Initial coin offering (ICO) in Lithuania refers to any process through which digital coins are used for the purpose of raising capital for investments in various types of products/services. In Lithuania, ICOs are divided into 2 main categories: 1) ICOs which do not provide profits or governance rights and 2) ICOs used for generating profits and governance rights.
Based on these 2 main distinctions, different rules of law will apply. Considering the complexity of the legislation regulating cryptocurrencies in this country, you can address our consultants in company formation in Lithuania for professional advice.
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What are the characteristics of ICOs in Lithuania?
The characteristics of ICOs are divided based on the 2 categories mentioned above. With regards to the 1st category of ICOs, they are defined by the following:
- they provide the right to use a product or a service;
- they are used as a payment mechanism;
- they are used for charity purposes.
The first characteristic is regulated solely by the Civil Code in Lithuania, while the 2nd and the 3rd fall under the supervision of the Anti-Money Laundry and Counter Terrorist Financing Act. The 2nd category of ICOs (used for profits/governance) is described by the following:
- they can be identified as securities;
- they can identify with crowdfunding projects;
- they can be seen as financial instruments.
Other characteristics apply, which can be detailed by our consultants in company registration in Lithuania. Please mind that the 2nd category is regulated under numerous rules of legislation, depending on their main characteristics. Those who want to open a company in Lithuania can find out in-depth information regarding this from our specialists. For legal aspects, you can contact our Lithuanian lawyers.
What other rules of law are applied to Lithuanian ICOs?
In the case of ICOs that offer governance rights, there are many rules of law that must be taken into consideration by investors. The specific legislation that must be followed may vary in accordance with the manner in which the ICO is used, but, overall, for this large category of ICOs, the following are applicable:
- the Law on Securities;
- the Law on Crowdfunding;
- the Law on Markets in Financial Instruments;
- the Law on Collective Investment Subjects;
- the Law on Collective Investment Undertakings Intended for Informed Investors;
- the Law on Collective Investment Undertakings Indented for Professional Investors.
Statutory documents required for the issuance of ICOs
Investors who open a company in Lithuania that will use ICOs must draw up and sign specific documents, in accordance with the Lithuanian law. Thus, it must be noted that in the case of ICOs used for security tokens, the investors have to sign the prospectus on the respective securities.
This document has to be approved by the National Bank of Lithuania and, if approved, the prospectus will be published. Please mind that the obligation to draw up and sign the prospectus varies based on the total sales value of the company and the destination of the securities tokens.
Thus, we mention that businessmen are exempt from drawing up, publishing and having approved the prospectus provided that the total value of sales is below EUR 5 million in a continuous period of 12 months. The rule applies as long as the securities are offered in other EU member states.
Regarding the offering of securities in other member states, the investors must abide by the rules of the Directive 2003/71/EC.
Is it possible for a Lithuanian LLC to publicly raise tokens?
One of the most important distinctions that must be made between the limited liability company (LLC), the most common way to open a company in Lithuania, and the public limited company is the rights these legal entities have concerning their shares.
If in an LLC, the investors can’t publicly trade the company’s shares (meaning, the company can’t be listed on the stock exchange), in a public limited company, the investors can easily register the business form on the stock exchange.
Most companies involved in ICOs and cryptocurrency are registered as limited liability companies, which implies, in theory, that their assets can’t be publicly traded due to the nature of the legal entity. Provided that a Lithuanian LLC is involved in securities tokens trading, it is important to know that the tokens may be publicly traded if the tokens have the characteristics of bonds instead of shares.
What is the tax system charged on initial coin offering in Lithuania?
There are few taxes that are charged to ICOs in Lithuania, but the manner in which these taxes are applied varies based on the nature of the ICO. Thus, one must have a very clear definition of the ICO activity carried out, so that it can evidence the main law applied followed by the correct tax system.
Basically, ICOs can be charged with the following 3 taxes: 1) the corporate income tax, 2) the personal income tax and 3) the valued added tax. For those raising capital through ICOs it is important to know that the corporate income tax may not apply as long as the tokens (digital currency) fall under the definition and scope of the Civil Code, Articles 1.101 – 1.108.
Individuals are also charged for the income that they obtain from cryptocurrency activities; the tax applicable in this case is the personal income tax, imposed at a rate of 15% or 20%.
The value added tax (VAT) can be imposed based on the category of ICOs used. Currently, the VAT is charged at the following rates: 1) 21% – standard rate, 2) reduced rate of 9% and 3) reduced rate of 5%, according to the State Tax Inspectorate. The obligation to pay VAT can also arise in the moment when the virtual currency is sold.
In the case in which an employer wants to pay the employees with virtual currency, this can be possible in Lithuania. According to Article 139(3) of the Labour Code, an employee can only be paid for his or her activity in a company with money.
The law in Lithuania recognizes virtual currencies as money, so companies can pay in cryptocurrency, as long as they conclude all the tax obligations related to employment.
If you want to open a Lithuanian company in this industry, you can always rely on our consultants for advice on the standard company formation procedure, as well as for any documents/licenses that are necessary as per the cryptocurrency regulations. Thus, we invite you to contact our consultants in company registration in Lithuania for more details.