Business Guide Lithuania If you are planning on doing business in Lithuania, knowledge of the information on the legal and taxation framework as well as some general facts are essential to keep you on the right track…

Business Guide Lithuania

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Contents

Foreword .................................................................................................................. 4

General Information ....................................................................................... 4

Attraction for Foreign Investors .......................................................................... 5 Geography and Population ................................................................................... 6 Constitution and Political Situation ..................................................................... 6 Language .................................................................................................................. 6 History ...................................................................................................................... 6 Business Hours/Time Zone ................................................................................. 6 Public Holidays ....................................................................................................... 7 Transport and Communications ........................................................................... 7 Payment and Currency ........................................................................................... 7 Economic Situation ................................................................................................ 7 Main Economic Indicators .................................................................................... 8 Banking and Finance .............................................................................................. 8 Legal System ............................................................................................................ 8

Business Organizations Available To Foreign Nationals ............................. 9

Private Limited Liability Company .................................................................... 10 Public Limited Liability Company ...................................................................... 10 Partnership ............................................................................................................. 10 Sole Proprietorship ............................................................................................... 11 Non-profit Organisation ...................................................................................... 11

Setting up and Running Business Organizations ....................................... 12

Private Limited Liability Company .................................................................... 12 Branch or Representative Office of Foreign Company .................................. 13 Accounting and Reporting Requirements ......................................................... 14 Audit Requirements .............................................................................................. 15 Work and Residency Permits .............................................................................. 16 Labour Law ............................................................................................................ 16 Real Estate ............................................................................................................. 17 Reorganization Law .............................................................................................. 18

Taxes ............................................................................................................ 19

Corporate Income Tax ......................................................................................... 19 Taxable income .......................................................................................... 19 Deductible expenses .................................................................................. 19 Interest ......................................................................................................... 20 Losses ........................................................................................................... 20 Investment incentive ................................................................................. 21 R&D incentive ............................................................................................ 21 CIT incentive to film supporters ............................................................. 21 Taxable period ............................................................................................ 22 Tax return and payments .......................................................................... 22 Tax reports .................................................................................................. 22 CIT rates ...................................................................................................... 22 Withholding tax .......................................................................................... 23 Participation exemption ............................................................................ 23 Transfer pricing .......................................................................................... 24 Taxation of permanent establishment..................................................... 24

Social Security Tax ................................................................................................ 24

Business Guide Lithuania

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Personal Taxation - Income Tax ........................................................................ 26 Residence ..................................................................................................... 26 Taxable income .......................................................................................... 26 Rates ............................................................................................................. 26 Non-taxable income and incentives ........................................................ 26 Employment income ................................................................................. 27 Income and capital gains from substantial shareholdings .................... 27 Tax period ................................................................................................... 27 Tax returns and payments ......................................................................... 27 Taxation of non-residents ......................................................................... 28

Inheritance and Gift Tax ..................................................................................... 29 Luxury Tax ............................................................................................................. 30 Income from Entrepreneurship ......................................................................... 30 Double Taxation Agreements ............................................................................. 30 Unemployment Insurance Act ............................................................................ 32 Value Added Tax .................................................................................................. 32

Tax base ....................................................................................................... 32 Taxable person ........................................................................................... 32 Tax rates ...................................................................................................... 32 Taxable period ............................................................................................ 33 Non-deductible input VAT ...................................................................... 33

Excise Duties ......................................................................................................... 33 Land Tax ................................................................................................................ 33 Local Taxes ............................................................................................................ 33

Contact details .............................................................................................. 34

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Foreword

This guide was prepared by:

UAB Grant Thornton Rimess A. Goštauto st. 40B 01112 Vilnius, Lithuania Tel: +370 5 2127856 Fax: +370 5 2685831 info@lt.gt.com www.grantthornton.lt

Key contact: Mr. Arūnas Šidlauskas, Advocate, Head of the Tax & Legal Department email: arunas.sidlauskas@lt.gt.com This guide is intended as a general guide and should not be acted upon without further advice from UAB Grant Thornton Rimess. UAB Grant Thornton Rimess is a member firm of Grant Thornton International. Grant Thornton International is one of the world's leading organisations of independently owned and managed accounting and consulting firms providing assurance, tax and specialist advice to independent businesses and their owners. The strength of each local firm is reflected in the quality of the international organisation. All Grant Thornton International member firms share a commitment to providing the same high quality service to their clients wherever they choose to do business. If you require any further information, please do not hesitate to contact UAB Grant Thornton Rimess. This guide has been prepared for the assistance of those interested in doing business in Lithuania. It does not cover the subject exhaustively but is intended to answer some of the important, broad questions that may arise. When specific problems occur in practice, it will often be necessary to refer to the laws and regulations of Lithuania and to obtain appropriate accounting and legal advice. This guide contains only brief notes and includes legislation in force as of June 2014. Grant Thornton International is not a worldwide partnership. Member firms of the international organisation are independently owned and operated. Services are delivered nationally by the member and practising correspondent firms of Grant Thornton International, a network of independent firms throughout the world. Grant Thornton International is an international umbrella organisation and does not deliver services in its own name.

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General Information Attraction for Foreign Investors

In the last few years, Lithuania has become a popular and attractive target in the region for foreign investment. Following the efforts of the Government of the Republic of Lithuania, worldwide corporations invested in Lithuania, including Barclays Bank, Western Union, Thermo Fisher Scientific, IKEA, Valeant, Computer Sciences Corporation, Mirror Accounting, Danske bank, Intermedix, Kinze Europe. Over the last couple of years, Lithuania has seen a growing presence of shared service and Business Process Outsourcing (BPO) activities. Today, Lithuania is the leading country among the Baltic States in the number of shared service and BPO projects attracted over the last nine years. The country offers ideal conditions for the expansion of the above businesses. Lithuania still offers a high quality and more cost efficient option when compared to similar investment activities in the West. According to the agency “Invest Lithuania” the key attractions include:

Fixed and stable currency;

Competitive business operating costs: productivity-driving tax incentives for R&D, tax “holidays” in free economic zones, competitive wages and rent rates. EU Structural Funds are still available in Lithuania for business development and investment into high value added products;

Strategic location: Lithuania is situated at the crossroads of 3 markets (Western Europe, the Nordic region and the CIS) and is part of the Baltic sea region;

Well-developed transport infrastructure: two trans-European network corridors, 4 international airports, an ice-free sea port, more than 550,000 m² of logistics and warehousing facilities;

Modern banking and financial system;

Top-quality talent pool: Lithuania has one of the best educated workforces in the European Union. 30% of the population possesses a higher education, 90% speak at least one foreign language, 50% speak two foreign languages. Over 201,000 students studies at 23 universities, 23 colleges and 35 research institutes across the country. With 40% of talent concentrated in science and technology, Lithuania maintains a pool of 18,000 researchers and scientists;

Labour costs are 4 times lower than the EU average. The minimum monthly wage in Lithuania is currently 290 EUR, and the minimum hourly wage is EUR 1.76.

Lithuania is mentioned by investors as an interesting market for business because of its stable political environment, good quality of life, profitability of local market, easiness to start a company, excellent ICT infrastructure. Business Climate Survey asked respondents what were the areas for improvement in Lithuania. Among those which were mentioned most often were: payment morale, meaning that the payment terms in Lithuania are often not followed both by private companies and municipal and governmental bodies; time consuming procedures (some of them were already reduced especially in real estate area) and accessibility by air. According to the agency “Invest Lithuania”, the key competencies of the Lithuanian labour pool described by foreign investors are: high number of graduates, Western culture, high quality of spoken English, availability of other languages, quick learners and very loyal employees. Respondents of the Business Climate Survey highlighted the same qualities of the Lithuanian labour force. According to them, Lithuanians are hardworking, easy to train, loyal, but have a lack of initiative and creativity. However, there’s a lack of certain specialist, among which are engineers, software developers and others.

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Geography and Population

Lithuania is the largest country within the three Baltic States situated in the north east of Europe and covering 65,300 square kilometres. Lithuania borders Latvia, Belarus, Poland and Russia. The largest cities in Lithuania are Vilnius (the capital), Kaunas, Klaipėda, Šiauliai and Panevėžys.

Lithuania has approximately 2,944 million inhabitants, 67% residing and working in urban areas. The population breakdown is 83.9% Lithuanian, 6.6% Polish, 5.4% Russian, and 4.1% other (Belarusian, Latvian, Ukrainian, etc.). The dominant religion is Roman Catholic (79%).

