Expanding into Lithuania for developing FinTech companies

Expanding Into Lithuania For Developing FinTech Companies

II. Incorporating into Lithuania
Apr 27, 2021

1. Lithuania’s regulatory adaptation and transparency

Since early 2017, the Bank of Lithuania has instigated the rapid development of a FinTech-conducive regulatory and supervisory ecosystem, which continually fosters innovation in the financial sector. The two most notable events were:

  • first, by opening a regulatory sandbox in late 2018 to allow startups and FinTechs to test their innovative products in a live environment under the guidance and supervision of the Bank of Lithuania.5
  • Second, as a result of the UK’s EEA departure and in the absence of an agreement on financial services cooperation between the EU and the UK, some UK companies with licensed activities subsequently passported into the EEA not wanting to be locked into only one single market. Lithuania has led by example, by inviting financial service institutions under their roof with an appealing and easily understood regulatory regime, attractive marketing plan, convincing regulatory supervision, as well as rapidly adapting national regulations for FinTechs, InsurTechs, RegTech, and other startups.

One of the most recent examples is Revolut, which transferred its EU customers from its UK-based company to a Lithuanian company. After setting up a Lithuanian company and acquiring a license for its activities, Revolut’s Lithuanian company has passported its licensed activities based on the provision of services without a branch in the other 29 EEA Member States, providing clients uninterrupted services. Revolut went even further by establishing and acquiring a Special Purpose Bank (“SPB”) license. The latter license permits Revolut to receive deposits and other repayable funds from its clients (Revolut currently provides this service in a total of 13 Member States).

In terms of numbers, Lithuania edges ever closer each year to the level of the UK within The World Bank Ease of Doing Business rankings. While Lithuania continues to improve its regulatory regime, in some areas (ahead of the EU), the existing transparent regulator and ‘easy on the eye’ regulations, Lithuania is leaning towards becoming the dominant “Fintech Hub” in the EU.

  1. The most popular licenses in Lithuania

Almost half of the FinTech companies in Lithuania hold an Electronic Money Institution (“EMI”), Payment Institution (“PI”), or SPB license. A majority of these companies can also

issue prepaid cards and digital wallets for the benefit of their clients, in addition to making money transfers.

  1. E-money and payment licenses

The respective provisions of the Lithuanian Law on Electronic Money Institutions defines “electronic money” as a monetary value as represented by a claim on the issuer which is issued on receipt of monetary funds by the electronic money issuer from a natural or legal person and has the following characteristics: (i) stored electronically (incl. magnetically); (ii) is issued for the purpose of making payment transactions; and (iii) is received by persons other than electronic money issuers.

For any FinTech company to be able to accept money from clients in the ‘electronic domain’ and to hold it in payment accounts for a relatively long time, issuing electronic money and then redeeming it, prior to being able to do, it is first necessary to become an electronic money issuer.

The Bank of Lithuania supervises and authorizes electronic money and payment institutions within Lithuania. The authorization process usually includes: (i) submitting an application for an EMI license to the Supervision Service of the Bank of Lithuania; (ii) an assessment of the application for a license of an EMI and attached documents; and (iii) issuance of a license or refusal to issue a license.

The entire authorization process, depending on the completeness of the documents submitted, usually takes around 6 to 12 months.

If, however, a FinTech company already holds an EMI license and respective documentation in the UK it is considered to be an advantage in producing the necessary documents, as well as saving time during the authorization process.

  1. An SPB license

A key feature of an SPB is the minimum capital requirement of EUR 1 million, while for traditional banks, it is EUR 5 million.

In terms of timing, it is possible to acquire an SPB license within 9 to 12 months.

An SPB differs from a traditional bank and comes with a number of restrictions attached to the services which an SPB can provide. An SPB is subject to limitations in investment and other financial services of a similar nature. The respective services an SPB can provide are the following:

1) acceptance of deposits and other repayable funds;

2) lending (including mortgage loans);

3) financial lease (leasing);

4) payment services;

5) issuance and administration of travelers' checks, bills of exchange, and other means of payment, if these activities do not include payment services;

6) provision of financial sureties and financial guarantees;

7) financial intermediation (agent activities);

8) money management;

9) creditworthiness assessment services;

10) rental of safe deposit boxes;

11) currency exchange (in cash); and

12) issuance of electronic money.

One of the notable benefits of holding an SPB license is the deposits of any one individual may reach up to EUR 100,000 and are insured under the deposit insurance scheme. SPBs are participants of the deposit insurance system and are obligated to make regular (ex-ante) and special (ex-post) deposit insurance contributions to the Deposit Insurance Fund of Lithuania.

Importantly, an SPB license is valid across the EEA and activities can be passported to the other Member States enabling access to the EEA financial services market. As previously mentioned, a good example is Revolut.

  1. CENTROlink

The Bank of Lithuania operates a CENTROlink system designated for processing and executing payment orders between Single Euro Payments Area (“SEPA”) participants.

The Bank of Lithuania provides technical access to SEPA schemes (credit transfers (“SCT”), direct debit (“SDD”) and instant payments (“SCT”)) for all types of payment service providers – banks, credit unions, e-money, or payment institutions – licensed in the EEA.

Any EEA licensed payment service provider has an option to access CENTROlink, given there is no mandatory requirement to establish an entity in Lithuania to access CENTROlink.

A recent example of a financial service institution accessing CENTROlink is TBI Bank EAD. The latter is registered in Bulgaria and has passported its activity to Lithuania and the Bank of Lithuania has approved its access to CENTROlink system.

  1. Employee Stock Options

On 1 February 2020, new tax-favorable legislation for the treatment of employee stock options came into effect in Lithuania.

Employee stock options can be exercised at no cost or for lower than their fair market value price, but no earlier than three years of holding stock options, from the date they were granted, are treated as non-taxable income for personal income tax purposes.

  1. Access to capital markets and alternative sources of financing

To encourage the development of capital markets in Lithuania, micro, small, and medium-sized enterprises (“SMEs”) can reimburse the costs incurred in acquiring third-party advisory services necessary exclusively for the listing of shares and/or bonds.

In such a way, SMEs can access alternative sources of financing with initially lower cost, for example, by receiving advisory services on setting set up a compliant and viable structure and on the respective financial instruments to be provided in the marketplace.

In recent years, the government has paid a lot of attention to the development of capital markets. Legislation has been adopted to develop alternative sources of financing: (i) a legal framework for crowdfunding and peer-to-peer lending has been established; and (ii) private limited companies have been allowed to issue bonds publicly. 

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