The heart of the dynamic crypto landscape, Vilnius, the capital of Lithuania, is now recognized as a vibrant hub for fintech innovation. Hosting a thriving community of fintech startups and attracting major international financial players, Lithuania distinguishes itself with business-oriented legislation and reasonable operational costs.
Since 2020, the country has swiftly emerged as a cryptocurrency-friendly pioneer, strategically establishing a regulatory framework that encourages transparent crypto businesses while effectively addressing concerns related to money laundering and terrorist financing. Substantial amendments to anti-money laundering (AML) and financial fraud countering (CTF) policies were implemented on November 1, 2022, underscoring Lithuania's commitment to fostering a secure and transparent crypto ecosystem.
The oversight of the Lithuanian financial market primarily falls under the purview of the Financial Crimes Investigation Service (FCIS) where crypto licensees are obliged to report to the FCIS for the purpose of ensuring compliance with anti-money laundering (AML) and financial fraud countering (CTF) measures. At the other hand, the Central Bank of Lithuania, known as the Bank of Lithuania, oversees financial market participants who’s also responsible for the issuance of crypto currency licenses. The Central Bank of Lithuania emphasizes the segregation of conventional financial and cryptocurrency operations. However, traditional market participants are permitted to engage in the circulation of virtual assets.
This move further solidifies Lithuania's commitment to ongoing transparency and sustainable growth within its crypto assets sector, affirming its status as a beacon for entrepreneurs seeking a secure and supportive environment for their fintech efforts.
Anti-Money Laundering and Counter-Terrorist Financing Law
The principal legal framework governing crypto assets activities in Lithuania is the Law of the Republic of Lithuania on the Prevention of Money Laundering and Terrorist Financing. This legislation has undergone amendments to encompass virtual currency exchange operators and deposit virtual currency wallet operators. The requirements took effect in November 2022 for new companies and in December 2022 for those already registered.
The list of major changes in AML Act includes:
Stringent Customer Identification: The legislative changes introduce more complex regulations for customer identification, emphasizing a heightened level of scrutiny.
- Ban on Anonymous Accounts: The updated regulation institutes a prohibition on the establishment of anonymous accounts, fostering greater transparency and accountability.
- Increased Authorized Capital: Crypto exchange operators are mandated to increase their authorized capital to a minimum of 125,000 euros, effective from January 1, 2023.
- Requirement of a Senior Manager: Crypto companies in Lithuania must now have a senior manager who is a permanent resident of the Republic of Lithuania, promoting enhanced communication with supervisory authorities and fostering closer ties with the local market.
- Public Disclosure of Companies and Commercial Register Oversight: Starting February 1, 2023, Registrų Centras publicly disclose a comprehensive list of companies operating as virtual currency exchange operators and virtual currency depository wallet operators, promoting transparency in the cryptocurrency service provider market. The Commercial Register (Registrų Centras) acts as the overseeing authority, ensuring compliance with formal requirements, including the deposit of initial capital and the presence of a local AML manager within the company structure.
- Unified Cryptocurrency License: The legislation introduces the provision for obtaining a unified cryptocurrency license in Lithuania: Virtual Currency Exchange Operator and Deposit Virtual Currency Wallet Operator.
For those seeking a more detailed exploration of the license and registration process in Lithuania, we have already crafted a comprehensive article.
- Shift in AML Manager Requirement: Instead of MLRO and a non-local AML manager, VASP is now required to have a local AML manager specifically working within a single crypto asset company.
- Heightened Requirements for Reputation: The revised legislation introduces heightened requirements for the reputation of directors and ultimate beneficial owners (UBO).
Obligations Imposed on Crypto Companies
To secure specialized authorization from the Financial Crimes Investigation Service (FCIS) for engaging in cryptocurrency exchange and storage services, applicant companies must develop:
- Criteria for evaluating customer and individual transaction risks
- KYC documentation (Know Your Client) /AML (Anti-Money Laundering criteria), where AML/KYC documentation includes:
- Overview of high-risk transactions, encompassing those involving client communication and location – establishing requirements and protocols for executing and monitoring such transactions
- Overview of lower-risk operations – specifying requirements and procedures for such transactions
- Guidelines for storing transaction and customer data
- Compliance with regulatory requirements for reporting suspicious transactions or activities to the regulatory body
- Procedural guidelines, where security measures within procedures include:
- Risk classification
- Evaluation of risks
- Implementation of due diligence measures
- Verification of fund and transaction origins
- Internal auditing and adherence to obligations for reporting suspicious transactions to regulatory authorities
Obligations Imposed on Crypto Companies
In Lithuania, despite the absence of a dedicated crypto taxation framework, the State Tax Inspectorate oversees the taxation of cryptocurrency exchange and wallet services. Taxable activities encompass mining, initial coin offerings, buying, selling, mediation and settlements for goods or services.
The company's tax obligations hinge on the nature of its crypto activities and may include:
- Corporate Income Tax (CIT): Levied at a rate of 15%, CIT applies to profits generated from crypto-related ventures.
- Value Added Tax (VAT): At a rate of 21%, VAT may be applicable to certain crypto transactions depending on their nature.
- State Social Insurance (SSI): Ranging from 21%, SSI may be imposed based on the company's crypto activities and structure.
- Withholding Tax (WHT): At a rate of 15%, WHT could be relevant, acting as a synonym for crypto-related taxation, particularly in transactions involving dividends or interest payments.
Promotion and Testing
Lithuania has expressed a keen interest in attracting FinTech enterprises, fostering the advancement and implementation of innovative products leveraging distributed ledger technology within the financial sector and enhancing regulatory standards.
