If you are on the lookout for a crypto-friendly jurisdiction, Lithuania may be the right choice not only for its impatient response to the fast-growing blockchain industry, but also for an effective tax system. At present, Lithuania ranks sixth in the index of international competitiveness in taxation. This indicates a low tax burden on business investment and sufficient neutrality thanks to a well-structured system of tax codes.
The main Lithuanian taxes are administered mainly by the State Tax Inspectorate, although contributions to the State Social Insurance System are administered by the Board of the State Social Insurance Fund (otherwise SoDra). The tax year lasts from 1 January to 31 December.
Currently, national authorities have not imposed any crypto-specific taxes, but such crypto-related activities as mining, primary offer, buying, selling, brokering, and paying in cryptocurrencies for products or services, are subject to the existing taxation system. All these transactions must be registered in euros.
To make the questions easier for crypto companies, the State Tax Inspectorate published a document explaining the cryptographic tax regime. For tax purposes, virtual currency is a tool that is similar in its characteristics to Bitcoin, Ethereum, Pulsation and Litecoin. However, the definition is not strictly defined and may include different markers.
In this case, tokens do not have a strict definition either, but it usually means a tool issued through an initial offer (ICO) via blockchain. The tax regime depends on the type of token. In practice, there are 2 types of taxable tokens:
- Security tokens have characteristics that are inherent in securities and confer upon their holders rights such as the right to manage a company or the right to a share of profits, etc.
- Utility tokens give the right to their holders to receive a specific product or service in the future in exchange for these tokens
This says it doesn’t mean that all tokens can qualify as either of these two categories, so the third uncertain type of cryptocurrencies stands out by authority. In addition, it is worth noting that when it comes to recognizing cryptocurrencies as specific types of tokens, the decision of the State Tax Inspectorate does not necessarily correspond to the conclusion issued by the Bank of Lithuania. For example, where the Bank of Lithuania does not recognize a token as collateral, the token may still be considered collateral for all or some tax purposes.
Depending on the characteristics of your crypto activities, your company might be subject to paying the following taxes:
- Corporate Income Tax (CIT) – 15%
- Value Added Tax (VAT) – 21%
- State Social Insurance (SSI) – from 21%
- Withholding Tax (WHT) – 15%
Corporate Income Tax
Lithuanian corporate income tax is one of the lowest in the EU. In this case, this applies to revenues generated by cryptographic license holders in Lithuania. Taxpayers may also receive a number of benefits (e.g., in relation to R&D projects).
In addition, companies with an average number of registered employees not exceeding 10 persons and income during the tax period not exceeding 300,000 euros are taxed at a rate of 0% for the first tax period and at a rate of 5% for subsequent tax periods, except in cases of Provided for in the Corporate Income Tax Act.
For the purposes of applying corporate income tax based on the nature of transactions and economic consequences, cryptocurrencies are recognized as short-term assets that can be used as a means of paying for products and services or are held for sale.
Examples of corporate tax application:
- Mining is not taxable, but sales of cryptocurrencies are taxable
- Security tokens are exempt from tax
- Funds raised during the ICO are not taxable where tokens issued during the ICO have securities characteristics
- Funds received during ICO security tokens should be included in taxable income only if the token issuer does not make any commitments or the amount of obligations is less than the amount of the raised funds
The application of corporate income tax also depends on the residence status of the company. The company is a tax resident in Lithuania if it is registered there in accordance with Lithuanian law.
Cryptographic resident companies are obliged to pay Corporate Income Tax on all income received within and outside Lithuania. However, income from economic activities carried out by the Lithuanian crypto company through permanent missions located in one of the EEA countries or in a country with which Lithuania has an agreement on the elimination of double taxation is not taxed, If such income is taxed in the same way in those countries.
Cryptographic non-resident companies should pay Corporate Income Tax only in the following cases: 1) for income received from economic activities carried out through permanent establishments located in Lithuania, 2) Income earned in foreign countries as a result of economic activities carried out by a foreign company through permanent representations located in Lithuania, 3) income earned in a Lithuanian company, excluding permanent representations, located in Lithuania.
