Changes in personal income tax in Lithuania

Obviously, every country has its own taxation system with specific aspects. However, trying to adopt to constant changes and development of the world the systems are being refined consistently. Lithuania‘s taxes system is different because, for example, it does not use progressive income taxes, which is more popular in Western Europe and Scandinavian countries. Only recently interest from deposits have been taxed. This new tax is discussed in an article intitled “Concessions are changed into taxes“ of the journal “IQ“ 2013, 08 (41).

Amendment to the personal income tax has been accepted and the changes will become effective from the beginning of 2014. These changes will expand the base of the personal income tax. One of the changes is the taxation of interest of deposits and warrants of bonds. Also assessments related to dividends and selling of shares have changed. Usually, when such changes are accepted they start to go in effect right away, almost with no time to prepare for them. This time the nation has almost five months to adjust and decide how to control their belongings and investments,  what strategy and methods to use. It is worth mentioning that these changes are not important to every lithuanian.

In general, assessment of deposits and bonds means the growth of tax burden. However, it will not effect people who are not wealthy. Just because a person gets interest from deposits or has a bond warrant does not mean he will have to pay the tax. Only the amount got from this kind of investments higher than 10 thousand litas (approximately 3000 euros) will be taxed with a 15 percent tariff. This amount (10 000 litas) is estimated for interest and bond warrant incomes together. The tax from bond will be estimated from the warrant, not the profitableness. However, by doing this the return on investment would be negative because the profitableness of Government bonds has decreased and the warrants are always the same. The new taxation will not be applied to some securities which will be bought by the end of this year. This exception is invoked in countries of European Economic Area (EU, Norway, Iceland and Liechtenstein). This means that an investor can change the portfolio until the end of this year, so it may be possible to get tax concession. 

Also the tax tariff for dividends will be adjusted. It will be 15 percent instead of 20 percent, which is valid now. Since 2009, investments in shares with dividends have been not only riskier but also a bit discriminatory in regard to taxes. The tax rate of 20 percent has been applied to all dividends when interest from non-government bonds or capital growth from selling the securities have been taxed with 15 percent tariff or not taxed at all. Moreover, the adjustment of the taxations system will abolish the concession to sell the shares bought before year 1999 if the value of shares is not bigger than 10 percent. If in this case income from selling securities is 10 000 litas and more, the transactions should be made before the first of January of 2014. 

There are still entrepreneurs who monitor shares of their companies themselves because of the concession for shares bought unitl year 1999, but this may change after the adjustments will take place from year 2014. It will be easier to transfer the management to a juridical person. This way it is easier to re-invest income, to alienate one of the businesses without any extra taxes.

One of the biggest disadvantage of changing the system is that the income from saving and investments, that is, taxes from them will have to be estimated by the people. Lithuanians will have to do that themselves when filling in the annual declaration of income. It is applied for permanent citizens of Lithuania. Temporary citizens will have the taxes docked before they will get the income. Up until now there have not been a lot of declarations of income from securities trading but it is believed that it will change next year. 

All in all, decision to make these kind of changes seems rational. Many other countries have already taxed income not only from wage but from other sources too. Of course, there are different ways to do that, for example Estonia tries to evaluate all kinds of income and tax them all with the same tariff. However, taxing all kinds of income usually is not possible and not expedient because of concessions to different kinds of income.

Laura Trubilaite

[artigo de opinião produzido no âmbito da unidade curricular “Economia Portuguesa e Europeia” do 3º ano do curso de Economia (1º ciclo) da EEG/UMinho]