Taxation in Agriculture

Chapter 26. Lithuania

Abstract

This chapter contains a description of tax provisions applied to agriculture in 2019, unless otherwise specified. They include taxes on income and profit, property, good and services, environmental taxes, and tax incentives for R&D and innovation.

26.1. Overview

Lithuania’s tax system comprises of direct taxes (e.g. income tax, personal income tax, immovable property tax, land tax, pollution tax) and indirect taxes (e.g. value added tax and excise duties).

According to the 2016 Farm Structure Survey over the period 2010 to 2016 the number of farms with more than one hectare reduced by 25% in Lithuania from 199 900 to 150 300. Enlargement of farms and the retiring of working-age farmers from agricultural activities are factors behind this trend.

Over the period the scale of medium-sized farms increased from 13.8 hectares to 19.5 hectares of utilised agricultural area (UAA) but the most rapid growth was observed in the number of large farms. Numbers of farms of more than 100 hectares of UAA increased by 38%.

As noted above the number of small farms with an area of 1 to 1.9 ha shrunk by 31% and those with an area from 2 to 9.9 hectares by 32%. The decline in the number of farms could be assessed positively, if not for its contribution to negative demographic changes. Lithuania, in comparison to other EU Member States, has the highest decline in population numbers and over the last ten years the population has dropped by 16%. Declining population is due to both internal and international migration. Rural regions, which according to 2017 data were inhabited just by 40% of the population, are depopulating most rapidly.

Agricultural operators are subject to more favourable conditions of taxation, as compared to other sectors. Historically, agriculture is one of the most significant economic sectors in Lithuania. To promote the sustainable development of regions, agriculture is encouraged by tax measures including by granting preferential fiscal treatment to both legal and natural persons in the form of personal income tax, profit tax, excise duties, immovable property tax, land tax, etc.

Before 2009, farmers who met certain criteria did not pay personal income tax, and companies were relieved of profit tax. There was also a reduced 5% rate of VAT applicable to agricultural and food products, and services. Furthermore, residents in possession of small and medium-sized agricultural holdings were not included in the state social and compulsory health insurance system. Following a tax reform which came into force in 2009 these exemptions were removed. However, residents and companies engaged in agricultural activities are still subject to preferential fiscal treatment.

Significant tax reforms were implemented in 2017 aimed at harmonising fiscal treatments of individual economic sectors. The state social insurance and pension reform was implemented in 2018 and came into force in 2019.

26.2. Income taxation

In 2019 personal employment related income is taxed at a rate of 20% with social security contributions from income 19.5%, and the tax rates for pension social insurance range from 1.8% to 3% (employee’s choice).

Income received by farmers is not taxed, if the farmer is not obligated to register during the taxable period and is not a registered payer of VAT. Persons supplying goods and services exceeding EUR 45 000 are obliged to the registered for VAT purposes.

Farmers' taxable income generated by agricultural activity is calculated on the same basis as self-employed persons and business expenditure is deducted from business income. Self-employed, including farmers, calculate their personal taxable income by applying a tax credit calculated according to a set formula. Taxable income below EUR 20 000 per year, is taxed at 5%. Annual taxable income between EUR 20 000 and EUR 35 000 per year is taxed at progressive rates scaling upwards from 5% to 15%, and income above EUR 35 000 is taxed at the fixed rate of 15%.

Profits of agricultural companies are taxed in accordance with a general profit taxation rules, although tax reliefs intended to promote agricultural activities also apply. For instance, direct and otherwise agricultural subsidy payments specified by the laws or other legal acts of the Republic of Lithuania to maintain the income level of agricultural operators, are not subject to the income tax.

Small enterprises, including small agricultural companies, are subject to a tax rate of 5% if their annual income is less than EUR 300 000 and they employ no more than 10 employees. Other agricultural companies, except cooperatives, are subject to the normal corporate income tax of 15%. A reduced 5% tax rate applies to cooperatives when more than 50% of their income is generated by agricultural activities.

