Lithuania’s investment account framework for cross-border investors
Authors: Akvilė Spirgienė, Senior Tax Advisor & Naidas Valatkevičius, Junior Tax Advisor
As of 1 January 2025, Lithuania introduced a new investment account taxation regime designed to simplify and modernize the taxation of personal investments. While the principle appears straightforward, cross-border investments introduce nuances that investors should not overlook.
Under the new model, personal income tax (PIT) becomes payable only when the amount withdrawn from the investment account exceeds the total contributions made to it up to the date of withdrawal. In practical terms, no withdrawal – no tax. As long as funds remain within the investment account, no tax liability arises.
This creates a deferral mechanism that supports capital accumulation and long-term investing. However, complexity emerges when investment income is sourced from foreign jurisdictions.
Foreign investment income – does “no withdrawal – no tax” still apply?
When a Lithuanian tax resident invests through an investment account in foreign financial instruments and earns income such as interest, that income may be subject to withholding tax (WHT) in the source country. This means the income may be taxed before it even reaches the investor.
Although the Lithuanian “tax upon withdrawal” principle continues to apply domestically, foreign tax may already have been paid. This raises an important question – how are the two systems reconciled?
Interaction with double tax treaties
Under applicable Double Tax Treaties (DTTs), foreign withholding tax may be credited against Lithuanian PIT. However, the timing of this credit is crucial. The foreign withholding tax is not credited in the year it is withheld. Instead, it may be credited in the tax period when taxable income from the investment account arises in Lithuania – that is, when funds are withdrawn and exceed total contributions.
For example, interest income may be received in 2027 and subject to foreign withholding tax, yet no taxable event arises in Lithuania if no withdrawal exceeding contributions occurs that year. If in 2028 the investor withdraws funds from the investment account and the withdrawal exceeds total contributions, taxable income arises in Lithuania in 2028. In such a case, the foreign withholding tax paid in 2027 may be credited in 2028 – when Lithuanian PIT becomes payable.
Therefore, while withholding tax may be paid today, its practical benefit in Lithuania materializes only when a taxable event occurs under the investment account rules.
Annual income tax return & first year challenges
Under applicable Double Tax Treaties (DTTs), foreign withholding tax may be credited against Lithuanian PIT. However, the timing of this credit is crucial. The foreign withholding tax is not credited in the year it is withheld. Instead, it may be credited in the tax period when taxable income from the investment account arises in Lithuania – that is, when funds are withdrawn and exceed total contributions.
For example, interest income may be received in 2027 and subject to foreign withholding tax, yet no taxable event arises in Lithuania if no withdrawal exceeding contributions occurs that year. If in 2028 the investor withdraws funds from the investment account and the withdrawal exceeds total contributions, taxable income arises in Lithuania in 2028. In such a case, the foreign withholding tax paid in 2027 may be credited in 2028 – when Lithuanian PIT becomes payable.
Therefore, while withholding tax may be paid today, its practical benefit in Lithuania materializes only when a taxable event occurs under the investment account rules.
Annual income tax return & first year challenges
This is the first year in which individuals file annual personal income tax returns including income derived through investment accounts. Although the State Tax Inspectorate has issued detailed rules and guidance, practical implementation may give rise to errors and interpretative challenges, particularly in cross-border situations.
Taxpayers must carefully track contributions and withdrawals, correctly identify financial instruments, allocate foreign withholding tax appropriately, and ensure the correct application of DTT provisions. Timing differences between foreign taxation and Lithuanian PIT add an additional layer of complexity.
How FO Consulting group can help
FO Consulting group provides professional advisory services in assessing investment accounts, identifying financial instruments subject to foreign withholding tax, and analysing cross-border tax implications. We also advise on the proper crediting of foreign withholding tax against PIT in Lithuania and support clients in preparing and reviewing annual income tax returns.
„The investment account regime is straightforward in theory, but in cross-border cases the correct identification of financial instruments and application of DTT provisions becomes critical. Also, given the novelty of the regulation, I anticipate errors occurring on both sides – from taxpayers and from the tax authority. Therefore, it is crucial to assess all risks and strive to prevent any errors before they happen, for example, by ensuring proper investment controls and obtaining advance clarifications from the tax administrator before making any decisions,” comments Akvilė Spirgienė, Senior Tax Advisor.
If you have questions or require assistance in navigating these rules, feel free to contact FO Consulting group for tailored advice on your investment structure and tax position.
