"The proposed package is a solid step forward in reducing the 'animal farm' and more fairly distributing the tax burden. Incentives for value-added investments for both small and larger businesses are strengthened. Reliefs that do not create more value for society are abandoned, replacing them with a modern investment model – an investment account. At the same time, a pollution tax, together with future investments, will contribute to a healthier and greener environment for everyone. Finally, the financial independence of self-government will be increased and the capacity to invest in public infrastructure will be strengthened, and it will be even more convenient to declare the taxes to be paid and carry out individual activities," the Minister listed the results of the package.
After today's presentation of the package of tax proposals to the public, there will be a three-week period for submitting comments and observations on the proposed project.
Convenience
The presented package of tax proposals covers several important areas. The first of them is convenience. The aim is to make tax declaration even simpler, and the administrative burden, especially for small entrepreneurs, to be significantly reduced.
The proposal is, from 2025, to simplify the declaration of the personal income tax – the State Tax Inspectorate (STI) will prepare annual tax returns for about one and a half million residents, of which even about 70 % will not need to have been adjusted – the data on the income of residents is obtained from third parties, so only a third of the tax returns will need to be adjusted. After 1 May, tax returns formed by the STI will be considered submitted automatically, and overpayments that have not yet been refunded will be automatically refunded to each person within a two-month period. In 2021, such overpayments not refunded amounted to almost EUR 60 million.
At the same time, from 2026, modern immovable property tax returns, to be prepared and calculated by the STI, will start functioning – residents will not have to waste additional time providing data on their immovable property, the data from the Centre of Registers will be used.
Simplifying the tax declaration systems for residents, an account of a small entrepreneur is also introduced - a joint project by the Ministry of Finance and the Ministry of Economy and Innovation, which will create opportunities to avoid the administrative burden when carrying out individual activities. For those engaged in individual activities, it will be enough to voluntarily open a small entrepreneur's account in a financial institution and its data will be automatically transferred to the STI. According to the account data, the Tax Inspectorate will register the account owner in the Register of Taxpayers, and the account proceeds will be automatically classified as operating income. This will significantly reduce the administrative burden of those engaged in individual activities, in addition, the STI will also prepare an annual tax return based on the account data, and taxes and social insurance contributions will be paid with a single click of a button.
Economic Growth
The second part of the package of tax proposals - economic growth - is inseparable from investment promotion, attracting talent to growing companies, as well as incentives for small businesses. This part also presents growth-friendly taxes, which have been recommended for Lithuania by various international organizations for several years.
An innovation is introduced to encourage investments - immediate depreciation deductions for fixed assets to encourage productive investments, e.g. for devices, computer equipment, software and others. This measure is proposed to be applied to businesses from 2024.
At the same time, one of the essential investment promotion measures is the investment project relief, which allows 100% of investment deduction in the implementation of innovations, thereby contributing to more favourable conditions for business to invest in technological renewal. In order to continue to promote the competitiveness and productivity of companies, it is proposed to extend this relief, valid until the end of the year, for another five years - until the end of 2028.
The currently valid relief for scientific research and experimental development (R&D) allows three times the deduction of costs incurred for this activity, and the "Patent box" advantage is a 5% reduced corporate income tax rate applied on profits obtained from the use of patented inventions. Extending the mentioned investment project relief ensures that the corporate income tax reliefs are applied on the entire innovation chain: research, investments, and commercialization of inventions.
At the same time, it is proposed to extend an relief for film production, which is valid until the end of this year, for a period of five years.
In addition to the above reliefs, incentives to attract talent to growing companies are introduced through the option programme. Currently, the option - the employee's right to purchase company shares in the future at an agreed reduced price or for free - was exercised during his employment for at least three years and could not be exercised after the end of the employment contract. The package presented by the Ministry of Finance offers from 2024 granting the right to apply the personal income tax relief for options - a person could buy options even when he no longer works.
For the promotion of small business, the proposals that will reduce the tax burden for an even wider circle of small companies from the coming year are planned. One of the proposals is faster depreciation of fixed assets, which is currently subject to restrictions: the average number of employees in the company must not exceed 10 employees, and the turnover must not exceed EUR 150 thousand. From 2024, the Ministry of Finance proposes to abandon the limitation of 10 employees and increase the turnover limit to EUR 300 thousand. It is also proposed not to apply the current limitation of 10 employees also for a 5% reduced corporate income tax rate relief. At the same time, it is proposed to set a higher income limit for companies that have not been obliged to pay advance corporate income tax until now: currently they are not obliged to pay when the taxable income of the previous tax period did not exceed EUR 300 thousand, but from next year it is proposed to increase the income bar to EUR 500 thousand. Finally, from 2024, it is also proposed to increase the value added tax (VAT) registration limit - currently it amounts to EUR 45 thousand, but it is proposed to increase the limit to EUR 55 thousand.