Capital gains on all property transfers, including farms, are taxed in accordance with the general procedure of the income taxes.

26.3. Property taxation

In Lithuania, land and other immovable property (buildings and structures) are taxed separately.

Land is taxed in accordance with the provisions of the Law on Land Tax and is generally calculated on the average market value of the property. Tax rates are determined by municipal councils with land tax set at rates between 0.01% and 4%. Municipalities have the right to reduce or exempt land tax on taxpayers at the expense of their budgets. Tax on agricultural land plots is differentiated according to the use of the land (abandoned or cultivated land) with tax incentives used to reduce the area of abandoned land and encourage landowners to use their land more efficiently. Tax on cultivated land is reduced by 35% of its determined value. When abandoned land areas are found within agricultural land holdings, the land tax is not discounted.

If land is acquired by a natural person in one of possible ways (purchase, exchange, inheritance, restoration of property rights, donation) with the aim of establishing a new family farm, it will be exempt from the land tax for three tax periods calculating from the date of the property rights acquisition to the land.

Buildings and structures are taxed in accordance with the provisions of the Law on Immovable Property Tax. Taxes are generally calculated on the average market value of the property and tax rates range between 0.3% and 3%. Buildings used in agricultural activities are not taxed. Other buildings owned by farmers but that are not used in agricultural activities are taxed at different rates according to their total taxable value as follows:

• 0.5% on property exceeding EUR 220 000.

• 1% on property exceeding EUR 300 000.

• 2% on property exceeding EUR 500 000.

Buildings of agricultural companies and cooperatives are not taxed by Immovable Property Tax, when more than 50% of the legal persons’ income is generated by agricultural activities during the taxable period.

Property inherited by residents is taxed in accordance with the provisions of the Law on Taxation of Inherited or Donated Property. In cases of inheritance or donation of agricultural properties, no special conditions apply.

Companies and residents operating within the agricultural sector are not subject to any preferential treatment, related to the calculation of the depreciation of property or its transfer, with respect to the profit tax.

26.4. Tax on goods and services

In Lithuania, products and services are subject to value added tax (VAT). The standard rate of VAT is 21% with reduced rates of 9% and 5%.

VAT applies generally both to farmer sales (if the farmer is registered or obligated to register as a payer of VAT) and procurement. However, farmers with less than seven hectares of land who are neither VAT registered, nor obligated to register as payers of VAT, can apply a flat rate charge of 6% for the agricultural products and (or) services they sell. This is to compensate them for the VAT paid on input purchases.

In Lithuania, ethyl alcohol, alcoholic drinks, processed tobacco and energy products are subject to excise duties.

There are annual rates set for the maximum gas oil consumption in agricultural (including aquacultural and commercial fishing) production according to the type of production. In 2019, agricultural operators that do not exceed these annual rates are eligible for a reduced excise duty of EUR 56 per 1 000 litres. Otherwise the significantly higher standard rate of EUR 330.17 per 1 000 litres is applied.

26.5. Environmental taxes

The main tax provisions used to improve the environmental impact of agriculture related activities are set forth in the Law on Pollution Tax and Law on State Natural Resources Tax. Economic instruments, such as taxes, charges, fees, are used to reduce pollution to required limits, prevent waste and incentivise waste management and rational use of state natural resources. This is consistent with the National Environmental Strategy.

Under the Law on Pollution Tax, pollutants emitted from stationary sources into the environment (atmosphere, water bodies, surface and deeper layers of the ground) are taxed. The tax payer is a legal or natural person who is obliged to obtain an Integrated Pollution Prevention and Control permit (IPPC). Permits are for determined levels of the emission of pollutants. The requirements and criteria for getting a permit are set in regulations.

