Areas of Strength

• The burden of tax compliance is relatively low in Lithuania, while revenue has been growing robustly. CIT and average estimated tax compliance costs are below the EU average, including for small and medium-sized enterprises (SMEs). VAT compliance costs are slightly above the EU average, although the VAT registration process is relatively efficient. Fewer Lithuanian firms considered business regulations to be an investment impediment than the EU average in 2023. At 3.8% of total revenue collected in 2023, tax arrears are well below the EU average and have fallen.
• Lithuania reports tax expenditures annually and breaks down the total into the main tax types and several individual exemptions. In 2023, reported tax expenditures amounted to nearly 5% of GDP, of which half were in the PIT system. The Lithuanian methodology is quite broad, in part because it includes the non-taxable amount of personal income in the PIT tax expenditure figures.
• Lithuania performs well on the digitalisation of its tax administration. Lithuania is one of the few EU Member States to provide pre-filling facilities for PIT, CIT (partial) and VAT returns. Lithuania offers electronic tax filing, which is widely used by taxpayers. The high e-filing rates for all tax types in Lithuania imply that the country's e-filing facilities are well-designed and easy to use, contributing to an increase in the ease of compliance for taxpayers. The tax assessment process is generally efficient, with most returns being processed automatically.

Areas for Improvement

• Despite progress, there is still scope for Lithuania to increase tax compliance and the effectiveness of its tax administration. After a period of significant falls in Lithuania’s longelevated VAT compliance gap, it has plateaued and stood at around 15% in 2023. The size of the shadow economy in Lithuania is estimated to be well above the EU average, with envelope wages remaining a significant issue. Through its Recovery and Resilience Plan (RRP), Lithuania is implementing a range of actions to strengthen tax administration including digitalisation projects; automatic collection of data on transactions; and training to improve tax and customs specialists’ competences.
• Lithuania’s capacity to provide accessible and high-quality public services is limited by it having one of the lowest tax revenue to GDP ratios in the EU, amid growing spending pressures. Its ageing population and defence spending commitments heighten future fiscal sustainability risks. Lithuania therefore has a challenge to harness additional revenue, including by broadening tax bases and reducing both compliance and policy tax gaps. Revenue from recurrent property taxes is set to remain very low after the implementation of ongoing reforms.
• Despite some positive reforms, the taxation of income will remain rather complex and uneven, reducing revenues. The income tax system continues to offer tax arbitrage opportunities, e.g. between employment, self-employment, and some forms of incorporated business. The preferential CIT treatment for the smallest businesses also creates a cliff edge effect and encourages underreporting. Income inequality is among the highest in the EU. Under its RRP commitments, Lithuania has been taking action to broaden the tax base and to abolish inefficient or environmentally unfriendly tax exemptions and special tax regimes. The reforms enacted will mitigate but not fully address these issues.

Tax Complexity

There is mixed evidence on the extent to which Corporate Income Tax complexity is an issue in Lithuania. In 2024 Lithuania ranked 25^th out of the 27 Member States in the Tax Complexity Index (‘TCI’), suggesting that multinational corporations face a relatively complex tax system in Lithuania. The TCI is based on the Global MNC Tax Complexity Project, a joint research project of Deborah Schanz (LMU Munich) and Caren Sureth-Sloane (Paderborn University). The TCI 2024 places Lithuania 24^th among the Member States with regards to Tax Framework Complexity, and 18^th with regards to Tax Code Complexity. However, it is not clear that there are material changes in the country that explain the dramatic deterioration in Lithuania’s ranking compared to the TCI 2022, when Lithuania was assessed as being 2nd best among the EU Member States. The TCI 2024 result is also at odds with analysis discussed above which suggests tax compliance costs in Lithuania are below the EU average.

The full Commission Staff Working Document of the Mind the Gap Report - Challenges and opportunities for tax compliance and tax expenditure in the EU regarding Lithuania can be found here.

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