Constitution and Political Situation

The Lithuanian State is an independent democratic republic. The scope of the sovereign powers is defined by the Constitution of the Republic of Lithuania, which was adopted in 1992. The sovereign powers of the State are exercised by the Seimas (Parliament), the President of the Republic, the Government and the courts. The parliament with legislative power is a unicameral parliament, comprising 141 seats. The President is elected by the citizens of the Republic of Lithuania for a five year term. The President is the Head of State and Commander in Chief, overseeing foreign and security policies of a legislative nature. The President nominates the Prime Minister and Cabinet of Ministers and a number of other top civil servants. The executive powers rest with the Government. The constitutional control is carried out by the Constitutional Court.

Language

The national language is Lithuanian, which is closely linked to Sanskrit and falls into the Baltic family of the Indo-European languages. 90% of population in Lithuania speak at least one foreign language, 50% speak two foreign languages. The main foreign languages used in Lithuania are Russian and English.

History

On 16 February 1918 Lithuania was re-established as a democratic state. It remained independent until the outset of World War II, when it was occupied by the Soviet Union under the Molotov–Ribbentrop Pact. Following a brief occupation by Nazi Germany when the Nazis declared war on the Soviet Union, Lithuania was again absorbed into the Soviet Union for nearly 50 years. In the early 1990s, Lithuania restored its sovereignty and in the following years became integrated into the European political structures, i.e. Lithuania officially became a member of the North Atlantic Treaty Organization (NATO) on 29 March 2004 and joined the European Union (EU) on 1 May 2004. Lithuania was invited to join European Monetary Union and introduce euro from 1 January 2015.

Business Hours/Time Zone

Lithuania is two hours ahead of GMT (Eastern European Standard Time) between the end of October and the end of March and three hours ahead (Eastern European Summer Time) between the end of March and the end of October. Office working hours are usually between 8am and 5pm, with one hour for lunch, Monday to Friday. Banking hours are generally from 8am to 4pm. Some banks may open on Saturday. Retail shops are typically open between 9am and 7pm.

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Public Holidays

The official state holidays observed by most businesses and government offices are:

New Year's Day - 1 January; Lithuania's Independence Day – 16 February; Restoration of the Lithuanian State – 11 March; Easter Monday (following Easter Sunday); Labour Day - 1 May; St. John’s Day – 24 June; Anniversary of the Coronation of King Mindaugas – 6 July; Assumption Day - 15 August; Christmas Eve - 24 December; Christmas - 25 and 26 December.

Transport and Communications

The country has four international airports, an ice-free seaport and a satellite-based telecommunications system. Its already extensive road network is being upgraded, with the assistance from EU, EBRD and the European Investment Bank. The EU has recognised Lithuania as the prime transport centre in the region, linking EU with the East. Lithuania has well-developed transport infrastructure with two trans-European network corridors, more than 550,000 m² of logistics and warehousing facilities. Lithuania is also part of the Schengen area. According to the data provided by the agency “Invest Lithuania”, Lithuania is:

- 1st in the Word competitiveness yearbook rankings for communication technology;

- 1st in Europe for Fiber to the Home/Building connectivity with 18% penetration in 2013;

- 1st in Europe for density of network of public Internet access points; - 2nd fastest Internet speed and 4th for Internet download in the EU; - 2nd most flexible wage rate regime in Central and Eastern Europe; - 3rt lowest in hiring difficulty in Central and Eastern Europe; - 3rd in the EU for the share of fixed broadband lines equal to or above 30Mbps; - 3rd in the EU for highest penetration rate of fixed broadband growth; - 92% of financial operations done via e-banking; - Most up-to-date ICT technologies (EDGE technology, 3G mobile

communications infrastructure, mobile WiMAX 4G Internet etc.) fully implemented and functioning in the entire country.

Payment and Currency

National currency of Lithuania is Litas (LTL), which is divided into 100 cents. Lithuania pegged its national currency, Litas, to Euro on 2 February 2002 at the rate of LTL 3.4528 for EUR 1. Lithuania shall join the single European currency in 2015.

Economic Situation

More than 70% of the economy’s output is generated by the private sector. More than 90% of the banking sector is controlled by foreign, mainly Scandinavian, capital. According to the Report of the Ministry of Finance, GDP in Lithuania will grow up to 3.4% in 2014. Taking into account the currently formed EU assistance absorption plans of the Financial Perspective for 2013–2016, in 2015–2016 GDP growth will reach 4.3%. In 2017 GDP growth acceleration up to 4,3% is expected. Average annual inflation rate in 2014 is expected to be at 1.6%, in 2015 – 2.2% and in 2016 – 2.5%.

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Unemployment rate continues to drop. Surveys of businesses and consumers, as well as the decrease of long-term unemployed in two years in a row, show that employment situation should improve. However, over the medium-term unemployment is expected to remain at rather high levels. In 2014 unemployment is estimated to fall to 10.5%, while in 2015-2017 it will drop by 9, 7.8 and 6.5% respectively. Credit rating agency “Standard & Poor‘s (S&P) has upgraded Lithuania‘s long term borrowing rating from BBB to A-.

Main Economic Indicators

The main economic indicators of 2013 were as follows:

Average inflation rate – 1.2%;

GDP growth – 3,3%;

Average gross remuneration of employees – EUR 646;

Foreign direct investment – EUR 405 billion;

Unemployment – 11,8%.

Banking and Finance

The Bank of Lithuania is the country’s central bank, and its main objective is to secure price stability. The Bank of Lithuania:

Implements monetary policy;

Manages foreign reserves;

Puts Litas banknotes and coins into circulation;

Supervises commercial banks and other credit institutions and payment institutions, securities and insurance markets, investigates of disputes between consumers and financial services providers;

Performs other functions to promote stability and integrity of the monetary, credit and payment systems of Lithuania;

Performs analysis of the country’s economic and financial system, prepares financial stability reviews, foresees the potential threats to Lithuania’s financial system and predicts the possible economic development prospects.

The Bank of Lithuania is independent from the Government of the Republic of Lithuania and other State or municipal institutions. The Bank of Lithuania sets the official exchange rate of Litas against foreign currencies every day. Litas may be converted into foreign currencies without any limitations. Legislation provides that Lithuanian enterprises must maintain accounts using the official exchange rate, while commercial banks may refer to their own market situation when setting the exchange rate of Litas against foreign currencies. There is generally only a minor difference between the exchange rate set by the commercial banks and the official exchange rate set by the Bank of Lithuania.

Legal System

The Lithuanian legal system is based on the legal system adopted in continental Europe. In the Lithuanian legal system, the principal source of law is statutory enactments. Substantive branches of the law are codified (for example, Civil Code, Criminal Code, Code of Civil Procedure, Code of Criminal Procedure, etc.). The legal and regulatory system includes:

The Constitution of the Republic of Lithuania, constitutional laws, international treaties, conventions and laws;

Resolutions of the Seimas (Parliament) and Government;

Decrees of the President and

Acts of other governmental institutions and local municipal authorities.

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The Lithuanian court system includes courts of general jurisdiction, which deal with civil and criminal matters. It includes the Supreme Court, the Court of Appeals, district courts and local courts. At the start of 1999, the system of specialised administrative courts was established to investigate administrative litigations, as well as tax disputes. Tax disputes are heard in the Highest Administrative Court and Vilnius District Administrative Court. When hearing cases, the courts are obliged to take into consideration the published decisions of the Supreme Court and the Highest Administrative Court that form court practice in the relevant areas. The Constitutional Court of the Republic of Lithuania is not a part of the court system, but is an independent judicial body with the authority to determine whether the laws and other legal acts adopted by the Seimas (Parliament) conform with the Constitution, and whether the legal acts adopted by the President and the Government conform to the Constitution or laws. The Constitutional Court does not perform preliminary judicial reviews of laws. The Constitutional Court will only rule on the constitutionality issues of enacted laws and other legal acts (a posteriori control) and examine a case when the entities prescribed by the Constitution address the Constitutional Court with a petition.

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Business Organizations Available To Foreign Nationals Lithuanian legislation recognises a number of different of legal entities, the most popular being:

Limited liability companies;

Branches/representative offices of foreign companies;

Partnerships;

Sole proprietorships;

Non-profit organisations. Limited liability companies are the most commonly used forms of business entities. It is also possible to register a business of an individual to operate as a sole proprietor. The main types of limited liability companies are:

the private limited liability company (uždaroji akcinė bendrovė or UAB)

the public limited liability company (akcinė bendrovė or AB). These companies are the most common legal entities adopted by Lithuanian and foreign investors. Most of the regulations that apply to the establishment, management structure and powers of the management bodies are identical for AB and UAB.

