proposed Changes to Personal Income Tax (PIT)

Lithuania is contemplating important changes to its personal income tax structure,according to a proposal registered by the Ministry of Finance. The plan introduces a progressive tax system based on annual income relative to the national average wage (VDU).

• Lower Bracket: Income up to 36 VDU would be taxed at 20%.
• Middle Bracket: Income between 36 and 60 VDU would face a 25% tax rate.
• Higher Bracket: Income exceeding 60 VDU would be subject to the highest rate of 32%.

Other income sources would be taxed at a flat rate of 15%. this includes:

• income from individual activities
• Royalties
• Compensation for activities on supervisory or management boards
• Dividends
• Sickness, maternity, paternity, childcare, and long-term employment benefits
• Income from the sale or transfer of shares (parts, shares) acquired more than 10 years ago outside of an investment account
• life insurance payouts upon contract expiration and pension fund payouts

For individual business activities, a 20% PIT rate would apply to income not exceeding €42,500 per year. A tax credit of 15% would be available for income up to €20,000 per year.

Income taxed through business licenses would be subject to a fixed income tax persistent by municipal councils.These councils would also have the authority to provide fixed-tax benefits at their own expense for income derived from business licenses.

Health Insurance Tax Implications

The proposal suggests taxing employer-paid employee health insurance only if the annual contribution exceeds €350. Currently, health insurance contributions are tax-free if they do not exceed 25% of the employee’s accrued salary.

Current Tax Landscape

Currently, the highest income bracket, exceeding 60 VDU, is taxed at 32%, while income below this threshold is taxed at 20%. Individual activities and distributed profit are taxed at a 15% PIT rate.

Real Estate Tax Overhaul

Significant changes are also proposed for real estate taxes. The government is considering allowing municipalities to set the tax-free threshold for real estate within a range of €20,000 to €80,000. Municipalities that do not set their own threshold would default to a €40,000 threshold.

Municipal councils would need to determine the non-taxable threshold for primary residences by December of this year, considering the property’s taxable value as determined by the Register Center.

Tax rates for primary residences would be as follows:

• 0.1% for properties valued up to €200,000
• 0.2% for properties valued between €200,000 and €400,000
• 0.5% for properties valued between €400,000 and €600,000
• 1% for properties valued above €600,000

The Ministry of Finance continues to propose a 50% tax relief for primary residences and a 75% relief for families with three or more children or a child with a disability, provided the property value does not exceed €450,000 in either case.

All other real estate owned by a resident, excluding the primary residence, would be taxed on the total taxable value exceeding €20,000. The same tax rates (0.1% to 1%) would apply to this additional property.

This would apply to the taxable value of single-family homes, duplexes, apartment buildings, various social groups, residential (apartments), amateur gardens, garages, animal breeding facilities, agricultural production processing facilities, as well as plant growing, auxiliary farms, science, religious, personal recreation, public recreation buildings, and engineering structures (including fishery structures).

An additional 0.2% tax rate is proposed for commercial property, while the current rate range of 0.5% to 3%, set by municipalities, would remain in effect. Neglected or poorly maintained real estate would be subject to a 4% tax rate.

Municipal councils would retain the right to reduce or completely waive the tax at their own expense.Taxes not exceeding €5 would not be collected.

The tax revenue would be allocated to the municipality where the real estate is located, accept for revenue from the additional 0.2% rate on commercial property and non-primary residences.

the government plans to re-evaluate real estate values every three years, rather of the current five-year cycle.

Changes to Profit tax and Insurance Costs

The Ministry of Finance has also registered updated proposals for amendments to the Value Added Tax (VAT), Security Deposit, and Profit Tax laws. These proposals remain largely unchanged from previous versions.

The proposed VAT law amendments primarily involve eliminating the reduced VAT rate for heating, hot water, and firewood. According to earlier data from the Ministry of Finance, eliminating this benefit would generate €65.1 million.

The project also proposes increasing the reduced VAT rate applied to accommodation, passenger transportation services, and visits to art and cultural institutions and events from 9% to 12%. The ministry estimates this would generate €20.1 million.

The ministry continues to propose reducing the reduced VAT rate for books and non-periodical information publications from 9% to 5%.

The project states that these VAT rate changes would collectively generate €80.5 million.

The proposal to increase the standard profit tax rate by 1% to 17%, and the reduced rate to 7%, remains unchanged. This is projected to generate €111.5 million in revenue from 2027.

Alongside this tax increase, measures to promote investment and entrepreneurship are planned, extending the profit tax “holiday” for newly established businesses from 1 to 2 years.

The acquisition cost of certain long-term assets would also be deductible from taxable profit,encouraging investment in productivity. The ministry estimates this would cost the budget €85.3 million in the short term but have a neutral impact in the long term.

Furthermore, it is proposed to allow taxable profit to be reduced by scholarships paid to students who have entered into tripartite agreements and will obtain higher education in science, technology, engineering, or mathematics.

Scholarships could also be awarded to researchers conducting research and experimental progress projects. The maximum amount by which taxable profit could be reduced is €2,500.

the proposed Security Deposit Law also remains largely unchanged, with a 10% tax continuing to be proposed for insurance premiums under non-life insurance contracts.

While the previously submitted tax reform project included an exception for civil liability of motor vehicle drivers, the proposal registered this Monday clarifies that a 0% security deposit rate would only apply to vehicles not used for economic activities.

According to the ministry’s proposal, if the amendments are adopted, payment would be due for the total amount of premiums specified in contracts concluded (extended, amended, if the insurance premium also changes) for the calendar quarter. The so-called security deposit would be paid by all insurers operating in Lithuania on the total amount of insurance premiums specified in non-life insurance contracts.

The government intends to consider these projects at its Wednesday meeting.