LA Lithuania 1 Legal Aspects – LITHUANIA - Legal Aspects of Cross-Border Activities - Section a: Setting up a business in Lithuania Company Law Foreign enterprises are entitled to establish their subsidiaries in Lithuania as legal entities, or open branch offices or representative offices that will not be legal entities. Representative offices will not have the right to engage in independent commercial activities. Foreign enterprises may also act in Lithuania though their permanent establishments. Permanent establishment is not a separate legal entity or a subdivision of a foreign enterprise. Rather, it is just the form of a foreign company's activities in Lithuania which entails tax consequences. Types of Companies public company (akcine bendrove) private company (uzdaroji akcine bendrove) individual (personal) enterprise (personaline imone) general partnership (tikroji ukine bendrija) limited partnership (komanditine ukine bendrija) state enterprise (valstybine imone) municipal enterprise (savivaldybes imone) co-operative society (kooperatine bendrove) agricultural company (zemes ukio bendrove) A public company is required to have a minimum authorized capital of 150,000 LTL (EUR 43,443). The minimum authorized capital of a private company is 10,000 LTL (EUR 2,896). A private company must have not more than 250 shareholders. Both public and private companies may be single-member companies. Companies are legal entities and their owners (shareholders) enjoy limited liability. Trade law Lithuania takes up a beneficial position of a transit country between Western and Eastern European markets. Such position requires proper legal regulation of different customs procedures and formalities applied to domestic and foreign investors. The Lithuanian Customs Code effective from 1 January 1998 was appreciated by the European Commission and other experts for being one of the first in Eastern Europe accurately harmonized with EU legislation. The process of harmonization of the supplementary customs legislation is still continuing. International Agreements Free Trade Agreements with the following countries: (EU Member States; EFTA member states (Iceland, Norway, Switzerland, Liechtenstein); and with Poland, Latvia, Estonia, Ukraine, Slovakia, Romania, Czech Republic, Slovenia, Hungary, Turkey); International agreements granting "most favoured nation" status to Belarus, Russia, Uzbekistan, Vietnam, Kazakhstan, and the member states of WTO (Lithuania joined the WTO as of 31 May 2001); The 14 June 1983 Brussels Convention on a Harmonized Commodity Description and Coding System (with the additional Protocol of 24 June 1986); The 26 June 1990 Temporary Import Convention (Istanbul Convention); LA Lithuania 2 The 18 May 1973 International Convention on the Simplification and Harmonization of Customs Procedures and its Annex E.3 Concerning Customs Warehouses (with certain reservations). Section b: Foreign Trade by Countries and Products Before joining to the European Union (hereinafter the EU), the foreign policy of Lithuanian Republic was guided according to the legal acts valid in Lithuanian Republic as well as according to various bilateral and multilateral international Agreements (i.e. Free-trade Agreements, Economic Partnership Agreements). Upon joining the EU, the Republic of Lithuania follows the requirements of the EU Incorporation Agreement. According to the agreement, the entire International trade within the EU is subjected to the same requirements. This means, that customs rates, means of anti-dumping, compensatory means, protection means are the same for all EU member countries including the Republic of Lithuania. A new system for agricultural products import and export licenses as well as for certificates with prescribed compensation have been introduced as of the 1st of May, 2004. The main objective of this system is the control of market planning. From May 1, 2004, as an EU member Lithuania also enjoys preferences stipulated in the trade agreements between the EU and third countries. The country's trade with Israel, Farer Islands and Mexico is regulated by the EU Free Trade Agreements with these countries. Lithuania now has much more favorable trade conditions with the Mediterranean and Balkan region countries. EU membership provides new trade possibilities in traditional and new markets. By Countries In 2003 the EU was Lithuania's main export and import partner (42% of total exports and 44.5% of total imports) and accession countries accounted for 19.3% of exports and 11.8% of imports. Exports to CIS made 17% of total exports, imports - 25.3%. Trade with EU countries is becoming more and more important in the Lithuanian trade. In the period of 1996-2003 the share of Lithuanian exports to EU increased from 32.9% to 42%. Lithuanian exports to EU in 2003 valued at € 2.699 billion. In 2003, compared to 2002, exports to EU decreased by 5.2%. To EU Lithuania exports textile articles, mineral products, transport means, machinery and equipment, miscellaneous manufactured articles, wood and articles of wood, products of chemical industry. CIS countries still