Private Limited Liability Company

With a private limited liability company (UAB), share capital is divided into shares. A UAB may be established by one or more natural or legal persons, either residents or non-residents or combined. The number of shareholders cannot exceed 250. The minimum share capital established by the legislation is LTL 10,000 (EUR 2,896). Shares of a private limited liability company may not be offered and sold publicly.

Public Limited Liability Company

A public limited liability company (AB) is usually established by incorporators who are seeking shares of a company that trades publicly through the stock exchange. As a result, the rules regulating trading in securities apply. The minimum share capital of AB is LTL 150,000 (EUR 43,443).

Partnership

A partnership is an entity of unlimited liability (except for small partnership which is mainly targeted to family or small business). It is founded on the basis of a partnership agreement between several natural or legal persons, who combine their property under a partnership agreement with the aim of performing joint economic-commercial activities under a single company name. There are two forms of partnerships with unlimited liability:

General partnership (tikroji ūkinė bendrija or TŪB)

Limited partnership (komanditinė ūkinė bendrija or KŪB). TŪB is a form of commercial partnership, in which the partners are jointly and severally liable for all of its commitments and debts. TŪB shall have not less than two and no

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more than twenty full members. TŪB must be registered with the Register of Legal Persons. There are no restrictions on the nationality or residency of the partners. KŪB shall have at least three members (two full members and one limited partner) and not more than twenty participants. Small partnership is limited liability entity which may have up to 10 members. There are no share capital requirements or amount of contributions to be set onto the partners.

Sole Proprietorship

Sole proprietorships may be established by individuals. Sole proprietorship has a status of a legal person of unlimited liability. The owner of the sole proprietorship may be one individual only.

Non-profit Organisation

If a person or a group of persons are active in the field of social affairs, education, science, culture, sports or other similar activities, and if the objective of their activity is non-profit-oriented, they may establish a non-profit organisation, such as a public institution, association, charity and sponsorship fund or a public organisation. The most popular among the non-profit organisations is the public institution (viešoji įstaiga - PI), which is also entitled to perform economic-commercial activity. A PI is a non-profit legal entity that carries out publicly beneficial activity. A PI is not allowed to distribute the profits to its stockholders. There are no limitations with regard to the number of founders or stockholders.

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Setting up and Running Business Organizations A company incorporated in accordance with the Lithuanian law and a branch office of a foreign company acquires its legal status from the moment it is registered in the Register of the Legal entities. Full disclosure of essential information must be made to the public register, which thereby becomes public and examinable by everyone. For establishment, the founding agreement or deed of incorporation and the articles of association of the limited liability company must be notarized. The submitted documents must be originals in the Lithuanian language or accompanied by translation. In certain cases companies may be established electronically.

Private Limited Liability Company

A Supervisory Council – a shared power (collegial) supervisory body and Board may also be appointed within a private limited liability company. If a Supervisory Council is not formed, the legal functions of the Supervisory Council cannot be delegated to other bodies within the company. If the company does not appoint a Board, the functions of the Board are delegated to the Manager of the company. The General Meeting of Shareholders is not allowed to delegate any issues that fall within its powers to other bodies of the company. The Manager of the company is responsible for all the day-to-day operational business decisions within the company. A private limited liability company may be incorporated both by natural and legal persons. Every incorporator of a company must acquire shares in the company and become its shareholder.

Establishment

Conclusion of the contract of company’s establishment. When a company is established by one founder, the act of incorporation should be drawn up;

Founding members may submit the request (in the form of JAR-5) on the name for a temporary inclusion in the Register of Legal Entities;

The act of incorporation or contract of establishment entitles the company to open an accumulative account for formation of the authorized capital;

An initial contribution of subscribed shares paid. Initial contributions shall be paid in cash only. An initial contributions shall be not less than LTL 10,000 (EUR 2,896);

Non-monetary contribution, which would partially be paid for the company's shares should be assessed by an independent evaluator;

The list of shareholders shall be established;

The Articles of Association shall be drawn up and signed.

Registration

Before submitting a request for the Register of Legal Entities to register a private limited liability company, the founding documents must be approved by a notary, checking whether these meeting the statutory requirements. For the registration of a private limited liability company in the Register of Legal Entities the following documents shall be submitted:

Articles of Association (2 copies);

A list of shareholders;

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A document confirming the payment of the registration fee of LTL 200 (EUR 58);

All forms of necessary applications for the Register of Legal Entities. The private limited liability company shall be deemed incorporated from the date of its registration in the Register of Legal Entities. A legal entity must be registered within 3 working days from the submission of the documents to the Register of Legal Entities.

Branch or Representative Office of Foreign Company

Business may be conducted in Lithuania by opening a branch or a representative office, rather than setting up a separate Lithuanian company. A branch/representative office does not have the status of a legal entity. A branch is entitled to carry out all or part of the functions of the foreign company (parent company). Therefore, a parent company is liable for its branch and the branch is liable for the obligations of the parent company. A representative office is entitled to represent and protect the interests of the parent company, conclude contracts and perform other actions on behalf of the parent company. However, it is not allowed to conduct independent commercial activities in Lithuania. Export and import operations may be performed only between the representative office and its parent company or any other company related to the parent company. A branch will normally be subject to the same treatment as a local company and will be regarded as a permanent establishment (PE) for tax purposes. A foreign parent is responsible for financing its branch, in addition to covering its debts. As a result, no minimum capital is required for the branch. Invoices must be issued on behalf of the head office. Legal entity’s unit - a branch or representative office – is taken to be established from the registration in the Register of Legal Entities. Establishment

A decision of the legal entity’s body to establish a branch or representative office

Drawing up the statutes of a branch or representative office

Appointing the management bodies of a branch or representative office. Before submitting a request for the Register of Legal Entities, the founding documents must be approved by a notary, checking whether these meeting the statutory requirements.

Registration

For the registration of a foreign branch/representative office in the Register of Legal Entities the following documents shall be submitted:

The statutes of a branch or representative office;

An Articles of Association of the parent;

The documents of financial accounting reports of the last year and in the cases provided by law – the documents of consolidated financial accounting reports if such accounting is required under the foreign law applicable to the parent;

The parent’s extract from the Company’s Register that stores the parent’s file;

All forms of necessary applications for the Register of Legal Entities;

A document confirming the payment of the registration fee of LTL 200.

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Accounting and Reporting Requirements

For all enterprises, permanent establishments and representative offices, Lithuania has legal mandatory requirements concerning the keeping of financial records. In addition, all business entities are required to submit information to the State institutions for taxation, financial accounting and statistical purposes. Financial statements for public companies and, in certain instances private companies, must be audited annually. Profit-seeking business entities with limited liability must comply with the local Business Accounting Standards established by the Accounting Institute of the Republic of Lithuania or International Accounting Standards. Companies that list their securities on the Stock Exchange are required to maintain their accounts in accordance with the International Accounting Standards. The accounting procedures followed by an enterprise will depend on its legal form, size, type of business activities and the form of ownership. All enterprises are required to follow a double-entry system. However, natural persons performing an individual activity, and legal entities with unlimited liability, can opt for a simplified accounting system if they:

Are not registered to pay VAT;

Have no employees in the current business year;

Did not have employees in the preceding business year.

Notably, business entities are allowed to determine the type of internal accounting system that is adopted, using their own discretion. The Law on Accounting of the Republic of Lithuania (Law on Accounting) establishes general principles for assets, equity and liabilities. Under this law, accounting information must comply with the criteria of relevance, objectivity and comparability, must be timely and must be complete, clear and easily understood. All business transactions must be confirmed by primary documents. Business transactions that cannot be confirmed by direct documentation must be supported by documents of related transactions. All enterprises, except those using a simplified accounting system, must prepare financial statements in the Lithuanian language and, if required, a foreign language. Financial statements must include all of the following:

balance sheet;

profit/loss statement;

statement of changes in equity;

cash flow statement;

notes to the accounts. The Manager of a company has also to prepare annual activity report. According to the Law on Accounting, the maintenance of accounts must be performed by the financial officer, outsourced company performing accounting services or professional rendering individual accounting services. However, the Law on Accounting does not allow a Manager of the company to render the accounting services to the same company save for individual proprietorship and small partnership. Annual financial statements have to be confirmed by the general meeting of shareholders. They must then be presented to the Register of Legal Entities and made publicly available. Prior to the drawing up of annual financial statements, the accounts must cover all business transactions made within the accounting period. Accounting data must be

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confirmed by the inventory data, covering long-term assets, inventory values, accounts as well as financial and other resources. Other legal entities are entitled to draw up simplified financial statements and are not required to prepare a cash flow statement. Additional financial statement reporting requirements apply to banks, insurance enterprises, investment companies and State and municipal enterprises.

