Taxes, Losses, Pandemic in Lithuania

Vincent Willem van Gogh "Cafe Terrace at Night (Yorck)" // Public domain

The COVID-19 pandemic has not only limited our liberties, but also liberated creativity. Vilnius mayor and LFMI’s ex-president has allowed turning the whole city into a giant outdoor café and let businesses to exploit parks and squares for this purpose.

This decision has received broad-based support from the citizens and extensive international media attention. Companies operating in Vilnius and affected by the coronavirus have also been given real estate tax exemptions.

As a way of relief for the whole business sector, the Lithuanian Free Market Institute has put forward a proposal to allow a 100-percent loss carryforward. Lithuania had applied this rule until 2014 but presently business companies are only allowed to carry over 70% of losses to future years to offset taxable income.

A 100-percent loss carryforward would not only make Lithuania’s tax system more attractive and fair. It would be particularly relevant in the context of the coronavirus pandemic.

Businesses are stalling, but even after the hardships are over, they will continue to face constraints. Businesses will have to pay a profit tax as soon as they start making profit even though they may have been operating at a loss for several years in a row. A possibility to reduce the profit by accumulated tax losses would provide an important relief on the way to recovery.

The Lithuanian government is opposing this proposal arguing that small enterprises, which have been hit by the lock-down the most, can offset taxable income with the operating losses of previous periods and are charged with a corporate tax rate of only 5 percent, as opposed to the standard tax rate of 15 percent.

The truth is that the lockdown has affected not just small businesses. Most of the support measures are intended for small businesses, but even these have not been implemented yet (according to the May 20 data, only 5%t of EUR 73.4 million allocated for business assistance has been discharged).

The EUR 100 mln support fund for large companies is not even operational yet, so the main measures available to medium-sized and large companies are wage subsidies and tax deferrals.

After all, companies that are considered small (i. e. those with up to 10 employees) account for only slightly over a fifth of the country’s workforce. So the 5-percent corporate tax rate and loss carryforward provisions are not applicable to companies that employ the lion’s share of the workforce.

In turn, the possibility to reduce the total taxable profit by the amount of accumulated losses would benefit all companies suffering from the economic recession.

Although the government of Lithuania is of the opinion that Lithuania has a very attractive corporate tax system as it is, Lithuania is the only Baltic country that taxes reinvested profits. Latvia and Estonia tax only distributed dividends.

As a result, the total effective corporate and personal income tax rate in Lithuania is about 27.5%, while in Latvia and Estonia it is about 20%.

So even if the Lithuanian corporate tax system is considered to be competitive in the global context, we should keep in mind that Lithuania is first of all competing for investments in the region.

The adoption of a 100-percent loss carryforward would improve Lithuania’s prospects of attracting more foreign direct investment and stimulating high value-added activities, innovation, employment, and wages. This would turn the crisis into an opportunity.

Continue exploring:

Czech Republic’s Tax Freedom Day 2020 Comes Late

Why Is It Necessary to Cut Taxes Now

Ieva Valeskaite