In answer to the challenges presented by the global financial crisis and a domestic economic slowdown, Lithuania boasts a strong banking sector, educated workforce, good quality of life at relatively low cost, and the legal protections afforded by the rule of law. Red tape and the lack of an effective national strategy to attract new investment prevent the investment climate from being even better. However, the government is actively trying to improve the business and investment climate in order to attract new investment.
The government affords foreign investors protection equal to that provided to domestic investors, and sets few limitations on their activities. Foreign investors have the right to repatriate or reinvest profits without restriction, and can bring disputes to the International Center for the Settlement of Investment Disputes. In 2008, Lithuania was removed from the Special 301 Watch List because intellectual property rights (IPR) protection in the country has significantly improved over the past several years. Lithuania offers special incentives, such as tax concessions, to strategic investors, and has completed nearly all major privatizations. U.S. executives report burdensome procedures to obtain licenses and residence permits as well as corruption, particularly in the lower and middle ranks of government. According to preliminary data from the Lithuanian Statistics Department, as of mid-2009, the United States was the 11th largest investor in the country, with investments totaling 438 million USD (2.5 percent of total FDI).
Overview of Foreign Investment Climate
Up until the second quarter of 2008 Lithuania was one of the fastest growing economies in Europe, with GDP growth of 7.8 percent in 2006, 8.9 percent in 2007 and 4.9 percent for the first three quarters of 2008. However, experts predict a 15% GDP contraction will be recorded for 2009 as a result of the global economic slowdown.
Lithuania offers investors a diversified economy, investment laws that conform to EU standards, a well-educated workforce, the region's best-developed road network, a stable democratic government and banking system, membership in the European Union, and proximity to Eastern European markets. EU Structural Funds amounting to more than USD 12.4 billion from 2007 to 2013 should provide a boost to the economy. Lithuania's income levels still lag behind the rest of the EU, with per capita GDP (at purchasing power parity) of nearly 61.6 percent of the EU average.
The Lithuanian Development Agency (LDA) is the government's principal agency dedicated to attracting foreign investment. In addition to its office in Vilnius, LDA has representative offices in Germany and Belgium -- but none in the United States (although it is considering opening one in California).
To attract more FDI the government of Lithuania needs to do a better job of promoting the country. The government also needs to create clustered or geographically concentrated investments in certain sectors. Government initiative is needed to centralize the process of starting a business, such as a "one stop shop" for residency, land use and business registration. More flexible labor regulations would also encourage FDI. Transportation barriers, especially insufficient air links with European cities, remain an impediment to investment, as does the lack of open, transparent information on tax collections and government procurement. The present Lithuanian government is making efforts to address these barriers to investment, working with the private sector, and has begun to offer limited financial incentives to attract key investment in Lithuania.
Openness to Foreign Investment
Lithuania's laws assure equal protection for both foreign and domestic investors. No special permit is required from government authorities to invest foreign capital in Lithuania. Foreign investors have free access to all sectors of the economy with some limited exceptions:
The Law on Investment specifically permits the following forms of investment in Lithuania:
Foreign entities are allowed to establish branches or representative offices. There are no limits on foreign ownership or control. Foreign investors can contribute capital in the form of money, assets, or intellectual or industrial property.
Lithuanian law protects foreign investments and investors' rights, and the judicial system is generally effective at upholding the enforcement of contracts. Foreign investors are free to enforce their rights by applying to the courts of Lithuania or directly to the International Center for Settlement of Investment Disputes under the Washington Convention of 1965.Foreign investors have the right to repatriate profits, income, or dividends, in cash or otherwise, or to reinvest the income without any limitation, after paying taxes. The law establishes no limits on foreign ownership or control.
State institutions have no right to interfere with the legal possession of foreign investors' property. In the event of justified expropriation, investors are entitled to compensation equivalent to the market value of the property expropriated. The law obligates state institutions and officials to keep commercial secrets confidential and requires compensation for any loss or damage caused by illegal disclosure.
Foreign investors are treated equitably in privatization programs. The government has privatized most state enterprises and property, and the State Property Fund is responsible for managing and privatizing state assets. Major assets still under government control include the railway company (Lietuvos Gelezinkeliai), Lithuania's three international airports (Vilnius, Kaunas, and Klaipeda) and Lithuanian post (Lietuvos Pastas). Foreign investors purchased the majority of state assets privatized since 1990. These included companies in the banking, transportation, and energy sectors. Some foreign companies have complained about a lack of transparency or discrimination in certain privatization transactions.
