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Lithuania. Making the Tax System Better for Everyone by Ivestors’ Forum Tax Group

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Lithuania. Making the Tax System Better for Everyone by Ivestors’ Forum Tax Group INVestors’ FORUM OUTLOOK: September, 2011 Lithuania. Making the Tax System Better for Everyone By Ivestors’ Forum Tax Group CORPORATE INCOME TAX tax and other issues related to corporate income tax should be considered: Corporate income tax should be assessed as a stable tax that • reduced rate (deemed allowable deductions) on income from is becoming increasingly attractive and business-friendly. financing activities; Corporate income tax in Lithuania essentially meets the golden • reduced rate (deemed allowable deductions) on income from “broad base – low rate “rule. disposals or franchises of intellectual property. Another issue that needs to be further improved is the taxation Corporate income tax in Lithuania of controlled foreign entities (“CFC income”). Under the essentially meets the golden “broad base current legislation a Lithuanian company having established – low rate“ rule. a subsidiary, e.g., in a free economic zone in Belarus that exports most of its output into other CIS States would be, in Lithuania, subjected to corporate income tax on the income of Key advantages: the subsidiary. This is clearly not a tax evasion case. Therefore • one of the lowest rates in the EU, classical system, the tax the current taxation regime should be reviewed. base has changed little since 200; Finally, an issue of specific importance in the context of • attractive depreciation calculation rules; corporate income taxation is still the small number of double • dividend taxation – one of the most attractive regimes in the taxation avoidance agreements (still below 50), and the no- EU; longer attractive terms of some of these agreements. In the • attractive participation exemption for holding companies, pursuit to attract international corporate holding, finance, exemption from taxation of capital gains of non-residents’ intellectual property and other structures to Lithuania it is most resulting from disposals of companies operating in Lithuania; important to continue increasing the number of double taxation • attractive rules for corporate re-organisations; avoidance agreements. Such agreements need to be concluded • income of foreign branches is exempt from taxation in with Southeast Asian, Middle East and Latin American States Lithuania which eliminates the need to recalculate income and – these are the regions to which the future belongs, they will costs of foreign branches according to Lithuanian rules; definitely be having interests in Europe and Lithuania needs to • taxes withheld at source have become nearly extinct; start making appropriate preparations in this respect. Second, • attractive tax reliefs for R&D and investment; there is an urgent need to renegotiate certain provisions of • attractive arrangements for the carrying-forward of losses the agreements with Belarus, Ukraine and other CIS States. including group loss relief; Lithuania does have the chance to take over part of the • prevalence of substance over form and consistent replacement international tax structures currently attracted by such countries of dogmatic commentaries by contemporary considerations. as the Netherlands and Cyprus, and this is what the country The current taxation system does not actually require any essential should be seeking. amendments or changes; on the contrary, no essential changes A less favourable introduction was the shortening of the deadline should be initiated. Subsequently, consistent improvement and for the submission of income tax returns from 9 to 6 months elaboration of the system is highly recommended having regard following the end of a tax period. The deadline was shortened to the factual changes and needs, and also to the Investrment because without having the data on income tax returns until Promotion Programme approved by the Government. Since October, the Ministry of Finance could not draw up a reliable the Investment Promotion Programme mostly focuses on high- draft budget to be submitted for the autumn session of the added value services consideration should accordingly be given Seimas. However, () income tax is only the fourth by size in to further possibilities for improvement of the corporate income the budget, (2) the data of the tax returns for – say 200 – that tax system. the Ministry of Finance receives by 30 June 2011 affects the Therefore the following changes of the law on corporate income advance corporate income tax payable for 200; it, however, LAND TAX does not affect the actual income tax payable in 200; (3) The Law on Land Tax is perhaps the oldest in the Lithuanian tax during the recent economic crisis a number of corporate income legislation and undoubtedly, the shortest in terms of text. When taxpayers shifted from advance income tax payment according assessed in the overall context of the taxation system neither to previous periods to payment according to expected results. the purpose, nor motivation for reliefs, nor the purpose of such Therefore the value of the accelerated declaration of corporate reliefs are sufficiently clear. income tax is doubtful and returning to the previous 9 months Complete exemption of forest land, to say the least, provides deadline is recommended. no incentive to use the land effectively. There could be some minimum taxation that would naturally encourage owners IMMOVABLE PROPERTY TAX to take care of the quality of the forest, its maintenance and An immovable property tax has been traditionally levied on reforestation needs, etc. and to generate enough income to at least legal persons. In the course of the past several years natural cover the tax costs. This would promote enterprise initiative, persons transferring on the basis of lease or otherwise their transparency, enhance efficiency and eventually create more immovable property to legal persons to be used in economic jobs in the forestry sector. activities were included in the taxable population. The rate of The tax reliefs in respect of the land tax, which is essentially one the tax is moderate, however the procedure for its calculation is of the property taxes, granted to individual social groups rather not in all cases very clear or fair: than to certain objects up to a certain minimum taxable value is • in certain cases the delineation between movable property an example of socially attractive but defective administration. (equipment and machinery) and immovable property (buildings It is no secret that in Lithuania disability certificates can be and structures) is not very clear; obtained for one single purpose – to obtain as many possible • the Law on Immovable Property Tax does not regulate the different social benefits and tax reliefs. A fair and reasonable procedure for taxation of property that for objective reasons has solution in this case would be to relate any tax reliefs, to the not yet been registered in the Register of Immovable Property; in property value and/or the income earned rather than to the practice the tax is levied on the carrying amount of the property health condition, pensionable age or working capacity of the which does not comply with the provisions of the Law; landowner. • after the property is registered and its taxable value is finally established, no procedure has been put in place for the In general terms this Law appears recalculation of the tax after a five year period as is the case with morally obsolete and should be all other taxes; essentially rewritten following prior • in practice on a number of occasions the substance over form rule is not operational and the possibility to correct any identification of the objectives assigned evaluation errors after a five year period is thus not realised. to the tax as a fiscal and regulatory A universal immovable property tax exists measure. A convenient occasion to do this in most developed economies, and in a would be in relation to the introduction of majority of cases the immovable property an immovable property tax. tax is payable by the owner irrespective The charge for land lots up to LTL 5.00 per year is exempt from of whether or not the property is used land tax, and the land tax return is prepared and submitted to in business activities, or for private taxpayers by the tax administrator – this is a clear indication that the tax collection costs in certain cases significantly exceed purposes. the proceeds from the tax. Is LTL 6.00 a sum really worth administering? We believe a number of amendments are required to the Law on In general terms this Law appears morally obsolete and should Immovable Property Tax designed to address and eliminate the be essentially rewritten following prior identification of the deficiencies identified. objectives assigned to the tax as a fiscal and regulatory measure. A universal immovable property tax exists in most developed A convenient occasion to do this would be in relation to the economies, and in a majority of cases the immovable property introduction of an immovable property tax. On the other hand, tax is payable by the owner irrespective of whether or not the however, this could be done independently without waiting for property is used in business activities, or for private purposes. the introduction of a universal immovable property tax. Our view in this respect is consistent and unequivocal: this kind of tax needs to be introduced. The tax should be universal, PERSONAL INCOME TAX without any exceptions by type of immovable property, status Since 2009, Lithuania has had an attractive rate of personal of the owner (pensioner, disabled, etc.), and without exemption income
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