Common VAT Mistakes in Lithuania and How to Avoid Them

Value added tax (VAT) – is a tax applied to goods and services in all EU countries. All countries set the rates of this tax independently, but general guidelines are imposed by the VAT Directive.

Also, VAT is the main tax in Lithuania as such tax collects the largest share of funds to the state budget. Since 1 September 2009 the standard VAT rate in Lithuania is 21 percent.

In general, supplies of goods and services made by a taxable person performing its economic activity for a consideration within the territory of Lithuania, purchase of goods or services from another EU country as well as import of goods, are subject to VAT. The main regulatory law for VAT in Lithuania – Law on VAT (Lithuanian Law on VAT)

Explanation of the different VAT rates

Four general VAT rates are applicable in Lithuania: 21%, 9% and 5% preferential and 0% VAT rates. Also, the compensational rate for farmers is 6%.

The standard VAT rate is 21%.

The reduced rate of 9% applies to:

supply of heating to residential premises and supply of hot water;
for printed and electronic books and printed and electronic periodicals;
for accommodation services;
passenger transportation services on regular transportation routes established by the Ministry of Transportation or its authorized institution or municipalities, as well as passenger baggage transportation services specified in this point;
For visiting all kinds of art and culture institutions, art and culture events, when the provisions of Article 23 of the VAT Law do not apply;
other cases.

The reduced rate of 5% applies to:

Medicines, medical aids and food products for special medical purposes, when the costs of purchasing these goods are fully or partially compensated in accordance with the procedure established by the Health Insurance Law of the Republic of Lithuania, as well as non-reimbursable prescription drugs;
Technical assistance devices for the disabled and their repair;
Paper and electronic newspapers, magazines and other periodical publications.

Common VAT calculation mistakes made by Lithuanian businesses

Based on our practice, the most frequent mistakes businesses in Lithuania make regarding VAT calculation:

The taxpayers may apply incorrect VAT rates, for example, apply preferential 9% or 5% VAT rates, when only standard VAT rate could be applicable;
The companies include VAT amounts to deductible, however such VAT amounts could be considered only as non- deductible, according to the requirements of Lithuanian Law on VAT, for example VAT for purchase or rent of passenger car;
The taxpayers may apply 0% VAT for supply of goods and services when only standard VAT rate could be applicable;
The taxpayers deduct 100% VAT amounts, however perform non-taxable VAT activities, for which prorate shall be calculated;
The companies apply local VAT reverse charge for construction services, however for such of kind of services only standard VAT rate is applicable (such works are not considered as construction services according to the Law);
The companies apply local VAT reverse charge for construction services, however one of the supply participants is not VAT payer in Lithuania;
The businesses apply local standard VAT in Lithuania but different VAT from foreign country is applicable to services which is related to real estate, located in such foreign country.

Misinterpretations of VAT-exempt goods and services by Lithuanian businesses

Businesses in Lithuania commonly consider VAT-exempted goods and services as taxed with 0% VAT rate, especially when such supplies are one-off or rarely happened. However, we would like to note that both cases are different from taxation point of view, as when the Company supplies VAT-exempted goods and services, purchase VAT, intendent for such activities, shall be considered as non-deductible. When Companies supply good or services taxed with 0% VAT rate, purchase VAT, intendent for such activities, could be considered as deductible.

Typical VAT documentation and record-keeping errors in Lithuania

Based on our practice, common errors in VAT documentation or record-keeping specific to Lithuania:

The taxpayers do not prepare and submit EU sales list when goods are supplied and services are provided to EU VAT payers;
The companies consider services as goods or vice versa and report such transaction incorrectly in VAT returns;
VAT taxable transactions are reported as non-taxable and etc.;
The taxpayers do not collect supporting documents when applying 0% VAT rate;
The taxpayers do not collect supporting documents for supplies outside Lithuanian territory.

Implications of late VAT payments and incorrect filings in Lithuania

Please be informed that for late VAT payments, the Lithuanian Tax Authority is calculating late payments interests. Late payment interest is set by the Minister of Finance for each calendar quarter and currently it equals to 0.03 percent of the unpaid amount.

Also, a fine could be imposed, according to Article 187 of Administrative Offenses Code of Republic of Lithuania. Late submission, non-submission, entry of incorrect data to returns or other reports submitted to the tax administrator, incurs a warning or a fine from 200 until 390 EUR (a fine may be higher according to the circumstances).

Impact of recent Lithuanian VAT law amendments on compliance errors

Until 31 December 2023, preferential VAT rate of 9 percent to catering services provided by restaurants, cafes or similar catering establishments and take-away food, except for alcoholic beverages and services or parts of services related to alcoholic beverages, was applicable in Lithuania. Thus, businesses that learned about these changes too late, had faced compliance errors while applying different VAT rates on 31 December 2023 (9 percent) and on 1 January 2024 (21 percent).

Other case regarding compliance errors, also could be recent changes regarding VAT deductible amounts for purchase of electric vehicles. If the Company purchase electric car for 49.000 EUR, plus VAT, such purchase VAT shall not be considered as deductible since the value of the car, including VAT would be more than EUR 50.000 EUR (Article 62 of the Lithuanian Law on VAT).

Sector-specific VAT challenges in Lithuania

In Lithuania local reverse charge VAT is applicable for constructions services, according to Article 96 of Lithuanian Law on VAT. Businesses, working in construction sector, usually face difficulties while applying local reverse charge VAT or standard VAT rate for different types of construction works. In such case Leinonen Lithuania tax team usually recommends preparing written inquiry to State Inspection of Territory Planning and Construction in order to clarify such if construction works, performed by the Company, fall under requirements, applicable for local reverse charge VAT.

Lithuanian Case Study: Significant Business Impact from Correcting a VAT Error

The tax payer mistakenly had deducted 100 % of purchase VAT amounts, however the mentioned Company performed non-taxable VAT activities (for example, financial services), for which prorate shall be calculated and VAT deducted proportionally. Summed up, as the result the Company had paid less VAT to the budget. In such case, the Lithuanian Tax Authority during tax investigation could calculate late payments interests and impose a fine which could have a significant impact on cash flows of the Company.

Other case also could be regarding aid as the Companies often provided goods or services free of charge, for example during Covid period companies provided medical gloves free of charge and deducted purchase VAT. In cases where businesses decide to provide free goods or services directly as aid, i.e. not through non-profit organizations, according to aid agreements, it is considered as consumption of goods for private needs of the VAT payer (Article 5 of the Lithuanian Law on VAT), therefore companies are obliged to calculate VAT on the sale of such goods given free of charge. Such non-compliance could lead also to late payments interests and a fine by the Lithuanian Tax Authority which will have a significant impact on financial funds of the Company.