Lithuania country focus: legal and tax aspects

The Lithuania is the largest of the three Baltic countries and, because of its geographical position, it forms a natural bridge to a wider market, which includes Belarus, Poland, Latvia, Estonia and Russia. 

This country arise after the dismantling of the USSR, gained the independence September 6, 1991 and it entered in the EU on May 1, 2004. The capital is Vilnius and has a total of 3.323.611 inhabitants.

Lithuania's geographical location combined with a relatively strong transport sector performance (accounting for 13% of GDP in 2013) may provide the right conditions for developing the country into a regional transit and logistics hub.

Economic growth is driven by domestic demand, from low energy costs and by household consumption, supported by increased employment and growth of wages, together with a slight deflation (-0.1% in 2015) and the low cost of money. Growth in investment, particularly in infrastructure.

The overall situation looks set to also improve because Russia has agreed to apply to Lithuania the most favoured nation clause, practically equalizing the terms of trade with Lithuania to those in force with the other CIS countries.

The following pages will analyze whether it can be profitable to create a trading company based in this country by analyzing the level of fees, the level of infrastructure, the legal system and then going to make some final remarks.

Financial and tax situation

From a financial point of view and taxes Lithuania is very profitable for several reasons. In general the tax imposition for a company in Lithuania is 5% if a turnover is less than 300 thousand euro by 15% otherwise. This level of taxation in any case is much lower than in Italy then open a company here from this point of view could be a good choice.

The level of VAT in Lithuania is 21% so for imported goods from China it will be applied to that level of taxation, but the VAT rate is set to zero (0%) when it comes to  moving goods within the European Union; so the products can be transported from Lithuania to Italy without any kind of taxation with regard to VAT.

Another advantage is that capital and dividends can pass in other countries  without any kind of limitation. Dividends and other distributions of profits are taxed between 0% to 15%; dividends paid to a company holding not less than 10% of a shares granting the same percentage of vote for at least 12 months are tax exempt, except for dividends paid to tax haven countries. It is possible to pay interim dividends in Lithuania.  

The level of taxation for royalties is between 0% to 10%. The royalties paid to associated EU companies are exempted of withholding tax. Two companies are deemed to be associated companies if one of them holds directly at least 25% of the capital of the other, or a third EU company holds directly at least 25% of the capital of these two companies.

A minimum holding of two years is required.  Between Italy and Lithuania it has also solved the problem of double taxation following the agreement signed in Vilnius on April 4, 1996 and rectified on the law number 31 of February 9, 1999 in force since June 3, 1999.

In Lithuania there are also two Free Economic Zones fully tax exempt, the first is located in Klaipeda and one in Kaunas. In 2002 it was established in Klaipéda, the only seaport in Lithuania on the Baltic Sea, a "free economic zone" to attract foreign investment through tax breaks. The first has an excellent port and is well connected to the highway, the second is near the airport and 100 km from the capital Vilnius.

The problem is that to operate in these areas should be made a productive investment of at least one million Euros and pay the rent of the land remains owned by the investor for 99 years in return you receive the tax exemption for the first 6 and a reduction of 50% for the remaining 10 years.

The Lithuanian banking system includes 77 banks and foreign institutions hold 88% of bank assets. The system is moderately concentrated: the top 5 banks control 82% banking activities. Total assets amounted to 85% of GDP.

Despite the risks associated with the deterioration of international financial conditions, the financial sector is stable and capitalization levels (over 12%) and cash they are appropriate. However, a slowdown in profitability and a deterioration of bank assets, due to the contraction in economic activity. In addition, the sector could be exposed to the risk of infection due to the strong presence of foreign banks, mainly Scandinavian. The burden of the credit thus remains a critical issue to keep in consideration

Judicial functioning

Lithuania is a civil law country then the legal system is highly comparable to that Italian and there are not the problems of difference between common law and civil law; the hierarchy of legal acts is:

  1. Constitution
  2. Constitutional laws
  3. International treaties ratified
  4. Laws
  5. Other acts of implementation of laws (acts of the President, the Government, the Constitutional Court, etc.)

 Other sources of law in the state are: the general principles of law (good faith, equity, individual responsibility, reasonableness of administrative action) are considered an integral part of the Lithuanian legal system and form the basis for interpreting statutory law and legal order to fill any gaps.

Customs, namely the rules of conduct approved by the state and fate in society as a result of repeated practice and long lasting. The Lithuanian Civil Code recognizes the habits as a direct source of law. legal precedents, namely a judicial decision and put in a particular case, which constitutes an example for the courts of the same grade or lower grade called to decide similar cases. The background has quite a consultative value within the Lithuanian legal system and doctrine.