The State Property Fund screens the performance record and size of companies bidding on state or municipal property and has halted privatizations when it determined that the bidders were not suitable, i.e., for criminal or other reasons.
Heritage Economic Freedom 2009: 30
Transparency International Corruption Perception Index 2009: 4.9
World Bank Doing Business 2010: 26
Conversion and Transfer Policies
The national currency is the litas. The Law on Foreign Currency also allows individuals and organizations to use the euro for domestic cash and non-cash payments and settlements; it allows individuals and organizations to use other foreign currency for making non-cash payments and settlements when both parties in the transaction agree to do so. There are no restrictions on the transfer or conversion of litas.
Lithuania has maintained a currency board since 1994. On February 1, 2002, the government pegged the litas (LTL) to the euro (EUR) at the rate of LTL 3.4528 to EUR 1. Prior to that date, the peg was LTL 4 to USD 1. The government backs the litas with gold and foreign currency reserves.
Lithuania entered the EU's exchange rate mechanism (ERM II) in June 2004. Its plans to adopt the euro in 2007 failed because inflation slightly exceeded the allowable limit. Lithuania will continue to pursue membership in the Euro zone, but the impact of the economic crisis may prevent entry before 2014, according to government officials and analysts from the private sector.
Expropriation and Compensation
Lithuanian law permits expropriation on the basis of public need, but requires compensation at market value in convertible currency. The law requires payment of compensation within three months of the date of expropriation in the currency the foreign investor requests. (If the government determines compensation in litas, it uses the official exchange rate on the date of this determination.) The compensation must include interest (calculated on the basis of the LIBOR rate of the relevant currency) from the date of publication of the notice of expropriation until the payment of compensation. The recipient may transfer this compensation abroad without any restrictions.
There have been no cases of expropriation of private property by the Government of Lithuania since 1991. There is an ongoing process to restitute property expropriated in the World War II and Soviet eras.
The Lithuanian legal system stems from the legal traditions of Continental Europe and is in accordance with the EU's acquis communautaire. New laws enter into force upon promulgation by the President (or in some cases the Chairman of the Parliament (Seimas) and publication in the official gazette Valstybes Zinios ("State News").
General jurisdiction courts, dealing with civil and criminal matters, comprise the core of the Lithuanian court system: the Supreme Court, the Court of Appeals, district courts, and local courts. In 1999, Lithuania established a system of administrative courts to adjudicate administrative cases, which generally involve disputes between government regulatory agencies and individuals or organizations. The administrative court system consists of the Highest Administrative Court and District Administrative Courts.
The Constitutional Court of Lithuania is a separate, independent judicial body that determines whether laws and legal acts adopted by the Seimas, President, and the Government conform to the Constitution.
Lithuania's legal system provides several possibilities for commercial dispute resolution. Parties can settle disputes in local courts or in the increasingly popular independent, i.e., non-governmental, Commercial Court of Arbitration. Lithuania also recognizes arbitration by foreign courts. Courts generally operate independently of government influence. There have been no major disputes between foreign investors and the Government of Lithuania since independence in 1991.
Lithuania passed the current Enterprise Bankruptcy Law in 2001. This law applies to all enterprises, public establishments, commercial banks, and other credit institutions registered in Lithuania. The law provides a mechanism to override the provisions of other laws regulating enterprise activities, assuring protection of creditors' rights, recovery of debts, and payment of taxes and other mandatory contributions to the State. This law establishes the following order of creditors' claims: claims by creditors that are secured by a mortgage/pledge of debtor; claims related to employment; tax, social insurance, and state medical insurance claims; claims arising from loans guaranteed or issued on behalf of the Republic of Lithuania or its Government; and other claims.
