Overview of recent tax developments in Lithuania

2020 indeed started with positive signs of growing GDP and positive economic forecasts. The number of VAT payers in 2019 also increased by 3.5 percent compared to 2018. This had to be viewed as a positive sign for the Lithuanian Tax Authorities as well – a stronger economy and wealthier people bring more revenue in taxes. The beginning of spring of 2020 not only saw the migration of birds back to Lithuania from the south, but also the arrival of the Covid-19 pandemic, along with the lockdown. This posed an extreme challenge to the Tax Authorities, who overnight became the body responsible for the issuing of subsidies and application of tax incentives for over 100,000 companies across Lithuania. Thousands of companies were included in the list of companies that were negatively affected by the Covid-19 pandemic and were allowed to postpone tax payments (including VAT) until the end of the end of this unprecedented state of affairs. And more than 6000 companies took advantage of this opportunity. Although this was intended to be a temporary measure, the pandemic  crisis showed no signs of lifting, so the Tax Authorities began contacting taxpayers and encouraging businesses not to use the tax postponement and pay their outstanding tax payments without further delays.

This leads us to believe that 2020 has been extraordinary not only for the entire world, but also for the Lithuanian Tax Authorities, who have  suffered from a significant additional workload in terms of various Covid-19 measures, but most importantly – from huge amounts of taxes that have not been collected from the taxpayers. 

It is hard to predict the future, especially now, but 2021 may see taxpayers under the increased spotlight of the Tax Authorities, who will likely start wielding the powerful tools they have at their disposal, for example, their ability to perform SAF-T audits etc.

In fact, from 2020, all Lithuanian companies have an obligation to provide an SAF-T report to the Tax Authorities upon request. An SAF-T report is a standard file which contains accounting data exported from the company’s accounting information system. Despite the fact that they are now obliged upon request to prepare and submit the required SAF-T reports, this  is still a significant challenge for many businesses due to the complexity of the data and the data structure required by the Tax Authorities.

In recent years we have seen numerous tax incentives initiated by the Lithuanian Ministry of Economy and Innovation towards the attraction of foreign capital in the form of green field and brown field investment. Via the use of such incentives as the elimination of corporate income tax for a ten-year period and the introduction of a range of other state subsidies, Lithuania has been able to lure some world leading companies to set up operations. 

With this in mind, Lithuania announced a new additional tax incentive – a 20 year tax holiday for large scale investments of over 10 million Euros from 2021 (certain other requirements have to be met). 

A number of companies have already made such investments, but they qualified for 10 years tax holiday only because their investments were made prior to the announcement of this initiative. It will, therefore, be interesting to follow the position of the Tax Authorities on whether these incentives could be retrospectively applied to already existing businesses in order to reduce the risk of creating a competitive advantage for new businesses.

Other corporate income tax incentives are intended towards development and innovation (e.g., R&D incentive and  investment project incentive) that allows for the double or triple deduction of related costs from taxable profits. These incentives are still in place and should not be switched off anytime soon.

As in the rest of the EU, 2021 will see a number of changes being enacted in relation to distance sales (MOSS for goods will be implemented from July 2021) and the taxation of foreign marketplaces. 

In addition to this, from 2021 taxpayers will be allowed to apply for VAT refunds more quickly, without the need to wait for 6 months and to freeze their funds. Nevertheless, the audit of a VAT refund claim might still take a lot of time as the deadline of the Tax Authorities can be easily extended.

Over the last year, there were 9 attempts initiated by the Members of the Lithuanian Parliament to apply a reduced VAT rate for pharmaceuticals, catering services, magazines – all failed (sharing the fate of many other attempts made in previous years). 2021 might be special in that sense – the prime minister of the newly elected Parliament has personally signed a draft VAT law promoting a 9 percent reduced VAT rate for restaurant services. Considering that the restaurant industry has suffered most from the pandemic, we would not be surprised if  this year saw a reduced VAT rate for restaurant services (food and beverages, except alcoholic drinks) being implemented.

Transfer pricing documentation is required if controlled transactions or the sum of controlled transactions during the financial year exceed 90,000 Euros per related party. There is a separate unit at the central office of the Lithuanian tax authorities specializing solely in transfer pricing. This indicates that the tax authorities are allocating more resources to this topic and becoming more experienced. The tax authorities have direct access to the most extensive databases and resources. 

At present, the most notably at risk transactions are those involving various types of services, management fees or financial instruments. The tax authorities usually challenge interest-free or low-interest loan transactions. There are a number of tests, and emphasis is placed not only on the mark ups but on demonstrating the actual performance (substance) of a service. It is also important to note that tax authorities pay a lot of attention to the performed benchmarking analysis - the search strategy chosen, and the companies selected and rejected.

For some distance sellers, 2021 might look to be the year of breaking free from endless VAT registrations and returns across the EU due to the extension of Mini One Stop Shop for B2C supply of goods. In Lithuania – this is not necessarily the case.

Doing business in Lithuania or even selling goods online and shipping them to Lithuania might result in packaging tax obligations for foreign entities in Lithuania. Following the guidelines provided by the Ministry of Environment of the Republic of Lithuania, based on the Law on Pollution Tax, distance sellers (entities selling goods online to Lithuanian customers) are considered as importers of goods for the purposes of packaging reporting, and may be subject to packaging tax obligations if the amount of packaging exceeds 0.5 tones. 

Even if the amount of packaging supplied to internal market does not exceed 0.5 tones, foreign distance sellers registered in Lithuania for VAT are obliged  to report all lists of taxable packaging brought to Lithuania through the Unified Product, Packaging and Waste Record Keeping Information System (GPAIS) online on a quarterly basis. Therefore, keeping accurate books on packaging brought to Lithuania is essential.

Most companies that are above the 0.5 tones threshold usually choose to conclude an agreement with a waste management company as the administrative burden is substantially lower and the costs are acceptable compared to tax rates.