Audit Requirements

According to the Law on Audit, the aims of the audit are to verify that financial statements give, in all material respects, a true and fair view of:

Financial position;

Business results and cash flows of the entity;

Whether the data presented in the annual activity report prepared by the entity’s Board corresponds to data presented in the financial statements.

The auditor’s report includes:

An introduction, defining the object of the audit and applicable laws;

Description part, establishing audit standards against which the audit was performed;

Auditor’s opinion, stating whether the financial statements give a true and fair view of the financial position, business results and cash flows of the entity;

Reference, noting the issues which do not change the auditor’s opinion;

Opinion, stating whether the annual activity report corresponds to the data of the financial statements.

The auditor’s report is signed by the head of the audit company or other authorised auditor, and by the auditor who performed the audit.

Entities that must have their annual financial reports audited include:

State-owned and municipal enterprises;

Public interest entities;

Public limited liability companies;

Private limited liability companies meeting the below requirements;

Cooperative societies (cooperatives);

General partnerships and limited partnerships where all members are public limited liability companies or private limited liability companies that exceed the limits specified below;

Public and private limited liability entities where shareholder is the state or municipality.

Annual financial reports of private limited liability companies, cooperative societies (cooperatives), general partnerships and limited partnerships all participants whereof are public limited liability companies or private limited liability companies must be audited where at least two indicators thereof on the last day of the financial year exceed the following limits:

Value of assets recorded in the balance sheet amounts to LTL 6 million (EUR 1,737,720);

Sales revenue in the accounting financial year amounts to LTL 12 million (EUR 3,475,440);

Average number of employees during the financial year is 50.

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Work and Residency Permits

EU citizens and citizens of Norway, Iceland, Liechtenstein and Switzerland do not require any form of visa, residence or settlement permit to legally live or work in Lithuania. They may enter the country with a valid passport or photo identity card. They only have to apply for a certificate stating the right of residence if they supposed to stay in Lithuania for more than 90 days during 6 months period. The right of a citizen of an EU Member State in the Republic of Lithuania is confirmed by a certificate of the form specified by the Minister of the Interior. The certificate is valid for five years from the adoption of a decision on the issuance of the certificate or for the planned period of residence of the EU citizen in the Republic of Lithuania, where this period is shorter than five years. Documents shall be submitted to a migration office within the territory of which the EU citizen intends to declare his place of residence. A residence permit to be issued to non-EU resident shall grant an alien the right of residence in the Republic of Lithuania, to choose and change a place of residence, to depart from and return to Lithuania during the period of validity of the residence permit. The following residence permits are issued to the aliens:

Temporary residence permit - a document granting an alien the right for temporary residence in the Republic of Lithuania for a period specified in the permit. It is usually issued for a period of one year, though it may also be issued for a shorter period;

Permanent residence permit - a document entitling an alien to reside in Lithuania and certifying the alien’s permanent resident status. A permanent residence permit shall be executed for an alien for a period of five years. After this period the permit shall be replaced.

An application for the issuance (replacement) of a residence permit is to be lodged by the alien with a migration office of a territorial police agency if he legally stays in Lithuania. Otherwise he may provide documents to the nearest Lithuanian embassy or consular division abroad. The first temporary residence permit is issued within 6 months. An alien who intends to work in the Republic of Lithuania, must obtain a work permit. The permission to work in Lithuania is issued to an alien coming to work in Lithuania under the contract of employment or transmitted in a temporary work, when his/her permanent work place is abroad, and is not released from the obligation to obtain a work permit. A work permit shall be issued to an alien taking into account the needs of the labour market of the Republic of Lithuania and giving priority to the citizens of European Union. The employer wishing to employ a foreigner by concluding a contract of employment shall submit the application for an issuance of a work permit (the form established by the Law) to the Local Labour Exchange. A work permit shall be issued to an alien and withdrawn by the Labour Exchange of Lithuania under the Ministry of Social Security and Labour. A work permit is issued at a Local Labour Exchange. The work permit is issued within 2 months.

Labour Law

Lithuania's labour costs are among the lowest in EU. As from 1 January 2013, the minimum monthly salary is LTL 1,000 (EUR 290). Before signing a contract of employment, parties must agree on the employee's place of work, description of duties and salary. Additional clauses (for example probation periods, shorter working hours) may be included in an employment contract if agreed by both parties. Probation periods must not exceed three months.

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According to Lithuanian labour law, any work in a company registered in Lithuania must be performed under a written employment contract concluded between the company, including branches and representative offices, and an individual. This provision does not apply to individuals working under royalty (copyright) agreement and individuals, who have obtained business certificates (e.g. sole traders). Ancillary and voluntary work under the conditions set out by the Government is also not treated as illegal work. Work is deemed to be illegal if:

no employment contract is concluded between the employee and employer, except for the cases specifically mentioned in the laws;

work is performed by an expatriate who does not comply with the requirements set forth by the legislation.

Note that according to local legislation, in order to prevent illegal work, the employer must send notification to the social security authorities on the employment of employee one day before the commencement of the employment. A regular working week is 40 hours. A shorter period may be negotiated. There is a minimum annual vacation of 28 calendar days, including weekends but excluding public holidays. Maternity leave and childcare leave are available until a child reaches three years of age. According to the Labour Code of the Republic of Lithuania, employment may be terminated on the following grounds: (i) on the grounds provided for in other Lithuanian laws (e.g. Law on Companies); (ii) by mutual consent of the parties; (iii) upon expiry of the term where the employment contract is concluded for a definite fixed term; (iv) by notice of the employee; (v) under the circumstances beyond the employee’s control (the employee has the right to terminate the employment contract if the idle time at the employee’s workstation during the working time, without any fault of the employee, lasts for more than 30 successive days or more than 60 days in the last twelve months; or if the employee is not paid his or her full work pay (monthly wage) for more than two successive months); (vi) on the initiative of the employer without any fault on the part of the employee; (vii) by the initiative of the employer’s without a notice to the employee. The procedures for dismissal of employees on the initiative of the employer without any fault of the employee are set out in the Labour Code. The employer may terminate a permanent employment contract concluded for an indefinite period only for valid reasons, i.e. reasons related to the employee’s qualification, professional abilities, behaviour at work, as well as technological, economical, structural, reorganisation reasons and the like, etc. The usual compensation when dismissing an employee on the initiative of the employer (as described above) amounts to the employee’s average salary, which must be increased according to the months spent with a company:

from 12 to 36 months – two average salaries;

from 36 to 60 months – three average salaries;

from 60 to 120 months – four average salaries;

from 120 to 240 months – five average salaries;

more than 240 months – six average salaries. As a rule, the employer must settle all accounts in full with the employee being dismissed on the day of his or her dismissal.

Real Estate

Legal system of Lithuania sets some restrictions on acquiring real estate in Lithuania. Foreign entities which do not meet the criteria of European and Transatlantic integration provided for in the Constitutional Law are prohibited from acquiring land, internal waters

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and forests in the Republic of Lithuania. However, they may lease the State land plots for the maximum term of 99 years. Foreign entities meeting the criteria of European and Transatlantic integration have a right to own the land for agricultural and forestry purposes but there are certain restrictions. Foreign investments in national security and defence activities are restricted, with exception of investments from business entities satisfying the criteria of the European and Transatlantic integration, if approved by the State Defence Council.

Reorganization Law

Reorganization of different type companies in Lithuania are contained in the Civil Code of the Republic of Lithuania. Law on Companies further details reorganization procedures for limited liability companies. It identifies that decision on a merger must be taken by General Shareholders meeting, outlines the requirements for preparing merger conditions and other procedures. Decision to reorganize the company can be taken by the participants of legal entity by majority set out in the articles of association but no less than 2/3 of all participants in shareholders meeting. Prior to the merger, governing bodies of the companies participating in reorganization must prepare conditions for a merger. Conditions of a merger must contain details on the entities participating in reorganization, type of reorganization, timeframe for carrying out a merger and when the new entity takes rights and responsibilities of the reorganized companies. The reorganization must be publicly disclosed and the creditors may request for additional security of their claims. Simplified reorganization procedure can be applied when the entity is merged to the entity that is the sole participant of the reorganized entity.

