Lithuania law news: is there a ceiling for bonus payments in Lithuania?

September, 2011

During the year 2011 Lithuania as well as other Baltic states faced a heavy challenge to combat the adverse financial situation in their country. Lithuania, followed by the crisis management plan, is trying to take the companies out of the shadow economy in order to offset the loss ensuring the stability of public finances due to the statements of Lithuanian Government.

Notably in the year 2011 the tax burden was reduced and Lithuanian Government introduced more attractive CIT rate of 15 % (instead of 20%) which corresponds to the rate in our neighbor Latvia. For dividends the tax rate remains at 20%. Therefore, Lithuania still remains attractive to the most foreign investors due to the favorable tax planning possibilities.

It is important to note that Lithuanian Tax institutions currently weights tax and other laws amendments which would overall change the financial situation in Lithuania and various businesses.

Lithuanian President Ms. Dalia Grybauskaite is very active in suggesting new law amendments to better the financial situation in the country. One of the most recent amendments from President of Lithuania side is the Draft on Amending the Law on Companies presented to Lithuanian Parliament in fall 2011.The President of the Republic of Lithuania Ms. Dalia Grybauskaite issued Decree No. 1K-785, by which she presents the draft Law on Amending the Law of the on Companies to Lithuanian Parliament.

The draft proposes amendment related to the general meeting of the shareholders and their taken decisions related to the paid annual bonuses. The annual payments to the Board are suggested not to exceed 1/3 of the profit allocated for payment of dividends. This draft is meant to minimize the tax evasion in the country and sets the grounds that annual payments should not be paid in case the dividends are not paid and the amount of the annual payments should depend on the share of profit.

The draft is also related to the other legal instruments, such as the tax inspection letter Nr. (18.18.31.1)-R- 5728 as of September which is related to the bonus taxation system to Board Members of the Companies and the Supervisory Board. It is constituted by local tax inspection that according to local practice Companies tend to increase the annual payments to the Board Members and Members of Supervisory Board in the Companies. The increase is done in some cases related not to the scope of activities of the Board Members, but in order to pay smaller taxes in Lithuania through contributing part of the salary to the annual payment (bonus). The tax inspection is informing that additional investigations will be carried out in order to clarify if the company is involved in tax evasions.

Valters Gencs

Tax Attorney & Founding Partner

Gencs Valters Law Firm, Riga

T: +371 67 24 00 90

Email: valters.gencs@gencs.eu