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Country Commercial Guides FY 2000: Lithuania Report prepared by U.S. Embassy Vilnius, released July 1999 Note*

CHAPTER VII. Investment Climate

Openness to Foreign Investment

Lithuania has been actively encouraging foreign companies and investors to explore the investment opportunities in Lithuania. The basic principles of the foreign investment policy are as follows:

Equality

The law provides that equal protection is afforded to both foreign and domestic investors. No special permit is required from governmental authorities to invest foreign capital in Lithuania and there are no prohibitions or limitations provided the investor carries on business in accordance with Lithuanian law.

Investment forms

The law permits the incorporation of a business organization wholly or partially owned; or the acquisition of shares in an existing company. In accordance with the Lithuanian law, a foreign investor can sell, donate, mortgage or otherwise dispose of fully paid shares.

Concept of origin of foreign capital

Only foreign capital, i.e. capital created or obtained legally outside the territory of the Republic of Lithuania, and owned by foreign nationals, may be invested in Lithuania from abroad. Foreign investors can contribute capital in the form of money, movable or immovable assets or intellectual or industrial property.

Guarantees

Foreign investments and the investor's rights are today well protected by enforcement mechanisms of the new law. After tax payments, foreign investors have the right to repatriate the profit, income or dividends in cash or otherwise, or reinvest the income without any limitation. State institutions have no right to interfere with the legal possession of the foreign investor's property. In the event of justified expropriation, the investor is entitled to compensation equivalent to the market value of the property expropriated. State institutions and officials are obliged to keep confidential commercial secrets and must pay compensation for any loss or damage caused by illegal disclosure. Foreign investors are entitled to enforce their rights by applying to the courts of Lithuania or directly to the International Center for Settlement of Investment Disputes under the Washington Convention of 1965.

Taxation Incentives

Under the current regulations, company profits are exempt from taxation for the first three years. Thereafter for the next three years the tax rate (presently 29 per cent) is rebated by up to 50 percent, provided the level of foreign capital does not exceed 30 per cent of the company's capital and the foreign investment element exceeds $ 3.0 million.

Companies incorporated prior to December 31, 1993 or prior to August 1, 1995 still enjoy enhanced tax incentives, namely 70 per cent and 50 percent tax reductions, respectively, on tax levied on the share of profit due to the foreign investor. As a further incentive to encourage foreign investment, contributions in kind made by foreign investors as part of the capital of a company both on incorporation and with respect to expansion are exempt from import customs duties. Subsequently, if the company ceases to function, any remaining assets, which were contributed by the foreign investor, may be exported from Lithuania without the imposition of any custom duties.

Conversion and Transfer policies

Lithuania's local currency is the Litas (LTL), equal to 100 Lithuanian cents. The Litas is currently pegged, under a Currency Board system, to the U.S. Dollar at a rate 4:1. Under the Currency Board, the amount of currency in circulation is tied to the reserves of the Bank of Lithuania. Having achieved monetary stability, the current government is committed to a gradual withdrawal from the Currency Board leading to a transitional peg to a Euro/U.S. Dollar basket in 2000 and an eventual floating exchange rate.

Expropriation and Compensation

Since regaining independence, the Lithuanian government has been de-nationalizing private property seized by Soviet authorities during the occupation. Lithuanian law allows expropriation for compensation under the right of eminent domain but since liberation there have not been any cases of expropriation of private property by the Lithuanian government.

Dispute settlement

There are currently no investment disputes with the Lithuanian Government involving either U.S. or other foreign investors in Lithuania. Foreign investments in Lithuania are protected by:

1) The Constitution, its laws and other lawful acts regulating economic-commercial activities. These measures protect the investor's property against nationalization or requisition.
2) International agreements.
3) Bilateral contracts on the encouragement of investments and on mutual investment protection.
4) The law on capital investment in the Republic of Lithuania and other lawful acts regulating customs duties, taxes and relationship with financial and inspection authorities. This law also establishes the order of dispute settlement.

Lithuanian state power authorities and institutions have no legal rights to create any obstacles to the investor in using or disposing of his property unless he has violated the laws of the Republic of Lithuania.

Intellectual Property Rights Protection

In the area of intellectual property, Lithuanian policy has been to observe international standards and to consider subscribing to international conventions beyond those accepted by the independent Lithuanian government before World War II. In 1990 Lithuania joined the World Intellectual Property Organization (WIPO) and signed the Paris Convention for the Protection of Industrial Property. In April 1994 Lithuania signed a trade agreement with the U.S., which includes reciprocal protection of intellectual property. The Lithuanian Parliament is considering laws for copyright enforcement, including amendments to the criminal and civil codes. Pirated recordings and software, both widely available, are regularly confiscated and destroyed by the police.