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Taxes Corporate Income Tax

The Corporate Income Tax Law (CIT Law) governing the issues related to corporate taxation of local and foreign entities. Corporate income tax (CIT) is levied on:

Domestic Lithuanian entities - legal persons incorporated in accordance with Lithuanian law.

Foreign entities - legal persons or organisations with their headquarters located in the territory of a foreign state and incorporated or founded in accordance with the laws of the foreign state as well as any other taxable entities incorporated or founded in a foreign state.

Taxable income

The taxable income of a Lithuanian entity is income earned in the Republic of Lithuania and abroad. The taxable income of a foreign entity is income derived from activities conducted through a permanent establishment (PE) situated in the territory of Lithuania. It also applies to income earned in foreign countries and attributed to PE in Lithuania where such income relates to the activities of a foreign entity conducted through PE situated in Lithuania. Income of a foreign entity sourced in Lithuania that is not received through a PE situated in Lithuania is also subject to Lithuanian corporate income tax and is applied on:

Interest income,

Income from distributed profit,

Royalties,

Income from the sale, transfer or rent of immovable property situated in the territory of Lithuania,

Compensation for the breach of copyright and neighbouring rights,

Income received from a sports or entertainment activities,

Remuneration for activities to members of a supervisory council.

Re-organisations of companies (including mergers and divisions) are generally tax-neutral transactions (if performed under the conditions set in CIT Law). However, the general anti avoidance rule of “substance over form” should be noted, which allows tax authorities to reclassify the legal form of transaction. Deductible expenses

Taxable profit is calculated by deducting the non-taxable income and deductible expenses, including deductible expenses of limited amounts, from the income received over the taxable period. Deductible expenses include all of the usual costs that the entity actually incurs for the purpose of earning a business income, or receiving the economic benefits. Depreciation is attributed to deductible expenses of limited amounts. Depending on asset type, depreciation is charged, subject to expenditures and deductions from income, over the following periods:

Buildings including renovations (own property) 8/15/20 years Plant and machinery 5/8 years Office equipment 3 to 6 years

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Cars 4/6/10 years Trucks and busses 4 years Software 3 years Goodwill 15 years Assets should be depreciated down to a residual value. If fixed assets are used in R&D activities, shorter depreciation norms than those set above shall apply.

Interest

Interest paid that relates to external financing, which is in accordance with true market value, is a deductible expense for CIT purposes. The maximum permissible related-party, which is considered as the controlling lender, debt equity ratio is 1:4 (thin capitalisation) save for the case if the same transaction on the same conditions to be concluded between non-associated entities. Losses

If losses are incurred during the taxable period after deducting the non-taxable income and deductible expenses, such losses (save for losses incurred as a result of transferring securities and/or derivative financial instruments) can be carried forward to the following taxable period (fiscal year) for an unlimited time, however, until the activity the losses were related to, is continued. Losses may not be carried back.

Losses incurred as a result of transferring securities and/or derivative financial instruments can be carried forward to the following taxable period no more than five consecutive taxable periods. However, this rule only applies if such losses will cover the income received from the transfer of securities and/or derivative financial instruments. Losses may not be carried back.

As of 2010, losses may be carried forward within a group companies, provided certain conditions are met:

On the day of the transfer of the tax losses, the parent group entity holds, directly or indirectly, at least 2/3 of shares (interests, member shares) or other rights to distributable profits of each of the subsidiaries taking part in the transfer of the tax losses; and

Tax losses transferred between the entities within a group have been part of that group for an uninterrupted period of at least two years, from the day of the transfer of tax losses; or

Tax losses transferred or taken over by the group entity (entities) have been part of the group since the date of the entity’s (entities’) registration and have formed part of the group for an uninterrupted period of at least two years, from the date of the entity’s (entities’) registration.

A foreign entity may transfer tax losses (or part thereof) to a Lithuanian entity (both companies belong to the group of companies and certain requirements are met) only when:

A foreign entity is a resident in EU Member States for tax purposes, and is one of the forms of business organisations that is listed in Annex to Council Directive 90/434/EC and which is subject to tax specified in Article 3(c) of Directive 90/434/EC; and

Tax losses transferred by the foreign entity may not be carried forward to the following fiscal year (or deducted from its income (profit)) under the requirements of legal acts of the EU Member State where the transferring foreign entity is a resident for tax purposes; and

Tax losses transferred by the foreign entity have been calculated (recalculated) in accordance with local CIT Law.

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Investment incentive

An entity carrying out an investment project may reduce the taxable profits in accordance with the procedure laid down in the CIT Law. The taxable profits may be reduced during the tax period for which the calculated taxable profits are reduced by the amount of the actual costs incurred for the acquisition of the assets. The taxable profits shall be reduced if the assets are necessary for the entity to carry out the investment project and: 1) the assets are attributable to the following classes of fixed assets listed in Appendix 1 to the CIT Law: “plants and machinery”, “installations (structures, wells, etc.)”, “computer and communications equipment (computers, computer networks and hardware)”, “software”, “acquired rights”, “trucks, trailers” (up to 1 million Litas through taxable period); and 2) the assets have not been used and were produced not earlier than two years ago (as calculated from the date when such fixed assets were put into use). Noteworthy that the fixed assets acquired shall be intended for the production of new, additional products or the provision of services or the increase in the production (service provision) capacity or the introduction of a new process of production (provision of services) or a substantial change in the existing process (part thereof) also the introduction of technologies protected by international invention patents. The entity’s investment intended only for replacement of the held fixed assets with fixed assets of an equivalent class shall not be treated as an investment project (or a part thereof). The taxable profits may be reduced by not more than 50%. Where the amount of costs exceeds 50% of 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. However, taxable profits calculated for each tax period may not be reduced by more than 50%. The taxable profits may be reduced only by the costs incurred during the tax periods of 2009–2018. Fixed assets for the acquisition of which the taxable profits have been reduced in accordance with the procedure laid down in this Article must be used in the activities of the entity for at least three years. An entity intending to reduce its taxable profits due to an investment project, upon having started to carry out the investment project, must inform thereof the local tax administrator submitting standard application form. R&D incentive

In calculating CIT, the costs of scientific research and experimental development, except for depreciation or amortisation costs of fixed assets, shall be deducted three times from income for the tax period during which they are incurred where the scientific research and/or experimental development works carried out are related to the usual or intended activities of the entity which generate or will generate income or economic benefit. Where scientific research and experimental development works are acquired from another entity or a natural person, the costs incurred due to such acquisition shall be deducted from income only if the acquired scientific research and experimental development works have been carried out in a state of the European Economic Area or a state outside the European Economic Area which has concluded and brought into effect a treaty for the avoidance of double taxation with the Republic of Lithuania. Depreciation or amortisation costs of fixed assets used to carry out scientific research and experimental development shall be deducted from income in shorter terms than regular. CIT incentive to film supporters

Lithuanian registered companies and permanent establishments of foreign companies in Lithuania that are liable for CIT in Lithuania, may benefit from the below tax incentive. When calculating taxable profit for the year 2014 and further, a legal entity may deduct funds granted free of charge to movie maker within the period of 2014-2018 for the production of movies in Lithuania subject to conditions set in the CIT Law. Furthermore, the calculated corporate tax may be reduced up to 75% of tax payable. If

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funds granted exceeding 75% of corporate tax payable, exceeding amount may reduce profits of 2 further successive years. The CIT Law defines Lithuanian film producer as a permanent Lithuanian individual or citizen of EEA countries and Lithuanian registered entity or entity of EEA country acting through a permanent establishment in Lithuania that carry out film production activities and liable for creative, organizational and financial process of films production. There is no list of qualifying expenditure for the purposes of the CIT incentive, however list of non-qualifying expenditure is only in place. Taxable period

In principle, for tax purposes the accounting year should coincide with the calendar year. The local tax administrator may, at the request of the taxpayer and having considered the business features of that taxpayer, set another taxable period, providing it is within twelve months of the taxable period concerned. Tax return and payments

The annual CIT return, accompanied by the financial accounts, must be filed and annual CIT must be paid after the end of the taxable period, before the first day of the sixth month in the next tax period. Other tax returns and reports are submitted within the fiscal year or together with the annual corporate income tax return. In the events established by CIT Law, advance CIT must be paid each quarter. Tax reports

The following corporate income tax returns are set by the legislation:

Annual CIT return (mandatory);

Advance CIT return (filed if applicable);

Tax return on income (amounts) paid to a foreign entity and on CIT calculated and entered in the budget (filed if applicable);

CIT return of a foreign entity conducting activities in the Republic of Lithuania (permanent establishment) (filed if applicable);

Tax return on CIT calculated and paid for dividends received and paid out (filed if applicable);

Annual fixed CIT return (filed if applicable).

