As 2017 has begun in earnest, we would like to draw your attention to key tax changes in the Baltic states which, as of 1 January 2017 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
2017 tax rates at glance
- Corporate income tax rate is 20%.
- Personal income tax rate is 20%.
- Non-taxable income is 180 euros per month.
- Social tax rate is 33% (paid by the employer). The minimum monthly basis for social tax liability is 430 euros (i.e. the minimum social tax liability is 141.90 euros per month).
- Unemployment insurance premium rate for employees is 1.6% and 0.8% for employers
- Funded pension rate is either 2% or 3%.
- VAT standard rate is 20%, reduced rate 9%.
Minimum salary
The minimum wage is 470 euros per month, 2.78 euros per hour.
Changes in the Income Tax Act
- The overall tax free income will gradually increase – in 2017 to 2,160 euros (180 euros per month).
- Additional tax exempt income on pensions increases to 2,832 euros per year
- In 2017, the average pension is exempt from income tax.
- Child-related tax exemptions will remain in force.
- Mortgage interest tax deduction limit will be reduced to 300 euros.
- The possibility of spouses to declare mortgage interest payments, training expenses and additional tax-free income for children will be preserved.
- Unlike the current situation, the tax exempt income of each spouse cannot be summarised when submitting a joint declaration.
- For the purpose of equal treatment, the list of people who are entitled to an exemption from income tax benefits and subsidies will be expanded. These are paid to officers, special constables, volunteer rescuers and people who are engaged to emergency work in the event of death or loss of capacity to work.
Changes in the Social Tax Act
- The amendment that was planned last year to decrease the social tax rate in 2017 to 32.5%, and in 2018 to 32%, was annulled.
- On 1 January 2017, the social tax exemption for sickness benefit paid for the second and third day shall enter into force (the sickness contribution is not mandatory and shall only apply if the employer has decided so).
Changes in Value Added Tax Act
- The amendment that was planned last year to increase the rate on accommodation and accommodation services in 2017 from 9% to 14% was annulled.
- The domestic reverse charge shall be applied to certain metal products sold between two Estonian VAT liable persons
Support for families with many children
- The support paid for families with many children will be increased on 1 July 2017 to 300 euros.
- This means that a family with three or more children will receive at least 500 euros per month from the Government.
Excise duties
- The excise duties on alcoholic beverages will increase stepwise (10% in 2017), as was planned in 2015.
- The increase on alcohol excise duties in 2017 will be postponed from 1 January to 1 February.
- In July 2017, excise duty on beer and light wine shall increase additionally:
- The rate of excise duty on beer will increase by an additional 41% (i.e. up to 15.52 euros per hectolitre).
- The rate of excise duty on light wine will increase by an additional 31% (i.e. up to 77.44 euros per hectolitre).
- The increase on fuel excise duties will also take effect in February 2017.
- The excise duty on natural gas shall increase 25 percent from 2018-2020, in addition to the pre-planned target.
- Along with the increase, the excise duty rates applied on all gaseous fuels shall be harmonised, and anti-fraud measures shall be introduced.
Changes entering into force in 2018
- In 2018, employers has the possibility to reimburse the spending of health promotion for employees in amount of 100 euros quarterly per employee without it being taxed as a fringe benefit.
- The amendment shall be established for a fixed term of five years.
- In January 2018, the tax-free income threshold shall significantly increase from the current 180 euros to 500 euros, while taking into account the following brackets:
- The tax-free income threshold will be fixed at 500 euros if the gross salary is less than 1,200 euros per month (i.e. a person who earns 1,200 euros per month will receive a total of 744 euros in additional revenue per year).
- For those who earn more than 1,200 euros, the tax-free income threshold will be reduced by one euro for each additional 1.80 euros that exceeds the payment of 1,200 euros (i.e. tax-free income will be zero for a person who earns 2,100 euros per month).
- The tax exemption of individual deposit interest will be abolished.
Potential Government plans for 2018
The following taxation topics may come into effect in 2018; however, the implementation details and draft laws will be finalised during the first half of 2017.
- Reduced corporate income tax rate (14% instead of standard 20%), applicable for entities and foreign permanent establishments that have been regularly (during three consecutive years) paid dividends. The reduced rate shall apply up to the amount of the average distributed dividends of the previous 3 years.
- Simplification of the company's car fringe benefits system, which will likely increase tax costs on more powerful cars.
