Member Article

By Vitas Vasiliauskas, Associate Partner of the law firm LAWIN Lideika, Petrauskas, Valiûnas ir partneriai

 

In December 2010, the most important legislative acts on taxation to be enacted in 2011 were publicised. They will not introduce any significant changes for business but some positive effect will be achieved for sure: many provisions will reduce the tax burden on businesses and will improve the investment atmosphere in Lithuania.

 

One of the most business-friendly draft amendments this year is reinstatement of the reduced rate of value added tax (VAT) of 9% on hotel services. Reduction of tax burden for hotels stimulates exports of services, which in particular need support in Lithuania. So far, such tax benefit is of an experimental character: after a year of its application its impact on the prices of hotel services will be assessed. If prices go down, then the tax benefit may be extended for the further periods.

 

As to the Law on Value Added Tax, it might be important to note that no import VAT will be levied on imports of goods when it is known that the goods are intended for export to another EU Member State. By such alleviation of the administrative and tax burden for businesses an attempt is made to improve Lithuania’s as a country of transit position.

Changes of the Law on Income Tax of Individuals should not be of any significance for business environment in Lithuania, except, may be, for small businesses. Introduction of a 5% tax rate on income of sole proprietors generated from manufacture, trade and provision of most services (i.e. on the activities other than independent professional activities) might be one of the prerequisites for promotion of entrepreneurship in Lithuania. A 5% tax rate is very favourable and the pattern of individual activities becomes very attractive for small business. On the other hand, the risk of future tax disputes is growing, as there is no definitive classification (final list) of the activities which would fall under the 5% and which under the 15% rate of taxation. A 10% difference between the rates is not insignificant and therefore the potential for disputes is rather high.

 

Increase of excise duty on diesel fuel from LTL 947 to LTL 1,043 per 1,000 l of product should have a considerable impact on business. Due to such increase the diesel fuel price for businesses will grow as competition among the wholesalers of diesel fuel is not large and this will influence corporate budgets. The burden, although grown, has been foreseen, as this growth was caused by the obligations to the EU. Consequently, when budgeting for 2011, businesses should have taken into consideration such increase.

Another really positive aspect of the amendments is the revision of the Law on Immovable Property (IP) Tax, where for the purpose of tax calculation an individual valuation depending on the impairment of IP value is permitted instead of mass valuation of immovable property. This allows companies in response to the actual market fluctuations to decrease the tax base value of their immovable property on which IP tax will be levied. Such amendment is indeed an important factor for improvement of business environment.

An amendment of the Law on Corporate Income Tax useful for businesses: annual bonuses paid to the members of the board and supervisory board for their activities no longer are attributed to distributable profit. This means that the taxable profit of an entity can be reduced by the amount of the annual bonuses.

 

An amendment of the Law on Corporate Income Tax not very favourable for businesses: the earlier deadline for delivery of tax returns. The need for the Government to forecast cash flows receivable is understandable. For companies this means a harder administrative burden and additional resources for preparation of tax returns.

 

The most important change in 2011 for improvement of investment environment in the country is the supplement of the Law on Tax Administration. It provides for the possibility for the tax payer to apply to the tax administrator for an advance binding agreement on tax consequences of the future transaction (sequence of transactions). This ensures stability, one of the essential criteria for investors in their decision-making on the investment-hosting country.

 

Regrettably, this amendment will come into force in 2012, as Lithuania is almost the only Member State where the so-called advance agreements between taxpayers and tax administrators (binding rules) are not in use. Anyhow, if preparations are made during 2011 for the actual use of this instrument, in the long-term perspective such amendment (together with other measures) will significantly contribute to Lithuania’s competitiveness in the region in respect of foreign investments.

 

Although the 2011 tax environment changes improve Lithuania’s investment prospects, the main outbreak that would provide a manifest competitive advantage to Lithuanian in the region would be an establishment of SoDra’s ceiling for wages. This issue could be tackled together with the overall reform of the SoDra system, which would be a unique chance to definitely and resolutely finalise this already well-prolonged matter.

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