VALUE ADDED TAX
Typically, a crypto company must register as a VAT payer if it delivers taxable products or services in Lithuania and when its taxable annual turnover exceeds 45,000 euros.
In terms of VAT, cryptocurrencies are considered a means of payment (the same as fiat money – euro, dollar, etc.), and their definition for VAT purposes does not depend on the opinion of the Bank of Lithuania. If the counterparty recognizes the cryptocurrency as a legitimate alternative to payment, it should be treated as a contractual means of settlement for VAT purposes, and transactions related to it should be treated as financial transactions.
The significant difference between processing cryptocurrencies for VAT purposes and processing cryptocurrencies for corporate income tax purposes is that such cryptocurrencies never consider short-term assets for VAT purposes.
Examples of VAT application:
- Mining is not subject to VAT unless there is a supplier-client relationship when the miner pays for products or services provided in Lithuania
- Sale of services related to cryptography (e.g. paid referral of other platforms), taxed VAT
- Revenues received from the provision of cryptocurrency exchange services are exempt from VAT as it is equivalent to the processing of fiat money
- The company providing services to the crypto exchange in Lithuania has the right to collect VAT from these services if the buyer (customer) is taxable person
- Tokens issued during ICO are exempt from VAT, as the process is equivalent to the issue of shares
The standard taxable period coincides with the calendar month, but the company may require the taxable period to coincide with the calendar quarter if its turnover from economic activity did not exceed 300,000 euros in the previous calendar year.
State Social Insurance
Any company engaging in crypto related activities and employing people is subject to paying the State Social Insurance, which is part of the payroll taxes. An employee can’t begin to work until he/she is registered at the Social Security Tax Office by submitting a 1-SD form designed for notifying about the beginning of the personal social income. This must be completed no later than a day prior to the start of the employment.
While 19.5% is withheld from employees, an employer is required to pay 1.61%-2.49% which is calculated on top of an agreed gross salary. In case of fixed-term employment contracts, the employer’s contributions can be increased to 2.49%.
Payments and reports of the State Social Insurance contributions must be made by the 15th of the following month, or by the first preceding regular working day, if the 15th isn’t a regular working day.
The team of Regulated United Europe (RUE) is pleased to offer comprehensive taxation advice to everyone who’s interested in optimising their taxes in Lithuania. We can also guide you through the company formation, familiarise you with all cryptocurrency regulations in Lithuania and crypto licensing process in Lithuania, as well as provide financial accounting services. Please click here to book a tailored consultation.
Crypto Taxes in Lithuania in 2023
Lithuania has recently updated its crypto rules but hasn’t made any significant changes to the applicable taxes and reporting, apart from the requirement for senior managers of Lithuanian crypto companies who now have to be permanent residents of Lithuania in accordance with the Lithuanian Personal Income Tax Law. Other than that, Lithuanian cryptocurrency businesses are still subject to paying general taxes and adhering to general tax reporting standards. However, the implementation of new taxation and reporting standards can go into the pipeline due to the new global tax transparency framework, introduced by the Organization for Economic Cooperation and Development (OECD).
Corporate Income Tax
Lithuanian and foreign businesses engaging in crypto-related economic activities remain obligated to pay a standard 15% Corporate Income Tax. Allowances and exemptions apply as usual. All income sourced by Lithuanian crypto companies (incorporated in Lithuania under Lithuanian law) inside and outside of Lithuania remains taxable, except for the income earned from economic activities carried out through permanent establishments based in the European Economic Area (EEA) and in the countries which Lithuania has double-taxation elimination agreements with. Non-Lithuanian crypto companies will continue to pay taxes on the income sourced in Lithuania.
If your cryptocurrency company has been recently established, the tax rate of 0% will be applied to taxable profits for the first taxable period. After that, it will be subject to paying a reduced 5% Corporate Income Tax if the following conditions are met: 1) an average number of employees doesn’t exceed 10 people, 2) the income during the tax period doesn’t exceed 300,000 EUR, 3) the shareholders are only natural persons, and 4) the economic activities aren’t terminated, the company isn’t liquidated, and the shares aren’t transferred over to new shareholders for three consecutive tax periods, including the first tax period. The 5% rate also applies to profits earned from commercialised research and development (R&D) inventions.