- Setting up a lump tax for first registration of passenger vehicles.
- The taxation of certain sugared drinks.
Key changes in Latvia
2017 tax rates at glance
- Corporate income tax rate is 15%.
- Personal income tax rate is 23%.
- Non-taxable income is 60 euros per month.
- Social tax rate is 34.09% (23.59% paid by the employer and 10.5% by the employee). The maximum amount of the social contribution is set at 52,400 euros per year.
- Solidarity tax – 34.09% (10.5% paid by employee and 23.59% by the employer). The social contributions for income exceeding 52,400 euros will be directed to the Solidarity tax payments.
- VAT standard rate is 21%, reduced rate 12%.
Minimum salary
The minimum wage is 380 euros per month.
The introduction of a “new” approach in vehicle taxation
According to the amendments of the Law On the Vehicle Operation Tax and Company Car Tax,a new chapter enters into force as of 1 January 2017 on the Vehicle Operation Tax payment for a foreign registered vehicle. The Vehicle Operation Tax for a foreign registered M1 and N1 category vehicle will be charged according to its usage period in Latvia and paid by the driver if a resident of Latvia.
Changes in Micro-enterprise tax
The latest amendments to the Law on Micro-enterprise Tax stipulate that the micro-enterprise tax shall be 15% from 2017. If turnover does not exceed the threshold of 7,000 euros, the tax is 7%. Further changes in the micro-enterprise tax regime are still under consideration with the goal of increasing social protection for employees, while maintaining the low tax regime for lifestyle businesses.
Changes in the Value Added Tax Law
The following changes to VAT Law come into force as of 1 January 2017:
- Throughout the law, several tax threshold values are rounded upwards or downwards to a whole number.
- The law no longer provides for the taxation period of a ½ year. The amendments also provide that after the registration at the State Revenue Service VAT register, the taxation period is one month, and it is maintained for the subsequent six calendar months.
- Introduced extended understanding of the term "representative car", aligned with the Law on Corporate Income Tax, which prevents the input tax deduction for passenger cars registered as cargo vehicles (N1).
- Additional Article 1433, which provides a domestic reverse charge mechanism applicable to transactions with unwrought precious metals, precious metal alloys and supplies of metal coated with precious metal.
- Amendments to the Law provides for the possibility of the State Revenue Service to close or suspend the top-level domain name ".lv" in the event of certain circumstances.
- A new Chapter XIII provides for contractors’ joint liability regarding construction industry employees.
- Cash transactions between individuals are limited to 7,200 euros.
Changes in the Law on Taxes and Duties
- Amendments to the Law provides for the possibility of the State Revenue Service to close or suspend the top-level domain name ".lv" in the event of certain circumstances.
- A new Chapter XIII provides for contractors’ joint liability regarding construction industry employees.
- Cash transactions between individuals are limited to 7,200 euros.
Changes in the Law on Personal Income Tax
- Deemed income in the amount of the minimal wage per month for a Member of the Board (introduced last year) is extended and applies to all Members of the Board in the following cases:
- there were no employees or a member of the board who were paid a minimum wage for that month and
- the monthly turnover exceeds 5 minimum wages (1,900 euros).
- The tax does not apply to employees’ catering expenses, if such are determined by the collective employment agreement and do not exceed 480 euros per year in regard to certain criteria.
- The tax does not apply to scholarships of 280 euros paid by the employer under certain criteria.
- The tax does not apply to scholarships of students taking medical education programmes, to promote acknowledgment of the education programmes paid from the resources of medical institution.
Changes in the Law on Corporate Income Tax
- The changes concern donations, the income of non-residents related to the sale of real estate property as company’s shares and the reporting of payments to non-residents.
- New restrictions for covering the losses of the previous years. The changes stipulate that, from FY2017, the losses of the previous taxation periods (commencing with FY2008) can be covered in an amount not exceeding 75% of the taxable income for the current period. Therefore, the period for covering losses stays unlimited, while the amount for one year is limited.
- The definition of a representation passenger car is changed – "representation passenger car" is further renamed as "representation car”.
- Specification of the procedure of the corporate income tax advance payment calculation – it will be done automatically after the submission of the CIT declaration.
Changes in the Law on the Lotteries of Goods and Services
- According to the amendments to the law, all the lotteries of goods or services, regardless of the amount of the prize fund, shall receive a permit from the Lotteries and Gambling Supervisory Inspection.
