunities that this brings.

Lithuania is one of several countries around the world (which include the likes of the UAE) that has established so-called “free economic zones” which provide additional benefits for offshore companies incorporating in these areas. There are a total of seven free economic zones operating in Lithuania. They offer advantages in the form of reduced taxation and favourable corporate legislation. 

Lithuania offers a sound balance between low taxation with a corporate-friendly environment and good reputation with a stable economic and political landscape. There may be many traditional tax havens which seem to offer more attractive tax-saving features than Lithuania, but they do not provide the same degree of reputability that owning an offshore company in the EU brings.  

The Benefits

The most popular type of offshore corporate structure in Lithuania is a Lithuanian Private Limited Company (UAB). It provides many advantages when set up as an offshore company by a foreign national, including:

• Low corporate tax: the standard corporate income tax (CIT) rate in Lithuania is 15%, which is well below the average for EU countries. Small companies can apply for a reduced CIT rate of 0% in their first year and 5% thereafter if certain criteria are met.
• Additional tax breaks in free economic zones: Lithuania has seven “free economic zones” in which there are significant tax incentives for foreign companies who conduct at least 75% of their business in one or more of these zones. In addition, they also provide favourable corporate legislature and reduced operating and reporting requirements. 
• 100% foreign ownership: the shares of a UAB may be completely owned by foreigners or a single foreigner. 
• Minimum of only one shareholder and director is required who may be the same person or any legal entity. 
• Limited liability protection: a Lithuanian UAB provides limited liability protection to its shareholders, which makes it an ideal vehicle to safeguard assets offshore. 
• Low capital requirements: The minimum registered share capital required is only €2,900 which must be kept in a Lithuanian bank account.
• Fast and simple incorporation process: all the filing for a Lithuanian UAB can be completed in one day and can be done completely online. Thereafter, it takes only 6 days for the trade register to approve the new company and issue the certificate of incorporation. 
• Access to a reputable EU tax haven: Lithuania is a full member of the European Union, which makes it the perfect entry to the benefits of owning an EU company that is based in a tax haven. 
• Setup and maintenance fees: Setup fees are low and include a €100 fee for the preparation and legalisation of the company’s registration documents, and an approximately €60 fee for registering with the trade register. There are few ongoing maintenance costs other than hiring an accountant when needed and paying the registered agent if you choose to use third-party services. 
• Filing requirements: annual filing and reporting requirements are not stringent. An audit is required only if a UAB’s annual gross revenue exceeds €1.4 million. 
• Shelf companies are available to purchase for easier and faster incorporation.

Lithuania's Taxation System

Lithuania has low taxes across the board compared to other EU nations, along with additional tax incentives for small businesses, and offshore entities operating in their economic free zones. This has made them one of the most attractive corporate tax havens jurisdictions in Europe. 

Personal Income Tax Structure

The Personal Income Tax (PIT) structure in Lithuania operates on a progressive scale where the tax burden adjusts according to the taxable income. For the bulk of taxpayers, the rate stands at 20% for income not exceeding a specified threshold and 32% for the portion of income above that threshold. Taxable income calculation takes into account various deductions, including a basic non-taxable amount determined by a specific formula.

• Monthly non-taxable income = 460 - 0.26 x (earned monthly salary - minimum monthly salary)

Social security contributions are also a significant part of the Lithuanian tax system, which are collected separately from PIT and fund the country's social security system.

Corporate Tax Framework

Lithuania has a standard flat corporate income tax rate of 15%. 

A company may qualify as a microbusiness if they have an average of less than 10 employees and earn less than €300,000 in gross annual revenue. If these criteria are met, their corporate tax rate is reduced to 0% in their first year of operation and only 5% thereafter. 

Tax incentives are also available for foreign companies who invest more than EUR 1 million in Lithuania, and conduct at least 75% of their business operations in one of Lithuania’s seven Free Economic Zones. These companies can apply for complete exemption from corporate tax during their first five years of operation, and a 50% reduction from the standard for the following ten years. Companies who operate in these free zones but invest less than EUR 1 million still benefit from VAT and real estate tax exemptions. 

