Here’s a detailed guide for those starting a business and taking their first steps towards formalising their self-employment activities.
Potayto potahto? The differences between self and regular employment
Self-employment activities, like regular employment, generate income over a period of time. For example, manufacturing, commercial services or even creative, scientific and sporting activities – all fall under the mandatory requirements for self-employment activities.
Foreigners and Lithuanians alike must register with the State Tax Inspectorate (STI), declare their income, pay taxes and comply with any other legal acts.
Activity certificate or a business licence?
The first thing you’ll have to decide when making it official is choosing what fits best for you. And by that we mean establishing whether your work falls under an individual activity certificate (in Lithuanian, individuali veikla) or business licence (verslo liudijimas).
The main differences between the individual activity certificate and business licence are the possible activities you can engage in, the work period in question, applicable taxes and a few other considerations.
Any activity not prohibited by law can be carried out under an individual activity certificate. Whereas in the case of a business licence, there is a limited list of activities that can be undertaken.
The time period of self-employment through an individual activity certificate is indefinite. The maximum duration of self-employment through a business licence is one calendar year. The minimum duration for trade is one day, and five days of your choice for services and manufacturing. A business licence may be renewed.
In the case of self-employment through an individual activity certificate, annual income not exceeding EUR 20,000 per year is taxed at a rate of 5%, while the applicable income tax increases to a fixed rate of 15% when annual income exceeds EUR 20,000 per year (where profits reach EUR 35,000 per year). The tax on self-employment through a business licence is fixed and calculated on a daily basis.
All activities are possible in the case of self-employment through an individual activity certificate, except for those that require the establishment of a company. Self-employment through a business licence is permitted if income from the activity does not exceed EUR 4,500 per calendar year.
Residents who have obtained a business licence are entitled to provide services and sell their manufactured goods to legal entities if the type of activity indicated in the business licence is not one of the activities carried out by that legal entity.
Type of persons
If you have your registered your activity or are employed by a resident who carries out self-employed activities through an individual activity certificate, you may participate in self-employment through an individual activity certificate. If you have obtained a business licence, then only one of the following family members – a spouse, father, mother, child aged 14 years and older, person under guardianship, guardian (caregiver) – may participate in self-employment through the business licence as well.
The accounting process
If a resident is self-employed through an individual activity certificate, they must keep a register of income and expenditures from the individual activity and issue invoices, cash receipts and Value Added Tax (VAT) invoices. In the case of self-employment through a business licence, the resident must keep a register of income and expenditure and issue a receipt for the purchase and sale of goods and services (form FR0508).
There’s nothing much to add when explaining the tax situation for the self-employed, other than highlighting a few key differences:
If you are self-employed through a business licence or individual activity certificate, your taxes will consist of:
Of course, it’s understandable if once in a while Lithuania’s rainy season might get a bit too grey and you find yourself working from somewhere sunnier. But remember, even if you’re working remotely, you are still required to take care of taxes. That’s of course if you’re a permanent resident of Lithuania.
In short, for anyone conforming to the definition of a permanent resident of Lithuania, all income sourced in and outside the country must be considered the object of income tax in Lithuania. Please note, when earning income for work in foreign country that has concluded a treaty with Lithuania to avoid double taxation, the issue of this income being subject to taxation in Lithuania should be in line with the provisions of the treaty.
The date that every self-employed professional in Lithuania knows
In Lithuania, 1 May marks the end of the income declaration season. Everyone, whether self-employed via an individual activity certificate or business licence, is obliged to declare their income earned during previous calendar year.
If you have carried out self-employment activities through an individual activity certificate and have earned income, you must declare it and pay Personal Income Tax. If you didn’t earn any income, you don’t need to submit a tax return form. For example, if you start your activities in 2023 and earn income, you will need to declare your income by 1 May 2024.
If you have earned income from self-employment activities through a business licence during the year that exceeds the EUR 45,000 threshold, you must declare it by 1 May of the subsequent year and pay PIT. If the income doesn’t exceed the threshold, you do not need to declare it.
How to declare your income
The most convenient way to submit your income tax return is by logging into the Electronic Declaration System. Personal Income Tax returns are completed using an easy-to-navigate guide. Once the tax return has been generated, the amount to be refunded or paid is immediately displayed. When there is an amount due, it can be paid immediately by logging in via e-banking. More useful information on income declaration and answers to frequently asked questions can be found on the STI website, and if you need advice, register for a consultation with the STI at International House Vilnius.