Key changes in Lithuania
2017 tax rates at glance
- Corporate income tax rate 15% and 5%
- Personal income tax rate is 15%
- 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%
Minimum salary
The minimum wage is 380 euros per month, 2.32 euros per hour.
Changes in the Value Added Tax
- 5% VAT on uncompensated medicines for which the taxable value of an exterior package is higher than 300 euros from 1 January 2017.
- Entry into force of the EU Regulation No 1042/2013 provisions regarding the notion of immovable property and services connected with immovable property.
Changes in the Corporate Income Tax
- Tax relief for free economic zone companies was enlarged, adding additional possible activities and reducing the minimum capital investment size from one million euros to 100 thousand euros.
- Tax relief for investments into modern assets was enlarged by abolishing the requirement to pay back the relief in the case of dividend distribution to individuals.
- Advance Corporate Income Tax was included in the “one date” tax payments simplification package, and from 2017 it will have to be paid by the 15th day of the last month of each quarter (15 March, 15 June, 15 September). Advance Corporate Income Tax returns shall be submitted by 15March and (in case it was chosen by the taxpayer to calculate the tax based on the results of previous years) until 15 September 2017 for the 3rd and 4th quarters of the year.
Changes in the Personal Income Tax and Social Security
- Social security tax base was broadened to include Board and Supervisory Council members annual bonuses (royalties or similar); the rate to be applied is 26.3%.
- Non-taxable income was raised to 310 euros per month if payroll does not exceed the minimum wage. If payroll exceeds the minimum wage, non-taxable income is calculated according to the set formula. Additional non-taxable income was raised to 200 euros per family, per month and per child.
- Life insurance and 3rd step pension funds savings tax reliefs were given a new “ceiling” and will apply only to insurance premium of up to 2,000 euros per year from 2017.
- From 2017, unemployment income shall be considered employment source income and will be taxed by the 15% standard tax rate subject to deductible expenses.
- Sponsorship by attributing up to 2% of the permanent resident’s personal income tax was enlarged to artists – it will become possible to grant sponsorship to a designated artist who is registered as a valid sponsorship receiver.
- The guarantee fund shall no longer be administered by the State Tax Inspectorate but rather by the Social Security Board. Accordingly, for the periods starting from January 2017, guarantee fund contributions will have to be paid to the Social Security Board.
Excise duties
From March 2017, excise duties shall increase:
- 112% on wine and beer;
- 23% on strong alcohol.
Disclosure of Information
Financial institutions (banks, credit unions, electronic payment institutions) have to report the following information to the Tax Authorities:
- Annual turnover in the bank accounts of individuals if it is not less than 15,000 euros;
- Balance in the bank accounts of individuals if it not less than 5,000 euros 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 15,000 euros;
- Debts to natural persons and vice versa if the debt at the end of the calendar year is not less than 15,000 euros;
- Pay-outs to foreign legal entities for services performed in Lithuania if the value of the transactions during the year exceeds 15,000 euros;
- 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 further into effect from 2017:
- i.SAF – submission of issued and received invoices, as well as i.VAZ – electronic transport documents (both started October 2016 – from January 2017 the “grace period” for non-intentional mistakes is over and the Tax Authorities will be able to apply penalties for noncompliance or delays);
- SAF-T – entities for which sales turnover in 2015 exceeded EUR 8 million must be ready to submit accounting data to the tax authorities in the SAF-T (“standard audit file – for tax purposes”) form.
Penalties for Non-Compliance with Transfer Pricing Regulations
From 1 January 2017, penalties for non-compliance with transfer pricing (TP) regulations are becoming stricter. The manager of a company (as an individual, not the company) responsible for failure to possess a TP documentation prepared in accordance with local legislation can be fined from 1,400 euros up to 5,800 (in the case of a repeated breach).
New Administrative Penalties Code
From 2017, the new Administrative Penalties Code is coming into effect. According to the Code, tax evasion not exceeding 3,766 euros shall be subject to administrative rather than criminal liability.
For more detailed information please feel free to contact us.
Estonia: tax partner Kristjan Järve (phone +372 626 4500, e-mail Kristjan.Jarve@ee.gt.com)
Latvia: tax adviser Kristaps Cimmermanis (phone +371 672 175 69, e-mail kristaps.cimmermanis@lv.gt.com)
Lithuania: tax project manager Vykintas Valiulis (phone +370 620 74 145, e-mail vykintas.valiulis@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.