Lithuania is a party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (Washington Convention) and is a member of the International Center for the Settlement of Investment Disputes. It is also a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
Lithuania provides special incentives to strategic investors. The criteria by which the national government or a municipality designates a strategic investor vary from project to project. In general, the national government requires that a strategic investor invest 50 million USD or more. Municipalities may tie the designation criteria to additional or other factors, such as the number of jobs created and the environmental benefits that accrue. Strategic investors' rewards include special business conditions, such as favorable tax incentives for up to ten years. Significant tax incentives apply to foreign investments made before 1997. Municipalities may grant special incentives to induce investments in municipal infrastructure, manufacturing, and services. The government intends to publish a long-delayed national investment strategy in 2010 which should expand the array of incentives provided to potential investors.
Government Resolution No. 918 of July 15, 2003 requires offset agreements as a condition for awarding contracts to procure military equipment valued at more than LTL 5 million (USD 2 million). Offsets are obligations the government imposes that require companies to provide services, create jobs, or purchase local goods as a condition for the contract's award. Bidders can negotiate the exact terms of the offset agreement with the government.
Foreign investors have the same rights as local firms to participate in government-financed and -subsidized research and development (R&D) programs.
There are no requirements for local content or purchasing from local sources as a condition for investment or public purchases. Municipalities may ask investors to develop roadways or other infrastructure adjoining their project, but such proposals are subject to negotiation. Lithuania's EU membership has given foreign firms the additional right to appeal adverse governmental rulings to the European Court of Justice. Lithuania's "Law on Public Procurement," which came into effect on March 1, 2003, is in accordance with the EU's acquis communautaire.
Some foreign investors, including U.S. citizens, report difficulties in obtaining and renewing residency permits. U.S. citizens can stay in Lithuania no more than 90 days without a visa (and no more than 90 days in any six-month period). Those who stay longer face fines and deportation. In principle, Lithuanian embassies and consulates abroad are able to assist by reviewing documentation required for a permit. However, foreigners may actually submit residency permit applications only after they arrive in Lithuania. By law, the Migration Department is allowed six months to issue U.S. citizens residence permits, but in recent years they have done so in less than three months, on average. This timing does not include processing for work permits or other documentation, which must be started before applying for a residence permit. Documentary requirements are extensive and change frequently. In addition, dependents of those who hold residency permits for less than two years are barred from receiving a residency permit, unless the permit holder earns a salary more than three times the monthly average, is coming to teach at a high level educational institution or is under an exchange program recognized by Lithuania, or who is investing in Lithuania. Other exemptions may apply. The Embassy recommends that those applying for residency permits, who intend to reside in Lithuania with dependents, investigate the ability of their dependents to obtain derivative residency permits. The Embassy is aware of cases where American citizens were asked to leave Lithuania solely because their application for a residence permit was not processed within the 90 days for which they were initially admitted.
Right to Private Ownership and Establishment
Foreign and domestic private entities have the right to establish, acquire, and dispose of interests in business enterprises. The laws of the Republic of Lithuania protect rights and legal interests of both domestic and foreign investors. Lithuania has privatized most state run enterprises. Where state-owned companies and private companies compete for public or private contracts, they do so on legally equal terms.
The Law on Investments describes the basic principles defining the treatment of foreign investments in Lithuania. Foreign investors have the same rights and obligations relating to commercial activities as local investors. They have the right to transfer profit (income) owned as private property without any restrictions after paying taxes. Generally, foreign investors have free access to all sectors of the economy. However, Lithuanian law prohibits investment of capital of foreign origin in sectors relating to security and defense of the State. Lithuania introduced a law restricting monopolies in 1993.
Protection of Property Rights
Lithuanian law protects foreign investments and the rights of investors in several ways.
Lithuania's commercial laws conform to EU requirements, and include the principles of the free establishment of companies, protection of shareholders' and creditors' rights, free access to information, and registration procedures. These laws include the following: the "Company Law" and "Law on Partnerships" (last modified January 1, 2004), the "Law on Personal Enterprises" (January 1, 2004), the "Law on Investments" (1999), the "Law on Bankruptcy of Enterprises" (2001), and the "Law on Restructuring of Enterprises" (2001).
The Civil Code of 2000 governs commercial guarantees and security instruments. It provides for the following types of guarantee and security instruments to secure fulfillment of contractual obligations: forfeiture, surety, guarantee, earnest money, pledge, and mortgage.