At the same time, the Minister of Finance reminded the public of the already presented projects for taxation of energy products according to the level of pollution and taxation of immovable property, the first of which has already been submitted to the Seimas, and the project for the immovable property tax will be submitted together with the entire package of tax proposals. Taxation of energy products aims to refuse reliefs and increase excise duties on polluting fossil fuels and include a CO2 component. However, in order to amortize the expected changes and to encourage both changing consumption habits and investing in renewable energy, renovation, clean business, heating and transport, the Government has planned by 2027 to allocate about EUR 4.7 billion from the structural funds of the European Union and the funds of the New Generation Lithuania Plan.
The immovable property tax already presented to the public switches to the traditional immovable property tax on the immovable property object, instead of the total sum of their values. Reduced taxation applies to residential housing - half of the residents will not have to pay any immovable property tax, and the average tax will be around EUR 14 per year. The exclusivity of the tax - the income from the tax goes to the municipalities, which increases the financial independence of self-government and strengthens the capacity to invest in public infrastructure.
Both projects respond to several years of recommendations given to Lithuania by international organizations regarding the introduction of environmental and immovable property taxes that are growth-friendly taxes.
Fairness
The third part of the package of tax proposals presented by the Minister of Finance includes a fairer calculation of the corporate income tax, a fairer taxation of personal income and a new neutral investment instrument - the investment account.
A fairer calculation of the corporate income tax is based on the reduction of sectoral exemptions for life insurance companies and health care institutions. Until now, life insurance premiums and insurance investment income received were excluded from the taxable profit, and their expenses were not deducted from the income. In the package of the Ministry of Finance, it is offered from 2024, to include in the taxable profit the parts of the insurance premiums, which are considered as remuneration for the services provided, and to deduct the costs incurred from the income. Until now, health care institutions did not include income for services financed from the Compulsory Health Insurance Fund (CHIF) in their taxable profit, nor did they deduct expenses from income. At the same time, starting next year, it is proposed to change this practice and to include in the taxable profit the income for services that are financed from the CHIF funds and to deduct the expenses from the income.
At the same time, taking steps to correct the existing gaps, it is proposed to limit the application of relief to risk and private capital entities, when related persons participate in the investment structure, starting next year. Also, in the deduction of the costs of the purchase and use of cars by companies, while contributing to the implementation of environmental goals, it is proposed to determine specific amounts and conditions of the costs of the purchase and use of cars that can be deducted from income, taking into account the level of pollution. At the same time, it is proposed to adjust the assignment of the value of goodwill to the allowed deductions of limited amounts when the risk of abuse is high and to shorten the depreciation of goodwill from the currently planned 15 years to 10 years. Finally, it is proposed to limit the amount of profit to 70% for the transfer of tax losses between group companies of taxable profit, which is reduced by losses taken over from the group company.
The proposals for fairer personal income taxation are presented in the package through the most popular forms: employment relations, individual activities, business licences. Proposals for high income earners are also presented.
In proposals related to labour relations, the Ministry of Finance presents the long-term goal of consistently bringing the non-taxable income amount (NTA) closer to the minimum monthly wage (MMW) through gradual decisions with the State budgets of the respective years. It is also noted that taxes for the middle class do not increase, and with the increase of the NTA, the tax burden for those earning up to 1 average wage (AW in 2023 – EUR 1684.9) will continue to decrease consistently.
Due to the changes in the taxation of individual activities, the situation of 75 % of self-employed persons will not fundamentally change - changes in taxation will mainly affect only those with higher income. At the same time, changes in the personal income tax rate and tax credit will not affect the persons earning up to EUR 10 thousand of taxable income.
The prepared package of proposals, responding to the recommendations of the Organization for Economic Cooperation and Development (OECD), proposes to gradually reduce the current gap between the taxation of individual activities and employment income, therefore a three-year action plan is envisaged: in 2024, it is proposed not to change the PIT rate, not to allow the deduction of state social insurance and compulsory health insurance contributions from taxable income, to reduce the amount of presumptive costs from 30 % to 20 %, while not changing the tax credit limit and waiving presumptive costs from the VAT payer's limit. The presumptive costs are reduced by the corresponding share, which usually forms a share of the state social insurance and compulsory health insurance. In 2025, it is proposed to increase the upper limit of the PIT rate from 15 to 17 %, and to decrease the lower limit from which the tax credit is applied from EUR 20 to 15 thousand of taxable income. Finally, in 2026, it is proposed to increase the upper limit of the PIT rate from 17 to 20 %, and to decrease the lower limit from EUR 15 to 10 thousand of taxable income. In addition, it should be noted that due to the application of the tax credit, the PIT rate is applied in full only after reaching the upper limit of EUR 35 thousand, or for those receiving almost EUR 3,000 per month.