Regulatory System: Laws and Procedures

Lithuania introduced a law on restriction of monopolies in 1993 and on competition in 1999. Businesses are precluded from manipulating prices or quantities of goods offered for sale and may not create artificial shortages in order to boost prices. The Lithuanian Anti-Monopoly Committee oversees the implementation of the law.

Efficient Capital Markets and Portfolio Investment

Government policies do not interfere in the free flow of financial resources or the allocation of credit. Commercial credit is restricted to high interest, short-term trade related loans which are in theory available to foreigners but in practice totally unattractive to foreign investors with other sources of credit available.

The underlying weakness of the banking system became apparent in late December 1995 when several smaller banks collapsed, and the Government imposed a moratorium on the two largest commercial banks (Litimpex and Akcinis Inovacinis Bankas). Unsustainable deposit interest payments, inadequate banking laws and regulations as well as risky lending practices and insider trading were the causes of the crisis. Since then, conditions have improved considerably, and all Lithuanian banks weathered the Russian financial crisis successfully in fall 1998.

Political Violence

There have been no reports of political violence or politically motivated damage to property since 1991. Civil disturbances are unlikely and there are no signs of any nascent insurrection movement.

Bilateral Investment Agreements

Lithuania has established commercial relations with more than 160 countries. Free Trade Agreements have been signed with 20 countries, including the EU. Additionally, agreements on the most favored nation's trade status have been signed with 22 countries. The United States and Lithuania have entered into a trade agreement that includes protection of intellectual property. A bilateral investment treaty between the U.S. and Lithuania has been initiated.

OPIC and other Investment Insurance Programs

Overseas Private Investment Corporation (OPIC) coverage is available for U.S. investments in Lithuania.

Labor

Lithuanian labor is inexpensive and highly qualified. By law, white-collar workers have a 40-hour workweek. Blue-collar workers have a 48-hour workweek with premium pay for overtime. There are minimum legal health and safety standards for the workplace. However, worker complaints indicate that these standards are sometimes ignored. The minimum wage is adjusted regularly by the parliament, but enforcement of the minimum wage is almost non-existent. The average monthly wage is the equivalent of approximately $ 250. The official unemployment rate in the beginning of 1999 was about 7%. The unofficial rate is higher. Skilled and unskilled labor are both available. Lithuanian labor unions have minimal influence on labor management but there have not been any major industrial strikes since regaining independence.

Foreign Free Trade Zones/Free Ports

Lithuanian Parliament voted in favor of the Law on the Fundamentals of Free Economic Zones on June 28, 1995. The law regulates conditions for the establishment of free trade zones in Lithuania, as well as the legal status of firms operating in such zones. Currently, Lithuania has three free trade zones, in Siauliai, Klaipeda and Kaunas. The largest airport in the Baltic States is located in Siauliai, Kaunas is an air, road, and rail hub, and Klaipeda is the largest port. The goal of the zones is to provide favorable conditions to promote investments in trade and manufacture and export through tax, customs and free monetary-financial operation incentives. However, so far the zones are badly managed and have attracted few businesses.

Benefiting from its geographical position and free economic zones, Lithuania also has a good access to eastern markets including Russia. Moreover, the labor force in Lithuania is not only cheap, but also highly qualified.

Capital Overflow Policies

The Lithuanian government does not have any restricting policies regarding the outflow of capital.

Foreign direct Investment Statistics

Over the past few years, Lithuania has become an attractive location for foreign investors and a competitive center for product sourcing in the region. The main reasons are high-skilled, low-cost alternative to production in the west, along with a stable and strong production potential to serve the huge markets to the east. Economic growth, a stable currency and a favorable business environment make Lithuania an relatively attractive investment location in the region.

Cumulative FDI reached $1 billion by the end of 1997. After the privatization of Lithuanian Telecom in July 1998, cumulative FDI increased by $510 million. Lithuania's accelerating infrastructure privatization program is projected to increase the FDI by approximately $2 billion in 1999. As of January 1999, the U.S. is the largest investor in Lithuania. It accounts for 18% of the total 1999 FDI ($396 million.)

Major Foreign Investors

Lithuania's largest foreign investors (as determined by an informal telephone survey in February 1998) are Telia/Sonera- $510 million, Williams Inc. -- $150, Motorola -- $100 million, Philip Morris -- $60 million, Kraft Jacobs Suchard -- $15.5 million, Statoil -- $37 million, Shell -- $28 million, Cawler Decken and Tuhfabriken AG -- $22.25 million, Coca-Cola -- $31 million.