Setting up a small business in Lithuania is convenient, but at the same time you have to face certain tax obligations. One of the most frequently asked questions is: what exactly is a Small Business Scheme (SME) and how does it work in terms of VAT?

In short, the Small Business Scheme (SMS) is a special VAT scheme designed to facilitate the activities of small businesses. Let’s take a look at what it means, when it applies and what’s important to know in 2025 and beyond.

What is a small business scheme (SME)?

If you choose to use the Small Business Scheme (SME), a person does not charge VAT on the goods or services they supply. VAT is only payable on goods and services sourced from abroad.

This means that the activity can be carried out without charging VAT as long as the annual turnover does not exceed the specified limit. This simplifies bookkeeping and reduces administrative costs. Therefore, freelancers, consultants or other small businesses are recommended to opt for this scheme when it comes to purchases in/from the EU country.

Is the CMS mandatory?

No, it is an option. A Lithuanian VAT payer who is obliged to register for VAT purposes (e.g. when purchasing or providing certain services) can decide for themselves whether they want to apply the SMS. If, on the other hand, a company purchases services from abroad, it must register as a regular VAT payer or apply the simplified SMS.

Main rules:

• If your business revenue in Lithuania did not exceed 45,000€ in calendar year and it is not planned that this limit will be exceeded this year, you can apply the SME and continue not to charge VAT on sales.
• If you purchase services from abroad (e.g. Meta, Google, Bolt, etc.) or provide services to VAT payers in other EU countries, you must register as a VAT payer or apply the SME scheme.
  

What happens when income exceeds the 45,000€ threshold?

Once your annual turnover goes over 45,000€, you lose the right to apply SMS. At this point, you must register as a normal VAT payer and begin charging VAT on your goods and services.

From that moment, your business is treated like any other VAT-registered company, with all the rights and obligations that come with standard VAT rules.

What’s the difference between SMS VAT payers and ordinary VAT payers?

Here’s where things get important. Businesses that apply SMS are not subject to the same VAT law provisions as ordinary VAT payers.

• Ordinary VAT payers must charge VAT on supplies, submit VAT returns, and can deduct input VAT.
• SMS payers, on the other hand, do not charge VAT on their supplies and are excluded from many of the obligations (and rights) under the Law on VAT.

This makes SMS especially attractive to small businesses that mainly serve local customers and have modest turnover.

International activities: why you need to follow the rules exactly

Important changes came into force on 1 May 2025. Even if your income in Lithuania is less than 45,000€, an obligation to register for VAT may arise if:

• The value of goods purchased from other EU VAT payers exceeds 14,000€ per year (normal VAT registration)
• You purchase services from abroad that are subject to the reverse charge procedure in Lithuania (SVS scheme)
• You provide services that are deemed to be located in another EU country (SMS scheme).

Why is SMS important for small businesses?

The small business scheme is more than just a simplified tax regime. The scheme can:

• Issue simplified invoices without VAT, offering more attractive prices to end consumers
• VAT is only paid on goods/services purchased from abroad.
• reduce the accounting and reporting burden (no need to keep a register of accounts). Only one VAT declaration PVM101 is submitted for the month in which purchases from abroad or sales of services to the EU were made (for sales of services, form FR0564 is also submitted)

However, there are also restrictions! It is not possible to reclaim input tax and it is necessary to keep track of income and international transactions.

Key takeaways

• The Small Business Scheme (SME) allows small businesses to be exempt from normal VAT obligations.
• This is a free choice as long as income does not exceed 45,000€ and no purchases are made from other EU countries
• If the threshold is exceeded, you must register as a regular VAT payer.
• SME simplifies the obligations, but is not suitable for everyone, especially not for those who actively trade internationally.

A small business scheme in Lithuania can be a great tool for start-ups, freelancers or small businesses as it reduces the administrative burden and helps to maintain competitiveness. However, it is important that you constantly monitor your income and international transactions to avoid unexpected additional VAT obligations.

If you are planning to start a business or are already operating in Lithuania, understanding how the SVS works and when it no longer applies is an essential step to a successful and smooth operation.

You can submit an application for the SVS scheme via the My STI (Mano VMI) system.