LITHUANIA GUIDE
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Global expansion is a step to make for any business, regardless of what you wish to achieve. The opportunities that can come with an expansion can be both incredibly exciting as well as intimidating and confusing, especially when you consider all of the registration procedures that needs to be done and documentation required.
Expanding to countries such as Lithuania – which is characterized by a highly-skilled and educated workforce, comprehensive employment and tax laws, a robust infrastructure network linking to the Baltics and Europe, and leading sectors in tech, manufacturing, ICT, agriculture & tourism – can bring both excitement to the possibilities, but also significant stress to ensuring the entity complies with the country’s rigorous legal structures and laws.
Ensuring compliance without the sufficient knowledge of the country’s laws also adds to the stress of getting your new entity off the ground and ready to test new markets. Going at it without the proper support can increase the costs, time and risks involved.
Each new markets bring new challenges, and these can be worked through more efficiently and cost-effectively with the support of an International Professional Employer Organization (PEO) such as Bradford Jacobs, especially through our Employer of Record (EOR) framework. This can be best utilized when businesses are just beginning their expansion process and require more information before committing to incorporating an entity and fully establishing themselves in that market.
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Lithuania – The Economy
The economy of Lithuania is the largest economy among the three Baltic states. Lithuania is a member of the European Union and its GDP per capita is the highest in the Baltic states.
Lithuania belongs to the group of very high human development countries and is a member of WTO and OECD.
In the 1990s, Lithuania rapidly moved from a centrally planned economy to a market economy, implementing numerous liberal reforms. It enjoyed high growth rates after joining the European Union along with the other Baltic states, leading to the notion of a Baltic Tiger. Lithuania’s economy (GDP) grew more than 500 percent since regaining independence in 1990. The Baltic states have a combined workforce of 3.3 million people, and 1.4 million of these working people live in Lithuania.
Lithuania has a sound fiscal position. The 2017 budget resulted in a 0.5% surplus; the gross debt was stabilizing at around 40% of the GDP. The budget remained positive in 2017 and was expected to continue to do so in 2018.
On average, more than 95% of all foreign direct investment in Lithuania comes from European Union countries. Sweden is historically the largest investor with 20% – 30% of all FDI in Lithuania. Foreign Direct Investment into Lithuania spiked in 2017, reaching its highest ever recorded number of greenfield investment projects. In 2017, Lithuania was the third country, after the Republic of Ireland and Singapore by the average job value of investment projects.
Lithuania is ranked 11th in the world in the Ease of Doing Business Index prepared by the World Bank Group, 16th out of 178 countries in the Index of Economic Freedom, measured by The Heritage Foundation and 8th out of 165 countries in the Economic Freedom of the World 2021 by Fraser Institute.
Lithuania is among the top 5 countries in the world by postsecondary (tertiary) education attainment. This educated workforce attracted investments, especially in the ICT sector in the last few years. The Lithuanian government and the Bank of Lithuania simplified procedures for obtaining licenses for the activities of e-money and payment institutions positioning the country as one of the most attractive for the financial technology initiatives in the EU.
Small and Medium-Sized Companies
SMEs account for 99.6% of all enterprises operating in Lithuania, the majority of them (81.9%) being micro-enterprises. Most SMEs (80.4%) operate as a private limited liability company and are primarily engaged in wholesale or retail trade activities (almost a third of all SMEs).
SMEs play an important role in Lithuania’s non-financial business economy. In 2018, they generated 69.4% of the economy’s value added and 75.9% of employment, exceeding the respective EU averages of 56.4% and 66.6%. On average, SMEs in Lithuania occupy around 3.8 people, close to the EU average of 3.9.
Average SME productivity (calculated as value added per person employed) was approximately €18,500 in the reference period, less than half the EU average of €44,600. Although it has caught up impressively over the past two decades, the fact that productivity is still below the EU average reflects remaining barriers to investment, skills mismatches, relatively low firm dynamics and a large informal sector.
| Country | Lithuania (The Republic of Lithuania) |
| Capital | Vilnius |
| No. of States/Provinces | 10 counties (apskritys) |
| Principal Cities | Vilnius, Kaunas, Klaipėda, Šiauliai, Panevežys, Alytus, Marijampolė, Jonava, Utena, Mažeikiaj |
| Language(s) | Lithuanian |
| Local Currency | Euro (EUR) |
| Major Religion | Catholic |
| Date Format | yyyy.mm.dd |
| Time Zone | Eastern European Time (GMT+3) |
| Country Dial Code | +370 |
| Population | 2.65 million |
| Border Countries | Latvia (north), Belarus (east and south), Poland and the detached Russian oblast of Kaliningrad (southwest), and the Baltic Sea (west). |
| Tax Year | 1 January to 31 December (calendar year) |
| VAT % | 21% |
| Minimum Wage | €730 per month |
| Taxpayer Identification Numbers | Tax Identification Number (VMI – Personal) Business TIN VAT Number |
| Leading Sectors | Petroleum refining, food processing, energy supplies, chemicals, furniture, wood products, textile and clothing, services |
| Main imports | Crude Petroleum, Cars, Packaged Medicaments, Broadcasting Equipment, and Refined Petroleum |
| Main exports | Refined Petroleum, Other Furniture, Wheat, Rolled Tobacco, and Laboratory Reagents |
| Main trading partners | Russia, Latvia, Germany, Poland, Netherlands, United States, Estonia, Sweden, United Kingdom, & Ukraine |
| Government Type | Unitary semi-presidential republic |
| Current Prime Minister/President | Gitanas Nausėda (President), Ingrida Šimonytė (Prime Minister) |
The Main Sectors of the Danish Economy
Lithuania focuses on the following key sectors, which all have a significant impact on the country’s economy:
- Manufacturing – The food processing industry is one of the primary Lithuanian sectors, which accounts for 11% of their total exports. There are about 979 food processing companies registered in Lithuania that produce a wide range of products, including dairy products, meat, fish, vegetables and fruits, baked goods and grains, spices, and herbs.
