Small community taxation issues
From 1st of September 2012 a new Law on Communities of the Republic of Lithuania came into force, which introduced a new form of legal entity in Lithuania – a small community (SC). The aim of this Law is to facilitate establishment of new business as well as to fill the niche between two existing legal forms: an individual enterprise and a private limited liability company.
Although only one month has elapsed since the Law came into force, the numbers speak for themselves: 154 Small Communities were founded as of 3rd October, 2012.
There are a lot of question regarding taxation regime to be applicable for SC income, both at the enterprise level as well as at their members level. We will attempt to overview briefly main tax issues in this article.
Income taxation at SC level
SC’s income shall be taxed in the same manner as the income of any other legal entity: legal acts do not provide any special taxation regime for SC. That means that income of SC shall be subject to a regular corporate income tax rate of 15 per cent.
However it should be noted that SC is subject to the same tax reliefs as any other legal entity. Therefore if the number of employees of SC does not exceed 10 and annual income does not exceed 1 million Litas, the income of SC shall be taxed at the reduced tax rate of 5 per cent (Paragraph 3 of the Article 5 of the Law on Corporate Income Tax).
Income taxation at member’s level
According to the Law on Small Communities, members of SC may receive income from SC in two ways:
1. By distribution of profits (dividends);
2. By paying some of SC funds to their member’s personal need as an advance payment of SC profits.
Taxation of dividends
After the end of each financial year members of SC shall approve the annual financial statement of SC as well as to distribute profits of SC (allocation of dividends).
The dividends of SC are taxed in the same manner as dividends of any other legal entity – at a tax rate of 20 per cent.
Taxation of Funds paid to SC members personal needs
Members of SC may agree on the rules of payment of SC’s funds to its members for their personal needs as an advance payment of SC’s distributable profits in SC’s regulations. In this way members are entitled to receive part of SC funds without the necessity to wait until the end of financial year. Considering the fact that members may not work at SC under the employment contract, such payment of funds is like member’s “salary”. The frequency and amount of such payments shall be established in the regulations of SC by its members.
It should be noted that from taxation point of view such income are considered as regular SC salary, what means that it should be taxed accordingly, i. e. the member shall pay Personal income tax of 15 percent; State Social Insurance contributions of 26,3 percent as well as Compulsory Health Insurance Contributions of 9 percent from their income.
It should be noted, that if the members of SC are not insured by compulsory health insurance on other grounds (works under the employment contract etc.) they must pay Compulsory Health Insurance Contributions of 77 Lt every month. This applies ever if members do not receive any income from SC.
Other taxation issues
Taxation of manager’s income
According to the Law on Small Community, an employment contract cannot be concluded with the manager of SC. A civil (services) agreement shall be concluded instead. This result in different taxation regime applicable for the manager’s income: These incomes are taxed by Personal income tax only at the rate of 15 percent. Nor State Social Insurance Contributions or Compulsory Health Insurance Contributions shall be paid from such income.
Even more, in case the manager of SC is foreigner and is not a Lithuanian tax resident under, incomes received by such manager shall not be a subject to taxation in Lithuania.
Contributions to Guarantee Fund
As employment contracts may not be concluded with the members of SC, contributions to the Guarantee Fund shall not be paid from members’ incomes.
In case SC has employees working under employment contracts, SC shall pay contributions to the Guarantee Fund in the same manner as all the other employers – 0.2 percent from the calculated salary of the employee.