In response to the initiative, the Bank of Lithuania issued a call for proposals, resulting in the successful launch of LBChain, a groundbreaking blockchain sandbox. Described as the world's first of its kind, LBChain was developed by a financial market regulator, combining regulatory and technological infrastructures. This platform provides FinTech companies with a controlled environment to test and refine their business solutions. Aimed at addressing the essential needs of FinTechs and start-ups, LBChain offers opportunities for gaining knowledge, conducting blockchain-oriented research, testing and adapting services. Recognizing the common challenges faced by start-ups, such as limited knowledge of the financial ecosystem, legal complexities and regulatory frameworks, the Bank of Lithuania designed LBChain to be a comprehensive solution.
LBChain offers:
- A cutting-edge technological testing platform based on Hyperledger Fabric/Corda.
- Regulatory support from the Bank of Lithuania.
- Technological guidance from leading blockchain integrators.
- A cost-efficient and low-risk pathway to innovation.
- Several innovative solutions have been successfully tested through LBChain, including a know-your-customer solution for anti-money laundering compliance, cross-border payments, a smart contract for factoring, a mobile point of sale and payment card solution, an unlisted share trading platform, a crowdfunding platform and payment tokens.
Even during its development stages, LBChain attracted participation from 11 FinTech start-ups across eight countries, testing over 10 diverse products and services. The platform's potential was underscored in 2020 when it secured victory in the national round of the World Summit Awards in the category of "Government and citizen engagement." This recognition serves as a testament to the positive impact and innovative strides made by LBChain in fostering FinTech development and engagement on both a national and global scale.
Taxation
In Lithuania, despite the absence of a dedicated crypto taxation framework, the State Tax Inspectorate oversees the taxation of cryptocurrency exchange and wallet services. Taxable activities encompass mining, initial coin offerings, buying, selling, mediation and settlements for goods or services.
The company's tax obligations hinge on the nature of its crypto activities and may include:
- Corporate Income Tax (CIT): Levied at a rate of 15%, CIT applies to profits generated from crypto-related ventures.
- Value Added Tax (VAT): At a rate of 21%, VAT may be applicable to certain crypto transactions depending on their nature.
- State Social Insurance (SSI): Ranging from 21%, SSI may be imposed based on the company's crypto activities and structure.
- Withholding Tax (WHT): At a rate of 15%, WHT could be relevant, acting as a synonym for crypto-related taxation, particularly in transactions involving dividends or interest payments.
Corporate Income Tax
The tax is applied to revenues generated by Lithuanian crypto companies and its scope varies based on the residence status of the company.
For resident crypto companies, Corporate Income Tax is levied on both domestic and international income. Non-resident crypto companies, however, are only taxed on income sourced within Lithuania, such as through permanent establishments in the country.
Importantly, income derived from economic activities conducted by a Lithuanian tax resident through permanent establishments in EEA countries or those with double taxation agreements with Lithuania may be exempt, provided equivalent taxes are paid in those jurisdictions.
In the realm of Corporate Income Tax, cryptocurrencies are recognized as short-term assets, used for transactions or held for sale. Notably, companies meeting specific criteria, such as having fewer than 10 employees and an income below 300,000 EUR, enjoy favorable tax rates, starting at 0% for the first period and 5% subsequently.
Value Added Tax (VAT)
A crypto company is required to register as a VAT payer if its taxable annual turnover exceeds 45,000 EUR and it supplies taxable products or services in Lithuania.
The definition of cryptocurrencies for VAT purposes categorizes them as an alternative means of payment, subjecting them to rules akin to fiat money. All crypto transactions are treated as financial transactions and specific VAT rules apply:
- Revenues from cryptocurrency exchange services are VAT-exempt, aligning with the treatment of fiat money.
- Tokens issued during Initial Coin Offerings (ICOs) are VAT-exempt, treated akin to the issuance of shares.
- Mining activities are generally exempt from VAT unless a supplier-client relationship exists, involving payment for products or services supplied in Lithuania.
- Sales of crypto-related services, such as paid referrals on platforms, are subject to VAT, ensuring compliance with established tax regulations.
Next Steps
- Market in Crypto Assets Regulation (MiCAR)
Lithuania has embraced a forward-thinking stance in overseeing activities linked to virtual currencies. Beyond incorporating the 5th Anti-Money Laundering (AML) Directive into its legal framework, the country has implemented more rigorous national standards governing Virtual Asset Service Providers (VASPs). This proactive approach in amending national laws aims to enhance the regulation of the cryptocurrency sector promptly, without reliance on the eventual implementation of the Markets in Crypto-Assets Regulation (MiCA).
- Travel Rule
Effective from January 1, 2025, Virtual Asset Service Providers (VASPs) will also be mandated to enforce the Travel Rule, necessitating the collection, retention and transmission of specific transaction and customer details to the VASP or financial institution receiving the transaction. The VASP itself is prohibited from accepting a transaction from another VASP that fails to meet the obligation of transmitting the requisite information.
Non-compliance with these obligations may lead to penalties and legal ramifications. It is imperative for VASPs to comprehend and adhere to the regulations pertaining to Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT), updating their compliance procedures regularly to align with the evolving regulatory framework.
Conclusion
As the crypto regulatory landscape undergoes constant transformation, businesses operating in Lithuania face the challenge of navigating this dynamic environment. Our highly experienced and trusted consultants stand ready to provide tailored support for registering with the Commercial Register and obtaining a crypto license in Lithuania. We closely monitor local regulations and are well-prepared to guide our clients through every stage of the registration process efficiently.
Note: This text is the sole work of the author and does not bind BlockReg Advisors Ltd. nor does it constitute legal advice. All rights reserved.
