Start Business in Lithuania
A small business is a private legal entity with limited civil liability, therefore, its participants are not liable for outstanding obligations of the small business with their property. A small business in Lithuania can be built up by a maximum of 10 individuals. In principle, a small business can carry out any type of activity that is not prohibited by law.
When building up a small business, the minimum authorized capital is not needed, but its participants pay contributions in the amount established at the meeting of community members. The earned profit is usually distributed in proportion to the size of the members’ contributions. A small business is managed by a meeting of members or a meeting of members and a manager. However, it should be noted that the law does not specify exactly how members of the community should share profits and deal with other operational issues, therefore, without first establishing a clear decision-making procedure, enterprise management in this form of business may become more complicated.
Building up a small business (SB): where to start?
To build up your own company and choose an SB, first of all, pick its name, collect the details of the founders and determine its registered address. If you are building up a small business as a single entity, you just need to prepare a registration act and regulations, but if you are not building up a company alone, it is important to conclude a contract for the formation of a small business and get the signatures of all its founders. Compared to building up a CJSC, building up a SB is much easier and takes less time, but it is still important to register it correctly.
The most important advantages of small business in Lithuania are:
- Limited liability of participants – if a business fails, members of a small business risk only the paid contribution, thereby protecting their property or the property of their family.
- The formation does not require a minimum authorized capital.
- It is not necessary to have a manager.
- Members do not have to have an employment relationship with the small business of which they are members.
- It is not difficult to get out of business – a member of a small business can easily sell or transfer the rights of a participant to other persons. Also, a participant can leave a small business by withdrawing the contribution paid by him or her.
Necessary data for the formation of a small business:
- Name of the company to be built up;
- Data of the founder(s): first name, last name, personal identification code and declared place of residence;
- Address of the registered company.
The most important disadvantages of a small business are:
- The founder and member of the company can only be an individual.
- A limited number of founders – a small business can be created by no more than 10 individuals.
- Without first establishing a clear procedure for profit distribution and voting, it may be difficult to resolve disputes between small business members in the future.
Building up a small business in Lithuania on the Internet
You can building up a small business in electronic and non-electronic form. When building up a SB in electronic form, you can use standard documents for creating a small business prepared by the Ministry of Economy and Innovation of the Republic of Lithuania. Thus, the buildup of a small business is greatly facilitated for a novice entrepreneur, since with the help of these model constituent documents, it is possible to quickly and simply prepare regulations, a constituent agreement or an act on registration of a small business that is being opened.
- Of course, standard documents for the creation of a small business can not always meet the needs of the business being build up, so the constituent documents of the SB can also be prepared independently, without following the already prepared sample documents. However, in this case, you will also need the services of a notary, who will have to confirm the authenticity of the prepared documents and their compliance with legal requirements. After the notary confirms that it is possible to register the small business you are building up, you will have to submit all the necessary documents to the Register of Legal Entities (“Center of Registers”) in the usual way, not electronically.
- Of course, if possible, we recommend that you use modern technologies and register your small business electronically. Registration of a SB via the Internet is much faster. You will be able to register a SB online within 2-3 working days, while with a notary the registration process can take a whole week. Also, do not forget that when visiting a notary, you will also have to pay for his or her services.
* Verification of documents of the State Enterprise “Center of Registers” may take from 1 to 3 working days.
What should you really know and think about before starting a small business in LITHUANIA?
- Address of the registered company. A small business is a legal entity and, like all legal entities, it must have its own legal address (registration address). If you have premises where you can register a company and there are no co-owners who object to this, there will be no problems with the address of the registered company. However, if you do not have such premises, the simplest solution would be to purchase a registration address from companies offering such a service.
- Capital formation. The founders of a small business must decide in advance on the amount and procedure for making contributions to the small business. In the usual case, cash or non-cash contributions can be made to a small business. The non-monetary contribution must be assessed by the property appraiser. Movable (furniture, computer equipment, etc.) and immovable (premises, land, etc.) property or property rights are considered non-cash contributions. Capital formation is a very important aspect of small business activity, since this stage is usually also closely related to the procedure of dividing the profits of small businesses.