Supplementary reports that may be filed with an annual CIT return include:

Reports on mutual transactions or economic operations between associated entities;

Reports on controlled and controlling entities and individuals.

Additional reports that may be filed include:

Report on derivative financial instruments;

Other returns and reports as set by the legislation.

Legal entities, save for non-profit organizations, must also present annual financial statements to the Register of Legal Entities. CIT rates

The taxable income of Lithuanian and foreign entities is taxed at a rate of 15%. The taxable income of entities where the average number of employees does not exceed ten and where income over the taxable period does not exceed the maximum of LTL 1

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million (approx. EUR 289,620) is taxed at a rate of 5%, except when otherwise stated in the CIT Law. Non-profit entities, where the income over the taxable period does not exceed the maximum of LTL 1 million (approx. EUR 289,620), taxable profit up to LTL 25,000 (approx. EUR 7,240) is taxed at a rate of 0%. Any taxable profit above LTL 25,000 is taxed at a rate of 15%. Note that income directly allocated for financing of activities carried out when satisfying public interests, shall not be attributed to the income received from economic and commercial activities of non-profit entities. The taxable profit of social enterprises that satisfy the requirements established by the Law of the Social Enterprises of the Republic of Lithuania (where the main criteria is the number of disabled and unemployed persons employed) is taxed at a rate of 0%. Withholding tax

Income of foreign entities is subject to withholding tax without any deductions, however, a foreign entity may submit request to the local tax authorities on recalculation of tax from sale of immovable property or entertainment and sports activities. 0% withholding tax is imposed on interest paid to EEA registered entities and entities established in countries where Lithuania has double tax treaties in place. 0% withholding tax is also imposed on royalties paid to an EU registered company if the payee and recipient company is related, with a minimum 25% holding capital for not less than 2 consecutive years. 10% withholding tax is imposed on the following income (without any deductions):

Interest (except for those stated above that are subject to 0% withholding tax, interests on deposits and subordinated loans that meet the criteria established by the Lithuanian Bank that are not subject to taxation. Interest on Government securities is also exempt from taxation);

Royalties (except for those stated above that are subject to 0% withholding tax);

Compensations for violation of copyright or neighbouring rights paid to foreign (non-resident) taxable entities.

15% withholding tax is imposed on the following income (without any deductions):

Distributed profits;

Income from the sale, transfer or rent of immovable property located in Lithuania;

Income received from a sport or entertainment activity;

Remuneration for the activity of members from a supervisory council.

If double tax avoidance treaties providing for more favourable withholding tax rates than stated above, then tax rates established by the double tax avoidance treaties shall apply if tax residency certificate is presented. Participation exemption

Applying the participation exemption rule, CIT is not imposed on dividends received from an entity where the recipient entity has held enough shares entitling it to more than 10% of the total amount of votes for at least 12 subsequent months. This includes the moment of dividend distribution. However, this rule is not applicable if the foreign entity paying/receiving the dividends is registered, or otherwise organised, in an offshore territory. If dividends received from EEA registered entity that profit is subject to corporate tax there, the participation exemption rule is also applied and dividends received are not subject to tax, irrespective to votes and term of shares held.

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Transfer pricing

For the purpose of calculating taxable profit, entities must accept the amount which is in line with the actual market price of a transaction or economic operation as income and they must recognise the total amount of costs incurred during a transaction or economic operation. Transfer pricing documentation is mandatory for a company where sales income exceeds LTL 10 million (EUR 2,896 million) during the tax period. If the company meets this criterion, it may be required to present transfer pricing documentation to the tax authorities within 30 days from the request date. Transfer pricing documentation must be prepared for each controlled transaction and must be updated for each tax period. According to Lithuanian legislation, the tax administrator has authority to adjust the prices fixed in the agreements between associated entities, where those prices are not in line with the actual market price, or/and revalue the income or payments. To find the effective market price, the tax administrator may apply transaction value adjustment methods. Such methods and their application are defined by the supporting legislation. Taxation of permanent establishment

A foreign entity is regarded as permanently operating through its permanent establishment (PE) in the Republic of Lithuania if its activities comply with the following two criteria:

its activities are not temporary (generally last up to six months);

commercial cycle of operations has been finished.

PE of a foreign entity is obliged to register with the Taxpayers’ Registry.

CIT base of PE includes income from goods sold or services provided in the territory of the Republic of Lithuania and income earned from the activities of such permanent establishment in foreign countries. Noteworthy that even though taxation of PE profit principles are generally the same as entities established in Lithuania (i.e. income less non-taxable income, deductions of limited amounts and deductions related to income earned by a foreign entity through the permanent establishment), however the Government has established special order for deducting expenses for PE corporate tax purposes. Taxable period is a calendar year (the local tax administrator may, at the request of the taxpayer and having considered the business features of that taxpayer, set another taxable period, providing it is within twelve months of the taxable period concerned). Taxable profits of permanent establishments are subject to a 15% CIT rate. Annual tax return must be presented and annual CIT must be paid after the end of the taxable period, before the first day of the sixth month in the next tax period.

Social Security Tax

Two kinds of social security taxes are provided by legislation: social security contributions and mandatory health insurance contributions. State social insurance contributions are paid by:

All public and private legal entities entitled to calculate, deduct and pay to the budget of the State Social Insurance Fund state social insurance contributions for insured persons, for example employees, persons receiving authorship fee, sportsmen, etc.

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Individuals who must pay individual state social insurance contributions – sole proprietorships, lawyers, legal assistants, notaries, members of a general partnership, members of a limited partnership, farmers and adult members of their household working on the farm, persons performing individual activities.

Health insurance is available to the following groups:

Persons insured by the state (retired persons, students, unemployed persons, etc.)

Persons paying contributions themselves or where a third party is paying contributions, for example work remuneration, authorship fee, individual activity income, etc.

Tax liabilities applicable to different income types are:

* Subject to number of difficult or fatal accidents at work, rate maybe higher (up to 29.6%). ** Tax ceilings apply. *** From extracted amount which is declared as employment source income. **** 9% from minimal wage of the month, currently LTL 1,000 (EUR 290).

If employee has selected to pay additional pension contribution at his own account from 2014 then all income mentioned above is subject to additional 1% social security contributions (rates established for the legal entity shall not change).

Income Tax burden Health

insurance contributions

Social security

contributions

Work remuneration

Employee 6% 3%

Employer (the most common)

3% 27.98%*

Authorship fee (in employment)

Insured person 6% 3%

Assurer 3% 27.98%*

Authorship fee (not in employment)**

Insured person (50% on the amount)

Insurer

(50% on the amount)

6%

3%

3%

26.7%

Income from performer’s or sportsman’s activity (when having no labour

relations)**

Insured person (50% on the amount)

Insurer

(50% on the amount)

6%

3%

3%

25.5%

Income from working independently (without

business licence)**

Person itself (50% on the amount)

9% 28.5%

Income from sole proprietorship or

partnership (general and limited) activity**

Insurer 9%***

But not less than 9%****

26.3%***

Income from individual activity (with business

licence)

Recipient of the business certificate

Each month 9%****

50% of the basic monthly pension for

the main pension part,

currently LTL 180

(EUR 52) per month

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Usually taxable period is a calendar month (e.g. in case of salary) or moment of payment (e.g., in case of authorship fee). Social insurance for the periods of work in foreign countries is regulated by the agreements made with respective countries. The social security of the persons moving among the member states within the European Union is regulated by the Regulation 883/2004. The provisions of this Regulation are applicable to the states of the European Union, as well as the European Economic Area (EEA) and Switzerland. As a general rule, the applicable legislation is that of the country where the activity is carried out. In the case of posting, social security tax may be paid pursuant to the legislation of the employer’s country of location entered in the register and it is also possible to be subject to the security scheme of the country. The prerequisite for this is certificate A1 of the social security board of the country where the employer is registered. Lithuania has signed bilateral agreements concerning social insurance with Belarus, Ukraine, Russia, Canada and the United States of America.

