As 2016 has begun in earnest, we would like to draw your attention to key tax changes in the Baltic states which, as of 1 January 2016 and gradually from now on, will enter into force. Please find a brief overview of the tax changes in Estonia, Latvia and Lithuania, respectively.
Key changes in Estonia
2016 tax rates at glance
- Corporate income tax rate is 20%.
- Personal income tax rate is 20%.
- Non-taxable income is 170 euros per month.
- Social tax rate is 33%. The monthly rate for minimum social tax liability is 390 euros (minimum social tax liability is 128.70 euros per month).
- Unemployment insurance premium rate for employees is 1.6% and for employers is 0.8%.
- Funded pension rate is either 2% or 3%.
- VAT standard rate is 20%, reduced rate 9%.
The minimum wage is 430 euros per month, 2.54 euros per hour.
Changes in the Income Tax Act
- The overall tax free income will gradually increase - in 2016 to 2,040 euros (170 euros per month), in 2017 to 2,160 euros (180 euros per month), 2018 to 2,280 euros (190 euros per month) and in 2019 to 2,460 euros (205 euros per month).
- The total amount of the deduction allowed from the individual taxable income will decrease to 1,200 EUR, whereas all deduction types will be treated equally.
- The amount of non-taxable daily allowance, in the case of a business trip abroad, will increase to 50 euros per day for the first 15 days of the business trip. If the assignment lasts longer or there are several assignments carried out in one calendar month, the non-taxable daily allowance remains at 32 euros.
- With the aim of legalising hidden rental income, only 80% of a natural person’s residential lease revenue will be taxed. Revenues do not need to be documented and there will be no limits.
Changes in the Social Tax Act
- The social tax rate changes will be implemented in 2017, when the rate decreases to 32.5%, and in 2018 to 32%.
Changes in the Value Added Tax Act
- The reduced rate on accommodation and accommodation services will increase from 9% to 14% in 2017.
A new subsistence for low-paid workers
- A system of annual refunds for low-paid workers shall be established as of 1 January 2016. The new scheme will not replace the current subsistence benefits system; instead, it is meant for adult employees who work permanently and full-time, receive at least the minimum wage and whose monthly wage is their only income. The refunds will be calculated based on the changes to the minimum wage and the poverty line. The payment amount will be calculated by subtracting 35% of a person's gross monthly wage from the absolute poverty line, and by multiplying the difference by the number of months worked. The formula will be reviewed in the course of the annual state budget drafting. For 2016, employees can apply for a refund together with the individual income tax return in 2017. The first repayment will be done by 30 June by the Estonian Tax and Customs Board.
- Excise duty on alcohol increases from 10% to 15%, and in 2019 and 2020 by an additional 10%.
- The excise duty on cigarettes and tobacco increases 8% during the period between 2016 and 2018, and 10% in 2019 and 2020. As the directive on tobacco will come into force from the beginning of 2016, the increase in the excise duty of tobacco was postponed, due to objections from entrepreneurs, until the beginning of the year.
The Supreme Court reclassified management and consultation service fees as constituting hidden salary in recent rulings
A recent Supreme Court ruling in Estonia has confirmed the Tax Authority’s right to reclassify certain management and consultations service fees as hidden salary payments for employees or board members and tax the transaction according to all labour taxes.
The Supreme Court rulings were all largely based on similar circumstances: the accused companies purchased various management and consulting services that were rendered by legal entities owned or managed by their own (former) employees or board members. The court agreed with the Tax Authority stating that the service transactions with private limited companies were in fact ostensible, and they were concluded for the purpose of avoiding labour taxes that would normally have to be paid if employees or board members are remunerated directly for their activities. The following served as grounds for court’s ruling in favour of the Tax Authority’s arguments:
- The service providers issued invoices to the company on a monthly basis and usually in the same amount;
- The service providers had no other clients or rendered services mainly to the company;
- The services offered coincided with the usual tasks of the company’s board members;
- Some of consultation service agreements had the typical characteristics of an employment contract.