- Small business (SB) management structure. No business can operate efficiently and successfully without a well—organized decision-making process, so perhaps the most important thing to think about before building up a SB is its management structure. In principle, a small business can be managed in two ways:
- Meeting of members of the small business – in this case, the meeting of members is the sole governing body of the legal entity. The Meeting of members may appoint one member of a small business as its representative and give him or her certain rights and responsibilities to manage the activities of the small business.
- Meeting of members and a manager of a small business – in this case, a small business is managed by a meeting of members and a manager of the small business, with whom an official (civil) contract should be concluded. It is important to remember that a member of a small business can also be the manager.
Since the most important decisions in the small business management are made by the Meeting of the SB members, it is very important to think about the organization of these meetings when considering the future business structure. Decisions at the meeting should be made by voting, and the number of votes of each member of a small business usually depends on the size of the contribution. A decision may be considered adopted if more than half of the votes of the members of the SB are earned for it. For making some strategic decisions (for example, distribution of annual profits, admission of a new member, payment of profits in advance, etc.), a two-thirds or even a unanimous decision-making mechanism can also be used. Of course, in the small business regulations, it is possible to establish a different procedure for organizing a meeting of its members, taking into account the needs of the business being built up.
- Conclusion of transactions. When developing a business, you have to constantly conclude various business transactions, so the transaction procedure is another organizational aspect that, if not thought through properly, can seriously complicate the opening of your SB and further business activities. Most often , the rights to conclude transactions are distributed in the following order:
- In the case when the management body of a small business is a meeting of its members, decisions on the conclusion of each transaction are made at a meeting of members of a small business. After making a decision to conclude a transaction, administrative actions for concluding a transaction are assigned to a representative of a small business.
- In the case when a small business has a manager , as the sole governing body, the manager has the right to act on behalf of the SB and conclude transactions independently. Of course, the regulations of a small business may provide for certain restrictions on the transactions of what value the manager of the SB can conclude himself, and which require approval by a meeting of members of the small business.
- Hiring employees. It’s no secret that when developing any business, you often have to hire certain employees who can contribute to the success of your business with their knowledge. What about small businesses? So, small businesses can hire employees and enter into employment contracts. Employment contracts must be concluded in accordance with the Labor Code of the Republic of Lithuania. The number of positions of employees and the salary paid to them are usually approved by a meeting of SB members. Employment contracts with employees should be concluded by a representative or head of a small business. An essential point to pay attention to is that a member of a small business him- or herself cannot have any employment relationship with a small business. Be sure to keep this in mind when planning SB activities!
- Profit distribution. Money is one of the most common causes of disagreements between business partners, so all procedures related to finance should be clear and unambiguous. The regulations of a small business should clearly establish the rules for the distribution of SB profits, the procedure for calculating the share of profits owned by a participant and other important nuances. It should be noted that small businesses are also distinguished by the fact that profits can be distributed here even before the financial year has passed, so the rules of the community should also clearly state the procedure for distributing profits in advance.
Accounting and taxes of small businesses
Having opened a small business in Lithuania and started an activity, you will inevitably face the need to record all financial transactions of the SB. After all, there will be many different economic and financial actions in your business that you will have to register, group, summarize and calculate on a regular basis. Properly conducted accounting of a SB will allow you to make an accurate balance of business, find out profit and loss, as well as calculate taxes payable.
The accounting of a small business is very similar to the accounting of a closed joint-stock company. Although it is not necessary to hire an accountant to manage the accounting of a SB and certain simplifications are applied (for example, at the end of the financial year you only need to prepare a balance sheet, a profit and loss statement and a simplified explanatory note), you definitely should not assume that SB accounting can be conducted as freely as accounting for an individual enterprise. However, the legislation provides for fairly clear and strict requirements that small business members will have to comply with.