Personal Taxation - Income Tax

Income tax is levied on individuals who are resident in Lithuania for tax purposes or on individuals who are not resident but receiving a Lithuanian sourced income. Residence

The residence of an individual is judged by the individual circumstances in each case. The criteria are laid down in the laws and principally outline the requirements as:

Domiciled in Lithuania;

Personal, social or economic interests in Lithuania;

Spending a specified period of time in Lithuania (residents are recognised foreign individuals staying in Lithuania with or without breaks for no less than 183 days in a calendar year, or staying in Lithuania with or without breaks for no less than 280 or more days during two consecutive calendar years, where the stay in Lithuania during one of these years lasted at least 90 days).

Taxable income

Permanent residents pay income tax on their worldwide income. Rates

The standard personal income tax rate is 15% including distributed profits. 5% personal income tax rate applies to income from individual activities, for example from the production, trade and most services, excluding income from intellectual professional activities and trade income in securities (including income from derivative financial instruments) that is subject to standard personal income tax rate. The income from activities specified by the legislation may be exercised under a business certificate that is subject to a fixed amount of personal income tax determined by municipality councils. Non-taxable income and incentives

The most notable tax exempt income includes:

Statutory compensations (e.g., business travel costs compensations, compensations related to movable nature of work), except for compensations for unused vacations and redundancy payments upon the termination of employment contracts;

Certain life insurance payments and non-life insurance compensations;

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Income from the sale of movable property, if this property is registered in the Republic of Lithuania or the movable property is registered in a Member State of the European Economic Area if property was purchased earlier than 3 years before its sale or other transfer of ownership;

Income from the sale of real estate located in a Member State of the European Economic Area if real estate was acquired more than 5 years prior to its sale or other transfer of ownership;

LTL 10,000 (EUR 2,896) profit from disposal of financial instruments;

LTL 10,000 (EUR 2,896) interest amount received from debt securities and/or deposits at banks;

Lottery winnings from entities registered with the European Economic Area if winnings are subject to tax from lottery turnover.

When calculating annual personal income tax amount of a Lithuanian permanent resident, taxable income may be reduced by expenses incurred by an individual those total amount during the tax year cannot exceed 25% of calculated taxable income, i.e., deductible can be life insurance contributions, pension contributions paid to pension funds and payments for studies within the set limits. Employment income

There is no separate wage tax in Lithuania. Employment income is subject to 15% personal income tax rate, which is deducted by the employer. When calculating tax on employment source income basic tax-exempt amount of income (depends on amount of income as well as working capacity of employee) shall apply and additional tax-exempt amount of income (depending on number of children). Income and capital gains from substantial shareholdings

Capital gains on the disposal of a substantial shareholding in a company are taxed according to the general principals of personal income tax, i.e. capital gains are subject to 15% personal income tax. Tax period

The tax period is a calendar year. Certain kinds of income are taxed at the moment of payment. Tax returns and payments

Depending on the particular type of income, the tax is paid and tax returns presented monthly or annually. All income, according to the tax payment procedure, is divided into two classes: “A” and “B”. Income of A class comprises income from which the income tax is calculated and paid to the budget by persons paying out income, for example income incidental to employment relations or relations in their essence corresponding to employment relations, income from sports or performing activities, royalties, income from artistic activities, income from property rent, etc. Income of B class comprises income from which the tax is calculated, paid to the budget and declared by an individual, for example, interest, winnings from gaming and lotteries, any income received from individuals of foreign states and from entities of foreign states (not through a permanent establishment), income from a resident of Lithuania (except for income incidental to employment relations, interest, royalties, etc.), income from the sale or other transfer into ownership of immovable property (e.g. a building, land) and of movable property where such type of property is subject to legal registration (e.g. a car), income from individual activities (except for income from individual activities from the sale or other transfer into ownership of non-felled forest, round wood, base metal scrap), etc.

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A resident of Lithuania who during the tax period received income attributed in accordance with the tax payment procedure to both A and B classes must, after the end of the tax period and before 1 May of the calendar year following that tax period, either himself or through a person authorised by him submit an annual income tax return to the tax administrator for the previous tax period and declare therein all the income received during the previous tax period and the income tax calculated in respect of such income. Income tax by an individual must be paid after the end of calendar year, before 1 May of the following calendar year. Taxation of non-residents

The object of personal income tax of a non-resident of Lithuania shall be:

income from individual activities carried on from a fixed base as well as income received in foreign countries and attributed to the said fixed base in Lithuania;

income sourced in Lithuania and received otherwise than through a fixed base, i.e.: - interest; - income from distributed profits; - income from distributed profits and payments to Board and Supervisory

Council members; - income from the rent of immovable property located in Lithuania; - royalties; - income incidental to employment relations or relations in their essence

corresponding to employment relations; - income from sports activities, including income connected directly or

indirectly to those activities, irrespective of whether it is paid directly to a sportsman or a third person acting on behalf of the sportsman;

- income from performing activities, including income connected directly or indirectly to those activities, irrespective of whether it is paid directly to a performing artist or a third person acting on behalf of the performing artist;

- income from the sale or other transfer into ownership of movable property where such type of property is subject to legal registration under the legal acts of the Republic of Lithuania and where it is (or must be) registered in Lithuania, and also from the sale or other transfer into ownership of immovable property located in Lithuania;

- compensations for violation of copyright or neighbouring rights. A natural person who is not deemed to be a resident of Lithuania may, in accordance with the procedure established by the Government of the Republic of Lithuania, apply to the tax administrator for recognition as a resident of Lithuania, provided that his income sourced in Lithuania during the tax period (except for the income on which income tax reliefs provided by the treaties of the Republic of Lithuania or the avoidance of double taxation were applied during the said tax period) accounts for not less than 90% of the total income received during the tax period. A permanent residency status for Lithuanian taxation purposes applies to an individual:

who has a main permanent residence place in the territory of Lithuania within the tax period (i.e. calendar year); or

who’s place of personal, social or economic interest within the tax period is more likely in Lithuania rather than abroad; or

who is present in Lithuania permanently or with intermissions equal or exceeding, in total, 183 days within the tax period or any twelve-month period commencing or ending in the calendar year or commencing in one and ending in another calendar year; or

who is present in Lithuania permanently or with intermissions equal or exceeding, in total, 280 days within the tax periods following each other and in

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one of such tax periods his/her presence permanently or with intermissions become equal or exceeding, in total, 90 days; or

who is a citizen of the Republic of Lithuania who receives remuneration under an employment contract or a contract in its essence corresponding to an employment contract or whose costs of living in another country are covered from the state budget or municipal budgets of Lithuania.

A non-resident of Lithuania who received income from individual activities carried on from a fixed base must, after the end of the tax period and before 1 May of the calendar year following that tax period, has to submit annual income tax return and pay personal income tax. A non-resident of Lithuania who during the tax period received income attributed to B class income (other than from individual activities carried on from a fixed base) must calculate income tax in respect of such income and pay it to the budget as well as file the respective income tax return not later than within 25 days of receipt of the income. When income is received from or through Lithuanian registered entities, income tax is deducted and paid to the state budget by those entities. When income is received from other individuals or foreign registered entities, then foreign residents must file individual income tax returns to the tax inspectorate of place of residence or place of work.

Inheritance and Gift Tax

Inheritance tax is levied on a beneficiary. Residents pay the inheritance tax on all inherited property – immovable and movable property, money, securities, etc. Non-residents pay the inheritance tax on inherited immovable property located in Lithuania and movable property, which is subject to legal registration (e.g. a car). The rate of inheritance tax must be calculated by applying the 70% value of the inherited property. The rate of the inheritance tax depends on the value of the inherited property. A property where the taxable value does not exceed LTL 500,000 (EUR 144,810) is subject to 5% inheritance tax rate. For a property where the taxable value exceeds LTL 500,000 (EUR 144,810) is subject to a 10% inheritance tax rate. Exemptions from inheritance tax apply when the taxable value of the inherited property does not exceed LTL 10,000 (EUR 2,896), and when the property is inherited by immediate family. This includes:

Spouses;

Children (including adopted children);

Parents (including adoptive parents);

Guardians (custodians);

Wards (foster children);

Grandparents;

Grandchildren;

Siblings. There is no separate gift tax – and as such, gifts are subject to 15% individuals’ income tax. Income received as a gift from spouses, children (adopted children), parents (adoptive parents), brothers, sisters, grandchildren and grandparents is tax free, while gifts from other persons up to the amount (value) not exceeding LTL 8,000 (EUR 2,317) in the calendar year is not subject to tax.

