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Investor's Legal Brief, April 2019

  • Lithuania
  • Other

10-05-2019

1.    The Seimas was suggested to introduce quotas for foreigners arriving in Lithuania
In April, the Government of the Republic of Lithuania proposed to the Seimas to adopt a law that would legitimize the introduction of quotas for foreigners coming from third countries to work in Lithuania. The draft law proposes that the quota be established annually by the head of the Employment Service, who is also responsible for list of the shortage occupations in the labour market of the Republic of Lithuania.
According to the explanatory writ accompanying the project, the quotas apply only to foreigners who are not subject to the assessment of compliance with the labour market needs of Lithuania - no work permit is required and no decision of the Employment Service regarding the compliance of the work of a foreigner with the needs of the Lithuanian labour market is accepted - when they come to work under the occupation included in the list of the shortage occupations in the Republic of Lithuania labour market by kind of economic activity. In other words, if a person comes to Lithuania to pursue an activity listed as a shortage occupation and is dismissed from the obligation to obtain a work permit or does not need to accept the Employment Office's decision on compliance, the number of such foreigners will be set. However, this does not mean that after the quota is exhausted, foreigners will no longer be admitted to Lithuania - after the quota has been exhausted, these foreigners will be subject to the general procedure - labour market test, i.e. will be required to receive the employment service document confirming the right to work in Lithuania.
The decision will have the greatest impact on companies employing foreigners to work as builders, concrete workers, scaffold builders, plasterers, insulators (construction), welders, metal shipbuilders, electricians, butchers, slaughterers, tailors (industry) and international freight transport drivers (services), as these were the shortage occupations in Lithuania in 1st quarter of 2019.
Under the current regulation, quotas for foreigners are not set and applied. It is proposed that the first quota is to be set for 2021, but it is proposed to exclude the highly qualified workers from this quota. In addition, the quota amount may be amended once a year.

2.    The Ministry of Economy and Innovation proposes to define the concept of a start-up by law
The Government approved amendments to the Law on the Development of Small and Medium-Sized Enterprises (SMEs) by the Ministry of Economic Affairs and Innovation, which define the concept of "start-up". Currently there are no “start-up” concepts in Lithuanian legislation.
According to the proposed definition, a start-up would be perceived as a very small or small enterprise with a large and innovation-based business development potential, operating for a maximum of 5 years. Meanwhile, as the Project Explanatory writ states, “A large and innovation-based business development potential can be measured by the following criteria:
The real product or service market size that ensures (Serviceable obtainable market) continuous and long-term growth. For example, SaaS (Software as a service) may be available anywhere in the world, at any time of the day, 365 days a year from anywhere in the world;

The product or service can be produced (provided) many times without the use of additional production resources, for example, once created, the software can be sold many times without any additional production costs, or the licensed technology license can be granted to multiple users multiple times;
The development plan is realistic, and the business model, along with the team's competencies, allows small and small businesses, employees, or turnover to grow by at least 20 percent a year. ”
As it is stated in the press release by the Minister of Economy and Innovation Virginijus Sinkevičius, "The definition of a start-up by law will allow further strengthening one of the priority areas of the country's economy - start-up. Last year, by the Ministry of Economy and Innovation 11 million euros of European Union investment has been allocated to start-ups, venture capital funds have reached 30 million, as well as the emergence of the Accelerator Fund, which will provide more access to funding for early stage starters, is a crucial step for the ecosystem. In the event of a start-up definition, more business environment improvement solutions will be provided this year.”

3.    The Ministry of Economy and Innovation increases the attractiveness of option taxation
The Ministry of Economic Affairs and Innovation (Ministry) has submitted a draft amendment to the Law on Personal Income Tax, which provides with a tax benefit for employees who have retained the shares of the company acquired through options for more than three years. As stated in the Ministry press release, the change will significantly contribute to the creation and improvement of business conditions in the country for start-ups who seek to retain and motivate employees to pay part of their salary with options.
An option is a financial instrument that gives the employee the right to acquire, at a predetermined price, the shares of the company in which he is employed, or to sell the shares he has acquired (pre-acquired) at an agreed price, and the employer has an obligation to sell or buy those shares.
The draft amendment to the Personal Income Tax Act proposed by the Ministry foresees that the employee's benefit from the option will not be subject to personal income tax at the earliest 3 years after the grant of the option.
As Minister V. Sinkevičius points out, “Start-ups at the start of their activities do not have enough money to start a business and to pay competitive salaries, so the alternative is to give company shares to employees, and a more favourable option taxation will allow young, as well as large, companies to motivate existing employees and attract new ones. This solution will make it easier for the early-stage start-ups who need the best specialists to improve the product at the start of their business, but the available capital is very limited. International practice shows that options are often a way out.”
This project will be submitted to the Seimas for consideration.