Personal Income Tax
The Personal Income Tax rates remain 5-32% and are now particularly relevant to crypto companies since they’re obligated to open local offices with local staff and hire a senior manager who’s a permanent resident of Lithuania.
In 2023, permanent and non-permanent residents of Lithuania are required to pay Personal Income Tax contributions at the rate of 20% if their annual income is sourced from employment relations and doesn’t exceed 101,094 EUR. Those whose annual income exceeds 101,094 EUR, must pay the tax at the rate of 32%. Reduced tax rates usually apply to paternal leave, sick pay, dividends, self-employment, and other types of income.
Value Added Tax (VAT)
In Lithuania, the Value Added Tax is 21% and it still doesn’t apply to companies offering crypto exchange services since for VAT purposes cryptocurrencies are treated as an alternative means of payment (not short-term assets), and their transactions are considered financial transactions. However, other crypto-related economic activities are generally taxed and any other company providing taxable crypto services in Lithuania is required to register as a VAT payer as soon as its taxable annual turnover exceeds 45,000 EUR.
Mining activities also aren’t subject to VAT since normally there’s no supplier-client relationship where a miner is paid for products or services provided in Lithuania. Also, tokens issued during ICO remain VAT-exempt as the process is treated as equivalent to the issuance of shares. On the other hand, such activities as sales of crypto-related services (e.g., paid referral of relevant platforms or software and hardware sale) are generally subject to VAT.
State Social Insurance
The State Social Insurance rate will be 21,27% in 2023 and is paid by the employer and resident and non-resident employees. An employer is obligated to pay 1,77-2,49% which is calculated on top of an agreed gross salary, and 19,5% is withheld from employees. If an individual is working under a fixed-term contract, the employer’s contribution can be increased to 2,49%. As usual, it’s mandatory to register a new employee with the Social Security Tax Office before the commencement of work. The regular reporting and payment deadline remains the 15th of the following month.
New Global Tax Transparency Framework
The Organization for Economic Cooperation and Development (OECD), an intergovernmental organisation consisting of 38 most developed countries, has recently introduced a new international tax transparency framework, entitled Crypto-Asset Reporting Framework (CARF), which should facilitate improved reporting and exchange of information about cryptoassets. OECD aims to raise crypto taxation and tax reporting standards by eliminating crypto-related tax inconsistencies and administrative siloes across its member countries and is essentially proposing automatic tax reporting and taxpayer information sharing among tax authorities that will apply to cryptocurrency exchange businesses, cryptocurrency transfers and may soon apply to online and offline crypto wallets.
Since Lithuania is a member of the OECD, it’s worth keeping in mind that it can actualise any policies presented as recommendations by OECD. This includes the recent crypto tax policy recommendations that might be transposed into the national taxation framework in 2023.
At the moment, the main services of our company are legal and compliance solutions for FinTech projects. Our offices are located in Tallinn, Vilnius, and Warsaw. The legal team can assist with legal analysis, project structuring, and legal regulation.
Company in Estonia OÜ
Registration number: 14153440
Licence number: FIU000186
Phone: +372 5333 8208
Email: [email protected]
Address: Sepise 1, Tallinn, 11415, Estonia
Company in Lithuania UAB
Registration number: 304377400
Phone: +370 661 75988
Email: [email protected]
Address: Lvovo g. 25 – 702, 7th floor, Vilnius, 09320, Lithuania
Company in Poland Sp. z o.o
Registration number: 38421992700000
Phone: +48 50 633 5087
Email: [email protected]
Address: Twarda 18, 15th floor, Warsaw, 00-824, Poland
Company in Czech Republic s.r.o.
Registration number: 08620563
Phone: +420 775 524 175
Email: [email protected]
Address: Na Perštýně 342/1, Staré Město, 110 00 Prague