Tax Changes in the Baltic States

All three Baltic States- Estonia, Latvia, and Lithuania- still offer favorable tax systems and low tax rates for foreign investors 2015, as well. What makes Estonia especially attractive is the zero percent income tax on retained earnings. Special tax rates for small companies offered by Latvia (11%) and Lithuania (5%) also attract interest. In 2015,

Estonia has reduced the corporate income tax rate; Estonia and Latvia have reduced their personal income tax rates; Latvia and Lithuania have changed their real estate taxes.

I. Tax Changes in Overview

1. Estonia

E-Residency: In 2014 Estonia introduced a unique in the world concept of E-residency. E-residency is a state-issued secure digital identity for non-residents that allows digital authentication and the digital signing of documents.

Personal income tax: personal income tax rate was reduced from 21% to 20%.

Corporate income tax: corporate income tax rate was reduced from 21% to 20 %.

2. Latvia

Personal income tax: personal income tax rate was reduced from 25 % to 23%.

Corporate income tax: corporate income tax rate for micro enterprises (with the annual turnover more then 7000 euros) was increased from 9 % to 11%.

Property taxes: increase in property taxes from 0,2 % up to 3% of the cadastral value of the land and buildings.

VAT: reduction of general VAT rate from 22% to 21%.

3. Lithuania

Income Tax: reduction of the income tax on dividends for individuals from 20 % to 15%.

Property/Real Estate taxes: changes in property and real estate taxes: decrease of property taxes from 1,5 % to 1% and increase in real estate taxis from 0.3 % up to 3% of the value of the buildings.

*) Mag. Dr. Peter Feith is Managing Partner, Epsilon Finance Group, a business Consulting firm in Austria and Slovakia. Maie Majak-Knöbl, MBA, is Project Manager at IMG Business Solutions, an Enterprise Group represented in all three Baltic States.

Taxes at a glance

II. Tax framework in Estonia

1. Personal Income Tax

Personal income tax rate was reduced from 21% to 20%.

Residents pay tax on their worldwide income. Taxable income includes, in particular, income from employment (salaries, wages, bonuses and other remuneration); business income; interest, royalties, rental income; capital gains; pensions and scholarships and alimony payments received.

Taxable income does not include dividends paid by Estonian or foreign companies when the underlying profits have already been taxed or foreign tax has been withheld on dividends.

Non-residents pay income tax on their income from Estonian sources. Income taxable in Estonia includes income from employment or government services provided in Estonia; income from business carried out in Estonia; part of interest received from Estonian sources that is above market rates; royalties arising in Estonia; certain types of capital gains; gains from disposal of assets located in Estonia; directors' fees and income of a sportsman or an artist from his activities in Estonia, pensions, insurance payments.

Estonia has effective double taxation avoidance treaties with 56 countries. Estonia has signed a new treaty with Luxembourg and treaties with Morocco and Russia that are not yet effective. 

2. Corporate income tax

Corporate income tax rate was 2015 reduced from 21 % to 20%.

There is no corporate income tax on reinvested profits. The resident companies and permanent establishments have to pay tax only on dividends and other distributed profits, fringe benefits; gifts, donations and representation expenses; and expenses and payments not related to business. The transfer of assets of the permanent establishment to its head office or to other companies is also treated like a distribution.

3. Value added tax (VAT)

The standard VAT rate is 20 % of the taxable value; the reduced rate is 9% (books, newspapers, medicines, accommodations).

The VAT registration threshold is 16 000 EUR a year.

4. Land Tax

Land tax rate is 0,1%-2,5% of taxable value (excluding buildings).

4. Social tax

Employers pay social tax on payments in cash and in kind made to natural persons. Sole proprietors pay tax on their business income. The social tax rate is 33 % on cross salary. An unemployment contribution, paid by the employers and the employees, amounts to 2,4% on cross salary.

III. Tax framework in Latvia

1. Personal Income tax

Latvian residents are subject to taxation on their worldwide income. There are different rates applied depending on types of income.

General flat rate of the income tax, was reduced from 25 % to 23%, and also includes self-employed.

10% tax rate applies to dividends, interest and rental income and insurance payments.

Income from capital gains is taxed at 15%.

The standard personal income tax also applies to non-residents. Taxation of non-resident individuals is limited to their activities in Latvia. By way of exception, income of non-residents from the disposal of financial instruments is not subject to personal income tax in Latvia.

Latvia has double taxation avoidance treaties with 56 countries.

2. Corporate Income tax

Latvian resident companies are subject to low, 15% income tax. As of 2011, a reduced rate of 9% applies to micro-enterprises (turnover under 100 000 euros, up to 5 employees and shareholders are individuals). As of 2015 the micro- enterprises with annual turnover between 7000 and 100 000 EUR are taxed with 11%.

Thin capitalization rules: debt equity ratio 1:4 or 1,2 times short -term interest rate as provided by the Statistics Department; the “less favorable” of the two criteria applies.

Accelerated depreciation (10-70%) of fixed assets using declining balance method is used.

No carry back, carry forward of losses is limited to 8 years; transfer of losses within the group is possible.

3. Value added Tax (VAT)

Standard VAT rate was reduced from 22 % to 21%. The reduced rate is 12% and applies for example to medications, energy and wood supplied to private individuals and public transportation services.

The VAT registration threshold is 50 000 EUR.

4. Property Tax

Increase in property taxes from 0,2 % up to 3% of the cadastral value of the land and buildings.

5. Social tax

In Latvia both employers and employees pay social security contributions. Currently, the social security contributions amount to 34%.

IV. Tax framework in Lithuania

1. Personal income tax

The general flat rate is 15%. A reduced, 5% rate applies to certain activities carried out by self-employed. The tax rate for dividends was reduced from 20% to 15%.

Residents are subject to personal income tax on their worldwide income. Taxable income includes, in particular, includes income from employment, business income; interest income, dividends and capital gains.

Non-residents pay income tax on their income sourced in Lithuania. Basically same rates apply as to residents unless reduced under double taxation treaties.

Lithuania has tax treaties with 52 countries.

2. Corporate income tax

The corporate income tax rate in Lithuania is unchanged, 15%. A reduced rate of 5% applies to small businesses (annual income below 300 000 EUR and up to 10 employees).

Thin capitalization rules: debt to equity ratio 1:4 applies; interest-free loans are not included in controlled debt.

Fixed assets are depreciated using straight-line method, for certain groups the double-declining method may also be used.

Generally, dividends received by a resident company are subject to corporate income tax at a rate of 15%. A participation exemption applies to dividends paid to a parent company holding more than 10% of the voting shares in the distributing company continuously for at least 12 months, provided the distributing company is not established or otherwise organized in a tax haven country.

No carry back, unlimited carry forward of losses (in case of losses from the transfer of securities and derivative financial instruments 5 years).

3. Value added tax (VAT)

Standard rate is 21%, a reduced rate of 9% applies to heating energy, books and non-periodical press, and a reduced 5% rate applies to medicines and medical products.

The VAT registration threshold is 45 000 EUR.

4. Property and real estate taxes

Changes in property and real estate taxes: decrease of property taxes from 1,5 % to 1% and increase in real estate taxis from 0.3 % up to 3% of the value of the buildings.

5. Social tax

In Lithuania, similarly to Latvia both the employers and the employees pay social security contributions, which added together amount to 40%.

Peter Feith / Maie Majak-Knöbl*)