Having entered the EU in 2004, Lithuania is known as a country with a fast developing economy, infrastructure and multiple opportunities for business. As the results of a survey carried out in 2005 by the World Bank show, Lithuania provides the easiest conditions for starting and developing business in comparison with other new EU members. Lithuania has become an attractive market for foreign investors and businessmen from many Western European countries, one of the main reasons being its business-friendly tax regime.
For instance, the corporate tax rate is only 15%. A reduced 13% profit tax rate is applied to all entities whose gross income during the taxable period is less than LTL 500,000 (EUR 144,810) and the number of employees does not exceed 10, except for certain cases. Meanwhile 0% rate applies to companies manufacturing agricultural products.
VAT in Lithuania is charged on assets and services provided within the country as well as on imports into Lithuania. Exports from Lithuania are not subject to value added tax. The standard VAT rate in Lithuania is in most cases 18%. However, a reduced rate of 5% applies to public transport services provided on certain routes, books, publications, medicines; and a 9% rate applies to the construction and renovation of residential premises. Special taxation schemes are applicable to farmers, second-hand goods, tourism services, works of art, and some other assets and services.
Interest earned by foreign entities is subject to Lithuanian withholding tax of 10%, unless a more favourable tax rate applies according to international treaties. To avoid double taxation, Lithuania has signed 40 bilateral treaties with Canada, China, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Slovenia, Spain, Turkey, Ukraine, the USA and other countries worldwide.
The acquisition of real estate in Lithuania is not subject to real estate transfer tax or any stamp duties. The annual land value tax rate amounts to 1.5%. Lithuanian and foreign entities owning buildings and structures located in Lithuania are obliged to pay real estate tax at a rate of 1% of the cadastral value of buildings and structures.
Individual income in Lithuania is taxable at different rates. The top tax rate has been recently reduced to 27%, and from January 2008, it is going to be reduced to 24%. In the year 2007 Lithuanian companies pay a temporary social tax of 3%.
Since Lithuania pursues a low-tax policy, the tax-to-GDP ratio was 28.7% in 2004, the lowest in the EU. It is also important to mention that Lithuania has two free economic zones in the major Lithuanian cities (Kaunas and Klaipeda). Incentives in these zones include no corporate tax for the first 6 years and a 50% corporate tax break for the next 10 years (applied to investments over EUR 1 million); no land, road, or real estate taxes, and a wide application of 0% VAT.
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