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In 2018, the Lithuania Ministry of Finance issued ICO guidelines that reiterated the differentiated approach to cryptocurrencies adopted by the Bank of Lithuania in 2017. The guidelines stated that there is no single piece of legislation that governs cryptocurrencies and cryptoassets. Applicable laws will depend on the nature of particular cryptocurrencies, their purpose, and their potential utilization.

I. Introduction

In 2017, the Bank of Lithuania adopted a definition of virtual currency similar to that of the European Banking Authority. It states that “virtual currency shall mean ungoverned and unregulated digital money, which may be used as a means of payment, but is issued into circulation and guaranteed by an institution other than the central bank.”[1] According to the Bank, virtual currencies can serve various purposes and have various forms, including as a means of payment, accumulation of saving, and as a tool for investments (including derivatives, commodities, or securities).[2]

In 2018, the Ministry of Finance of Lithuania issued guidelines on initial coin offerings (ICO Guidelines) with an aim of providing more certainty and transparency regarding the regulatory, taxation, accounting, and other requirements, as well as better cooperation between different stakeholders.[3]

According to the Guidelines, organizing an ICO is not regulated by specific legislation. However, taking into account different ICO models and different characteristics of tokens, in some cases such an activity may be subject to the requirements of certain legislation and to the supervision of the Bank of Lithuania.[4]

Various provisions of Lithuanian legislation could apply depending on the conditions of the ICO issue and the rights acquired in the process of the issuance of tokens.

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II. Financial Regulation and Consumer Protection

According to the Guidelines, only entities that are planning to provide regulated financial services and/or projects that release tokens that have the characteristics of securities will be under the scrutiny of Bank of Lithuania.

A Financial Market Participant (FMP) can provide services associated with virtual currencies provided there is proper separation of the services by the FMP. According to the Guidelines and the position of the Bank of Lithuania, FMPs must ensure that their regulated financial services, including their name, brands, domain, and other corporate attributes, including managed environment (website, platform, mobile application, online account, etc.) or other elements are not linked to services associated with virtual currencies. 

FMPs should ensure compliance with the requirements of anti-money laundering and counter- financing of terrorism (AML/CFT) legislation, and take appropriate measures to manage the risks associated with of money laundering and terrorist financing.[5]

As noted above, the intent and the character of tokens issued through an ICO process determine the applicable legislation. This differentiated approach was set forward in the position of the Bank of Lithuania concerning ICOs and reiterated in the Ministry of Finance guidelines. The ICO Guidelines provide for two types of ICO based on their purpose:

• ICOs that do not grant profits or governing rights

If an ICO grants a right to use a product or service then the provisions of the Civil Code would apply. When ICOs are used as a payment instrument or are considered to be a charity, the AML/CFT legislation would apply.[6]

• ICOs that grant profits or governing rights

If the tokens issued by an ICO have the characteristics of securities then the provisions of the Law on Securities would apply. When an ICO is used in crowdfunding of a project the provisions of the Law on Crowdfunding would apply.[7] For example, a newly-launched ICO platform called DESICO, which aims to create a safe and regulated environment in order to develop global financial and blockchain technologies, is governed by the Law on Crowdfunding.[8]

When an ICO is used as a financial instrument or when entities are engaged in the secondary trading of tokens, the Law on Markets in Financial Instruments would be the governing legislation. If the funds generated through an ICO are collectively invested by entities in certain projects, the provisions of the Law on Collective Investment Subjects, the Law on Collective Investment Undertakings Intended for Informed Investors, and the Law on Collective Investment Undertakings Intended for Professional Investors would apply.[9]

If the funds raised through an ICO are intended for the formation of the capital of a newly established FMP, the capital formation requirements applicable to a specific form of financial institution shall apply.[10]

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III. Taxation

The State Tax Inspectorate has issued a position paper with regard to the taxation of virtual currencies.[11] The tax treatment of virtual currencies is differentiated based on their purpose. The position paper states that, from the standpoint of the Law on Corporate Income Tax and the Law on Personal Income Tax, “according to the substance and economic sense of the transactions carried out, ‘a virtual currency’ is recognized as current assets which may be used as payment means for goods and services or stored for sale, while for VAT purposes, ‘a virtual currency’ is considered as the same currency as euros, dollars and etc.”[12]

Tax laws are applicable to the following transactions involving virtual currencies: mining, purchase, sale of virtual currencies, payment by such currencies for purchased/sold goods or services.[13] For accounting purposes, all transactions in virtual currencies should be reported in Euro. The exchange rate of virtual currency (or tokens) against the Euro is not regulated by legislation. Therefore, in selecting the exchange rate to be applied, “all available information and comparable data on the market may be used.”[14]

A. Corporate Income Tax

The production of virtual currency is not taxable. However, any profit incurred from selling of the produced virtual currency being the difference in the cost associated with the production of the virtual currency and sale price, is taxable.[15]

B. Personal Income Tax

For the purposes of Lithuanian tax legislation, virtual currency is considered to be property; therefore, income incurred from the sale of virtual currency is taxable in the same way as any other form of income.  In this case, the difference between the sales price and the acquisition price is taxed. It should be noted that a virtual currency or similar instrument is not considered as personal income in itself. A personal income tax obligation only arises when a person sells virtual currency.[16]  Income in the amount of EUR 2,500 (approximately $2,80) or less incurred from the sale of virtual currency is not taxable.[17] Starting from January 1, 2018, income from the sale or purchase of virtual currencies will be subject to personal income tax rate of 15%.[18]

1. Tax Treatment of Wages (Incentives) in Virtual Currency

According to article 139(3) of the Labor Code of the Republic of Lithuania, wages must be paid in cash.[19] Transferred items or services provided by the employer or other persons are not considered part of wages. Therefore, the incentives transferred in a virtual currency by the right of ownership to the employee are considered income in-kind for the purposes of Lithuanian tax legislation. Such income is attributed as work-related income, from which the employer must calculate, pay, and declare income tax.[20]

2. Tax Treatment of Tokens Provided to the Founders of a Company

Locked or non-activated tokens received by founders without payment are not considered to be subject of income tax. When the sale, exchange, or transfer of tokens takes place, the tokens will become subject to income tax.[21]

C. Value-Added Tax

For the purposes of value-added tax (VAT), tokens issued by an ICO are divided into three categories:

• Tokens with characteristics of securities. In this case, the funds raised by an entity through an ICO are not subject to corporate income tax or VAT.
• Tokens having the same characteristics as virtual currencies. Their supply is exempt from VAT.
• Tokens with characteristics of coupons. Consideration received for the supply of such tokens will be considered as advance payment and will not be subject to VAT.[22]

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IV. Anti-Money Laundering Law

According to the ICO Guidelines, Lithuania is in the process of updating its anti-money laundering legislation with regard to cryptocurrency operations.[23] The Guidelines state that all FMPs engaged in cryptocurrency operations should comply with existing anti-money laundering legislation.[24]

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Prepared by Astghik Grigoryan
Legal Research Analyst
April 2019

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Last Updated: 12/30/2020