If you’re on a quest for a crypto-friendly jurisdiction, Lithuania might be the right choice not only for its eager responsiveness to the fast evolving blockchain industry but also for the effective taxation framework. Lithuania currently ranks 6th on the International Tax Competitiveness Index which indicates low tax burdens on business investment and a sufficient level of neutrality through a well-structured framework of tax codes.
The main Lithuanian taxes are predominantly administered by the State Tax Inspectorate, although the State Social Insurance contributions are administered by the Board of the State Social Insurance Fund (aka SoDra). The tax year runs from the 1st of January until the 31st of December.
Currently, the national authorities haven’t imposed any crypto-specific taxes, but such crypto-related activities as mining, initial offering, buying, selling, mediation and paying in crypto currencies for products or services fall under the existing taxation framework. All of these transactions must be recorded in euros.
To make matters easier for crypto companies, the State Tax Inspectorate has published a paper clarifying crypto tax treatment. For tax purposes, a virtual currency is an instrument which is analogous in its characteristics to Bitcoin, Ethereum, Ripple and Litecoin. However, the definition isn’t strictly determined and may include various tokens.
In this case, tokens don’t have a strict definition either, but it usually means an instrument issued through initial offerings (ICO) using blockchain. The taxation treatment is dependent on the type of token. In practice, there are 2 types of taxable tokens:
- Security tokens have the characteristics inherent to securities and confer on their holders such rights as the right to manage the company or the right to receive a share of the profit, etc.
- Utility tokens entitle their holders to receive a specific product or service in the future in exchange for those tokens
That said, it doesn’t mean all tokens can qualify as any of these two categories which is why a third undefined type of cryptocurrencies is distinguished by the authority. Also, it’s worth noting that when it comes to recognising cryptocurrencies as particular types of tokens, the decision of the State Tax Inspectorate doesn’t necessarily correspond with the opinion issued by the Bank of Lithuania. For example, in cases where the Bank of Lithuania doesn’t recognise a token as a security, such a token may be still considered a security 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
The Lithuanian Corporate Income Tax is one of the lowest in the EU. In this case, it’s applied to the revenues generated by the crypto licence holders in Lithuania. The taxpayers can also benefit from a number of allowances (e.g. relating to R&D projects).
Furthermore, companies with an average number of listed employees not exceeding 10 people and income for the tax period not exceeding 300,000 EUR are taxed at the rate of 0% for the first tax period and at the rate of 5% for the following tax periods, except cases outlined in the Law on Corporate Income Tax.
For the purpose of the Corporate Income Tax application, based on the nature of transactions and economic implications, cryptocurrencies are recognised as short-term assets that can be used as a means of payment for products and services or held for sale.
Examples of the Corporate Tax application:
- Mining isn’t taxed but sales of cryptocurrencies are recognised as taxable income
- Security tokens are exempt from tax
- Funds raised during the ICO aren’t taxed in cases where the tokens issued during the ICO have the characteristics of securities
- The funds received during the ICO of security tokens shall be included in taxable income only if the issuer of the tokens doesn’t make any commitments or the amount of commitments is less than the amount of funds collected
Application of the Corporate Income Tax also varies depending on the residency status of a company. A company is a tax resident in Lithuania if it’s incorporated there under Lithuanian law.
Resident crypto companies are obligated to pay the Corporate Income Tax on all income sourced inside and outside of Lithuania. However, income from economic activities carried out by a Lithuanian crypto company through permanent establishments located in one of the EEA countries or in a country with which Lithuania has an agreement on the elimination of double taxation, isn’t taxed if such income is subject to an equivalent tax in these countries.
Non-resident crypto companies only have to pay the Corporate Income Tax on the following instances: 1) for the income earned from economic activities carried out through permanent establishments located in Lithuania, 2) income earned in foreign countries attributable to the economic activities carried out by a foreign company through permanent establishments located in Lithuania, 3) income sourced in Lithuania and received by a non-resident company otherwise than through permanent establishments located in Lithuania.
Value Added Tax
Generally, a crypto company must register as a VAT payer if it supplies taxable products or services in Lithuania and when its taxable annual turnover has exceeded 45,000 EUR.
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 isn’t dependent on the opinion of the Bank of Lithuania. If the counterparties recognise the cryptocurrency as a legal alternative to the means of payment, it must be treated as a contractual means of settlement for VAT purposes and the transactions relating to it shall be considered financial transactions.
The essential difference between treating cryptocurrencies for VAT purposes and treating cryptocurrencies for the Corporate Income Tax purposes is that such cryptocurrencies are never considered short-term assets for VAT purposes.
Examples of VAT application:
- Mining isn’t subject to VAT, unless there’s a supplier-client relationship where a miner is paid for products or services provided in Lithuania
- Sales of crypto related services (e.g. paid referral of other platforms) are subject to VAT
- Revenues generated from the provision of cryptocurrency exchange services are exempt from VAT as it’s an equivalent of the treatment of fiat money
- A company supplying crypto exchange services in Lithuania has the right to choose to charge VAT on these services if the purchaser (customer) is a taxable person
- Tokens issued during ICO are exempt from VAT as the process is equivalent to the issuance of shares
The standard taxable period coincides with a calendar month but a company may request the taxable period to coincide with a calendar quarter if its turnover from economic activity didn’t exceed 300,000 EUR during 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 and crypto licensing processes as well as provide financial accounting services. Please click here to book a tailored consultation.
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