A preferential rate of 5% is available for small companies that meet certain conditions, such as having not more than ten employees and declaring annual revenue below €300,000. This dual-rate system aims to support small and medium-sized enterprises (SMEs) by reducing their tax burden.

• Standard Corporate Tax Rate: 15%
• Reduced Rate for Qualifying SMEs: 5%

Aside from the income taxes, corporations may also be subject to real estate tax, charged on the value of the property owned by the business. Both capital gains and dividends are also taxed at a flat rate of 15%.

Value Added Tax (VAT) Details

The standard rate of Value Added Tax (VAT) in Lithuania is set at 21%, which applies to most goods and services. There are reduced rates for specific categories, such as a 9% rate for books and medications and a 5% rate for certain goods essential for residents. The VAT system's role is a principal revenue source for the government, and it is designed to be neutral to businesses as they can reclaim VAT on business expenses.

• Standard VAT Rate: 21%
• Reduced VAT Rate (selected items): 9% and 5%

VAT, together with PIT and Corporate Tax, represents the main pillars of taxation in Lithuania, contributing significantly to the state revenue and shaping the overall tax burden on individuals and entities within the country.

Lithuania as a Potential Tax Haven

Lithuania has garnered attention due to its comparatively low corporate tax rates and accommodating tax environment, inviting scrutiny regarding its status as a potential tax haven.

Comparative Tax Advantages

Lithuania's corporate tax structure provides clear incentives for businesses, particularly small and emerging enterprises.

• Corporate Income Tax (CIT): The standard CIT rate is set at 15%, a competitive figure within the European Union landscape. This rate undercuts the EU average, positioning Lithuania favorably in the eye of foreign investors and corporations.

• Incentives for Small Companies: Newly established smaller entities benefit from a reduced CIT rate of 0% during their first year of operation, followed by a modest 5% rate subsequently, provided they meet specific criteria.

• Free Economic Zones (FEZs): To further bolster its appeal, Lithuania has established seven FEZs, where businesses can leverage additional tax breaks, specifically targeting reductions in capital gains and on royalties to incentivize investment and economic activity.

These strategic tax positions align with Lithuania's goal to attract more offshore business, highlighting the potential for the country to be perceived as a tax haven.

International Perception and Regulations

The international community, with institutions like the OECD, closely monitors tax practices to ensure compliance with global standards.

• OECD's Stance: Although not classically defined as a tax haven, Lithuania's tax policies have been reviewed by the OECD, pointing out the nation's efforts to align with international regulations. In the OECD Tax Policy Reviews: Lithuania 2022, the country's tax system was examined comprehensively, acknowledging its robust economic performance and increased tax-to-GDP ratio despite its attractive tax regime.

• EU Regulations: As a member of the European Union, Lithuania is subject to the EU's stringent tax regulations, ensuring that its tax policies remain transparent and fair. This conformity with EU standards serves to counterbalance the potential notion of Lithuania operating as a traditional tax haven.

Lithuania's tax advantages and compliance with international tax standards shape its distinctive position as a jurisdiction with tax haven-like attributes, while still maintaining adherence to OECD and EU regulatory frameworks.

Background Information

Location

Lithuania is situated in the Baltic region of North-eastern Europe. It has a land area of 65,300 square kilometers (25,200 sq. mi). Lithuania shares land borders with Latvia to the north, Belarus to the east, and Poland and the Russian province of Kaliningrad to the south and southwest. To the west, Lithuania has a coastline which meets the Baltic Sea.

Political Structure

Lithuania was a former satellite of the Soviet Union and officially declared the restoration of its independence on 11 March 1990. It joined the European Union in 2004. 

Lithuania held its first independent general elections on 25 October 1992. It was during this election that the majority of voters supported the new constitution. Lithuania has a semi-presidential system whereby the president serves alongside the prime minister and cabinet. The head of state is officially the president who is directly elected for a maximum of two five-year terms. The current president is Gitanas Nausėda (assumed office on 12 July 2019) and the prime minister is Ingrida Šimonytė (Assumed office on 11 December 2020). 