The food and beverage sector accounts for over 4.5% of the Lithuania’s GDP and employ 4.6% of the total workforce. Another significant manufacturing activity in Lithuania is a chemical product which accounts for over 12.5% of its total export.
Over 80% of the chemicals produced in Lithuania are exported. The furniture production sector employs over 50,000 individuals in Lithuania, with the biggest firms in this industry working together with IKEA. - Tourism – The tourism sector is a very crucial part of the Lithuanian economy, which contributes around 5% of the GDP and approximately 4.9% of total employment in the country. Over 2 million tourists visited Lithuania in 2020.
A huge number of tourists in Lithuania came from the UK (58,200), Ukraine (84,000), Latvia (143,400), Poland (148,400), Belarus (171,900), Russia (15,600), and Germany (174,800). Bicycle tourism is quite popular in the country, especially in the Seaside cycling routes which are 2,342miles long. Tourists visit some of Lithuania’s big cities (Kaunas, Klaipeda, and Vilnius), seaside resorts (Palanga and Neringa), and Spa towns (Birstonas and Druskininkai). - Agriculture – Farming in Lithuania dates back to the Neolithic era, and it has been one of the most crucial occupations in the country for centuries. The accession to the EU in 2004 resulted in the introduction of a new agricultural era.
The farm sector has employed over 8% of the country’s workforce and supplies raw materials to most of the Lithuanian food processing companies. - Technology – Lithuania is a regional center of excellence for global technology companies looking to harness the quality competences the country has to offer – whether it’s in the fields of software engineering, game development, AI-driven solutions, fintech product development or compliance & AML.
The sector is also a hub of innovation, with Lithuania having one of the fastest-growing startup ecosystems in the region. Lithuania is the 2nd largest FinTech hub in Europe, with over 200 Fintech companies operating there. 35 FinTech firms came to the country in 2017 after the Bank of Lithuania and the government simplified the process of obtaining licenses for various activities of payment institutions and e-money.
The sector also employs over 2.60% of the country’s workforce. - ICT (information and communication technologies) – This is one of the main sub-sectors in the country that has employed over 37,000 people. There are over 2,000 ICT firms in Lithuania. Lithuania is home to 13 out of the 20 biggest IT firms in the Baltic region.
Some of the most promising subsectors in Lithuania include business process outsourcing and shared services. Some big-name companies that have utilized these services include Western Union, Yara international, and Barclays.
Compliance Highlights
- The State Tax Inspectorate (Valstybinė Mokesčių Inspekcija or VMI) – the tax authority in the Republic of Lithuania. It is an agency under the Ministry of Finance. The main objectives of the agency include:
- helping the taxpayers with their tax obligations and rights
- implementation and enforcement of tax laws, primarily collecting and administering the taxes
- collection of revenue for the state budget
- The State Labor Inspectorate – the national institution under the Ministry of Social Security and Labor responsible for the enforcement of labor legislation and safety and health issues as well as overseeing compliance with collective agreements. It also has responsibilities over the prevention of accidents at work and occupational diseases.
Labor Contracts Law
In Lithuania, employment contracts must be presented to employees in writing and there are a variety of contract types to choose from, depending on business needs and employment types. An indefinite contract, however, is the standard. Employment law, the Labor Code, and (in some cases) collective agreements govern employment conditions, benefits, and health and safety regulations, and must be adhered to. It is best to confirm with the Labor Inspectorate on what regulation applies, as this may vary according to industry and sector.
Labor law in Lithuania is based on both employer and employee protection. The employment relationship and its terms are hierarchically determined by the Constitution, international treaties, the local labor law, collective employment agreements, employment rules and business practices, with the individual contract being last in the order.
All employee contracts, irrespective of type, should contain the following conditions: the place of work, the job function, and the salary. If the contract has expired, and neither the employer nor employee have requested its termination, then it is considered extended for an indefinite period.
There are a few types of employment contracts one can use in Lithuania, which are stipulated by the Labor Code, that depend on the employment relationship and the business’ needs:
- Open-ended/Indefinite employment contract – the standard and most used type of employment contract in Lithuania, which is used for indefinite employment.