A meeting of SB members usually decides who will be responsible for accounting for small businesses. The variety of options is really significant, since in a small business accounting records can be maintained by:
- One of the members of a small business
- A SB employee hired under an employment contract
- An individual accountant
- SB Accounting services of the company
Small business – taxes that will have to be paid
The main taxes of small businesses are:
- Income tax. As a rule, corporate profits in Lithuania are taxed at the corporate tax rate of 15%. However, if your small business has on average no more than 10 employees, and the income of the SB during the tax period (calendar year) does not exceed 300,000 euros, then the profit in the first year of your business may be taxed at the corporate tax rate of 0%, and profits in other tax periods may be taxed at a reduced rate of 5%. However, you can only use this condition if your SB has not been suspended for three consecutive calendar years, including the first year of operation, the SB has not been liquidated, reorganized or transferred to new participants. Similarly, members of a small business may not own more than 50% of the shares, shares or interests in other enterprises.
- Value added tax (VAT). The standard value added tax (VAT) rate in Lithuania is 21%. If your small business is not registered as a VAT payer, you do not need to pay this tax. However, if the income of a small business in the last 12 months has exceeded 45,000 euros, or you purchased goods from other EU countries worth more than 14,000 euros in the previous calendar year, then you must register as a VAT payer.
- Property tax. If real estate is registered for a small business, then you may also have to pay property tax in the amount of 0.3 to 3 percent. The exact property tax rate is set by local municipalities.
- Taxes of the administrative body of social security, state social insurance (VSD), compulsory health insurance (PSD). Payments are made from half of the amount of funds withdrawn for the personal needs of a member of a small business. The PSD rate is 6.98%, and the VSD rate 13.83% (16.83% in case of participation in additional pension savings).
Income from business activities is also taxed:
- Dividends of a small business member. Income from profits distributed by small businesses (dividends) is taxed at the rate of 15% personal income tax (GPM). This income is considered Class B income, therefore, at the end of a year, a SB member him- herself is obliged to file an income declaration with the tax inspectorate and pay the personal income tax (GPM) due.
- Funds are withdrawn for the personal needs of a member of a small business. Although a SB member cannot receive a salary from the community, he or she is entitled to receive benefits in the form of an advance payment of small business profits. Such income of a small business member is classified as income related to labor relations or relations corresponding to their essence, therefore, according to the payment procedure (GPM), it is considered class B income, from which the SB member him- or herself must declare and pay (GPM) at the rate of 20% of the amount. Also, out of 50% of the amount of funds withdrawn for personal needs, small businesses will have to pay 6.98% compulsory health insurance contributions (PSD) and 13.83% state social insurance contributions (VSD).
- The income received by the manager of a small business, who is a member of the SB, under a civil legal contract for the provision of services. This income is taxed at the Personal Income Tax rate (GPM) of 15%. This income is considered Class B income, therefore, after the end of a year, the manager of a small business him- or herself is obliged to file an income declaration with the tax inspectorate and pay the taxes due (GPM). Contributions (PSD) and (VSD) are not taxed on this income.
- Income received by the manager of a small business, who is not a member of the SB, under a civil legal contract for the provision of services. Such income of the head of the SB is considered Class A income, and, therefore, taxes should be paid by the company itself. Depending on the annual share of the income, the income may be taxed at a rate (GPM) of 20% or 32%. When the annual share of the income does not exceed 84 average wages (VDU), a 20 percent rate (GPM) should be applied. If the income exceeds 84 average wages (VDU), the income received will be taxed at the rate of 32 percent of (GPM). Also, in all cases, you will have to pay 6.98% compulsory medical insurance (PSD) and 8.72% state social insurance contributions (VSD).
General information about Lithuania
Of all the countries located in the Baltic region, Lithuania is the most suitable for those foreigners who want to enter a new stage of business development, as well as obtain a leave to remain or citizenship in one of the stable and environmentally friendly countries in Europe.