Economy and Infrastructure

Lithuania’s open and mixed economy has been classified as a “high-income economy” by the world bank (countries with a GNI per capita of $12,236 or more for the 2018 fiscal year). They have a high GDP per capita which is estimated at $25,015 nominal and $46,479 PPP adjusted in 2022 (39th highest in the world). 

Lithuania’s economy is geared towards services, which comprise 68.3% of their GDP. Industry and Agriculture make up the remaining 28.5% and 3.2% respectively. Their largest exports industries are agricultural products and food (18.3%), chemical products and plastics (17.8%), machinery and appliances (15.8%), mineral products (14.7%), and wood and furniture (12.5%).  

Lithuania has highly developed infrastructure that is comparable with other first-world European nations. Transportation is the third largest sector in their economy, and they have one of the most extensive networks of motorways in Europe. They have a well-developed communications infrastructure and have one of the largest fresh water supplies in Europe. 

Population, Language and Culture

The 2021 population estimate of Lithuania was at approximately 2.8 million. This is a reduction of almost 1 million from 1990, the year it declared its independence, when the population stood at about 3.7 million. The major driver of the negative population growth has been international migration, along with natural changes in population. 

Lithuanians are by far the largest ethnic group, accounting for 84.6% of the population. Eastern Europeans make up most of the remainder, which includes Poles (6.5%), Russians (5%), Belarusians (1%), and Ukrainians (0.5%). Other ethnicities only make up the final 2.3%. Lithuanians are the most “homogenous” ethnic group of the Baltic states, whose genetics have remained largely unchanged since the Neolithic period (7000 – 1700 BCE), despite demographic movements. There are no apparent genetic differences between ethnic subgroups. 

The official language is Lithuanian, but there is also significant presence of the other eastern European languages in some areas, such as Polish, Russian, Belarusian, and Ukrainian. Approximately 85% of the population speak Lithuanian as their native language. Most schools teach English as the first foreign language, and 31.1% of Lithuanian residents are able to speak English as a foreign language. 

Christianity is the predominant religion (79.4% of the population), of which most follow Catholicism (74.2% of the population).

Exchange Control

On 1 January 2015, the euro replaced the litas at a rate of EUR 1 = LTL 3.4528. There are currently no exchange controls.

Type of Law

Lithuanian law belongs to the civil law legal system. It is largely based on the legal systems of France and Germany.

Principle Corporate Legislation

Corporate entities in Lithuania are primarily governed by Lithuania’s Civil Code and the Law on Companies. The Law on Companies regulates activities such as: registration, liquidation, rights and duties of members, division and/or transformation, and the registration of different branches, The law also outlines all the details related to the content of the documents needed for incorporation. 

Frequently Asked Questions

What are the tax implications for foreigners living in Lithuania?

Foreign residents in Lithuania are subject to tax on their worldwide income, whereas non-residents are taxed only on Lithuanian-sourced income. Tax rates for individuals range from 20 to 32% based on annual income.

How is income tax calculated for individuals in Lithuania?

Individual income tax is calculated progressively, with rates depending on the gross annual income. Rates start at 20% and can go up to 32% for higher income brackets. A minimum non-taxable income provision also applies.

What is the standard corporate tax rate in Lithuania?

The standard corporate income tax rate in Lithuania is 15%. This is lower than the EU average, making it an attractive rate for businesses operating within the country.

How does Lithuania's tax rate compare to other European countries?

Lithuania's corporate tax rate of 15% is competitive when compared to the average rates across the EU, which are typically higher, thereby providing a fiscally favorable environment for businesses.

What are the VAT obligations for businesses operating in Lithuania?

Businesses in Lithuania are required to charge and remit Value-Added Tax (VAT). The standard VAT rate is 21%, with reduced rates applicable to certain goods and services.

What are the tax exemptions and tax-free thresholds available in Lithuania?

Lithuania offers certain tax exemptions and reduced rates for eligible small companies, which can benefit from a 0% corporate tax rate for the first year and 5% thereafter, subject to meeting specific criteria. For individuals, tax-free thresholds are determined by the minimum non-taxable income provision.