15.03.2018

Alice Salumets, attorney-at-law of Rödl & Partner Advokaadibüroo OÜ

On the seminar “Business and taxation in Latvia and Lithuania” held in Tallinn on March 14, Mantas Mališauskas, Domestic Tax Division Leader of Rödl & Partner Vilnius office and Elina Putnina, certified tax consultant and Tax Division Leader of Rödl & Partner in Latvia, discussed the tax systems and the best features of business environment in Latvia and Lithuania.

Lithuania – flexible employment relationships and international shared service centres

In Lithuania, the three principal forms of business entities are small partnership (MB, corresponds also to the private limited company), private limited liability company (UAB, private limited company) and public liability company (AB, public limited company). Most legal persons have been established in the form of UAB; however, since 2012 when the law was changed and the small partnership (MB) was introduced, the form of small partnership has become more widely used as well. Small partnership is a legal person that may have up to 10 natural persons as shareholders and it can be established without making a contribution into the share capital.

The establishment of a company takes about 5 to 10 calendar days in Lithuania. A Lithuanian address is needed for the company registration documents and a respective written consent is required from the owner of the premises. Members of the Board shall be individuals and the board member and the business entity shall have an employment relationship.

New Labour Code

The new Labour Code entered into force on 1 July 2017 in Lithuania, significantly reforming the previous labour code towards making the employment relations and their termination more flexible.

The new Code has also regulated the agreement of non-compete. It provides the possibility to conclude a non-compete agreement which shall be valid for no longer than 2 years after the end of labour agreement and during the time of non-competing the employer shall pay to the employee compensation, which shall be not less than 40 % of employee’s average monthly salary.

Since 01.02.2017 it is allowed to pay the minimum salary only for unskilled jobs. In 2018, the minimum monthly gross salary in Lithuania is EUR 400.

Tax system in Lithuania

In the recent years, Lithuania has actively reformed its tax system and business environment in order to attract more foreign investors. As a result of the reforms, Lithuania has developed science and business valleys as well as free-economic zones. Today, Lithuania is an attractive destination for example to international businesses’ shared service centres.

The main direct taxes in Lithuania are:  corporate income tax, personal income tax, social insurance contributions.

Corporate profit tax rate is 15%, however a 5% preferential rate applies to small entities with annual income not exceeding EUR 300,000 and an average number of employees that does not exceed 10 for the tax year. Entities registered and operating in a free economic zone benefit from 100% exemption from profit tax for 10 years and a further 50% reduction in profit tax for an additional 6 years.

Currently, there are seven free-economic zones (FEZ) in Lithuania which are located in Akmenė, Kaunas, Kėdainiai, Klaipėda, Marijampolė, Panevėžys and Šiauliai. Both Lithuanian and foreign entities may operate in a FEZ, provided that they make investments in fixed assets of at least EUR 1 million, and at least 75% of their income is derived from the activities in FEZ. A special rule applies to service companies whereby FEZ incentive would also apply to companies doing investments in fixed assets of at least EUR 100,000, when their average number of employees is no less than 20, and at least 75% of their income is derived from the activities in FEZ.

According to the treaty for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital concluded between Estonia and Lithuania, the dividend income is subject to the tax rate of 5% or 15% in Lithuania (the 5% rate applies if the recipient owns at least 20% of the authorized capital of the payer), interest and royalties are subject to 10% income tax rate.

Payroll taxes

Personal income tax rate of a natural person is 15%. Additionally, the social insurance tax employee’s contribution of 9% is withheld from a natural person’s salary. The rate of social insurance tax employer’s contribution is 31.18%. The social insurance contributions are not payable in Lithuania, if a person submits an A1 certificate.

VAT rates

In Lithuania, the standard VAT rate is 21%. The VAT rate of 9% applies to books, newspapers, other printed materials, public transport services, hotel accommodation and heating of residential premises. The VAT rate of 5% applies to pharmaceuticals, and technical aid devices and their repair for disabled persons.

Latvia – reformed tax system

The main business forms in Latvia are SIA (private limited company), AS (public limited company), but also PS (general partnership) and KS (limited partnership). The most popular business form is SIA.

Obligation to disclose the beneficial owner

By March 1, 2018, all legal entities registered in the Latvian Register of Enterprises were obliged to disclose their beneficial owners. The beneficial owner is a person who directly or indirectly owns more than 25% of the entity’s voting rights, or directly or indirectly controls the entity, or in whose name or interests a business relationship is established or a casual transaction is carried out.  

Work relationships in Latvia

In Latvia, the labour law and court practice leans heavily in favour of employees, and the general principle is that doubts or misunderstandings shall be ruled in favour of employee. Employment contracts must be in written form and in the Latvian language.

In 2018 the minimum gross salary in Latvia is EUR 430. The main types of salary calculation are monthly salary, piece wage system and time based system. Normal working hours are 40 hours per week, 8 hours per day, from Monday till Friday. In case of a 6-day work week the working time is 40 hours per week, 7 hours per day, from Monday till Saturday, whereas the working day is shorter on Saturdays.

Tax system in Latvia

In 2017, Latvia carried through a tax reform, whereby the corporate income tax system was changed significantly. The Estonian income tax system has served as basis thereto. As the result of the reform the corporate income tax was abolished and only the distribution of profit is subject to taxation. The tax rate is 20/80. It must be noted, however, that although the Estonian tax system was the basis, the Latvian system still considerably differs from the Estonian system. In Latvia, companies must declare and pay income tax on monthly basis in addition to the dividends paid out during a taxable period also from other taxable profits. Taxable profits are considered to be also expenses not related to economic activity, including expenses for acquisition and maintenance of representative vehicles, donations, costs related to the assets not used for business purposes, penalties, fines etc.

Latvia has also established the following income tax rates:

Management and consultancy services are subject to 20% income tax rate (a special rule is applied to countries which have concluded the treaty for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital with Latvia).

Transfer of real estate property in Latvia is subject to 3% income tax rate.

Payments made to legal entities and natural persons located or established in low-tax and tax-free countries are subject to 20% income tax rate.

In Latvia there is no withholding tax for royalties or payment for intellectual property.

Payroll taxes

Latvia has a progressive personal income tax rate: annual income up to EUR 20,004 is subject to 20% income tax rate; annual income between EUR 20,005-55,000 is subject to 23% income tax rate and annual income exceeding EUR 55,000 is subject to 31.40% income tax rate.

Social contribution tax in Latvia totals 35.09%, from which 11% is employee’s contribution and 24.09% employer’s contribution. The maximum taxed amount is EUR 55,000. If the annual salary exceeds EUR 55,000, the exceeding amount is subject to solidarity tax at the rate of 11%.

If an employer allows using a company car, it is subject to salary taxes, unless the company has paid company car tax. In addition, released share purchased options, payments for employee health insurance (annual maximum EUR 426.86) and 3rd pension level/insurance (provided that policy duration is at least 10 years, and up to 10% of gross yearly salary, but not exceeding EUR 4,000 a year) are not subject to tax.

Value added tax

In Latvia, the standard VAT rate is 21%. The reduced VAT rate of 12% applies to books, periodic publications and other printed materials, public transportation services, accommodation services, supply of heating and gas to residential premises, and infant food. The VAT rate of 5% applies to certain fresh fruit, berries and vegetables typical to Latvia (a respective list has been established).

 

The article was published on 15.03.2018 at the website www.raamatupidaja.ee (in Estonian).

In case of questions please contact attorney-at-law Alice Salumets by e-mail alice.salumets(at)roedl.pro or by phone +372 6068 650.