At the same time, social guarantees for self-employed residents are being increased: from 2024, it is proposed to unify the taxable base from currently varying in different activities (reaching 50-100 % of taxable income) to 90 % from taxable income - as a result of the increase in these contributions, the calculated pension points will also increase. Also, social guarantees are provided to self-employed residents, farmers, family members - if they lose their income, they will be entitled to unemployment benefits, since these people will be included in the unemployment insurance system, the amount of the contribution is 1.31 % of taxable income. Finally, it is proposed to unify the ceiling of "Sodra" with the applicable labour income and apply the same limit of 60 AW (in 2023 – EUR 101,094).
The presentation emphasized that taxes for 75 % of residents declaring income from individual activities will not increase in principle - more significant changes will affect only 25 %, i.e. the highest income earners.
For those who receive income under business licenses, it is proposed to apply a fixed income tax rate on turnover not of up to EUR 45 thousand, but of up to EUR 20 thousand. Also, to provide services and sell goods only to end users - people. Finally, it is proposed that a fixed income tax rate can be applied on the income of renting residential premises - currently the limit is set to EUR 45 thousand, while from 2024, it is proposed to refuse the fixed PIT rate and apply a 15 % PIT rate on 80 % of turnover. However, even after the introduction of the mentioned proposals regarding changes in the taxation of business licenses, the situation of even 84 % of business license holders will not change either.
Perhaps the most significant changes will affect those with high income. The package of proposals presented today notes that it is proposed to aggregate all types of income and to apply special additional taxation on high income instead of the current progressive rates. Special additional rates will be paid by twice as many people as the progressive ones (from 8,000 now to 16,000 after the changes (i.e. 0.8% of all taxpayers), while the gap between employment and capital income taxation is reduced on high income.
From next year, it is proposed to change the tax rates on high income. Until now, income from labour relations, shares of profits, income of managers of small associations was taxed at a basic 20 % rate and progressive 32 % rate if the income exceeded 60 AW. The income of individual activities was subject to 5-15 % rates. Until now, a 15 % rate or progressive 20 % rate have been applied on passive income from dividends, real estate rental and other income, if it exceeded 120 AW. Meanwhile, from the coming year, it is proposed to maintain the base rates, but to apply a 5% rate on the share of income exceeding 60 AW and reaching up to 120 AW (in 2023 – EUR 202,188 ), and if exceeding 120 AW, apply a 7 % rate on the share of income above 120 AW. The proposals presented are a reflection of international trends in the fight against income inequality, while also ensuring consistency in the taxation of income from passive activities. A person's ability to pay taxes does not depend on the type of income, but on its amount. Therefore, it is proposed to sum up all income and apply new rates.
Finally, the proposed changes from next year in relation to gifts from relatives and income-reducing expenses are presented. In response to international practice and in order to prevent tax evasion, it is proposed to exempt gifts from relatives up to EUR 300 thousand per year - from spouses, parents, children, grandparents, grandchildren and up to EUR 150 thousand per year - from brothers and sisters.
Meanwhile, in terms of income-reducing expenses – the proposal is to withdraw reliefs for long-term life insurance premiums – they apply to a relatively small group of people and create unfair competition between investment instruments. Therefore, starting next year, it is proposed to allow the deduction of contributions from income only to Pillar II pension funds, but the currently effective relief would be valid for life insurance and Pillar III contracts concluded before the end of this year, but no longer than 10 years. At the same time, a new neutral investment instrument – the investment account - is being introduced as part of the implementation of changes in this area.
It is proposed to make it possible for residents to choose an account and declare it as an investment account from next year. The profit obtained through it will be proposed to be taxed only if it is not reinvested. It is proposed to allow the amount invested through the investment account to be deducted from any type of investment income received, and to focus the product itself on smaller investors by setting an annual investment limit of EUR 10,000. Finally, it is proposed to maintain the EUR 500 tax-free interest and sales benefits of financial instruments - only for income received from financial products purchased outside of the investment account.
It is estimated that the final impact on public finances in 2026 would be EUR 447 million, but the final amount would depend on coordination with the public, final decisions by the Seimas. At the same time, the negative impact on public finances is predicted to be about -EUR 271 million due to proposals to extend the investment project relief, immediate depreciation of fixed assets, R&D relief, reliefs applied to small businesses. It should be noted that the NTA decisions will also be made, so the negative impact is likely to be greater.