4.    Reducing obstacles to attract talents from abroad
In Lithuania, the “Startup Employee Visa” procedure is being introduced, allowing to attract, retain and help integrate foreigners in Lithuania. The aim of this procedure is to reduce the obstacles of entering Lithuania for highly qualified specialists whose qualifications are necessary for start-ups in Lithuania.
So far the project is not running and is only at the stage of agreement. As stated in the press release of the Ministry of Economy and Innovation, the Ministry of the Interior of the Republic of Lithuania, the Ministry of Economy and Innovation and the Migration Department signed a memorandum by which the Ministry of the Interior of the Republic of Lithuania and the Migration Department committed to ensure a one-stop-shop for all services related to the start-up employees’ temporary residence permits in Lithuania.  This means that documents for temporary residence permits in Lithuania will be provided in one institution - the Migration Department, where services will be provided in at least two foreign languages (English and Russian), and the documents of the participant of the "Startup Employee Visa" procedure will be examined as a priority in the shortest possible term.
This is not the first initiative to improve the start-up ecosystem. For some time now, Lithuania has a “Startup Visa” program that allows foreigners to handle all procedures in the Migration Department much faster and easier. Its aim is to attract start-up investments to Lithuania and to ensure smoother resettlement procedures. During the first quarter of this year, 18 start-ups from abroad were established in Lithuania thanks to this program, i.e. three times more than in the same period last year.
It is also planned that this year a fast-track start-up procedure for start-ups shortlisted in the Lithuanian accelerators will be launched and accelerated.

5.    The Government approved the legalization of the status of an foreigners electronic resident
The Government approved the amendments to the Law on the Legal Status of Foreigners submitted by the Ministry of the Interior, which provides the foreigners who do not have a residence permit in Lithuania with a possibility to acquire the status of an electronic resident (e-resident). This status would allow a foreigner to use electronic public, administrative and commercial services provided in Lithuania and would contribute to a more favourable environment for business development in Lithuania as well as the development of electronically supplied services.

The project foresees that foreigner’s request to acquire e-resident status would be provided to the Migration Department through an external service provider or directly in the department. Submitting an application to an external service provider would be essentially the same as in the case of issuing visas, as such a mechanism is well-established and successful. In order to make the service attractive, it is suggested that the procedure for granting the e-resident status would be simple and quick.
As stated in the Government's press release, amendments to the Law also propose the establishment of a unified foreigner registration mechanism - all foreigners with interests or obligations in Lithuania would be registered in the Foreigners’ Register. Foreigners in this register would be given a unique foreigner identity code. According to the current legal regulation, some foreigners who are not listed in the database of the Foreigners Register but use services in Lithuania are separately registered in other registers or information systems.
Ensuring the identification and validation of foreigners whose data are processed in Lithuanian registers and information systems would avoid any duplication of data, inaccurate or erroneous data processing and would reduce the administrative burden on the authorities handling foreigner data.
It is proposed that this amendment would enter into force as of 1st of January in 2021. However, this amendment has to be prior approved by the Seimas.

6.    European Commission has approved €385 million support for production of electricity from renewable sources in Lithuania

On 23rd of April 2019 The European Commission has approved the new Green Energy Promotion Scheme developed by Lithuania in accordance with EU state aid rules, which has been applied since 5th of May 2019. The main criterion of the new support mechanism is the technologically neutral auctions. It means, that in such auctions the participation will be allowed for power plants using various renewable energy technologies for, i.e. solar, wind, hydropower and biomass.
However, only new production facilities will be able to participate in auctions. The auction application should be made before the start of operation of the production facilities from a particular renewable energy source (i.e., the project will not be able to have a permit for the development of the already issued capacity and the conditions of pre-connection to the electricity grid).
The most important criterion that will determine the winners of the new auctions is the smallest addition to the electricity market price on the ‘Nordpool’ stock exchange, which will be paid for 12 years. The model will be financed by a service fee regarding the public interests.
The winning manufacturer will have to pay the cost of connecting to the grid, and manufacturers developing power plants over 500 kW will have to assume responsibility for balancing. The auctioneer will have to trade on the stock exchange on its own or sell the energy produced based on bilateral agreements, and if the energy is not produced or it is produced less than 80% of the set amount of electricity to be produced, the producer may be fined.
The new auctions will also be open to electricity producers from other EU countries that have a direct connection with Lithuania and are committed to opening up part of their support to Lithuanian companies. Producers in other countries will be able to compete for a certain share of the total quota to be allocated.
This model of support for renewable energy chosen by Lithuania aims to encourage producers to operate under the market conditions. As the price of green technologies diminishes, the support is gradually reduced and the producer's own responsibilities gradually increase, including the financial and productive ones.
The first auction is planned to be announced on 2 September 2019 when the 0.3 TWh quota will be allocated. After the announcement of the first auction the schedule of auctions for the next three years shall be approved.

7.    17 managers of certain companies may face a responsibility for cartels
According to the data published by the Competition Council of the Republic of Lithuania, 17 managers of companies may face the responsibility for cartel agreements concluded by their companies. The Competition Council asks to punish these persons by restricting the right to hold managerial positions in the public or private sector and to impose fines.
According to the information published by the Competition Council, this year the Competition Council sent to the Vilnius Regional Administrative Court requests for sanctions to 12 persons. These individuals have led the companies that have been recognized as having committed cartels and infringed the competition law. The final decision of the Supreme Administrative Court of Lithuania this year is awaited for the personal responsibility of 5 leaders.
As announced earlier, managers of 3 construction companies have already been restricted to hold any managerial power for 4 years. These restrictions are currently valid. It should also be noted that one of the aforementioned persons was fined EUR 498 by the Vilnius Regional Administrative Court for non-fulfilment of the legal obligation.
It should be noted that the sanctions for company managers were foreseen in the 2011 edition of the Competition Law. Thus, bringing corporate executives to account shows the new approach of the Competition Council to the imposition of sanctions, i.e. that from now on, violations of competition law will not only be the responsibility of companies, but also of their managers contributing to these violations.

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