July 27, 2018

Fair progressive taxation model in Lithuania for immovable property

The public debate on “fair taxation” has escalated since the Lithuanian government and representatives of the Parliament of the Republic of Lithuania submitted a number of policy proposals to introduce a progressive taxation system covering, but not limited to, immovable residential property.

Currently, immovable property with a value of up to EUR 220,000 is exempt from tax. For immovable property with a total value of between EUR 220,000 and EUR 300,000, a rate of 0,5% applies. Immovable property with a total value of between EUR 300,000 and EUR 500,000, is taxed at a rate of 1%, and for immovable property with a total value in excess of EUR 500,000, a rate 2% applies. The immovable property tax is collected by the state and remains within the state budget.

The government has proposed expanding the base of immovable property upon which tax is levied, applying a rate of 0.3 % to the second and subsequent residential property owned by a natural person, even where the value of such immovable property does not exceed EUR 220,000. On immovable property exceeding this 220,000 threshold, a progressive rate of between 0.5 and 2% is proposed.

Immovable property taxes in Lithuania have been subject to constant change: in 2012, immovable property with a value of up to 1,000,000 LTL (approx. EUR 290,000) was exempted from tax; in 2015, this exemption threshold was reduced to EUR 220,000. In 2017, proponents of tax reform unsuccessfully attempted to enforce amendments that would exempt only owners of immovable property with a value of up to EUR 150,000.

Needless to say, a progressive tax model will result in ever-growing taxation. In theory, most will agree with the principle that it is fair for individuals with higher incomes to pay more tax than those who earn less – the underlying premise being that higher-income individuals have a greater ability to pay. But how much more tax is “fair”?

Proponents of the progressive plan have proposed a number of bands in the value of immovable property, upon which different tax rates are applied. Tax will be payable on the portion of the value of immovable property that exceeds the tax-exempt threshold. However, neither the proposal, nor the accompanying explanatory note specifies or explains the basis of the methodology used, or the logic that governs the calculation of the bands of immovable property value and their corresponding tax rates. This concretisation and differentiation of the value of assets has been proposed without recognising the crucial fact that the immovable property market is subject to systemic change as a result of both global and domestic factors. These include the law of supply and demand, and changes in the condition of the property. Since municipal administrations supervise the roads, green spaces and, lighting in their areas, and provide other services necessary to the proper functioning of immovable property, they are aware of the needs, expectations and opportunities of the property’s residents and legal entities. The draft law should therefore stipulate that the tax rates be established by specific municipal councils. It is also expedient that the tax collected for immovable property be transferred to municipalities.

If implemented, the progressive model will affect approximately 330,000 owners of immovable property with two or more residential houses. The proposed increase in tax rates and reduction in the tax exemption threshold appear a significant change – thus, no mistakes can be made about its future implications.

By Giedrė Liulytė, Associate at CEE Attorneys Lithuania