Lithuania joined the World Intellectual Property Organization (WIPO) in 2002 and the World Trade Organization (WTO) in 2001. Lithuania, as a member of the EU, has ratified WIPO's Internet treaties (Copyright Treaty and the Performances and Phonograms Treaty) as listed below. It is also a signatory to the following IPR-related treaties and conventions:
Lithuania enacted regulations in 2002 to protect confidential test data that pharmaceutical firms submit for patent and trademark registration. Following EU accession, Lithuania extended protection to member states' trademarks, designs, and applications. Lithuania brought its national law protecting biological inventions into compliance with EU Directive 98/44 in June 2005. In recent years, Lithuania has significantly improved IPR protection and in 2008 it was removed from the Special 301 Watch List. Lithuania's parliament amended the country's Copyright Law in October 2006, bringing it into line with the EU's copyright directive.
Transparency of the Regulatory System
The World Bank's "Doing Business" survey, which evaluates the ease of doing business in 181 economies according to ten criteria, gave generally high marks to Lithuania, ranking it 26th in 2010 (out of 183 countries ranked). Lithuania scored especially high in the categories of "registering property" (fourth) and "enforcing contracts" (seventeenth). It did less well in the categories of "employing workers" (19th) and "protecting investors" (93rd). According to this report, registering a company takes approximately 26 days and requires seven procedures.
The legal system of the Republic of Lithuania recognizes generally accepted principles of the legal regulation of investments and subjects both Lithuanian and foreign investors to equal business conditions.
Red tape remains a problem. Local business leaders complain that bureaucratic procedures often are not user-friendly and that the interpretation of regulations is too often inconsistent and unclear.
Businesses and private individuals complain of corruption, including in the process of awarding government contracts and the granting of licenses and permits.
Businesses also complain that they have little opportunity to influence new legislation and that new legislation sometimes appears with little advance notice. Modern technology, however, may alleviate this problem: the parliament's website contains all draft laws currently before it. Ministries also post many, but not all, draft laws under consideration.
In 2009 the GOL changed the corporate income tax rate to 20 percent (on January 1, 2010 it was changed back to 15%), personal income tax to 21 percent (earlier 24 percent) and value added tax to 21 percent (earlier 18 percent). The GOL also eliminated most VAT exemptions at this time, excepting pharmaceutical products, heating utility services and non-periodical publications. In 2006, the GOL introduced an annual real estate tax ranging from 0.3 percent to one percent of the market value of a property. Municipalities are given a right to determine the exact rate, on real estate owned by individuals but used for commercial purposes. In practice, this tax is usually set at a one percent level.
Efficient Capital Markets and Portfolio Investment
Government policies do not interfere with the free flow of financial resources or allocation of credit. In 1994, Lithuania accepted the requirements of Article VIII of the Articles of Agreement of the International Monetary Fund to liberalize all current payments and to establish non-discriminatory currency agreements. Lithuania ensures free movement of capital and does not plan to impose any restrictions. The government imposes no restrictions on credits related to commercial transactions or the provision of services, nor on financial loans and credits. There are no restrictions on non-residents opening accounts with commercial banks.
The banking system is stable, well-regulated and conforms to EU standards. Currently there are 9 commercial banks holding a license from the Bank of Lithuania, 8 foreign bank branches, one financial institution controlled by EU licensed foreign banks providing services with an established branch, 5 foreign banks representative offices, the Central Credit Union of Lithuania and 67 credit unions. 209 EU banks provide cross-border services in Lithuania without a branch operating in the country, and 2 financial institutions controlled by EU licensed foreign banks providing services without a branch. Following the completion of the bank privatization process in 2002, the share of banking capital held by foreign investors increased to 90 percent. Nearly all foreign banks are under German or Scandinavian control. As of September 30, 2009 the total assets of major Lithuanian banks were:
There is no restriction on portfolio investment. The right of ownership to shares acquired through automatically matched trades is transferred on the third working day following the conclusion of the transaction. The Vilnius Stock Exchange is part of the OMX group of exchanges and offers access to 80 percent of all securities trading in the Nordic and Baltic marketplace. OMX is owned by the U.S. firm NASDAQ and the Dubai Bourse.
Three authorities supervise financial markets. The Bank of Lithuania supervises commercial banks and credit unions, the Securities Commission supervises the securities market, and the Insurance Supervisory Commission supervises insurance companies. The law requires these institutions to cooperate with appropriate EU authorities.
