KPMG Baltics

Business environment in Business environment in

LithuaniaLithuania

SeminarSeminar

RigaRiga, , June 2009June 2009

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ContentsContents

General information on LithuaniaGeneral information on Lithuania

Legal environmentLegal environment

TaxationTaxation

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General informationGeneral information

Note: * - First quarter figures

** - 6 months Vilnius Internal bank rate dated at 1 of January of each year (VILIBOR 8.49% as of 3 of June 2009)

Source: Central Statistical Bureau of Lithuania, Lietuvos Bankas, SEB

18.9%43.9%48.9%53.6%39.7%Loan portfolio annual growth, %

24.3%*21.4%13.5%16.9%11.2%Retail sales growth

5.8%4.3%5.6%8.3%11.4%Unemployment rate

7.10%3.90%2.64%2.72%n/a6 months VILIBOR**

11.1%5.7%3.7%2.7%1.2%Inflation, (CPI)

630 522 433 370 333 Gross average salary, EUR

11.6%14.6%10.6%7.1%7.7%Current account deficit as % of GDP

9,612 8,420 7,065 6,112 5,285 GDP per capita, EUR

3.1%8.9%7.8%7.8%7.4%Real GDP growth

20082007200620052004

Main macroeconomic indicators

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Lithuania: Sector informationLithuania: Sector information

Construction

9%

Agriculture

4%

Taxes and

subsidies

10%

Services

14%

Financial

intermediation

15%

Industry

20%

Trading and

Catering

28%

Source: Central Statistical Bureau, news2biz

GDP breakdown by economic sectors in 2008 GDP breakdown by economic sectors in 2008 -- Total EUR 32.3 billionTotal EUR 32.3 billion

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Lithuania: Sector informationLithuania: Sector information

Manufactured

goods

10%

Other*

6%

Food and live

animals

13%

Miscellaneous

manufactured

products

14%

Chemical

products

14%

Machinery and

transport

equipment

19%

Mineral fuels

and lubricants

24%

Note: * - Other includes Crude materials except fuels, Beverages and tobacco, and Animal and vegetable oil

Source: Central Statistical Bureau, news2biz

Major exports, 2008 Major exports, 2008 –– Total EUR 16.1 billionTotal EUR 16.1 billion

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Lithuania: Sector informationLithuania: Sector information

Other

15%

Public

administration

6%

Real estate

and renting

7%

Health and

social work

7%Transport,

storage and

ITC*

7%

Construction

11%

Education

11%

Wholesale and

retail trade

including

repair works

18%

Manufacturing

18%

Note: * ITC corresponds to communication sector

Source: Central Statistical Bureau, news2biz

Employment breakdown by activities in 2008 Employment breakdown by activities in 2008 –– Total 1,345 thousandTotal 1,345 thousand

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Lithuania: Economic activitiesLithuania: Economic activities

In the first quarter of 2009 the GDP amounted In the first quarter of 2009 the GDP amounted --13.6 % 13.6 %

coming mostly from the rapid decrease observed for the coming mostly from the rapid decrease observed for the

value added of construction (by 37.3%), trade, transport value added of construction (by 37.3%), trade, transport

and communication (by 20.9 %) and industry and energy and communication (by 20.9 %) and industry and energy

(by 13.5 %) activities.(by 13.5 %) activities.

The external current account deficit reached 11.6% of The external current account deficit reached 11.6% of

GDP in 2008. The current account of the balance of GDP in 2008. The current account of the balance of

payments for Januarypayments for January––March 2009 was balanced.March 2009 was balanced.

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Lithuania: Economic activities (2)Lithuania: Economic activities (2)

In 2008, annual inflation averaged 11.1% compared with In 2008, annual inflation averaged 11.1% compared with

5.8% in 2007 due to external factors and also domestic 5.8% in 2007 due to external factors and also domestic

demand pressures. demand pressures.

