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Summary of key tax changes effective as of 1 January 2019

Summary of key tax changes effective as of 2019

Recalculation of salaries Due to personal income taxation reform, as of 1 January 2019 employers have been required to recalculate gross salaries of their employees multiplying them by 1.289.

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Minimum salary

The minimum monthly salary (MMS) increased from EUR 400 to EUR 555 in 2019. The minimum hourly rate increased from EUR 2.32 to EUR 3.39 accordingly.

Social Security Contribution (SSC) rates

New standard SSC rates for employment income are as follows:

·       employee‘s rate – 19.5% (additional 1.8%/ 3% is paid by employees participating in II pillar pension accumulation plans; withheld by employer);

·        employer‘s rate – 1.77% (2.49% for temporary employment contracts).  

“Ceiling” for SSC in respect of employment income has been introduced. SSC shall be paid from annual employment related income not greater than*:

·        120 average country salaries (AS) in 2019 (EUR 136,344);

·        84 AS in 2020 (approx. EUR 95 thousand);

·        60 AS in 2021 and further years (approx. EUR 68 thousand).

*Not applicable for mandatory health insurance contributions.

New II pillar pension scheme

As of 1 January 2019 new 2nd pillar pension accumulation scheme came into effect. Key changes are the following:

·        All employees up to 40 years are automatically included in the II pillar pension scheme with the possibility to opt out (by notifying the authorities by 30 June 2019).

·        Employees older than 40 can join the scheme voluntarily.

·        Current participants are able to withdraw from the system by 30 June 2019.

·        New standard contribution formula: 3% from gross salary is contributed by an employee, additional 1.5% from country’s average salary is contributed by the government.

·        New participants joining as of 2019, as standard, will contribute gradually (starting from 1.8% contributions in 2019).

Personal Income tax (PIT)

As of 2019 new PIT rates apply.

Progressive 20/27% PIT rate is applicable to:

·       employment income;

·       remuneration paid for activities of the supervisory or management board;

·       royalties received from employer;

·       remuneration of the managers of small partnerships (under civil contracts).

 

If the total annual income (from sources listed above) exceeds certain threshold (EUR 136,344 in 2019) which also serves as ceiling for social security contributions, the exceeding part is subject to 27% rate.

15% rate applies to:

·       dividends;

·       income from individual activities;

·       social security benefits (including sickness allowance payable by employer).

Progressive 15/20% PIT rate applies to any other income which is not subject to 15% or 20/27% rates (except for income from waste). The total annual amount exceeding the threshold established (EUR 136,344 in 2019) the exceeding part is subject to 20% rate (otherwise 15% rate applies).

New monthly tax-exempt amount (up to EUR 300) applies for employment income (new calculation formula established). If monthly income exceeds EUR 2,555, no tax exempt amount applies.

 

Tax Administration

Certain changes in the Law on Tax Administration came into effect as of 1 January 2019:

·      Tax “amnesty” – an opportunity to voluntarily declare undeclared income received from 1 January 2014 until 31 December 2018 and pay the taxes due without any delay interest or penalties. Only available until 1 July 2019. 

·      The minimum criteria for reliable taxpayers were defined. Taxpayers which will not meet these criteria will not be able to participate in public procurements, receive support, will also be subject to longer statute of limitations (as of 2019).

Corporate Income Tax (CIT)

·      Lithuanian rules of controlled foreign corporations (CFC) were strengthened in line with the EU anti-avoidance directive. Passive income (e.g. interest, dividends, royalties, income from financial and insurance services, certain capital gains, income from related parties, etc.) of controlled foreign entities meeting certain criteria is included in taxable income of the Lithuanian controlling entity.

·      New concepts of controlling foreign tax entity and a controlled foreign tax entity have been introduced.

·      The general anti-avoidance provision has been established. For corporate income tax purposes an arrangement or a series of arrangements which, having been put into place for the main or one of the main purposes of obtaining a tax advantage, are disregarded.

·      New interest limitation rule came into force. The exceeding borrowing costs shall be deductible in the tax period in which they are incurred only up to 30% of the taxpayer's EBITDA. This restriction does not apply if interest expenses do not exceed EUR 3 million. Special rules apply to calculation of interest, EBITDA and group interest costs. Thin capitalization rules remain to be applicable as well.

·      CIT relief for film production has been extended until 31 December 2023. Maximum amount of the financial support has been increased to 30% of the film budget.

Value Added Tax (VAT)

·      Reduced 9% VAT rate applies to firewood and wood products supplied to household energy consumers for heating purposes. Reduced 5% rate (instead of 9%) applies to newspapers, magazines and other periodicals (exceptions apply).

·      New VAT reporting period of a quarter (3 calendar months) is set to be introduced as of 1 July 2019 for small companies (annual income of which do not exceed EUR 300 thousand).

·      Certain changes to taxation of vouchers as well as VAT treatment of telecommunications, broadcasting and electronically supplied services came into force.

Transfer pricing

The new transfer pricing documentation requirements apply to related-party transactions conducted in 2019 and the following years. The new requirements generally reflect the measures implementing recommendations under the OECD’s base erosion and profit shifting (BEPS) project.

Main changes to the transfer pricing documentation rules are the following:

·      Expanded definition of a “group of entities”.

·      New turnover thresholds. A taxpayer will be required to prepare the:

o  Master file – if turnover exceeds EUR 15 million and the taxpayer is part of an international group.

o  Local file – if turnover exceeds EUR 3 million.

·      Introduced exemptions for low-value transaction. Transfer pricing documentation will not be required if a controlled transaction or the total value of controlled transactions during the financial year does not exceed EUR 90,000 per related party.

·      Deadlines set for preparing transfer pricing documentation. The documentation must be prepared by the 15th day of the sixth month after the financial year-end (i.e. 15th June if calendar year is the financial year).

·      Updates of transfer pricing documentation can be made every three years if the conditions and circumstances of the underlying transactions remain unchanged. The data of controlled transactions must be updated annually.

·      Tightened sanctions for non-compliance with the new requirements. Non-compliance will result in a penalty ranging from EUR 1,820 to EUR 5,590, and the penalty for repeated violations will range from EUR 3,770 to EUR 6,000.

 

© 2020 "KPMG Baltics", UAB, a Lithuanian limited liability company and a member firm of the KPMG network of independent members firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved.

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