One of the most common long-term benefits offered to employees in Lithuania is contributions to third pillar pension funds. Accumulation in the third pillar pension funds is gaining more popularity and is attracting more attention from employers as if the conditions are met, contributions to third pillar pension funds may be considered as not taxable income.
According to the Lithuanian legislation, in case contributions to pension funds do not exceed 25% of employee’s annual salary, benefit received by the employee is not considered as subject to Personal Income Tax and social security contributions.
However, there are cases when entities or employees misuse this exemption (e.g. the employees withdraw funds before reaching retirement age and the purpose of exemption – encouragement of long-term saving is not met). Due to that the Tax Authority is inclined to pay more attention to such benefits. Therefore, our recommendations to the entities willing to introduce such benefit would be to take preventive measures in order to ensure that the purpose of long-term saving is ensured.
The employer shall clearly inform the employees that contributions paid to third pillar pension funds are not considered as salary and their purpose is long-term saving (i.e. the employee should understand that funds should not be withdrawn early).
Additionally, the employer shall take effective internal arrangements (preparation and application of internal policies, agreements with employees, etc.) in order to prevent and ensure that the employee does not withdraw contributions paid to third pillar pension fund before he/she reaches retirement age.
If your company is considering to provide these or other benefits to employees and wishes to implement them in a way which does not create tax risks to the Company, please contact us and we will be happy to help you.
Information above was prepared by Leinonen Lithuania Tax Team.