Nevertheless, in April 2009, annual inflation (April 2009, Nevertheless, in April 2009, annual inflation (April 2009,

against April 2008) made up 6.3%against April 2008) made up 6.3%

The economic downturn has been accompanied by a The economic downturn has been accompanied by a

sharp rise in unemployment. Unemployment amounted sharp rise in unemployment. Unemployment amounted

to 11.9% as of 1 April, 2009. to 11.9% as of 1 April, 2009.

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Lithuania: Credit policyLithuania: Credit policy

The downward trend of enterprise crediting emerged in The downward trend of enterprise crediting emerged in the second half of the year, when the credit flow the second half of the year, when the credit flow declined three times, compared to the same period in declined three times, compared to the same period in 2007. The sharpest decline was registered in the 2007. The sharpest decline was registered in the volumes of crediting to construction, real estate and volumes of crediting to construction, real estate and trade sector enterprises.trade sector enterprises.

Households lending has slowed intensively Households lending has slowed intensively –– event event though the portfolio of housing loans was shrinking at though the portfolio of housing loans was shrinking at a slower pace, and the flow of these loans was still a slower pace, and the flow of these loans was still positive at the end of the year. positive at the end of the year.

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Lithuania Lithuania

Note: * - Forecasts of the EU Commission

Source: Ministry of Finance of Lithuania, EU Commission

11.50%11.50%11.50%11.50%15.40%15.40%

15.9%*15.9%*

13.50%13.50%

13.8%*13.8%*

Unemployment rateUnemployment rate

0.1%0.1%--1.2%1.2%--0.7%0.7%

--0.4%*0.4%*

5.4%5.4%

3.6%*3.6%*

Inflation, CPIInflation, CPI

4.5%4.5%4.3%4.3%--2.6%2.6%

--4.7%*4.7%*

--10.5%10.5%

--11.0%*11.0%*

Real GDP growthReal GDP growth

20122012201120112010201020092009

Macroeconomic forecastMacroeconomic forecast

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Corporate business entitiesCorporate business entities

Private limited liability companies (Private limited liability companies (UABUAB))

Public limited liability companies (Public limited liability companies (ABAB))

Investment companiesInvestment companies

Personal enterprisesPersonal enterprises

General/limited partnerships (General/limited partnerships (TUB/KUBTUB/KUB))

Agricultural companies (Agricultural companies (ZUBZUB), etc.), etc.

Most popular business vehicle is a private limited Most popular business vehicle is a private limited

liability company (liability company (UABUAB))

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Main characteristics of UABMain characteristics of UAB

Minimum share capital of LTL 10,000 (EUR 2,900)Minimum share capital of LTL 10,000 (EUR 2,900)

11--249 shareholders (individuals and/or companies)249 shareholders (individuals and/or companies)

½½ equity ratio requirementequity ratio requirement

Mandatory corporate bodies Mandatory corporate bodies -- Managing director and Managing director and

General Meeting, Board is optionalGeneral Meeting, Board is optional

Management can be both local and/or foreign Management can be both local and/or foreign

individualsindividuals

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Incorporation process Incorporation process

Key documents needed from founder:Key documents needed from founder:-- Articles of AssociationArticles of Association-- Registration certificateRegistration certificate-- Decision to set up a companyDecision to set up a company-- Owners consent to give office premisesOwners consent to give office premises-- Sample signature of Managing directorSample signature of Managing director-- Power of Attorney to represent founder during incorporationPower of Attorney to represent founder during incorporation

All foreign documents shall be approved with All foreign documents shall be approved with AppostileAppostile

Documents shall be verified by the Lithuanian notary publicDocuments shall be verified by the Lithuanian notary public

Registration performed by the Register of Legal PersonsRegistration performed by the Register of Legal Persons

Registration takes ~ 2 weeks after collection of all documentsRegistration takes ~ 2 weeks after collection of all documents

VAT registration shall be arranged separately at the tax VAT registration shall be arranged separately at the tax authoritiesauthorities

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Company vs branchCompany vs branch

CompanyCompany

Limited liabilityLimited liability

Minimum LTL 10,000 (EUR 2,900) Minimum LTL 10,000 (EUR 2,900) share capitalshare capital

