Lithuania’s Finance Ministry presented its proposal for a tax reform, two years in the making. The centrepieces of the package include expanded real estate taxes and scrapping exemptions for the self-employed.
“Discussions are over and proposals are being put forward to contribute to economic growth, transformation, and a fairer distribution of taxes,” Finance Minister Gintarė Skaistė said on Tuesday at the presentation of the tax reform proposal, which has been in the pipeline for more than two years.
If adopted, the tax changes would be phased in gradually by 2026. The Finance Ministry’s estimates suggest that the changes would bring in 447 million euros in additional revenues, while new exemptions would cost 271 million.
The proposals will be put before the parliament in May.
Property tax revamp
Proposals for residential real estate taxes have received most attention from the media. They would completely change how the tax is calculated and where the proceeds go.
The Finance Ministry has proposed that the tax bill be calculated on each piece of property separately rather than on the total value of properties owned by one person, as is currently the case.
The proposal also broadens the base of the tax, making half of the country’s properties subject to it.
The tax would be based on property valuations in each municipality. The bottom half of residential real estate in each municipality would be exempted from the tax, which would only apply to properties valued at above the median. A rate of 0.06 percent per annum would apply to properties worth between one and two times the median value. Properties valued above that would be taxed at 0.01 percent.
Retired and socially vulnerable people could apply to defer the tax until their property is sold or otherwise passed on to new owners, Skaistė said.
In Vilnius, for example, the median value of residential property is currently estimated at 60,100 euros, meaning that only real estate valued above that sum would be subject to the tax. Properties worth more than 120,200 euros would be taxed at the higher 0.01-percent rate.
Another big change is that the proceeds from the tax would go directly to municipalities, rather than the central government, and could be used at their own discretion. One of the goals of the reform, according to the government, is to give municipalities an independent source of income.
Changes for the self-employed
The Finance Ministry’s proposal also includes significant changes for taxes on self-employed workers, particularly high-earners such as lawyers and bailiffs.
“There have been a lot of expert discussions that there is too much of an ‘animal farm’ type of things in self-employment, where high earners pay much lower tax rates than those with employment contracts,” said Finance Minister Skaistė.
In Lithuania, the self-employed can work under two regimes: by registering so-called “individual activity” (individuali veikla) or taking out a “business certificate” (verslo liudijimas).
The Finance Ministry is proposing to cap incomes that can be earned under the business certificate – intended for short-term gigs – at 20,000 euros per year (the current cap is 45,000). Moreover, the proceeds would be taxed at 15-percent (minus deductions) rather than subject to a fixed tax as is currently the case.
The self-employed who are working under the “individual activity” regime would see their income tax rate gradually raised to 20 percent by 2026.
According to Skaistė, however, the changes would not affect 75 percent of those self-employed under the individual activity and 85 percent of those using business certificates.
Changes for high-earners
Most workers employed under contracts would not feel much difference in the way they are taxed, except the high-earners, according to the ministry.
At the moment, employment incomes are subject to the 20-percent income tax, with the higher marginal rate of 32 percent applied to incomes above 101,100 per year (the threshold is calculated according to the statistical VDU, “average [monthly] salary”, which is 1,685 euros at the moment; the higher rate applies to incomes above 60 VDUs). Meanwhile, passive incomes – such as interest on deposits or rents – are taxed at 15 percent.
Under the new proposal, all incomes, irrespectively of their source, would be added and taxed equally. Incomes in excess of 60 VDUs (101,100 euros per year) would be subject to an additional marginal tax of 5 percent and those in excess of 120 VDUs (202,200 euros per year), 7 percent.
According to the Finance Ministry’s estimates, around 16,000 people in the country would be subject to the higher income tax rates (up from some 8,000 at the moment) or 0.8 percent of all taxpayers.
More changes have been proposed to ease the tax burden and small businesses and to encourage investment into innovations.
Newsletter
Every Friday morning.
