“As far as the taxation of labour goes even though the income tax rate is not high – at 15%, the actual tax burden, including social security contributions is about 55%,” said Fidexperta founder Rūta Bilkštytė.
She said Lithuania has a good geographical location, a sufficiently trained workforce, modern office space and information technology infrastructure but because of the tax system‘s uncompetitiveness and unpredictability Lithuania does not only fail to attract investment, but also loses a large portion of potential revenue that Lithuanian entrepreneurs pay to countries with lower tax rates.
Decisions by foreign investors on investing in Lithuania depends on a range of factors, but taxes on labour and profits are key.
"While the standard income tax rate in the Netherlands is 20% - 25%, depending on the amount of income, the Netherlands is still a leading jurisdiction for attracting foreign investment and holding companies. This comes from having a wide network of double taxation avoidance treaties,” said the tax expert.
“Estonia has a unique model of taxation for the companies reinvested profits. Estonian companies pay tax not on operating profits but only on expenses not related to the company’s operating activities,” said Bilkštytė.
However, Estonia is an exception across Europe when it comes to corporate tax, Baltic neighbours Latvia tax profits at 15% while the corporate tax rate in Poland is 19%. Scandanavian countries Finland, Sweden and Norway all have corporate tax rates of 20% or more. The corporate tax rate in Lithuania is 15%.
In the Polish Free Economic Zone, companies that provide services to foreign businesses do not have to pay corporate taxation but pay taxes on employees‘ wages, said Bilkštytė.
She believes that international companies prefer stable countries where corporate profits are taxed at a low tax rate as Switzerland where corporate rate can be as low as 6%, or Malta can be just 5%.
Tax rates for small businesses in Lithuania on the other hand are just 5%.