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Luxury Tax

Starting 1 January 2012 if total value of the real estate (including apartments, garages, farms, greenhouses, recreational buildings, fishery, civil engineering constructions and the like) owned by individuals exceeding LTL 1 million (EUR 289,620), then the excess value shall be subject 1% real estate tax. The taxable period is a calendar year and tax return shall be submitted and tax to be paid until 15 December of the current year. Note that land is not subject to luxury tax. It should be noted, that the non-taxable value up to LTL 1 million applies to the real estate, which is owned by family members or is acquired by them. The meaning of family members includes spouses and children (adopted children) under the age of 18 years living together with the parents.

Income from Entrepreneurship

Entrepreneurship is a person’s independent economic or professional activity, the aim of which is to derive income from producing, selling or intermediating goods, rendering services, or from other activities. A natural person engaged in entrepreneurship must register it with the tax authorities. The tax period is a calendar year and the tax rate is 5% or 15% (depending on kind of activity performed). Entrepreneur can reduce his taxable income from entrepreneurship by deducting business expenses. The income is also subject to social security contributions and mandatory health insurance contributions. The tax return must be submitted and income tax must be paid before 1 May of the following calendar year (mandatory health insurance contributions shall also be paid within the calendar year).

Double Taxation Agreements

Lithuania has in place 50 double taxation treaties with other countries. These treaties specify:

whether the right to tax particular income is exercised by the country of residence or the country of source;

to what extent tax credits will be granted by one country for taxes paid in another country;

whether income is fully tax-exempt in one country or the other. The following table shows the countries with which Lithuania has concluded Double Taxation Agreements, showing the rates of withholding tax on dividends, interest and royalties in each case.

%

Country Dividends Interest Royalties

A B C D E F

Armenia 5 15 10 10

Austria 5 15 10 5 10

Azerbaijan 5 10 10 10

Belarus 10 10 10

Belgium 5 15 10 5 10

Bulgaria 10 10 10

Canada 5 15 10 10

Croatia 5 15 10 10

China 5 10 10 10

Czech Republic 5 15 10 10

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Denmark 5 15 10 5 10

Estonia 5 15 10 10

Finland 5 15 10 5 10

France 5 15 10 5 10

Georgia 5 15 10 10

Germany 5 15 10 5 10

Greece 5 15 10 5 10

Hungary 5 15 10 5 10

Iceland 5 15 10 5 10

India 5 15 10 10

Ireland 5 15 10 5 10

Italy 5 15 10 5 10

Israel 5/10* 15 10 5 10

Kazakhstan 5 15 10 10

Kyrgyzstan 5 15 10 10

Korea 5 10 10 5 10

Latvia 15 0 0

Luxembourg 5 15 10 5 10

Macedonia 10 10 10

Malta 5 15 10 10

Mexico 0 15 10 10

Moldova 10 10 10

Netherlands 5 15 10 5 10

Norway 5 15 10 5 10

Poland 5 15 10 10

Portugal 10 10 10

Romania 10 10 10

Russia 5** 10 10 5 10

Serbia 5 10 10 10

Singapore 5 10 10 7,5

Slovakia 10 10 10

Slovenia 5 15 10 10

Spain 5 15 10 5 10

Sweden 5 15 10 5 10

Switzerland 5 15 10 5 10

Turkey 10 10 5 10

Ukraine 5 15 10 10

United Kingdom 5 15 10 5 10

USA 5 15 10 5 10

Uzbekistan 10 10 10 A – applies if the recipient owns more than 25% of the authorised capital of the payer; B – applies if the recipient owns more than 20% of the authorised capital of the payer; C – applies if the recipient owns more than 10% of the authorised capital of the payer; D – in all other cases; E – For use of industrial, commercial or scientific equipment.

* applies if the recipient owns more than 10% of the authorised capital of the payer, when

dividends are paid out of profit that according to Israel law on promotion of investment is released from the taxation or taxed with lower than usual taxable rate;

** applies if the recipient owns more than 25% of the authorised capital of the payer and direct investment amounts not less than USD 100,000.

If Lithuanian legislation providing for more favourable withholding tax rates than stated above, then tax rates established by the Lithuanian legislation shall apply.

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Unemployment Insurance Act

Payment to the Guarantee Fund is made by employers, legal entities and individuals (including non-profit organizations, banks and credit unions, representative office and branch of EEA entities, farmers, individuals carrying out individual business activities). The purpose of that payment is to ensure benefits for employees against unemployment. Taxable period – calendar month. This tax is not subject to reporting. The rate is 0.2 % of the gross salary paid to employees, which is used as the basis to calculate State Social Insurance contributions. Payments are made once a month, no later than the 15th day of the following month. If preferred, payments not exceeding LTL 150 (EUR 43) per year, can be paid once a year, whilst payments not exceeding LTL 300 (EUR 87) per year, can be paid twice a year.

Value Added Tax

The current Law on VAT is valid from the 1st of May 2004 and it is based on VAT directive. Tax base

According to the Law on VAT, the supply of goods and/or services is subject to Lithuanian VAT providing the following conditions are satisfied:

the supply of goods and/or services is effected for consideration; and

the supply of goods and/or services, according to the provisions of this Law on VAT, is considered to be effected within the territory of Lithuania; and

the goods and/or services are supplied by a taxable person for economic activities.

Taxable person

Lithuanian legal entities and individuals must register for VAT purposes when their income from the activities within the territory of Lithuania exceeding LTL 155,000 (EUR 44,891) during the last 12 months period. Foreign registered entities must register for VAT purposes starting the commencement of their activities unless the activity falls under the exception set by the legislation. Tax rates

The standard VAT rate is 21%. However, reduced VAT rates can be applied to specific activities:

0% VAT rate - commonly applied to: - Goods exported from the territory of the European Community; - Goods transported from Lithuania and supplied to a registered VAT payer

in one of the member states; - New cars supplied into another member state; - Certain transactions relating to international trade (e.g. supplied goods

delivered to a free zone or warehouse and where appropriate customs procedures are executed);

- other.

9% VAT rate applies to: - Books and other irregular information publications; - Nespapers, magazines and other periodic publications; - Heating energy and hot water for residential premises and to the

accommodation services defined in the legislation (until 31 December 2014);

- Transport of passengers to regular routes. Starting 1 January 2015 9% VAT rate shall also apply to tourist accommodation services.

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5% VAT rate applies to: - Pharmaceuticals and medicine support devices when their acquisition costs

entirely or partly compensated from the Health Insurance Fund; - Technical assistance means and their repair for disable people.

Taxable period

The taxable period for VAT is one month. In certain circumstances, the taxable period may be six calendar months, or another specified duration, but not exceeding 60 days. The VAT return for the taxable period must be submitted and the VAT must be paid at the end of the taxable period and before the 25th day of the next month. Non-deductible input VAT

Deduction is not allowed for input VAT incurred on the purchase of goods and services used for non-chargeable VAT activities; sales when VAT is calculated on margin; representation (deduction of 75% only is allowed); acquisition and rent of cars, etc.

Excise Duties

Excise tax is imposed on four classes of goods: 1. Ethyl alcohol and alcoholic beverages; 2. Processed tobacco; 3. Energy products; 4. Electric power.

Excise tax is paid by owners of warehouses of excise goods, registered traders, persons receiving goods from other EU countries for a business purpose as well as other persons who must declare and pay excises.

Land Tax

Land tax payers are defined as owners of private land situated in Lithuania, except forestry land. Taxable period is calendar month. The tax rate varies from 0.01 to 4% of the market value of the land. The specific rate for each calendar year is established by the municipalities.

Local Taxes

According to the Law on Charges, the municipalities may set number of local charges the most notable are for:

Permission to digging works in a public area of municipality;

Permission to trade in public areas established by the municipality;

Permission to install outside advertising;

Permission to organize commercial events in public areas;

Car parking;

Animals keeping in residential houses;

Permission to sell pyrotechnics;

Others.

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Contact details Arūnas Šidlauskas, Advocate, Tax & Legal Manager UAB Grant Thornton Rimess Goštauto st. 40B, 03163 Vilnius Republic of Lithuania Tel: + 370 5 212 7856 Fax: + 370 5 268 5831 Email: arunas.sidlauskas@lt.gt.com www.grantthornton.lt © UAB Grant Thornton Rimess, July 2014

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