After gaining independence, Lithuania quickly moved to a stable market economy. This was due to the active policy of the state and the support of business conducted by the government of the country.
Thus, Lithuania ranks 15th in the ranking of the world’s freest economies, 11th in terms of ease of starting a business, and 2nd in Europe in terms of investment attractiveness index.
Attracting foreign capital to Lithuania has become one of the highest priority strategic goals of the state. In doing this, the Lithuanian government focuses on creating new jobs with the involvement of Lithuanian specialists.
Opening a business in Lithuania has a number of the following advantages, including:
- Low employee maintenance costs compared to other EU countries
- Well-developed infrastructure
- Income tax is 15% (for small companies up to 10 people and turnover of 300,000 euros — 5%)
- The possibility of entering the global EU market
- The possibility of VAT refund
- 4 languages of communication: Lithuanian, English, Russian, and Polish
- Minimum number of tax inspections
- Fast internet and advanced IT in all areas of business
- World’s fastest public Wi-Fi and highest broadband connection speed
Thanks to the latter advantage, Lithuania ranks first in Europe in the use of public online services, so 99% of entrepreneurs use this service in their activities.
leave to remain and citizenship in Lithuania
If you decide to move to the EU and start your own business, then Lithuania is a good place to start. Especially considering the fact that business immigration is the most common option for obtaining a leave to remain in Lithuania. Having a leave to remain makes it possible to enjoy all the privileges of European residency, including moving around the Schengen area, buying real estate, doing business, etc.
To obtain a leave to remain in Lithuania, a foreign entrepreneur should take into account the following:
- The company where the candidate for a leave to remain works must operate for at least 6 months before applying for a leave to remain,
- The amount of the authorized capital of the Lithuanian enterprise shall be at least 28,000 euros, of which at least 14,000 euros shall be funds invested by a foreign citizen
- The total value of the shares owned by a foreigner shall be at least 1/3 of the total value of the company’s shares
- The company employs at least 3 employees who are citizens of Lithuania or foreigners permanently residing in Lithuania
- The salary of the company’s employees (referred to in paragraph 4) shall not be less than 2 average monthly salaries in Lithuania
If a representative office or branch of a foreign enterprise is established, its director or specialist has the right to apply for a leave to remain in Lithuania if:
- He worked at a foreign company that is the founder of a representative office or branch for at least the last 1 year
- Professional knowledge or qualifications of the foreigner are necessary for the activities of a representative office or branch
A temporary leave to remain in Lithuania can only be issued for 2 years. A temporary leave to remain permit can also be obtained by family members of a non-resident.
A temporary leave to remain is the first document on the way to permanent residence in Lithuania for foreigners. Permanent residence in Lithuania can only be obtained after 5 years of temporary residence, and 5 years after obtaining permanent residence, you can safely apply for citizenship.
To obtain permanent residence, you need:
- To take an exam to confirm knowledge of the Lithuanian language
- To be sure to have health insurance
- Have a sufficient amount of funds and their confirmation (stable income) to live in the country for 5 years. The same must be confirmed by the relatives of the applicant, who also want to obtain a permanent leave to remain.
- Have a permanent place of residence in the format of rent, ownership rights or on the basis of the provision of housing for limited or unlimited use.
Mandatory conditions for obtaining citizenship and permanent residence in Lithuania are the absence of criminal and administrative offenses, 180-day annual residence in the country.
Company registration rules in Lithuania
It is not a problem for a foreigner to open a business in Lithuania, because the state system is open to investments from outside and the entry of foreign entrepreneurs into the local market.
Lithuania does not have a list of countries whose citizens cannot conduct business on the territory of the state, which is another advantage.
Every foreign entrepreneur should also be ready to employ at least 3 local residents (namely those who have Latvian citizenship).