½½ equity ratioequity ratio

Thin capitalizationThin capitalization

Transfer pricing complianceTransfer pricing compliance

Audit required if at least 2 criteria Audit required if at least 2 criteria met:met:-- annual net turnover ~ EUR 3.48 annual net turnover ~ EUR 3.48 million (LTL 12 million)million (LTL 12 million)-- total assets ~ EUR 1.74total assets ~ EUR 1.74million (LTL 6 million)million (LTL 6 million)-- average number of employees average number of employees 5050

BranchBranch

No separate legal liabilityNo separate legal liability

No share capital requiredNo share capital required

Simplified financial statementsSimplified financial statements

No audit requirementNo audit requirement

Branch income included into Branch income included into income of foreign founder and income of foreign founder and subject to CIT and DTA treatiessubject to CIT and DTA treaties

Financial statements of founder Financial statements of founder requiredrequired

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Permanent establishment (PE)Permanent establishment (PE)

Fixed place of business through which the business Fixed place of business through which the business activities are wholly or partly carried onactivities are wholly or partly carried on

Dependent agentDependent agent

No legal (corporate) registration, tax registration onlyNo legal (corporate) registration, tax registration only

Lower accounting and reporting requirementsLower accounting and reporting requirements

No share capital requiredNo share capital required

No management requiredNo management required

Income received through PE included into income of Income received through PE included into income of foreign entity subject to CIT and DTA treatiesforeign entity subject to CIT and DTA treaties

VAT registration might be relevantVAT registration might be relevant

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Dividend distributionDividend distribution

Decided in annual General Meeting (4 months after the end of Decided in annual General Meeting (4 months after the end of

financial year) by 2/3 majority votesfinancial year) by 2/3 majority votes

No dividend distribution if the company has failed to pay taxes No dividend distribution if the company has failed to pay taxes in in

due timedue time

No dividend distribution if:No dividend distribution if:

-- company is insolvent or will become insolvent after dividend company is insolvent or will become insolvent after dividend

distributiondistribution

-- company has negative result (losses);company has negative result (losses);

-- equity is less or will become less than the sum of share capitaequity is less or will become less than the sum of share capital + l +

legal reserve + revaluation reserve + reserve to acquire own legal reserve + revaluation reserve + reserve to acquire own

sharesshares

Dividend shall be paid in cash in 1 monthDividend shall be paid in cash in 1 month

No advance dividend distribution allowedNo advance dividend distribution allowed

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Bankruptcy and insolvencyBankruptcy and insolvency

Company is insolvent when it fails to settle with the Company is insolvent when it fails to settle with the

creditor (creditor (--s) within 3 months from the deadline s) within 3 months from the deadline

prescribed by laws or contracts and the overdue prescribed by laws or contracts and the overdue

obligations exceed obligations exceed ½½ of the value of the companyof the value of the company’’s s

assetsassets

Bankruptcy petition may be filed by the creditor (Bankruptcy petition may be filed by the creditor (--s), s),

management, shareholders, liquidator of the companymanagement, shareholders, liquidator of the company

Claim ranking: Claim ranking: Employment related claimsEmployment related claims

Tax claimsTax claims

All other claims All other claims

Mortgaged claims have priority Mortgaged claims have priority

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Employment (1) Employment (1)

Written employment contract shall be concludedWritten employment contract shall be concluded

Minimum monthly salary is LTL 800 (EUR 230)Minimum monthly salary is LTL 800 (EUR 230)

Standard working time is 40 hours per weekStandard working time is 40 hours per week

Maximum overtime permitted is 4 hrs per day, 120 hrs Maximum overtime permitted is 4 hrs per day, 120 hrs

per annum (180 hrs allowed when set in collective per annum (180 hrs allowed when set in collective

agreement)agreement)

Overtime is remunerated at 1.5 rate, working during Overtime is remunerated at 1.5 rate, working during

holiday or day off holiday or day off –– at double rateat double rate

Standard annual paid vacation is 28 calendar daysStandard annual paid vacation is 28 calendar days

