Employers in Lithuania have a responsibility to contribute to the country's social security system, which is managed by the State Social Insurance Fund Board, also known as "Sodra". These contributions cover various benefits for employees, such as pensions, sickness benefits, maternity/paternity benefits, unemployment benefits, and disability benefits.

Social Security Contributions

The standard social security contribution rates for employers are:

• For Permanent Employment Contracts: 1.77% of an employee's gross salary.
• For Fixed-Term Employment Contracts: 2.49% of an employee's gross salary.

Additional Contributions

In addition to social security contributions, Lithuanian employers also make contributions to:

• The Guarantee Fund: 0.16% of the employee's gross salary. This fund ensures basic payments to employees in the event of a company's bankruptcy.
• The Long-term Employment Benefit Fund: 0.16% of the employee's gross salary. This fund supports severance payments for employees with significant tenure who have lost their jobs.

Important Considerations

There are a few important considerations for employers:

• Contribution Ceilings: As of 2023, there are no contribution ceilings for social security or other mandatory contributions in Lithuania.
• Withholding Responsibilities: Employers are obligated to calculate, withhold, and transfer both employee and employer social security contributions to the relevant authorities (Sodra).

In Lithuania, a progressive income tax system is employed with two main rates. A 20% rate is applied to annual taxable income up to 60 average monthly salaries (in 2023, this threshold is €90,246). A 32% rate is applied to any annual taxable income exceeding the 60 average monthly salaries threshold.

Social Security Contributions

Employees in Lithuania are required to make social security contributions, which are withheld by their employer. These include:

• Pension: 8.72% of gross salary
• Sickness: 1.99% of gross salary
• Maternity: 1.81% of gross salary
• Health insurance: 6.98% of gross salary

Non-Taxable Income (Tax-Free Amount)

A Non-taxable Income Amount (NTA) can reduce the employee's taxable income. The NTA is calculated based on the employee's income level and is designed to ensure a minimum level of tax-free income.

Additional Deductions

Employees may be eligible for deductions from their taxable income for certain expenses. Some of the allowable deductions include:

• Life insurance premiums: Up to a limit of €1,500 annually.
• Pension fund contributions: Up to a limit of €1,500 annually.
• Expenses for home renovation, car repairs, and nursing services: Up to €2,000 annually.

Important Note

The total amount of eligible deductions cannot exceed 25% of the employee's taxable income.

Value-Added Tax (VAT) is a consumption tax applied in Lithuania to the value added at each step of the supply chain of goods and services. It's ultimately borne by the final consumer.

VAT Registration in Lithuania

Businesses providing taxable services in Lithuania must register for VAT if their annual turnover exceeds €45,000. However, businesses with an annual turnover below the threshold may choose to register for VAT voluntarily. The State Tax Inspectorate under the Ministry of Finance of the Republic of Lithuania administers VAT affairs.

Standard VAT Rate

The standard VAT rate in Lithuania is 21%.

Reduced VAT Rates

Reduced VAT rates apply to specific services. A 9% rate applies to books and non-periodical information publications, public transport services, accommodation services, certain heating and hot water supplies, and firewood for household energy users. A 5% rate applies to specific medical equipment and pharmaceuticals.

Place of Supply Rules

The place of supply rules determine where a service is considered taxable for VAT purposes. Generally, for services in Lithuania, the place of supply for B2B (Business-to-Business) Services is usually where the customer is established. The reverse-charge mechanism may apply. For B2C (Business-to-Consumer) Services, the place of supply is usually where the supplier is established.

Intra-Community Acquisition of Services

VAT-registered businesses acquiring services from other EU countries may be responsible for paying VAT under the reverse-charge mechanism. The VIES verification tool can be used to validate VAT numbers of EU businesses.

VAT Invoicing

Taxable persons must issue VAT invoices compliant with the Republic of Lithuania Law on value added tax.

Reporting and Filing VAT Returns

Lithuanian businesses generally file VAT returns monthly or quarterly. The State Tax Inspectorate provides electronic filing services.

Additional Considerations

Specific VAT rules apply to businesses providing cross-border services to consumers in other EU countries. Lithuania has also implemented policies regarding taxation of digital services. VAT regulations can be complex, and it's advisable to consult a tax professional for specific guidance on your business activities.

Companies that invest in Lithuanian Free Economic Zones (FEZs) are entitled to partial or complete Corporate Income Tax (CIT) relief, depending on the investment amount. Additional benefits include relief of tax on real estate, and a 50% relief of land lease tax.

Large Project Relief

This provides an exemption from CIT for 20 years or until maximum state aid is reached. Requirements include an average of at least 150 employees in Lithuania during the tax year and substantial investments in the project.

Technological Renewal

Companies investing in technological renewal can reduce taxable profits by up to 100%. To qualify, fixed assets acquired for these purposes must be used within the company for at least three years.

Research & Development (R&D) Incentives

Expenses incurred for R&D purposes can be deducted from income three times, providing significant tax savings. Fixed assets used in R&D activities can be written off within two years, offering faster depreciation benefits. Companies commercializing inventions created through R&D activities may benefit from a reduced 5% CIT rate on derived profits.

Other Incentives

New small businesses may be eligible for a one-year CIT holiday during their first year of operations. This is a significant incentive for small business start-ups.