Although each case is different and must be first carefully analysed before drawing any conclusions, it is evident that the recent rulings by the Supreme Court will have significant implications. The ambiguity in tax practice has been finally cleared and, relying on the recent case law and guidelines given by the court, the Tax Authority has already started to contact potential taxpayers who seem to be implementing similar service model schemes in order to identify potential tax avoiders.
In the light of the abovementioned, we recommend that the terms and circumstances of any transactions with the private companies of employees, board members or shareholders are carefully examined. The Tax Authority expects that the service providers render distinctive, value generating services that do not duplicate the existing resources of the purchaser and they operate under similar business risk and liability models as third party service providers (i.e. the fees depend on actual results and quality of work, no workflow is guaranteed, the service provider owns the necessary assets for services, bears its operating expenses and assumes liability for its business activities).
Potential plans of Minister of Finance
The Minister of Finance work plan for 2016 includes a corporate income tax exemption for capital gains on the sale of shares of foreign subsidiaries, analysis of the abolition of the double taxation of dividends in the case of participation under 10%, abolition of withholding of income tax on royalties and analysis to simplify the taxation and accountancy of self-employed individuals.
Key changes in Latvia
2016 tax rates at glance
- Corporate income tax rate is 15%.
- Personal income tax rate is 23%.
- Non-taxable income is 75 euros per month.
- Social tax rate is 34.09% (23.59% paid by the employer and 10.5% paid by the employee).
- Unemployment insurance premium rate is 2.08% (included in Social tax).
- VAT standard rate is 21%, reduced rate 12%.
The minimum wage is 370 euros per month.
New tax incentives
There are some new tax incentives in order to improve the existing situation in the Budget.
- Individual Income tax rate still remains at 23%; however, it was indicated that it may be gradually decreased.
- Non-taxable income was previously 75 EUR and has been changed to a variable amount that will depend on income – the basic limit will remain at 75 EUR.
The introduction of a “new” tax - solidarity tax
The State Budget is still under the pressure and the government is searching for ways to reduce the gap between rising social expenses and State income. Because of this, Latvia cancels the benefit for those employees or self-employed persons whose taxable income was exceeding 48,600 EUR. Since 1 January 2016, the amount exceeding 48,600 EUR shall become taxable in the same way as social contribution tax at its normal rate: 10.50 + 23.59 = 34.09%. The Ministry of Finance explains that only 4,700 people will be affected by this amendment, which is now called a Solidarity tax.
Changes in Micro-enterprise tax
The long discussions about the necessity of a Micro-enterprise tax regime have led to the new (but not the last) amendments to the Law on Micro-enterprise Tax.
- The tax rate until 1 January 2017 remains at 9% for turnover reaching 100,000 EUR. Since 1 January 2017, the effective rate shall be 5% (from turnover) in the first three years of operation, but in the fourth year of operation it shall be 8% (instead of 12%).The maximum allowed number of employees remains 5 and maximum turnover is 100,000 EUR.
Employees should be informed in written form that they work for a company registered for the Micro-enterprise Tax regime. Due to the distorting difference between the social
protection of regularly employed persons and those employed by micro-enterprises, the recent amendments introduce additional payable social contributions for those employees working for a micro-enterprise. This amendment will enter into force starting on 1 January 2017. Also, the microenterprise tax regime shall not be applicable in 37 certain fields of activity, but this clause has also been recently postponed until 2017.
Changes in the Value Added Tax Act
The following changes to VAT Law come into force on 1 January 2016:
- Domestic reverse charge for mobile phones, computers and electrical components starting from 1 April 2016;
- 21% VAT on ticket sales for commercial culture events starting from 2017 (previously 0%);
- 21% VAT on maintenance fee of real estate from 1 July 2016 (previously – exempted);
- Allowed limit of input VAT of deductible car expenses is reduced from 80% to 50%.
