The government published draft amendments to the law "On Personal Income Tax" on 11 October, 2024. The stated objective of these amendments is to enhance the competitiveness of the workforce in the Baltic region, reduce the tax burden on employees with low and middle incomes, and simplify the application of personal income tax (hereinafter – PIT). Below is a brief overview of the proposed most significant changes.
The following two-tiered progressive PIT rates will be introduced
- A 25.5% rate for income up to the maximum salary on which the state social insurance is paid (hereinafter - SSC) – EUR 8,775 per month (EUR 105,300 per year);
- A 33% rate for income exceeding the maximum SSC limit of EUR 8,775 per month (EUR 105,300 per year), which for salary is essentially collected through the solidarity tax.
These rates will apply to all income of the taxpayer specified by law. At the same time, 25.5% will apply to capital income, including capital gains and other specific types of income as determined by the law.
For salary income, regardless of the number of income sources, the 25.5% rate will be applied at the time of payment. The same rate will also be applied by the State Social Insurance Agency (hereinafter - SSIA) to temporary disability benefits and pensions.
Fixed PIT rates will be increased for certain types of income
Income currently only taxed at 20% or 23% will be subject only to the 25.5% rate. This includes capital income (including capital gains), professional athlete income, income for non-resident taxpayers from artistic, athletic, or coaching activities, and royalties for the creation of literary, scientific, or artistic work, as well as rewards for discoveries, inventions, and industrial designs.
To ensure legal certainty, transitional provisions of the law will stipulate that income from transactions with capital assets, initiated but not completed by 31 December, 2024, will be taxed at 20% for the years 2025, 2026, and 2027, if the capital gains declaration appendix "Information on transactions started but not completed in one tax year" is submitted.
An additional 3% PIT rate will be introduced for income exceeding EUR 200,000 annually
Income exceeding EUR 200,000 annually will be subject to an additional 3% PIT rate upon filing the annual income tax return. This additional rate will apply to salary, capital gains, other capital income, income from economic activity, intellectual property income, and even dividends and liquidation quotas which are otherwise exempt from PIT.
Other income exempt from PIT, such as exempted benefits and gifts, and income from the sale of real estate that qualifies for tax exemption according to law “On Personal Income Tax”, will not be taxed with the additional PIT rate.
What other PIT changes are expected?
Differentiated non-taxable minimum will be replaced with a fixed non-taxable minimum
A fixed non-taxable minimum will be applied to all employees, regardless of their gross income. In 2025, it will be EUR 510 per month, in 2026 – EUR 550 per month, and from 2027 – EUR 570 per month.
Non-taxable minimum for pensioners will be increased
The non-taxable minimum for pensioners will be increased from EUR 6,000 per year (EUR 500 per month) to EUR 12,000 per year (EUR 1,000 per month).
The list of payments made by employers in accordance with collective agreements that will not be taxed as benefits will be extended
The list of non-taxable benefits will be expanded (currently only covering employee meal and medical expenses) to include expenses such as relocation, accommodation, and transportation costs. It will be specified that the total amount of all these employee expenses in a year cannot exceed the amount obtained by multiplying the average number of employees, as defined by the law “On Annual Statements and Consolidated Annual Statements, by EUR 700.
Non-taxable limits for childbirth, funeral benefits and gifts provided by employers will be increased
Non-taxable limits for childbirth and funeral benefits will be increased from EUR 250 to EUR 500, and for employer gifts from EUR 15 to EUR 100 annually.
Tax exemptions for cash and material awards received in competitions and contests will be EUR 1,500 per year
Winnings from certain national lotteries will be tax exempt
Winnings from national lotteries such as "Sporta loterija", "Sporto visi" and "Senatnes loterija" will be exempt from PIT.
Certain state support payments will be exempt from PIT
From 2025 to 2029, payments received as state support for agriculture, EU support for agriculture and rural development, or other similar support payments aimed at preserving biodiversity, including under the Natura 2000 project will not be included in taxable income.
Recipients of royalties will not be obliged to register economic activity until 31 December, 2027
The transitional period allowing recipients of royalties not to register economic activity has been extended. During this time, PIT and SSC will continue to be withheld at source by the payer of the income, applying a 25% PIT rate.
Comments
Upon reviewing the proposed changes, it is clear that high-income earners (with expected annual income exceeding EUR 200,000) may consider realizing their income this year to avoid the additional 3% tax next year, for example, by selling certain assets or distributing company profits.
It is also anticipated that the number of solidarity tax payers will decrease, making the maintenance of the solidarity tax system involving two state institutions (SSIA and the State Revenue Service) less efficient from the state's perspective.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
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