Permits are mandatory for farmers rearing a certain amount of poultry and cattle or operating installations of certain capacity. The tax payer should calculate the tax for every unit of discharged pollutant into environment and pay it to State Tax Inspectorate at the end of the calendar year. When permitted pollution limits are exceeded a non-compliance fee applies. Fees for non-compliance differ depending on the type of pollutant discharged. The more hazardous the pollutant, the higher tax rate is applied. Legal and natural persons discharging pollutants from biofuel combustion installations when burning bio fuels are exempted from tax payment for quantities of pollutants discharged not exceeding the ratio set in the permit.

There is no tax on fertilisers or pesticides in Lithuania but packing used in agriculture is taxed with the exception of haylage packaging.

Pollutants discharged from stationary sources are taxed equally regardless of the type of activity. Exemptions are applied to natural and legal persons polluting from transport vehicles used for agricultural activities, if their income gained from such activity accounts for more than 50% of the total income.

Taxes have a low impact on reducing the environmental impact of agri-food activities. Pollution taxes are more targeted towards the reduction of pollution at the end of the pipe and less at the source.

In order to protect forests and prevent the reduction of forest land due to land-use changes, Lithuania has introduced specific forestry legislation. In case of land-use change, all forest owners must plant new forest on their own land or pay compensation, which is used to plant and maintain new forests.

26.6. Tax incentives for R&D and innovation

Income tax benefits in Lithuania are oriented towards the promotion of innovation and technological renewal.

Under the scientific research and experimental development (SRED) benefit, expenditure incurred while conducting R&D is deductible from companies’ income three times; certain types of fixed assets used in such activities are subject to more favourable conditions for the calculation of depreciation;

Companies investing in technological renewal can claim an investment benefit and reduce their taxable profits by up to 50% during the taxable period 2009-2023 by way of expenses incurred under R&D projects.

The SRED and investment benefits are available to all companies, regardless of size and field of activity. Of approximately 120-140 companies making use of the SRED benefit, only 1 or 2 are engaged in the agriculture, forestry, and fishery sector (less than 1%). Of approximately 1 000 companies making use of the investment benefit, around 50 are from the agriculture, forestry, and fishery sector (or approximately 5% of companies).

26.7. Other taxes

In 2019 the overall rates of the state social insurance contributions payable by employers for pension, sickness, maternity, unemployment social insurance and health insurance is 1.47%. The rate of the state social insurance contributions of employees is 19.5%. State social insurance contributions by self-employed persons for pension, sickness, maternity social insurance and health insurance is 19.5%, or 21.3% (if they participate in pension accumulation and pay for pension at a rate of 1.8%), or 22.5% (if they participate in pension accumulation and pay for pension at a rate of 3%).

Farmers and their partners are covered by social insurance for pensions, sickness and maternity. For farmers, who declare income, the national social insurance and compulsory health insurance premiums calculate from 90% of taxable income. Farmers who do not declare income shall calculate the contribution from the minimum monthly salary of EUR 555 per month (2019). The annual amount of the taxable income from which the premiums are calculated may not be higher than the government-approved 43 amounts of average wages (2019 to 1997) 43 x EUR 1 136.20 = EUR 48 856.60).

Farmers whose farm size exceeds 4 units of economic size pay the state social insurance contributions. Those operating smaller farms or agricultural holdings are exempted from paying state social security contributions. The economic size of the holding or agricultural holding used for tax purposes is calculated on the basis of the areas declared by the farmers and the average number of animals and the standard productive profit of each production or animal type as calculated by the Lithuanian Institute of Agrarian Economics and endorsed by the Ministry of Agriculture.

The rates of the state social insurance contributions have changed since 2019. Farmers' social insurance contribution rate is 12.52%. Farmers and their partners are not obliged to pay social security contributions when they receive old-age pensions, invalidity benefits or social assistance pensions.

Compulsory health insurance contributions are paid by all farmers. Compulsory health insurance contributions rates have changed since 2019. For farmers whose farm size is up to 2 economic-size units, the contribution rate is 2%. For farmers whose farm size exceeds 2 units of economic size, the contribution rate is 6.98%.