Extremely tightened control of financial institutions and paranoid transparency requirements force clients to abandon complex structures. Hiding directly behind a foreign company is an easy low-cost option and sometimes the only way to become a client of a bank. Setting up a Lithuanian company with a bank account in Lithuania has become a popular solution for planning international transactions.
New solutions in Lithuania
Active clients have discovered Lithuania as a country with good FinTech reputation in the field of e-money institutions. Today, over 40 e-money institution licences have been issued in Lithuania. Institutions holding such licences have become a low-cost and quick alternative to banks. Currently, Lithuania is the leader in EU in terms of issuing e-money licences, with one of the most liberal legislation in EU and one of the lowest costs for obtaining licenses. Consequently, Lithuania has gained the reputation of a FinTech country.
Lithuanian payment institutions are keen on working with companies from different jurisdictions and have become a solid solution to many clients. Some banks in Lithuania even continue to open bank accounts for non-residents and have also acquired a wide practical experience in working with such clients, which further increases the attractiveness of Lithuania. Usually, Lithuanian bank employees are fluent in both Russian and English, which means that documents/applications of foreign clients may be submitted in English without increasing the cost of opening a bank account for the client.
Regretfully, large flows of foreign clients have somewhat reduced the operation speed of Lithuanian banks and e-money institutions; foreign business inspection measures are also getting stricter. However, local companies still find it easy to open Lithuanian bank accounts, which nowadays is often considered as a luxury. For example, it usually takes up to 1-2 days to open a bank account for a Lithuanian company, transaction fees for such companies are usually lower than for foreign companies. National laws when conducting commercial transactions with foreign business are sufficiently liberal and it is easy to obtain VAT and TIN numbers, which allows Lithuanian companies to occupy more and more space for themselves on the international scene.
Low corporate income tax
Low corporate income tax may be another reason why Lithuanian companies may be attractive in trading operations. The standard corporate income tax is 15%, but smaller enterprises are subject to corporate income tax of 0% or 5%.
Corporate income tax of 0% is applicable for the first financial year, provided that:
the shareholder is a natural person and
during three consecutive financial years: shares are not sold; activities are not suspended; company is not being liquidated/reorganized and
the company meets the requirements to be subject to corporate income tax of 5% (see below).
5% in case:
- annual income does not exceed EUR 300,000 and
- number of employees does not exceed 10 and
- on the last day of the financial year, the owner does not hold more than 50% of shares in any other company.
In other cases, the standard corporate income tax is 15%. Lithuanian companies are not subject to any restrictions, while engaged in trading with offshore companies from tax heaven “blacklist” (additional requirements may be raised when paying for services).
Also, small partnerships (MB) might be attractive as one of the types of limited liability companies, only with natural persons as founders. Directors of such companies are not required to work under an employment contract (a civil contract is sufficient; lower taxation of employment relations). Salary payments made to the Director reduces the corporate income tax of MBs. Furthermore, disbursements made to the Director for being a foreign citizen are not subject to taxation in Lithuania. This method allows to flexibly plan the company’s tax burden and the Director, as a foreign citizen, will declare such disbursements himself/herself in the country of citizenship according to the concluded civil contract.
Another popular type of limited liability companies is a private limited liability company (UAB). A shareholder thereof may be either a legal or natural person, and the Director of the company should work under an employment contract.
Flexible Holding regime
Lithuanian companies may also be used for holding purposes:
- dividends of a Lithuanian company, received from the EU/EEA companies (corporate income tax payers), shall be exempt from taxation;
- dividends received and paid out shall also be exempt from taxation, in case a shareholder owns or intends to own at least 10% of shares for at least 12 months in the future (substance requirements according to ATAD).
- foreign owners do not pay capital gain taxes in Lithuania from the sale of a Lithuanian company;
- Lithuanian companies do not pay capital gain taxes, if they own at least 10% of shares (for at least 2 years) of a company registered in the EU or in the country with whom the Double Taxation Avoidance Agreement (DTAA) is concluded.
- no withholding tax on interest paid to EU companies and companies from countries, with whom the Double Taxation Avoidance Agreements have been concluded (30% from EBITDA/3 million euros – ATAD requirements);
- no withholding tax on royalties paid to companies registered in countries, which are favoured by the Double Taxation Avoidance Agreements; also, paid to companies of EU states, which hold at least 25% of shares for at least 2 years (directly and indirectly)
- profit from the sale of the copyrighted programmes/patents is subject to corporate income tax of 5%.
In conclusion, Lithuanian companies are worth exploring and may come in hand in these restless times of such onshore turbulence.
Contributed by Jaroslavas Lukoševičius, Attorney at Law.