COUNTRY ESSENTIALS. The Coface Country Essentials offer a concise and clearly structured

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1 COUNTRY ESSENTIALS LITHUANIA Summer 2015 TABLE OF CONTENTS / 02 / 03 / 04 / 04 General Information Risk Assessment Foreign Trade Economic Key Data / 05 Insolvency / 07 / 08 Checklist for Business Operations Contacts Coface / 09 References Overview The Coface Country Essentials offer a concise and clearly structured overview of country economic facts. The most important facts for 18 countries in Central and Eastern Europe include the most recent risk overview and our Coface country risk assessment. You receive a general information on the country ranging from major cities to natural resources and most important sectors. This is followed by our risk assessment giving a general overview on the economic and political situation and the strength and weaknesses of the country. The next chapter focuses on the key facts: top trading partners and economic data like GDP growth, inflation or public debt. The insolvency part shows you the top and flop sectors, information on the development of insolvencies and the procedure. Last but not least we provide you with a checklist for business operations and the latest corruption and doing business index data. If you need further information your will find a list of our contacts in the region.

2 GENERAL INFORMATION Lithuania declared its independence in 1990 and joined the European Union in Together with Latvia and Estonia, it forms the Baltic States - whereby Lithuania is the largest of these three countries. Lithuania borders to Baltic, Latvia, Belarus, Poland and the Russian enclave of Kaliningrad. Form of government: Administrative organisation: Area: Parliamentary republic 10 administrative districts, 60 self-governments 65,300 km² Population: 3,007,758; density: 46.6 inhabitants / km² Official language: Lithuanian Local currency: 1 Litas (LTL) = 100 Centas LTL 1 = approx. EUR Capital: Vilnius: 534,056 inhabitants Major cities and population: Kaunas Klaipėda Šiauliai Panevėžys 311,148 inhabitants 160,361 inhabitants 107,875 inhabitants 98,612 inhabitants Ethnic groups: 83.7% Lithuanian, 6.6% Polish, 5.3% Russian, 1.3% Belarus Religion: 79% Catholic, 4% Orthodox, 7.6% other, 9.4% no religious affiliation Natural resources: Limestone, peat, quartz and gypsum, amber Most important sectors: Industry, manufacturing, construction, agro food Membership in international organisations: UNO, IMF, EBRD, World Bank, NATO, EU, Council of Europe, WTO / 2

3 RISK ASSESSMENT Coface Country Assessment A4 Activity driven by internal demand but slowed by the external context Despite the concerns triggered by the Russo- Ukrainian crisis, growth is expected to remain among the strongest in the European Union, driven above all by internal demand. Household consumption will still be very dynamic, due to the rise in wages driven by the decline in the availability of skilled labour. Moreover, the adoption of the euro could favour a recovery through cheaper credit. Public investment will continue to be supported by European contributions, while investment by companies, whose overall financial position is good, is likely to accelerate due to high use of productive capacity. House building will continue to trend upwards. In contrast, the contribution of trade is expected to remain negative. While imports are fuelled by domestic demand, exports are struggling. Sales of cereals, timber and fertiliser, as well as of refined products from the Orlen Lietuva refinery belonging to the Polish group, Orlen, the country s leading taxpayer, have been hit by falling prices. Exports to Russia are suffering, at the same time, from the economic slump, the fall in the rouble and the counter-sanctions. However, the impact is limited for several reasons. First, 80% of shipments to Russia consist of products which only pass through Lithuania, like, for example, capital goods or new or second-hand cars. As far as these are concerned, the impact is therefore limited to logistics. The remaining locally manufactured 20% are mainly dairy and meat products. Even in this instance, the impact is limited by the fact that they are in part repackaged and shipped via Belarus. Satisfactory public and external accounts The situation of the public accounts has distinctly improved since 2009, when the deficit exceeded 9%. The reduction in the overall deficit and the near-disappearance of the primary deficit, i.e. excluding interest on debt, has enabled the latter to be stabilised. The decision to increase military spending will not alter the situation. Likewise, the current account, showing a deficit in excess of 10% of GDP until 2008, is currently close to equilibrium. The traditional trade deficit, due in particular to energy imports, is not fully offset by the surplus on the balance of services and the remittances of the many emigrants. Meanwhile, European structural funds and foreign direct investments, even though modest, balance the capital outflows linked to the banks reduction of the debt owed to their Scandinavian parent companies. These banks and the public sector hold an almost equal share of the external debt which amounts to 64% of GDP. Heavy energy dependence on Russia, but this is on its way down The political landscape is marked by a change of government at each of the elections. Since the last poll in October 2012, Algirdas Butkevicius has led a coalition government composed of his Social Democratic Party and the Labour Party, representing the moderate left, and the right-leaning Order and Justice Party. The party representing the Polish minority (7% of the population) was ejected from the coalition, with the support of President Dalia Grybauskaite, an independent who began her second term of office in May 2014, due to its support for Russia at a time when the authorities have taken a very hard line. Lithuania, though, has a shared border with the Russian enclave of Kaliningrad, where there is an important naval base, and depends heavily on Russia for its energy supply. However, the start of operations at the Klaipeda port gas terminal at the end of 2014 and an underwater electricity cable linking the country with Sweden in 2015, as well as the State s purchase of gas installations from Gazprom, will reduce this dependence. Strength Euro zone membership (since January 2015) Banking system controlled by Scandinavian institutions Skilled, competitive workforce Crossing point between the EU and Russia Significant shale gas potential Weaknesses High energy dependency Shrinking population High structural unemployment Wide disparity between the capital and the provinces, especially in the northeast Inadequate transport infrastructures Corruption and tax evasion / 3