Lithuanian law does not regulate hostile takeovers.
Competition from State Owned Companies
According to Lithuanian law state companies have no privileges in conducting business and competing for supply and/or project implementation contracts. The embassy has no records of complaints from either foreign or domestic companies regarding cases of state companies exercising superiority in competing for business.
Corporate Social Responsibility
Although Lithuania’s high private sector contribution to GDP evidences the existence of a strong private sector, the concept of Corporate Social Responsibility (CSR) is not very widely known in Lithuania, especially in rural areas where there is little or no foreign investment. The understanding of the concept is frequently linked to philanthropy, rather than partnership. The private sector appears more interested in its own business affairs rather than displaying a real commitment to social issues.
There are, however, an increasing number of important private-public partnerships, as well as social projects, where the private sector is involved including volunteerism, restoration, and scholarships. Furthermore, successful participation in the European Union market will require high standards of CSR. Foreign investors in Lithuania have played a very important role in promoting CSR. In 2009, the government developed and approved a National Corporate Social Responsibility Development Program for 2009-2013 aimed at promoting CSR. Also, in the past few years there has been a growing interest from both government and NGOs alike in promoting CSR values by organizing competitions and awards ceremonies such as the Social and Labor Ministry’s annual Socially Responsible Business Awards Ceremony, Confederation of Industrialists’ Awards and others.
Lithuania has not witnessed any incidents involving politically motivated damage to projects and/or installations. There are no nascent insurrections, belligerent neighbors, or other politically-motivated violence.
There is a general perception in Lithuanian society that corruption, especially on lower levels, is common. More than 50 governmental institutions regulate commerce in one way or another, creating plenty of opportunities for corrupt practices.
Large foreign investors report few problems with corruption. On the contrary, most large investors report that high-level officials are often very helpful in solving problems fairly. In general, foreign investors say that corruption is not a significant obstacle to doing business in Lithuania and describe most of the bureaucrats they deal with in Lithuania as reasonable and fair.
Small and medium enterprises (SME) perceive themselves as more vulnerable to petty bureaucrats and commonly complain about extortion. SMEs often complain that excessive red tape virtually requires the payment of "grease money" to obtain permits promptly. Business owners maintain that some government officials, on the other hand, view SMEs as likely tax-cheats and smugglers, and treat the owners and managers accordingly.
Paying or accepting a bribe is a criminal act. Lithuania established in 1997 the Special Investigation Service (Specialiuju Tyrimu Tarnyba) specifically to fight public sector corruption. The agency investigates approximately 100 cases of alleged corruption every year, but has yet to bring charges against high-level officials for corrupt practices. Lithuania ratified the UN Convention Against Corruption in December 2006. Lithuania also hosts a representative office of Transparency International (TI). TI ranked Lithuania 52nd in its 2009 Perceptions of Corruption Index with a score of 4.9. (TI considers countries with a score below 5.0 to have serious problems with corruption.) Police, medical personnel and local government, among others, were cited by TI as prone to corruption.
Bilateral Investment Agreements
Lithuania joined the European Union on May 1, 2004. In doing so, it joined all EU trade agreements with third countries and international organizations. Lithuania also delegated its international trade policy function to the EU Council and the European Commission. As a consequence, Lithuania had to revoke all of its bilateral free trade agreements signed before its accession to the EU.
The United States and Lithuania have signed and ratified the following agreements and treaties:
OPIC and Other Investment Insurance Programs
Coverage from the Overseas Private Investment Corporation (OPIC) is available for U.S. investments in Lithuania. Lithuania is a member of the Multilateral Investment Guarantee Agency (MIGA). Lithuania's fully convertible currency, the litas, is pegged to the euro and its exchange rate against the U.S. dollar fluctuates on a daily basis. On January 6, 2010, the exchange rate was 1 USD = 2.389 LTL. Lithuania plans to adopt the euro, but is unlikely to meet the Euro Zone's entry requirements until 2014, at the earliest.
Lithuanian labor is inexpensive compared with Western Europe. However employment regulations are often stricter than those in other EU countries according to some foreign investors.
By law, white-collar workers have a 40-hour workweek. Blue- collar workers have a 48-hour workweek with premium pay for overtime. There are minimum legal health and safety standards for the workplace. However, worker complaints indicate that employers do not always observe these standards. Lithuania is a member of International Labor Organization (ILO) and adheres to its conventions.