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Employment (2)Employment (2)

Redundancy shall strictly follow the requirements set in Redundancy shall strictly follow the requirements set in the Labor Code:the Labor Code:

22--month advance notification (for certain categories 4month advance notification (for certain categories 4--month, e.g. employees having children under 14month, e.g. employees having children under 14--year year age)age)

Leave compensation depends on work duration:Leave compensation depends on work duration:

-- if less than 1 year if less than 1 year –– 1 month salary1 month salary-- if 1if 1--3 years 3 years –– 2 months salary 2 months salary -- if 3if 3--5 years 5 years –– 3 months salary3 months salary-- if 5if 5--10 years 10 years –– 4 months salary4 months salary-- 1010--20 years 20 years –– 5 months salary5 months salary-- over 20 years over 20 years –– 6 months salary 6 months salary

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Corporate Income Tax (1) - GeneralCorporate Income Tax (1) - General

Lithuanian entity is subject to corporate income tax on Lithuanian entity is subject to corporate income tax on

its worldwide incomeits worldwide income

Foreign entities are subject to Lithuanian corporate Foreign entities are subject to Lithuanian corporate

income tax on their Lithuanianincome tax on their Lithuanian--source incomesource income

Taxable profit is arrived at deducting allowable and Taxable profit is arrived at deducting allowable and

partly allowable expenses from taxable incomepartly allowable expenses from taxable income

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Corporate Income Tax (2) - RatesCorporate Income Tax (2) - Rates

The general corporate income tax rate is 20%The general corporate income tax rate is 20%

The 13% corporate income tax rate applies for:The 13% corporate income tax rate applies for:

the taxable profit if an entity's average number of the taxable profit if an entity's average number of

employees does not exceed 10 and income does not employees does not exceed 10 and income does not

exceed LTL 500,000 (ca EUR 144,800) (certain exceed LTL 500,000 (ca EUR 144,800) (certain

exemptions apply)exemptions apply)

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Corporate Income Tax (3) – Incentive ratesCorporate Income Tax (3) – Incentive rates

The 0% corporate income tax rate may be The 0% corporate income tax rate may be

applied for:applied for:

social companiessocial companies

companies established in the companies established in the Free Economic ZoneFree Economic Zone

production companies production companies with more than 50% of their with more than 50% of their

employees with limited working abilityemployees with limited working ability

CIT incentives also apply to the companies implementing CIT incentives also apply to the companies implementing

investment projects (acquisition of new assets to start investment projects (acquisition of new assets to start

new or upgrade existing product or service line)new or upgrade existing product or service line)

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Corporate Income Tax (4) – DividendsCorporate Income Tax (4) – Dividends

Dividends paid by a Lithuanian company from taxed Dividends paid by a Lithuanian company from taxed

profits to a foreign company holding not less than 10% profits to a foreign company holding not less than 10%

of the shares granting the same percentage of votes of the shares granting the same percentage of votes

not less than 12 months are tax free, except for not less than 12 months are tax free, except for

dividends paid to tax heaven countriesdividends paid to tax heaven countries

In other cases, dividends are subject to 20% In other cases, dividends are subject to 20%

withholding taxwithholding tax

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Corporate Income Tax (5) – Withholding taxCorporate Income Tax (5) – Withholding tax

A 20% withholding tax rate applies to the taxable A 20% withholding tax rate applies to the taxable

income of foreign units received in Lithuania, except income of foreign units received in Lithuania, except

for interest and royaltiesfor interest and royalties

A 10% withholding tax rate applies to interest and A 10% withholding tax rate applies to interest and

royaltiesroyalties

Withholding tax rate can be lowered under the tax Withholding tax rate can be lowered under the tax

treaties to which Lithuania is a partytreaties to which Lithuania is a party

Currently Lithuania has tax treaties with 46 countries Currently Lithuania has tax treaties with 46 countries

in force (including Latvia)in force (including Latvia)

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Corporate Income Tax (5) – OtherCorporate Income Tax (5) – Other

