This report is part of the OECD Tax Policy Reviews series. OECD Tax Policy Reviews are intended to provide independent, comprehensive and comparative assessments of OECD member and non-member countries’ tax systems as well as concrete recommendations for tax reform. By benchmarking countries’ tax systems and identifying tailored tax policy reform options, the objective of the Reviews is to enhance the design of existing tax policies and to support the adoption and implementation of tax reforms.

Despite a rapid recovery from the pandemic, Lithuania faces several structural demographic, employment and economic challenges. The economy and the labour market in Lithuania have recovered from the pandemic. GDP per capita has grown rapidly since 2019. Labour force participation and employment are high. The unemployment rate is on a downward path. Strong economic performance has contributed to a rising tax-to-GDP ratio. However, the country faces several structural challenges. The share of the population aged over 65 is expected to reach 32% by 2050. The working-age population is shrinking at about 1% per year on average. In addition, a pool of vulnerable individuals are locked-out of the labour market. The share of long-term unemployment is high and many long-term unemployed are unable rather than unwilling to re-enter employment. Poor health, skill mismatches and an educational divide in the country contribute to the employment challenge. Notwithstanding the rapid increases in wages in recent years, including minimum wages, disposable income inequality is among the highest in the OECD, the redistributive role of taxes and transfers is limited and social spending as a share of GDP remains comparatively low.

This chapter summarises the recommendations for tax and benefit reform that have been identified as part of this review. The chapter sets the scene for tax reform by describing an overview of the economy, providing observations on the tax and benefit system and identifying areas for general economic reform. Tax and benefit policy reform options are provided across a range of areas including personal income tax, social security contributions, unemployment benefits, housing benefits, social assistance and child benefits. Tax reforms for self-employed individuals focus on the business certificate regime, the individual-activity regime and on owner-managers of closely-held corporations.

This chapter sets the scene for tax reform in Lithuania. The chapter reviews the economic, employment and inequality challenges facing the country. The chapter examines the wage income distribution and poverty risks with a focus on older workers. Finally, tax revenues and social spending are reviewed.

This chapter is divided in two parts. In the first part, it assesses and provides reform options for the design of the tax system including the design of the personal income tax, the basic tax allowance and social security contributions. An assessment of the sustainability of the social security system is also included. In the second part, the chapter assesses and provides reform options for the design of the benefit system including unemployment benefit, housing benefit, social assistance benefit and child benefits.

This chapter provides an assessment of the incentives to work in Lithuania. It begins with a discussion of optimal tax theory and an evaluation of the tax burden in Lithuania. Next, the chapter examines the current incentives to enter work followed by the incentives to progress in work.

This chapter focuses on the taxation of self-employed individuals in Lithuania. The chapter begins by considering self-employment trends, the tax rules on self-employment and the characteristics of the self-employed. Next, the tax design and tax burdens of the business certificate and individual-activity regimes are evaluated against each other and standard employment and options for tax reform are presented. Finally, incorporated self-employment under different CIT rates is compared against standard employment and the individual-activity regime.

Different definitions of the average wage for employee and self-employed are used in the report. For the purposes of this report, the employee annual gross average wage (AW) is EUR 16 844 in Lithuania in 2021 based on OECD Taxing Wages, unless otherwise stated (this AW was provided by Lithuania to the OECD in late 2020 and is approximately representative of the period late 2020 / early 2021). The employee AW is used for comparisons in the self-employment chapter as it is the AW used to calculate the employee tax burden elsewhere in the report. The self-employed AW is calculated as the mean gross monthly self-employment income from the IA and BC regimes respectively based on the sample microdata (see Figure 5.5 and Table 5.4). An official gross monthly AW in Lithuania is published every quarter by Statistics Lithuania.