4 FOREIGN TRADE & ECONOMIC KEY DATA Lithuania s Top Trading Partners Imports in MEUR EU 28 12,949 14,240 15,707 16,935 Russia 7,316 8,085 7,770 5,736 Germany 2,278 2,450 2,740 2,899 Poland 2,071 2,437 2,490 2,505 Latvia 1,515 1,517 1,628 1,827 Exports in MEUR EU 28 12,355 13,963 14,097 13,389 Russia 3,340 4,355 4,870 5,081 Latvia 2,062 2,510 2,451 2,237 Poland 1,400 1,394 1,813 2,014 Germany 1,874 1,787 1,761 1,767 Source: Eurostat Economic Key Data Key Data (e) 2015 (f) GDP growth (%) Inflation (yearly average) (%) Budget balance (in % of GDP) Current account (in % of GDP) Public debt (in % of GDP) (e) estimate (f) forecast Source: Coface / 4

5 INSOLVENCY Top 5 sectors Public administration and defence; compulsory social security Other service activities Human health and social work activities Education Arts, entertainment and recreation Flop 5 sectors Construction Accommodation and food service activities Administrative and support service activities Transportation and storage Water supply; sewerage, waste management and remediation activities Lithuania s Biggest Insolvencies in 2014 Company Name Sector Town 1. METOIL UAB Wholesale of solid, liquid and gaseous fuels and related products VILNIUS 2. TORLINA UAB Wholesale of waste and scrap KAUNAS 3. MELESTA UAB Wholesale of metals and metal ores KAUNAS 4. ERTRESA UAB Non-specialised wholesale trade SIAULIAI 5. TVISTERIS UAB Wholesale of electrical household appliances KAUNAS Insolvencies in 2014 Companies in the Baltic States are suffering from the deterioration in foreign trade with Russia, although they are actively trying to substitute alternative trade destinations. Company insolvencies show that deteriorated economic conditions translate into an increased number of bankruptcies. Whereas official data available for Lithuania shows that insolvencies rose by 5.4% in 2014, our estimation assumes that one-digit growth was also recorded in Latvia and Estonia, at 4.3% and 1.8%, respectively. As changes in the macroeconomic environment have an impact on the microeconomic side with some delay, we forecast a further rise of insolvencies in the Baltics, which will reach 8-10% by the year end. Detailed insolvency statistics on Lithuania show that the construction sector continued to suffer from high insolvency rates last year, similar to the statistics for In 2014, 4% of construction companies were declared insolvent. The sector breakdown of insolvencies is dominated by wholesale and retail entities, in line with their strong representation in the overall economy. Transport companies also figure in the insolvency statistics. Due to their strong exposure on international routes (90% of total haulage in 2012 in the case of freight transport), including Russia, they are directly impacted by the lower demand for their services. Insolvencies of transport companies increased by 15% during the course of last year. Insolvency procedures The deadline for lodging claims is 45 days following the court s decision to initiate bankruptcy proceedings. The average time for these proceedings is 1-6 years and the average costs 300 EUR. The requested documents are: POA (2 original copies), copies of orders, unpaid invoices, delivery documents, terms and conditions, correspondence concerning debt. In other words documents evidencing the debt. Initiating company bankruptcy proceedings 1. Filing the claim with the court (grounds for bankruptcy, Republic of Lithuania Law on Bankruptcy, Art 4): 1. the company fails to pay wages and employment-related benefits in due time; 2. the company fails, in due time, to pay for goods, works (services) carried out, or to repay credit and fails to discharge other property obligations assumed under transactions; 3. the company fails to pay, in due time, taxes and other compulsory contributions prescribed by law and/or the awarded amounts in due time; / 5