Financial information exchange
In order to reduce the impact of grey economics as well as improve the discipline of tax paying, the government has approved the rules setting the order of automatic information exchange between financial institutions and the State Revenue Service. One of the focus points of the SRS shall be the information on non-resident accounts held in Latvian banks.
Key changes in Lithuania
2016 tax rates at glance
- Corporate income tax rate 15%, 5%
- Personal income tax rate is 15%
- Non-taxable income is 200 euros per month if payroll is not exceeding the minimum wage. If payroll exceeds the minimum wage, non-taxable income is calculated according to the set formula
- Social tax rate is as follows:
- Employee’s liability is 9%
- Employer’s liability is 30.98% (based on the number of serious or fatal accidents at work, the rate may be higher)
- Payments to the Guarantee Fund - 0.2% of the gross payroll paid to employee
- VAT standard rate is 21%, reduced rate is 5% and 9%
The minimum wage is 350 euros per month, 2.13 euros per hour.
Disclosure of Information
From 2016, financial institutions and local entities shall be required to disclose additional information to the Tax Authorities.
Financial institutions (banks, credit unions, electronic payment institutions) have to report the following information to the Tax Authorities:
- Annual turnover in bank accounts of individuals if it is not less than EUR 15,000;
- Balance in bank accounts of individuals if it not less than EUR 5,000 in the same bank;
- Data of the bank accounts of legal entities that have not filled tax returns or reported zero income;
- Interests, debts, securities, insurance and pension premiums as well as other information for the performance of the functions of the Tax Authorities;
- Data of the bank accounts of foreign residents.
- Local entities shall have to report the following information to the Tax Authorities once a year:
- Contributions of shareholders (natural persons only) exceeding EUR 15,000;
- Debts to natural persons and vice versa if the debt at the end of the calendar year is not less than EUR 15,000;
- Pay-outs to foreign legal entities for services performed in Lithuania if the value of the transactions during the year exceed EUR 15,000;
- Temporary residents working in Lithuania (i.e. “rented employees”).
The information provided above shall be submitted in 2017 for 2016, except for the report on temporary residents, which has to be submitted by the 15th of the following month.
Smart Tax Administration
Smart tax administration (i.MAS) is coming into effect from 2016. According to local legislation, the following systems shall be in place:
- i.SAF – submission of issued and received invoices (starting October 2016);
- i.VAZ – electronic transport document. To be registered with the Tax Authorities before transportation (starting October 2016).
Other systems (cash register machines, accounting data custody and management of process control) shall be implemented later.
It is noteworthy that from 2016 taxpayers have to submit all tax returns to the Tax Authorities online, solely.
Fines for Non-Compliance with Transfer Pricing Regulations
From 1 April 2016, the regulation on transfer pricing is becoming stricter, i.e. fines shall be imposed for failure to possess TP documentation (including the obligation to keep TP documentation prepared in accordance with local legislation). Fines range from EUR 1,400 to 4,300 and for repeated breach from EUR 2,900 to 5,800.
Restrictions on Dividends Distribution
It is expected that changes will also be introduced from 2016 in the field of corporate income tax. According to new regulation, the participation exemption regime on dividends shall not apply:
- if the main or one of the main purposes is tax benefit;
- there are no commercially sound reasons.
For more detailed information, please feel free to contact our head of our tax advice department in Estonia, Kristjan Järve, via phone on +372 626 4500 or e-mail at Kristjan.Jarve@ee.gt.com, our partner in charge of tax/legal advisory and outsourcing service line in Latvia, Ilze Palmbaha, via phone on +371 6721 7569 or e-mail at Ilze.Palmbaha@lv.gt.com and head of tax and legal advisory in Lithuania, Arunas Sidlauskas, via phone on +370 5 212 7856 or e-mail at Arunas.Sidlauskas@lt.gt.com.
Please note that Grant Thornton Baltic newscasts are compiled for general information only, are free of obligation and are free of legal responsibility and liability. They do not cover all laws or reflect all changes to legislation, nor are the explanations provided exhaustive. Therefore, we recommend that you contact Grant Thornton Baltic or your own adviser for further information.