Cost of personnel

If in the near future the company decides to hire employees in Lithuania the choice would be good for both the level of preparedness of the Lithuanian workers and the point of view of their behaviour at work as we see below.  

With regard to the employee's employment law contracts of employment may be indefinitely or forward up to five years, you may be dismissed only for cause and with little notice; otherwise the compensation to the worker can reach a maximum of 6 months'. An average salary Gross and equal to 600 euro monthly. Lithuanian labour force is generally young, well-educated and highly motivated, while labour costs are among the lowest in Europe.

The assumption is simple. Low- and medium-skilled individuals face a relatively high risk of unemployment. The unemployment rate for high-skilled individuals is among the lowest in the EU (4.2 % in Lithuania compared with 6.1 % in the EU in 2014). However, for medium-skilled individuals it is significantly above the EU average (13.5 % in Lithuania compared with 9.4 % in the EU in 2014); and for low-skilled individuals it is among the highest in the EU (29.8 % compared with 18.5 % in the EU in 2014). Similar trends can be observed in employment rates. Lithuania has one of the highest skills mismatches among EU countries.

Logistic flow

The aviation industry in Lithuania is currently going through a difficult period. The national airline bankruptcy (flyLAL-Lithuanian Airlines), which occurred in early 2009, and the decision of the Latvian airline Air Baltic - who had initially aimed at transforming the Vilnius airport in its second "hub" - to retire at the airport Riga, have in fact decreed the opening of a period of deep crisis for the air transport of this country that now seems to have been overcome, however.

The sector is still attractive opportunities that may merit a deepening by Italian airlines. The unusual chain of events that affected FlyLal airlines and Air Baltic and the management company Vilnius International Airport, have in fact created a situation indeed paradoxical: on the one hand there is an unusual availability of slots and definitely profitable routes (up summer 2008 the airports of Rome Fiumicino and Milan Malpensa were connected with the airport Vilnius through 17 weekly) direct flights, but on the other hand, when there are few carriers operating. In spring 2009, the heads of airport authorities in Vilnius – while the management of which the dispute has arisen with Air Baltic which then led to the decision to the latter to abandon the Lithuanian airport - were removed and the current management, took office with a firm mandate to revive the dying call, it is practicing rates absolutely competitive in order to make it even more attractive Vilnius airport.

Only purposes of example, consider that every new route that is introduced benefits from package of incentives to reduce start-up costs of the companies as well as discounts on rate-standard airport taxes. Additional support in marketing is also offered to those companies which recorded notable performances on the new routes.

A trade policy that are flanked by measures aimed at containing costs airport management: the organic, for example, as of October 1, 2009 of Company "Vilnius International Airport" was reduced by 180 units (more than 25 percent of staff), in order to optimize services and rationalization of resources. It's about a particularly favourable economic situation that could open up interesting opportunities for national carriers interested in entering the aviation market Baltic and Central Northern, until now in the hands of airlines Scandinavian line, or British "low-cost". The infrastructure system has yet to be properly developed.

The railway network (1775 km) European efficiency is still far away, but thanks to funds provided by the EU it is expected renewal. So far, the inadequacy and obsolescence of the network, even gauge different compared to western standards, has, in fact, condemned the country to isolation with the rest of Europe, in spite of a territory that, for morphological characteristics, well It lends itself to the development of a modern railway network and rail transportation. The transport infrastructure has room for improvement. Only 6.9 % of railway tracks are electrified, and there is no north-south rail connection.

The road network of Lithuania, already quite extensive the country has a relatively well developed network of roads (77,142 km, road to over 90%), is undergoing further improvements with EU assistance, the EBRD and the European Investment Bank.

The EU has recognized Lithuania as the first regional centre for links between the EU and the countries Europe. The European Commission for Transport has included two roads (I and IX) that connect Lithuania to the nodes of the most important exchanges in Europe: it is the rail network combining from north to south Scandinavia to the countries of Central and road network running along the east-west.

The Eastern European markets with the transport of internal goods road is, in recent years, decreased as a result of the moving a part of its volume on railway, which now performs the approximately 50% of the transport interior of the country. There are plans to merge the three Baltic countries to Russia, and, through the Poland, the EU, but the railway gauge is not compatible with the European one.

Rail Baltica project 

The infrastructure will be able to connect Berlin to Helsinki - through Warsaw, Kaunas, Riga and Tallinn - in about seven to eight hours. In general, the land transport remains to complete the separation process rail infrastructure by carriers and the autonomy of the Authority for the road network.

The EBRD and EIB funds will finance the development of infrastructure linked to maritime transport (inland waterways 477 km).