6 INSOLVENCY 4. the company publicly announces or otherwise notifies the creditor(s) of its inability or lack of intent to discharge its obligations. Disclosure on the Enterprise Bankruptcy Management Department under the Ministry of Economy (hereinafter - the Department) website is also deemed to be a public announcement; 5. The company has no assets or income from which debts could be recovered therefore the bailiff has returned the writs of execution to the creditor. 2. Persons entitled to petition the court to initiate bankruptcy proceedings are (Republic of Lithuania Law on Bankruptcy, Art 5): 1. the creditor (creditors); 2. the owner(s); 3. the Head of company s Administration. It must be noted that this is an exhaustive list of persons capable of petitioning the court to initiate bankruptcy proceedings. 3. Creditor (creditors) petitioning for bankruptcy. If at least one of the grounds specified in the Law on Bankruptcy, Art 4 parts 1, 2 or 3 is presented, 30 days after notifying of the intention to apply to the court for bankruptcy the creditor(s) may submit a petition to initiate bankruptcy proceedings. The notice must indicate the company s outstanding obligations and contain a warning stating that, should these obligations fail to be discharged within the period specified in the notice, the creditor(s) shall apply to the court so that bankruptcy proceedings may be initiated. The creditor(s) must allow at least 30 days following the date of delivery for the debtor to discharge his obligations. Bankruptcy proceedings When an eligible applicant submits the claim to court, the court makes an assessment of the preinsolvency proceedings and makes a decision to initiate bankruptcy against the company if any of these grounds are present: 1. the company is insolvent or the company has failed to pay employee wages and employment-related benefits in due time; 2. the company has made a public announcement or otherwise notified the creditor(s) that it is unable or lacks the intent to discharge its obligations. Once a decision to initiate bankruptcy proceedings is taken, the court must appoint an administrator, who has to take care of some general tasks before the first meeting with creditors: 1. Report the insolvency proceedings to: The commercial register Bankruptcy Management Department under the Ministry of Economy Company (in the order adopted by written procedure and creditors) Bank of Lithuania 2. Organize the protection of assets and take control of the documents. 3. Hire and fire employees. 4. Apply to the court to approve the costs of administration. 5. Compile a list of the company s creditors and submit it to the court for approval. 6. Organize the first meeting of creditors. Lodging claims The Law on Enterprise Bankruptcy regulates the procedure by which creditors may lodge their claims. The court, by the order on bankruptcy proceedings against the company, sets a time limit within which creditors are entitled to lodge their claims. Approval of creditors claims occurs in two stages. During the first stage, creditors submit their claims, accompanied by supporting evidence, to the administrator in charge of the proceedings within the prescribed time period, who then must within one month submit them to the court for approval. Only those creditors that are confirmed by the court enjoy special rights in bankruptcy proceedings: 1. to attend meetings of creditors and defend their own claims; 2. to get information from the administrator regarding the status of the bankruptcy proceedings; 3. to apply to the court for the determination of fraudulent bankruptcy or resolutions adopted during creditors meetings. Completion of bankruptcy proceedings After all assets have been sold and all income has been allotted, the administrator petitions the court to finish the bankruptcy proceedings, and the company is struck down from the commercial register. / 6