Business registration forms in Lithuania
Like in any other country, there are several legal forms for starting a business in Lithuania. Below we will look at each of them:
UAB (closed joint stock company)
This is the most common form of entrepreneurial activity on the territory of Lithuania. It assumes the presence of the authorized capital, which in turn shall be divided into shares.
- The company’s liability is limited
- An individual may be the head of a joint-stock company who has both the status of a resident and a non-resident of Lithuania
- The amount of the authorized capital has a minimum threshold of 2.5 thousand euros, which can be divided into 2 parts: 25% to be paid upon registration and the rest during the first 12 months of the company’s operation
- The maximum number of shareholders shall be up to 250
- The shares shall be registered only. All debts of the company shall be paid by the owners within the limits of the authorized shares
TUB (full business partnership)
This form is opened on the basis of a contract, which is combined into a common share of individuals and legal entities.
- There is no need for a fixed share capital
- Unlimited liability
- The maximum number of participants shall be no more than 20
- All decisions shall be made by Director general with prior approval from employees
AB (open joint stock company)
Within the frame of this form of entrepreneurial activity, all shares of the company shall be openly distributed on the Lithuanian market.
- The owner decides for him- or herself how to dispose of the shares. Shareholders’ meetings are not needed
- The founder may be an individual or another company that operates both in Lithuania and abroad
- The existence of a supervisory board of 3-15 people
- The existence of a board of directors of at least 3 participants
- The authorized capital shall have a minimum amount of 43,500 euros
IE (individual enterprise)
A single individual is the owner.
- No other sole proprietors in the IE
- Unlimited civil liability
- There is no need for the authorized capital, or rather there is no clear amount from and to
MB (small business)
Only an individual can be the founder of such an enterprise .
- The authorized capital shall be in the hands of the owners
- The maximum number of participants shall be 20
- Unlimited liability of the company
- The opportunity to invest in the development of the company not only money, but also any other property
- There were no other restrictions and rules from the state
Business registration procedure in Lithuania
Before starting the business registration procedure, the first thing you need to pay attention to is the possibility of business licensing in Lithuania. In the following areas, business is subject to mandatory licensing:
- Tourism and restaurant business
- Alcohol production-sale
- Radio broadcasting and media
- Gaming business (casinos, lotteries, etc.)
- Investment and construction business
- Sale of antiques
- Pharmaceutical business
Stages of business registration in Lithuania
- Choosing a name and checking through the registry for its uniqueness and compliance with language requirements. All company names shall be approved by the State Linguistic Commission of Lithuania
- Choose a company registration form
- Specify the legal address
- Open an account with the Bank of Lithuania and transfer the authorized capital of the company to it (if this is provided for).
- Prepare all the necessary registration documents and certify them with a national notary
- Register the company in the Register of Legal Entities
- Register the company in the social insurance fund
- Register a company with the tax service
After completing all the above steps, you will receive all the company’s documents and can start your business activities
Business taxes in Lithuania
- The income tax is 15%, applied to legal entities
- Preferential income tax of 5%. It is applied if the company employs no more than 10 people, and the annual income received does not exceed 1 million litas
- Exemption from income tax can be obtained only if your business belongs to the agricultural sector
- VAT is 21%. But this tax is only paid if the turnover of the company is more than 29 thousand euros per year
Dividends on business in Lithuania
- The standard rate is 15%. There is also a preferential rate that only applies to holding companies
- Dividends without tax shall only be paid to a legal entity, and only if several rules are followed:
- a) The company owns at least 10% of the share of the subsidiary for at least 1 year
- b) The benefit does not apply if the company distributing the dividends has not paid income tax at the standard rate
Today Lithuania is one of the few countries where a foreigner can quickly open his or her own business. Registration of a company with the opening of a bank account takes from 5 days with a personal visit and up to 14 days remotely.
If you decide to open a company in Lithuania, the specialists of Company in Lithuania UAB will be happy to help you with this, and advise you at all stages of starting a business in Lithuania.