“Following discussions with the social partners and publicly available proposals to adjust the drafts, we updated the package of tax proposals, maintaining the essence – we take a targeted step towards a fairer tax system and strengthen incentives to work. At the same time, we abandon the benefits that do not generate higher value for the society by replacing them with a modern investment model – an investment account that will be the most ambitious in the region“, said the Minister of Finance talking about the amendments.
According to the Minister, after the presentation of the initial package of proposals, 20 additional presentations-discussions with the social partners were held and the feedback was received from almost 70 interested bodies and organisations as well as individuals. In the light of the comments made, the drafts were updated with a focus on enhancing integrity in the tax system, while maintaining the substantive proposals of the initial draft.
A fairer personal income taxation
The proposals for a fairer personal income taxation are presented in the package through the most popular forms: employment relationship and individual activities.
In the proposals related to employment relationship, the Ministry of Finance presents the ongoing long-term commitment to consistently bring the amount of non-taxable amount (NTA) closer to the minimum monthly wage (MMW), as increasing NTA for those earning up to one average wage (EUR 2,045 in 2024) - the tax burden will continue to decrease steadily. In the coming years, increasing the MMW by 10 % to EUR 924, accordingly, the increase of NTA by 20 % - to EUR 751 is planned. Historically, this Government has increased the MMW by 30 % and NTA by 56 % since the beginning of its term of office.
Taking into account the Lithuanian labour market and the fact that 70 % of the employed currently earn up to one AW, the objective set by the Ministry of Finance to align these two amounts over a period of five years, annually, accordingly, will contribute to a significant reduction in the tax burden of those individuals, the number of which is about 811 thousand. This will strengthen incentives for lower income earners to work. As a result of the decision to increase the MMW and the NTA, income for MMW earners will increase by EUR 76 after taxes.
The recommendations of the Organisation for Economic Co-operation and Development (OECD) to Lithuania suggest bringing the taxation of individual activities closer to the taxation of income from employment relationship, since currently the system leading to different taxation of the same amount of income according to the forms of activity does not comply with the principle of integrity.
Another good news is the change in the effective rate of PIT and the threshold for full application of the tax credit. If in the initial package of proposals it was proposed to apply a full tax credit to 75 % of persons engaged in individual activities (equivalent to non-taxable amount in employment relationship), i.e. to apply the 5 % effective PIT rate to those earning up to EUR 10 thousand of taxable income, the updated draft proposes to apply a full tax credit to 85 % of persons, reducing the taxable income (profit) threshold, which would be subject to a reduced effective PIT rate of 3 %, to EUR 15 thousand.
In this way, the package of tax proposals ensures that the impact of the tax burden on those earning less (up to EUR 15 thousand taxable income), due to the allocation of state social insurance (SSI) and compulsory health insurance (CHI) contributions to unauthorised deductions and the introduction of the unemployment insurance contribution, will be reduced: the impact on those declaring actual costs is almost eliminated, while on those declaring presumptive costs partly remains due to the principles of calculation of SSI and CHI bases.
An updated fairer gradual implementation of taxation over three years would look like this: In 2024, it is proposed not to change the rate of PIT, to prevent the deduction of state social insurance (SSI) and compulsory health insurance (CHI) contributions from taxable income, to reduce the amount of presumptive costs from 30 % to 20 %, not to change the tax credit threshold (equivalent to non-taxable amount in employment relationship) and to abandon the presumptive costs from the VAT payer threshold, but to reduce by 1 pp currently the lowest 5 % effective PIT rate to 4 %.
In 2025, it is proposed to increase the cap of the PIT rate from 15 % to 17 %, and to lower the floor rate, from which the tax credit is applied, from EUR 20 to 15 thousand of taxable income. The unemployment insurance contribution rate of 1.31 % of taxable income is also introduced, thus providing more social guarantees and integrity. At the same time, the lowest effective PIT rate is reduced by another 1 pp to 3 %.
Finally, in 2026, it is proposed to increase the cap of the PIT rate from 17 % to 20 %, abandoning the proposal to lower the floor rate of tax credit to EUR 10 thousand of taxable income presented in the initial draft. Moreover, it should be noted that, as a result of the application of the tax credit, the PIT rate is fully applied only after the cap rate of EUR 35 thousand has been reached, or for those earning almost EUR 3,000 per month. It should be noted that only 5 % of self-employed persons fall within this range of taxable income of more than EUR 35 thousand.
As regards the costs incurred, all self-employed persons will further be able to declare operating costs in two ways: the method of declaration of actual costs – by collecting evidence of the costs incurred and by deducting presumptive costs – the most popular among those engaged in individual activities, thus guaranteeing a lower administrative burden. When declaring the presumptive costs, the base of taxable income (income – costs) was reduced by SSI and CHI contributions and only then SSI and CHI contributions were calculated, thus essentially creating a tax injustice in relation to both employment relationship and self-employed persons declaring actual costs, as contributions for them are calculated from profit (taxable income), whereas for those declaring the presumptive costs – from profit (taxable income), in the calculation of which not only implicit operating expenses were deducted, but also implicit SSI and CHI contributions. In order to remedy this unfairness of the system not only between different forms of activity, but also between different ways of declaring the costs of the same activity, it is proposed to allocate SSI and CHI contributions to the non-authorised deductions and, accordingly, to reduce the rate of presumptive costs from 30 % to 20 % — to the extent that SSI and CHI contributions normally constituted in the presumptive costs.
Investment account – the most ambitious in the region
After evaluating the proposals received, the Ministry of Finance also presents the updated Investment Account proposal, making it the most ambitious in the region. The updated draft proposes not to limit the amount of the contribution, as well as not to limit the desired amount of investment accounts or them or geography, it is important that with this country, where the account in opened, Lithuania had signed a double taxation agreement allowing for sharing of information. It is also planned to cumulate
profits and losses from different investment operations, with the possibility to transfer them, and to tax the return/profit received through the Investment Account only at the time of withdrawal of funds.
Bringing the conditions for agricultural taxation closer to other businesses
Individual farmers are offered to equalise their operating conditions with businesses operating under the same conditions. It is proposed to apply instantaneous depreciation of assets, as is the case for business entities. Apply the principle “expenditure necessary to earn income is treated as costs” to land remediation costs which improve land productivity and to attribute them to permitted deductions, which are not currently the case.
It is also proposed to exempt the transfer of a holding to family members if the activity of the farm continues, while maintaining continuity. Finally, it is proposed to introduce a minimum rate of real estate tax on real estate used to generate income from agricultural activities by aligning business and farm conditions.