Tax losses can be carried forward for indefinite time Tax losses can be carried forward for indefinite time

period if the activities are continued except for loss period if the activities are continued except for loss

from disposal of securities or financial derivatives from disposal of securities or financial derivatives

Transfer pricing rules are applicable in LithuaniaTransfer pricing rules are applicable in Lithuania

Thin capitalization rules apply in LithuaniaThin capitalization rules apply in Lithuania

Capital gains are taxed as ordinal income at 20% Capital gains are taxed as ordinal income at 20%

standard CIT ratestandard CIT rate

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Value Added Tax (1) - RatesValue Added Tax (1) - Rates

The standard VAT rate is 19%.The standard VAT rate is 19%.

The 0% rate applies to exports outside the European The 0% rate applies to exports outside the European Union, supplies of goods to another member state, Union, supplies of goods to another member state, supplies of gold to the system of Central Banks of supplies of gold to the system of Central Banks of European countries and the Central European Bank, European countries and the Central European Bank, goods and services intended for diplomatic missions, goods and services intended for diplomatic missions, supplies to charities, supply, modification, supplies to charities, supply, modification, modernisation, and the hiring of seamodernisation, and the hiring of sea--going ships and going ships and aircraftaircraft

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Value Added Tax (2) - RegistrationValue Added Tax (2) - Registration

Lithuanian persons whose income from VAT taxable Lithuanian persons whose income from VAT taxable activities exceeds LTL 100,000 (approximately EUR activities exceeds LTL 100,000 (approximately EUR 29,000) per annum should register as VAT payers29,000) per annum should register as VAT payers

Foreign persons should register for Lithuanian VAT if Foreign persons should register for Lithuanian VAT if their activities in Lithuania are subject to VATtheir activities in Lithuania are subject to VAT

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Excise dutiesExcise duties

Excise duties are levied on production in, or import Excise duties are levied on production in, or import

into Lithuania of the following items: into Lithuania of the following items:

ethyl alcohol and alcoholic beveragesethyl alcohol and alcoholic beverages

tobacco productstobacco products

fuelfuel

electricityelectricity

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Payroll taxesPayroll taxes

Personal income tax rate is 15%Personal income tax rate is 15%

(20% personal income tax applies to income from (20% personal income tax applies to income from

profit distributions (including dividends)).profit distributions (including dividends)).

Individuals are subject to 6% mandatory health Individuals are subject to 6% mandatory health

insurance contributionsinsurance contributions

Social security contributions: Social security contributions: Employees' Employees'

contributions equal 3% of employment income and contributions equal 3% of employment income and

employers have to pay 30.98%employers have to pay 30.98%

The employeesThe employees’’ contributions and personal income tax contributions and personal income tax

must be withheld by employersmust be withheld by employers

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Land and real estate taxesLand and real estate taxes

Land tax is paid by the owners of private land and it Land tax is paid by the owners of private land and it amounts to 1.5% of the value of the landamounts to 1.5% of the value of the land

Legal and private persons leasing state or municipality Legal and private persons leasing state or municipality owned land must pay a land lease tax, which is not owned land must pay a land lease tax, which is not less than 1.5% and not higher than 4% of the land less than 1.5% and not higher than 4% of the land valuevalue

The real estate tax should be paid by Lithuanian and The real estate tax should be paid by Lithuanian and foreign legal entities and organisations, as well as by foreign legal entities and organisations, as well as by Lithuanian and foreign individuals owning real estate Lithuanian and foreign individuals owning real estate in Lithuaniain Lithuania

The annual tax rate ranges from 0.3% to 1% of the The annual tax rate ranges from 0.3% to 1% of the taxable value of real estatetaxable value of real estate

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Other taxesOther taxes

Environmental taxes are applicable in Lithuania:Environmental taxes are applicable in Lithuania:

pollution taxpollution tax

tax on tax on environmentally harmful goodsenvironmentally harmful goods

package taxpackage tax

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Thank you! Questions?

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Tel. +370 5 210 26 00 (Vilnius)

Tel. +370 46 480012 (Klaipeda)

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