7 CHECKLIST FOR BUSINESS OPERATIONS The following table summarizes relevant information for investors and exporters. Corporate law Tax law Investments Foreign exchange Labour law Customs Travel and residence Share capital for a Lithuanian LLC: LTL 10,000 (approx. EUR 2,896.20) Share capital for a Lithuanian joint stock company: LTL 150,000,- (approx. EUR 43,430) JSC referred LLC Corporate tax rate: generally 15% Income tax: 15% (flat rate) VAT: 21% Foreign investors are accorded equal treatment with domestic investors The import and export of foreign exchange by nationals and foreigners is unlimited within the EU A declaration is required for foreign exchange transactions to or from a third country that exceed LTL 10,000 (approx. EUR 2,896.20) Lithuanian labour law is aligned with European standards Very inflexible regulations on working hours and contracts Very low private autonomy Minimum 1000, - LTL (approx. EUR 290) The harmonised customs tariff of the EU as well as the rules of the CEFTA, EFTA and WTO apply EU citizens do not require an entry or transit visa However, a residence permit is required if the duration of stay exceeds 90 days per half-year Corruption Doing Business Lithuania was 39 th in the International Corruption Perceptions Index In comparison, Germany was ranked 12 th and Austria was ranked 23 rd. The Corruption Perceptions Index is issued by Transparency International, and lists countries according to the perceived level of public sector corruption. This perception is based on surveys of managers and experts, and related solely to the public sector. The Doing Business Index issued by the World Bank ( expresses the ease of doing business in a particular country. In this ranking, Lithuania was ranked 24 th in 2015 and lost seven ranks compared to the previous year. Germany and Austria were rated 14 th and 21 st, respectively. This index consists of ten different sub-indexes that determine whether laws or other regulations exist in certain areas and whether or how they are applied. For example, the subcategories deal with the payment of taxes, hiring of staff and the founding and closing of companies. / 7

8 CONTACTS COFACE Coface Austria & Coface Central Europe Stubenring Vienna T. +43 (1) F. +43 (1) Coface Lithuania Vilniaus str Vilnius T (5) F (5) Coface Albania serviced by Coface Croatia Avenija Dubrovnik 46/III Zagreb T (1) F (1) Coface Macedonia serviced by Coface Croatia Avenija Dubrovnik 46/III Zagreb T (1) F (1) Coface Belarus serviced by Coface Russia 1st Tverskaya-Yamskaya str., 23, bld Moscow T. +7 (495) F. +7 (495) Coface Moldova serviced by Coface Romania 39 Calea Floreasca - Et District Bucharest T. +40 (21) F. +40 (21) Coface Bosnia & Herzegovina serviced by Coface Croatia Avenija Dubrovnik 46/III Zagreb T (1) F (1) Coface Montenegro serviced by Coface Serbia Bulevar Oslobodjenja Belgrade T (11) F (11) Coface Bulgaria 42 Petar Parchevich str Sofia T (2) F (2) Coface Poland Al. Jerozolimskie Warsaw T. +48 (22) F. +48 (22) Coface Croatia Avenija Dubrovnik 46/III Zagreb T (1) F (1) Coface Romania 39 Calea Floreasca - Et District Bucharest T. +40 (21) F. +40 (21) Coface Czech I.P. Pavlova Prague T F Coface Serbia Bulevar Oslobodenja Belgrade T (11) F (11) Coface Estonia serviced by Coface Latvia Berzaunes iela 11a Riga T (6) F (6) Coface Slovakia Soltésovej Bratislava T (2) F (2) Coface Hungary Tüzoltó utca Budapest T. +36 (1) F. +36 (1) Coface Slovenia Slovenceva ulica Ljubljana T (1) F (1) Coface Latvia Berzaunes iela 11a Riga T (6) F (6) Coface Ukraine 4 B. Gmyri Str., of Kyiv T (44) F (44) / 8

9 REFERENCES Internet >> Country Risk and Economic Research, CEE Insolvencies Panorama 2014, Coface, Niederlassung Austria, Vienna Print Handbuch Länderrisiken 2015, Coface, Niederlassung Austria, Vienna Imprint Media owner and production: Coface, Niederlassung Austria, Stubenring 24, 1010 Vienna, Austria; Editorial office: Susanne Krönes. Copyright and Liability Coface, Niederlassung Austria (Stubenring 24, 1010 Vienna, Austria) copyright, conditions of use: you may copy and publish the information on this site provided that you do not make commercial use of it and clearly indicate that it originates from Coface, Niederlassung Austria. This information is provided without guarantee and does not bind Coface, Niederlassung Austria in any way. The Coface Country Assessment was included in this country report as of May Coface, Niederlassung Austria cannot accept responsibility for changes made at a later date. / 9