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Lithuania set to expand residential real estate tax payers’ base

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Ramūnas Karbauskis, the leader of Lithuania’s ruling LFGU

Linas Jegelevičius for the BNN

With the economy prospects for the new year looking bleaker, the Lithuanian government is scrambling to find new ways to prevent a looming drought of state coffers. The Lithuanian legislature, Seimas, has revisited this week the idea of taxing polluting cars, real estate (RE) and bank assets.

Last month, Lithuanian lawmakers rejected the Cabinet’s initiatives on the taxes, but the ruling Lithuanian Peasants and Farmers (LFGU) – orchestrated Coalition drafted new bills and they have received initial backing.

Two taxes matter most

Understandably, most in Lithuania are concerned about the first two types of taxes, as they effect the majority of the population. The new polluting car tax bill stipulates a lower car pollution tax rate than the government’s previously suggested. Also, such tax would be paid only once during a vehicle’s initial registration in Lithuania and the tax would not apply once the car changed owners within the country.

With regards to the expansion of application of real estate tax, lawmakers proposed leaving a higher non-taxable real estate value than the government proposed as Ramūnas Karbauskis, the leader of the LFGU, suggests reducing that RE value from 220,000 to 150,000 euros, and not to 100,000 euros as the Cabinet wanted.

There are approximately 3 500 real estate tax payers in Lithuania. The taxable property now is from 220 000 euro and over.

Saulius Skvernelis, the Lithuanian Prime Minister, however, doubted if the proposed taxes will be effective in reducing pollution, and he also pondered that also affluent people will perhaps evade the real estate tax. Although the Government’s plans saw a backlash from all layers of the society, experts were mostly neither embracing nor rejecting the new tax initiatives.

Much chaos throughout

Approached by BNN, Žygimantas Mauricas, chief economist of Luminor bank, notes that the whole process of drafting such bills was «chaotic».

«There is a clear understanding that the state needs to collect more tax money – there are still unfulfilled promised to some professional groups like policemen, firemen and teachers; besides, the economy now looks more stagnant, but the efforts as to where collect the necessary money seem quite frantic,» he said.

According to him, the late submission of the tax bills with both the public and the Seimas devoid of time to have a good look into them signals the Government’s rush to find sources for additional budget revenues. The analyst believes that amid the state’s growing commitments, stalling tax collection and failure to resolve the public sector’s efficiency problem, Lithuania might focus on harnessing crisis instead of promoting economic growth.

The Lithuanian Finance Ministry estimates economic slowdown in the country over the next couple of years. Lithuania’s economy should grow 3.7 per cent this year, and slow to 2.4 percent next year and to 2.3 per cent in 2021-2022.

Threats to stability?

Some other experts have voiced concerns that the government’s inability to convince the country’s parliament on car and real estate taxes reflects a growing political turmoil in the country and may pose risks to the stability of public finances as it remains unclear how budget holes will be patched up at the very last minute. Marius Dubnikovas, a financial analyst from the Lithuanian Business Confederation, noted to Lithuania media tax proposals are presented in the parliament by «non-competent» people and decisions are made at the very last minute.

Real estate sector is booming

But some argue that the Government’s plans to expand the real estate tax base are logic.

 «Despite the ongoing talks about a looming downturn, there is a tangible frenzy in Palanga’s real estate market. We see particularly this year more emigrants returning to the resort town and looking for homes and/or apartments to settle here. There are many people who own several apartments and homes here. So taxing some property sounds logic perhaps. But I doubt if an expanded real estate tax can work wonders – it will hardly deter really affluent people from buying real estate unless the economy hits doldrums,» Regina Lingė, a real estate broker in the Lithuanian resort of Palanga, told BNN.

Others realtors in major Lithuanian cities have shared similar observations for Lithuanian media.

Investing in real estate still pays off

Echoing, Žilvinas Butkevičius, partner of M Capital, a real estate firm, says that investments in real estate still pay off. «Although many speak about a new crisis and its aftermaths, cheaper flats, students returning to live with their parents and so on, no one can say when exactly it will come.  A right-size flat in a right location still remains a good investment,» he told BNN.

According to him, the number of Lithuanians who own five flats has risen nearly 50 per cent over the couple of last years and the numbers of those who gained ownership to their third or fourth flat have risen too.

With local tax inspectorates struggling to oversee all the flat and home owners who rent their secondary or tertiary estate but tend to avoid paying the income tax, such a legislative initiative to expand the base of real estate tax payers is understandable from the point of view of the Government, the realtor believes.

More RE tax payers ahead

Meanwhile, Mindaugas Statulevičius, director of Lithuania’s Real Estate Expansion Association (LREEA), believes that, with the natural RE price increase in the future, the number of home owners who will fall in the category of taxable people – i.e. whose estates’ value reaches 150 000 euros – will inevitably grow. «So my prediction is that in the next two years the number of real estate tax payers will increase on its own. The Government is sending a clear sign that a real estate tax will be applied on every flat and/or home in the near future,» he said.

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