The government adjusts the monthly minimum wage regularly. At the end of 2009, Lithuania's minimum monthly wage was 335 USD. The average monthly wage was approximately 741 USD in 2009. Average salaries decreased by approximately 6.1 percent in 2009 compared to 2008.
Membership in the EU, and the consequent ability of Lithuanians to work legally in EU countries, generated, in the past, a sizable outflow of labor causing a shortage of skilled construction workers, truck drivers, shop assistants, medical nurses, and medical specialists. This outflow led in the past to extremely low (4.3 percent) unemployment compared with other EU members. However, the current slowdown in the global and local economy has resulted in a sizeable increase in unemployment. Lithuania's registered unemployment in the third quarter of 2009 was 13.8 percent. Experts predict that in 2010 unemployment may reach 16 percent.
Lithuania's management-labor relations are good. Labor unions are not considered influential in Lithuania, according to some foreign investors. There have been no major strikes or labor disruptions since the country's independence in 1991.
Some business leaders claim that the 2002 Labor Law lacks flexibility and increases the cost of production by making it harder to hire and fire labor. This is a particular complaint of businesses that experience seasonal fluctuations in labor needs.
Lithuania has one of the best-educated workforces in Central and Eastern Europe. The percentage of the Lithuanian population with higher education is two times higher than the EU-15 average and is also the highest in the Baltic States. Lithuania is one of the five EU members with the highest percentage of people speaking at least one foreign language. Ninety percent of Lithuanians can speak at least one other language – mostly Russian, English and Polish – apart from their mother tongue.
Hi-tech studies are currently among the top choices at the universities of Lithuania. Major Lithuanian companies specializing in knowledge driven sectors of industry, such as the information and telecommunications sector, biotechnology, laser technology, etc., cooperate closely with the leading Lithuanian technological universities, which provide the companies with R&D services and offer students specialized on-the-job training programs. In this way companies are able to attract a large number of qualified specialists for both local and international projects.
Foreign Trade Zones/Free Ports
Lithuania has two Free Economic Zones (FEZs): one in Klaipeda, the country's largest seaport, and one in Kaunas, an air, road, and rail hub. There are currently 13 businesses operating in the Klaipeda FEZ, and eight investors in the Kaunas FEZ.
Lithuania's EU accession agreement permits the indefinite operation of existing FEZs, but precludes the establishment of new ones. Foreign firms operating in the FEZs have the same opportunities and benefits as local companies.
Companies operating within the zones enjoy:
Foreign Direct Investment (FDI) Statistics
The United States is the eleventh largest investor in Lithuania. American investments (stock) totaled 438 million USD (Q4, 2009), accounting for approximately 2.5 percent of total FDI in Lithuania. There are about 113 U.S. companies doing business in Lithuania, and about 500 U.S. companies have representatives in the country. The largest U.S. investors include Philip Morris, Kraft Foods, Mars Incorporated, and Paulius and Associates.
On October 1, 2009 Lithuania’s total FDI was 14.3 billion USD. Sweden is the largest foreign investor in Lithuania. 78 percent of FDI stock in Lithuania comes from EU countries. Investment from EU countries reached about 14.2 billion USD as of the third quarter of 2009. 26 percent of the FDI was invested in the manufacturing sector, 15 percent in real estate, 14.3 percent in financial intermediation, 13.8 percent in the refining and chemical industry, and 13 percent in wholesale and retail.
As of October 1, 2009 the countries with the most foreign investment in Lithuania were:
[Source: Lithuanian Department of Statistics.]
In 2008 FDI stock as a percentage of GDP was 31.9 percent and 5.9 percent FDI inflow as a percentage of GDP.
The largest investors in Lithuania include (estimated figures by the firms themselves):
Lithuanian businesses are expanding abroad, with investments (as of January 1, 2009) totaling 2 billion USD. Investments into real estate make up 38 percent of total Lithuanian investments abroad, followed by financial intermediation (19 percent), processing industries (16 percent), wholesale and retail (12 percent) and transport and logistics (6 percent).
The top destinations for Lithuania's investments abroad are:
[Source: Lithuanian Department of Statistics.]