On 7 June 2005, the Seimas approved three tax laws, which implement the new and highly debated tax reform.

I. The Temporary Law on Social Tax

The Temporary Law on Social Tax imposes an additional 4 percent tax on the profit of legal entities for the year 2006, and a 3 percent tax for the year 2007. The purpose of this temporary taxation is to minimize negative effects of reducing individuals’ income tax on the state budget and in particular to ensure further financing of social programs and means for the reduction of poverty and enhancement of social cohesion. The elements of taxation under the Temporary Law on Social Tax are mainly the same as those established by virtue of the Law on Profit Tax (e.g. taxpayers, tax basis, taxation period, etc.).

All payers of profit tax (legal persons) are subject to temporary social tax.

The tax base is the taxable profit calculated in accordance with the procedures set by the Law on Profit Tax. Reductions on the tax base include the profit taxable by 0 percent rate under the Law on Profit Tax and the reductions adequate to these of profit tax applicable to companies employing persons with limited working capacity under the Law on Profit Tax.

The taxation period is a calendar year (exceptions existing under the Profit Tax Law apply).

Payments are to be made in advance payments calculated on the prospective profit of the actual taxation period. Advance payments must be made by 1/3 of the total calculated amount before the last day of the third, sixth and ninth month of the taxation period. As advanced payments of the profit tax are made by 1/4 of the total calculated amount each quarter of the taxation period, additional accounting duties are imposed on the legal entities and a more detailed planning of money flow circulation will be needed due to the temporary social tax.

The annual tax report must be submitted on the same terms as the profit tax report (before the first day of the tenth month on the following taxation period), but the form of the report of the temporary social tax must be separate.

The temporary social tax is paid to the state budget and intended to finance social programs and means.

This law will come into effect on 1 January, 2006.

II. Law on the Tax of Immovable Property

The main novelty of the new Law on the Tax of Immovable Property (hereinafter – the "Law)" is that a duty to pay the tax of immovable property is also imposed on natural persons, not just legal persons.

The purpose of this Law is: 1) to create a clear and transparent taxation system of immovable property; 2) to employ valuation methods of immovable property dominating in international taxation of immovable property practice in assessing taxable value of immovable property; 3) to expand the tax base of immovable property; 4) to eliminate a possibility to avoid taxes by transferring immovable property to natural persons and leasing it later; 5) to promote fair competition by distributing the burden of taxes evenly.

The taxation object is immovable property located on the territory of the Republic of Lithuania and privately owned by natural persons and legal persons. However, certain immovable property privately owned by natural persons (residential premises, county-houses, garages, farms, etc.) is not taxed, unless it is used for economic or individual activity or it is transferred to legal persons for use for indefinite period or for a period exceeding one month.

The taxable value of immovable property is the average market value of immovable property, as well as the value of immovable property assessed by the reproducible value method. Furthermore, the Law provides that individual valuation of immovable property may also be regarded as the taxable value of immovable property.

Moreover, the Law sets forth tax exemptions for natural persons. Natural persons are exempted from tax of immovable property if their privately owned immovable property is used for manufacturing religious cult articles, social care and maintenance, agriculture activity, education purposes, individual creative work, rendering of burial services. The Law also lays down an exhaustive list of tax exemptions for legal persons, which is fairly the same as in the previous Law on Tax of Immovable Property of Enterprises and Organisations (the immovable property of diplomatic and consular missions, international intergovernmental organizations, state and municipalities, education establishments, religious communities and associations, trade unions (which is not used for commercial purposes), etc.). Buildings that are not suitable for use are not taxed either unless they are actually used.

The tax rate is 1% of the taxable value of the immovable property.

Taxation period is one calendar year.

The Law lays down that the tax is to be paid not only by legal persons, but also by natural persons. The tax on immovable property owned by natural persons, except for immovable property transferred to legal persons for indefinite period or for a period exceeding one month, is to be reported and paid by natural persons. The tax on immovable property privately owned by legal persons and on immovable property privately owned by natural persons, but transferred to legal persons for indefinite period or for a period exceeding one month, is to be reported and paid by legal persons. Furthermore, legal persons have to make an advance payment, which is equal to ¼ of the sum calculated by applying the tax rate of immovable property (i.e. 1% of the taxable value of the immovable property) to the taxable value of immovable property belonging by the right of ownership to legal persons on 1 January of each calendar year. However, if the tax-payable sum does not exceed LTL 1,500, legal persons do not have an obligation to make an advance payment. The report has to be submitted by 1 February of the next calendar year.

The tax of immovable property is paid to the budget of the municipality on whose territory the property is located.

This law will come into effect on 1 January, 2006.

III. The Law on Income Tax of Individuals

The Law on Income Tax of Individuals was amended in order to reduce the present 33 percent rate, which currently is mainly applicable to employment-related income. Starting from 1 July 2006 the main rate will be reduced to 27 percent and from 1 January 2008 it will amount to 24 percent. The 15 percent rate on certain categories of income (i.e., royalties, interests, income from individual activities, etc.) remains unchanged.

The main purpose of tax rate reduction is to increase the competitive ability of Lithuania in the region, to balance work and capital taxation and to lower the tax burden on individuals. The tax system is meant to become more attractive to foreign investors. Moreover, high tax rate causes undesirable outcomes, such as tax evasion and avoidance.

Amendments were also made regarding the procedure of deducting the basic tax-exempt amount of income. The main principle to be applied is that deductions should be first made on the income taxed by higher rate and only afterwards on the income of the same taxpayer taxed by lower rate. These amendments were mainly needed to establish the procedure of deducting the basic tax-exempt amount of income due to different tax rates applied during the same taxation period (e.g. year 2006). Changes of similar nature were made to the additional tax-exempt procedure.

The new wording of the Law on Income Tax of Individuals grants Lithuanian residents the right to deduct the amount of income tax paid in a foreign country on the income derived in that country from the amount of income tax calculated according to Lithuanian tax laws if a double taxation treaty is concluded with that country or if that country is not a tax haven country. Under this provision, almost universal double tax relief is granted to the residents of Lithuania, excluding the income from tax haven countries. This new provision on relief will be applied to income received during the year 2005 and later.

This law will come into effect on 1 July, 2006.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.