- Fixed-term employment contract – the standard duration of this contract may not exceed 2 years (with exceptions – the maximum duration is 5 years), of which there is more than one type:
- Apprenticeship employment contract – a fixed-term contract that is used when the person is employed for the purpose of acquiring qualifications or gaining skills required for the profession.
- Project-based employment contract – a fixed-term contract where an employee carries out their job functions for a particular project.
- Temporary employment contract – a contract for temporary workers, that cannot exceed more than 2 months.
- Seasonal employment contract – a contract used for seasonal workers, which can be valid for up to 8 months in a year.
- Contracts on additional work: this contract type stipulates that the employee will perform certain additional duties (that were not agreed to in the first employment contract) at the same workplace.
- Contracts with home workers: contracts for work functions being performed at home.
- Job-sharing employment contract: A contract between 2 employees and an employer, where one job position is shared among the employees.
- Secondary job employment contract: a contract with an employee who will be performing the same job function for more than one job and must be signed by both the employee and employers involved.
- Collective Agreements: Collective agreements may not be commonplace in the private sector, but they are vital to regulating work conditions in the public sector and affect the conditions and format of the employment contracts. 70% of all valid agreements are established in the public sector, according to the Collective Agreements Register.
Under the Labor Code, all valid collective agreements must be registered with the Ministry of Social Security and Labor, and publicly announced on their website.
Payroll – Tax Contributions and Benefits
Income Tax: Any individual earning an income must pay local taxes in Lithuania, regardless of their residential status. Permanent residents are taxed on their worldwide income, whilst foreign nationals living and working in Lithuania are only taxed on the income they receive in Lithuania. Individuals are subject to pay Income Tax (GPM). Income tax can be with-held by the employers and paid to the Tax Inspectorate monthly or paid by the individual in certain cases.
Under tax payment procedure, an individual’s income can be divided into 2 classes – Class A (tax is calculated and withheld by the employer/organization making the payment), and Class B (tax is paid personally through the individual filling a tax return). Income can be divided by class like so:
A non-resident individual (as well as a Lithuanian entity, or a foreign entity through its permanent establishment) that has spent Class B income must submit an annual statement on this income on or before 15th of February of the next calendar year.
Social Taxes: Employees in Lithuania contribute 19.5% of their wages to social security and health insurance in monthly instalments (but can go up to 22.5% if the employee participates in the additional pension accumulation system). The employer is obliged to withhold social security payments from monthly salary payments and pay the employees’ contributions to the relevant authorities. Employee social security payments are divided as follows:
Employers must also contribute to social security, with a monthly payment for unemployment insurance (1.77% for indefinite employment contracts, and 2.49% for fixed-term employment contracts), and insurance from accidents at work or occupational diseases (0.14% is the standard rate). However, accidental insurance depends on the category the company is placed in, based on their history of accidents. The tariffs for each category are:
Payments of Social Security Tax contributions must be filed with the relevant authorities by the 15th of the following month, or by the first preceding workday if the 15th does not fall on a working day (is on the weekend or a public holiday).
Employers must also pay 0.16% of an employee’s wage to the Guarantee Fund (in case of bankruptcy), and 0.16% to the Long-Term Unemployment Fund (for long-term employees’ severance pay). However, some company types are exempt from one or both payments, such as the central bank and budget institutions, as well as political parties, societies, and trade unions.
Sick Leave & Pay: Employees must receive between 80-100% of their pay from their employer in the first two days of their illness. From the third through the seventh day, employees are eligible for 40% of their pay. After that, the State Social Security Fund pays 80% of the employee’s salary.
Annual Leave: Employees in Lithuania are entitled to a minimum of 20 days paid annual leave when working a five-day week, and increases depending on the length of an employee’s service. This minimum is increased to 24 days if an employee is working six-day weeks.
Annual leave may be taken in parts and must be no less than 10 or 12 days at a time, according to the length of workdays in a week. Single parents with children under the age of 14 are entitled to 35 days of annual paid leave.
Public Holidays: Employees in Lithuania are also entitled to paid leave for 14 public holidays. The day before the holidays, work ends an hour early, but employees are still paid for the full day. If an employee must work during a national holiday, they are entitled to double pay, or extra time is added to their annual leave. Holidays falling on the weekend are not moved to the next working day.
Maternity & Paternity Leave: Mothers are entitled to 70 calendar days’ pregnancy and childbirth leave (in case of complications, twins, or multiple births) before delivery, and 56 calendar days after delivery. Maternity leave allowance is 77.58% of the mother’s wages, and is given to the mother in its entirety, regardless of the amount of leave days taken before delivery.
Paternity leave is granted for 30 days (uninterrupted). The leave can be taken any time from the date of birth to the age of 3 months. In the case of a complicated delivery, twins, or multiple births, the leave can be taken until the child reaches 6 months.
Parental Leave: Lithuania also has parental leave. Parental leave is paid by the State Social Security Fund, and the mother, father, grandmother, grandfather, or other relatives participating in the care and raising of a child are granted parental leave of 1 year until the child reaches the age of 3. The leave can be taken all at once or in instalments.
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