New taxes in Lithuania

In Lithuania, the fiscal burden stands at 32.2%, while the average rate in the EU is at 40.7%. This significant disparity constrains the budget’s potential. According to an official, income inequality in Lithuania ranks second highest in the EU, surpassed only by Bulgaria. The country’s property tax revenues are also very low, accounting for only 0.3% of GDP, compared to the EU average of 2.2%.

Triggers for the tax reform include decisions to increase the military budget to 2.5% of GDP and raise salaries for teachers. Changes in the Income Tax Law propose revising profit tax rates and tax exemptions, as well as modifying the taxation conditions for specific activities and setting limitations on gifts from relatives.

According to the amendments, starting from 2025, the income tax rate for self-employed individuals will increase from 15% to 17% and then to 20% in 2026. This change will only affect individuals earning at least €3,000 per month or €35,000 per year. It is estimated that only 15% of self-employed individuals will be affected by this tax increase. Additionally, these individuals will be eligible to receive unemployment benefits.

Another proposed measure is the improvement of business license regulations. The minimum income threshold for using this tax regime is suggested to be reduced from €40,000 to €20,000 per year.

The proposed legislation also includes a revision of the tax rate for the annual aggregate taxable income (including dividends, individual business income, etc.). The revised rates are as follows:

The reform plans to eliminate benefits for long-term life insurance and pension fund contributions, simplify the taxation regime for investment income through the introduction of a new tool called an investment account. This proposal allows Lithuanian residents to continuously invest in specified securities traded on stock exchanges or other prescribed investment instruments. Tax will only be paid on the received investment income that is not reinvested and used for other purposes.

The reforms also suggest limiting the tax-exempt amount for gifts from close relatives. Previously, such presents were entirely exempt from taxation, but now the following gifts are exempt from fiscal burden:

Furthermore, the amendments propose simplifying the declaration process for profit tax and the automatic refund of overpaid tax through an automatic declaration submission process.

Asset Depreciation: The project suggests granting all companies the right to apply instant depreciation for certain fixed assets and extending corporate tax benefits for investment projects and film production for another 5 years. This applies to legal entities with annual income ranging from €300,000 to €500,000. These taxpayers will calculate the corporate income tax rate using a prescribed formula. As a result, the effective corporate income tax rate for such companies will increase from 5% to 15%.

Increase in VAT Registration Threshold: The tax reform entails raising the VAT registration threshold from €45,000 to €55,000 and exempting social services from this tax.

Property Taxes: The tax reform in this area introduces the following innovations:

Additionally, it is proposed to tax the primary residence of individuals (based on its tax value) on a progressive scale depending on the average property value in the municipality:

If an individual owns more than one residential property, the municipality will independently decide on the tax rate, which should fall within the range of 0.1% to 1%. If approved by the Seimas (the Lithuanian parliament), this tax will be payable starting in 2026.

Social Security Contributions: In a separate vote, the parliament approved proposals from the Ministry of Social Security and Labour as part of the tax reform package.

The draft law on state social insurance suggests expanding the coverage of the unemployment social insurance system by including additional groups of self-employed individuals and reducing the minimum period of social insurance for unemployment from 12 to 9 months within the last 30 months.

The reforms also introduce a minimum unemployment social insurance benefit, equivalent to 5 basic social benefits. In 2023, this amount is set at €245.

Setting the non-taxable income equal to the minimum wage: Through these changes, the Ministry of Finance aims to align the non-taxable income (NPD) with the minimum wage (MMA). This adjustment will lead to a continued reduction in the tax burden for those earning less than one average monthly wage. By 2028, the goal is for NPD to reach the level of MMA.

According to the Lithuanian government’s calculations, approximately 811,000 individuals fall into this category. As a result of the gradual increase in these two parameters, the earnings of these citizens will start to rise. For example, in 2024, when the MMA increases to €925 and NPD rises from €625 to €750, their incomes will increase by €76.

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