Linas Jegelevičius
Lithuania’s Finance Ministry finally unveiled a tax reform earlier this week, triggering an avalanche of backlash and indignation from tax experts, politicians, and the public alike.
It definitely will not be a mere tempest in the teapot – some even predict that, if the ruling Conservatives, officially Homeland Union- Lithuanian Christian Democrats (HU-LCD) pass the bill, they will hammer a nail in the coffin, dashing hopes in the general elections next year.
«What was going on during its preparation was preposterous – having delayed the process multiple times without providing an explanation, the right-wing parties came up with what many dubbed «tax Frankenstein». Sadly, not a single bit of the reform draft was shared or discussed with the opposition. Now this «tax Frankenstein» goes to the Seimas hall and my gut feeling is that, at the end of the Seimas spring session, the ruling MPs will attempt to muddle it through, insisting that it is very urgent and et cetera. It is always easier to push such «half-products» in chaos like this,» Saulius Skvernelis, former Prime Minister and, now, MP and chairman of the «In the Name of Lithuania» parliamentary fraction, said.
The centerpieces of the package encompass expanded real estate taxes and phasing out exemptions for the self-employed.
However, proposals regarding taxing residential real estate taxes have already grabbed the most attention, from the media and property owners.
The Finance Ministry seeks that the tax be calculated on each piece of property separately rather than on the total value of properties owned by one person. Namely, the latter was in the Ministry’s plans last year. If enacted, the provision will broaden the base of the tax, with half of the country’s properties being subject to it after the adoption of the reform package.
While some modest residential real estate in each municipality would be exempted from the imposition of the tax, a rate of 0.06 percent per year would apply to residential real estate worth between one and two times the median value. Properties assessed above that would be taxed at 0.01 percent.
In Vilnius, the median value of a residential estate is 60,100 euros currently, meaning that only real estate valued above that sum would be subject to the tax. Properties whose value exceeds 120,200 euros would be taxed at the higher 0.01-percent rate. Notably, the proceeds from the tax would fill municipalities’ coffers, rather than those of the central government.
Retired and socially vulnerable people could apply to defer the tax until their property is sold or otherwise passed on to new owners, Finance Minister Gintarė Skaistė said.
Besides, the Finance Ministry proposes a 20 percent personal income tax for revenue received from the individual activity
and it would be introduced gradually. The existing tariff would remain unchanged in 2024, but it would increase from 15 percent to 17 percent in 2025 and reach 20 percent in 2026.
The tax reform draft envisions that residents whose total annual income ranges from 60 and 120 average wages (roughly 101,000 to 201,000 euros) would be taxed not only at 20 percent but would be also obligated to pay an additional tax rate of 5 percent and those whose annual salary exceeds 120 average wages will need to pay not 5 but 7 percent.
The Ministry also proposed that those with business certificates earning more than 20,000 euros yearly would be obligated to register their individual activity, meaning more taxes.
In Lithuania, the self-employed can either register for so-called «individual activity» or obtain a «business certificate».
Additionally, from 2024, all self-employed workers would be required to pay the same social insurance (SoDra) contributions calculated on 90 percent of their taxable income, compared to the existing range of 50 to 100 percent.
The draft foresees that the annual income threshold for businesses to register as VAT payers would go up from 45,000 to 55,000 euros. The Ministry wants the change from 2024.
The Ministry has also laid out tax proposals regarding corporate income.
Until now, many Lithuanians would shun taxes when the property is handed over to a close family member in form of a gift, but the Ministry is set to put an end to the practice – proposes taxing gifts from relatives, including spouses, parents, children, grandparents, grandchildren, exceeding 300,000 euros from next year. Gifts from brothers and sisters, exceeding 150,000 euros per year, would also be taxed. Now, such gifts are tax-free, regardless of their value.
«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 at the presentation of the tax reform proposal, which has been in the making for more than two years.
Daiva Čibirienė, president of Lithuania’s Association of Lithuanian Accountants and Auditors, told Žinių radijas that such reform has not been implemented in the country since the beginning of Independence. «A lot of changes are proposed. And they will touch absolutely everyone. And the Ministry’s claim that the changes will affect the quarter of the population is wrong – it must have wrong numbers,» she said.
Zita Sorokienė, chairwoman of the Association of Lithuanian Small Businessmen and Traders, told Delfi tema that the country’s small businesses were left aside when the guidelines for the tax reform were laid out. At first, the Ministry of Finance consulted with them, but later the joint meetings stopped, and the presentation of the tax reform became a surprise.
Luminor bank economist Žygymantas Mauricas told Delfi tema that the Ministry of Finance declared the aim of tax reform to increase social justice, but in the end, everything turned into news about tax increases.
«I got the impression that the reform deviated from the original goal, the general picture, that it is a tax increase reform,» he emphasized.
Approached by BNN, Vytautas Dumblauskas, associate professor at Mykolas Romeris University, reasoned that the ruling Conservatives were compelled to act on taxes, following the conclusions of the World Bank on Lithuania’s tax system deficiencies last year.
«No doubt, any tax reform is a very sensitive issue that can backfire on politicians behind it later.
It will be interesting to see how the coalition’s liberal parties will vote on the tax reform package,»
Dumbliauskas accentuated.
The tax proposals will be put before the parliament in May.
If the Parliament, the Seimas, approves the tax changes, most of them will go into effect by 2026. The Finance Ministry says that the changes would bring in 447 million euros in additional revenues, while new exemptions would cost 271 million.