remain important markets for the Lithuanian exports. In the period of 1996-2003 the share of Lithuanian exports to CIS decreased from 45.4% to 17%. Lithuanian exports to CIS countries in 2003 valued at € 1.088 billion and, compared to 2002, decreased by 3.7%. In 2003 Lithuania's main export destinations were Switzerland (11.7%), Russia (10.1%), Germany (9.9%) and Latvia (9.7%). Main import partners were Russia (22.2%), Germany (16.2%), Poland (5.2%) and Italy (4.4%). By Products The leaders of the Lithuanian exports in 2003 were mineral products with € 1.261 billion export volume (19.6% of total exports). In 2003, compared to 2002, exports of mineral products increased by 13.6%. In the second position were transport means with € 982.2 million export volume (15.3%). In 2003, compared to 2002, exports of transport means increased by 4.3%. LA Lithuania 3 Textiles and textile articles make 13.6% in the total export structure, machinery and equipment - 11.1%, products of chemical industry - 6.6% Most of all Lithuania imports machinery and equipment comprising 18.6% of the total import volume (€ 1.634 billion). In 2003, compared to 2002, imports of machinery and equipment increased by 14.1%. Mineral products make 18.1% in the total import structure (€ 1.586 billion). In 2003, compared to the previous year, imports of mineral products increased by 8.8%. Transport means make 15.6% in the total imports structure, products of chemical industry - 8.6%, textiles and textile articles - 7.4%, base metals and articles thereof - 6.0%, plastics and articles thereof - 5.3%. - Taxation - Taxation of income There are two rates of individual income tax: 15% and 33%. 15% rate is applied to the following income: Income from distributed profit; Interest income; Royalties, remuneration under copyright agreements; Sale or other transfer of non-individual activity assets; Income from lease of assets; Income from individual activities, if the individual chooses not to deduct allowed deductions there from; Other income listed in the Law on Income Tax of Individuals. Natural persons employed in Lithuanian-registered enterprises are subject to a standard income tax of 33% on their salary. Salary includes all income related to labor relations, including fringe benefits, minus monthly non- taxable income amount (currently LTL 290 or EUR 84). Apart from the base salary and bonuses, all kinds of payments are usually subject to the standard personal income tax rate of 33%. The standard profit tax rate applied to legal entities is 15%. Small enterprises with an annual income not exceeding LTL 500,000 and an average number of employees not exceeding 10 are subject to a 13% profit tax rate, moreover, a company (individual company or partnership) with an average number of employees not exceeding 10 and the income not exceeding LTL 1 million (approx. EUR 289,620) per tax year has a right to apply zero income tax rate to the amount of LTL 25,000 (approx. EUR 7,240) and a 15% profit tax rate to the remaining amount of profit. Value Added Tax The standard VAT rate is 18%. A 5% rate is applied to passenger route transportation services approved by state institutions, books, periodicals, medicine, hotel services and certain food products, 9% - for construction, renovation and heat isolation of residential premises covered by the state and municipal budgets, preferential loans granted by the state and by special state funds. A zero rate is applicable to export and transit of goods and related services. Self-production or essential improvement of real estate is viewed as a VAT object. Under certain circumstances, transfer of goods free of charge is subject to VAT. LA Lithuania 4 Certain goods and services related to insurance, finance, education, healthcare and public sector are not subject to VAT. Sale and rent of real estate older than 24 months are not subject to VAT, although the parties may agree to apply it. Persons, who have chosen to calculate VAT on sale or lease of real estate, should charge VAT on all the respective transactions for at least two years. Analogous rules are applicable while selecting VAT taxation of certain financial services. Goods and services supplied outside Lithuania are not subject to Lithuanian VAT. Other Taxes Payments to the Guarantee Fund enterprises must make contributions to the Guarantee Fund. 0.2% from the employees' gross salary is allocated for such contributions. Real estate tax - 1% tax is paid based on the cadastral value and applied to real estate located in Lithuania owned by Lithuanian and foreign enterprises. Land taxes - the annual tax rate amounts to 1.5% of the value of the land. Road tax is calculated from turnover (excluding VAT and repaid bad debts). Capital gains are added to the taxable base while losses do not reduce the taxable base. The rate depends on the type of activity that the enterprise is engaged in (0.1 - 1%) and usually amounts to 0.48%. And others such as: Excise duty, Tax on natural resources, Oil and gas resource tax and Pollution tax. Tax Relief for New Enterprises None.
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