Yesterday the European Commission and the European Central Bank published their Convergence Report on Lithuania. The Report concludes that Lithuania has achieved a high degree of sustainable convergence with the euro area. Therefore, the Commission proposes that the Council should decide on Lithuania’s adoption of the euro from 1 January 2015. The Council is expected to take the final decision in July, at the same time fixing the litas/euro conversion rate. However, this seems to be only a formality as it is now clear that Lithuania will begin the New Year by joining the euro zone.
We set out below a brief summary of the main legal issues related to euro introduction in Lithuania as well as lessons from our experience in Estonia and Latvia.
General principles of euro introduction
The main principles for transition to the euro are set out in the Law on Euro Adoption in the Republic of Lithuania, adopted on 17 April 2014. A range of legislative amendments and regulations are also under way to guide the switch to the new currency. This includes amendments to the Civil Code, the Law on Companies, the Law on Banks and the Law on Payments and other pieces of legislation.
Following introduction of the euro, salary rates set in Lithuanian litas in employment agreements must be converted to euro by rounding the salary to the nearest euro cent to the employee’s benefit. For example, an employee receiving a salary of LTL 2,100 should, after conversion, get EUR 608.21 (2,100:3.4528=608.202...=608.21; assuming (here and below) that the fixed conversion rate will be the same as the current official litas/euro exchange rate, ie 3.4528 LTL = 1 EUR).
No need arises to change employment agreements solely with the purpose of establishing the salary in euro. All employment agreements will be valid without making such changes as conversion must be applied automatically.
Nevertheless, this might be a good opportunity to review employment agreements and, if needed (eg some clauses of the agreement are now obsolete or the agreement does not cover other important aspects (such as confidentiality, IP rights)) to update them accordingly.
Generally, euro introduction by itself will not impact the effectiveness of commercial contracts.
All commercial contracts in litas will remain valid for their original term but values in litas (eg prices, outstanding payments) will mean the value in euro converted in line with the fixed conversion rate. Therefore, the switch to euro cannot itself necessitate revising or terminating any commercial contracts, unless a contract specifically indicates that a change of currency is a ground for revision or termination. The main principle of conversion is that the amount in litas is divided by the fixed conversion rate and the value obtained is rounded to two decimals.
Nevertheless, as regards newly concluded and existing long-term contracts, it would be advisable to add references to euro and review other relevant provisions in order to avoid uncertainties related to the upcoming conversion to euro. This is especially relevant for contracts with parties from non euro zone countries which currently refer to litas.
Accounts and loans
On the day of euro introduction all loans and funds in bank accounts will be converted from litas to euro in line with the fixed conversion rate. Conversion by banks and other financial institutions must be free of charge, ie no conversion or other fees can be levied on account holders and borrowers.
All references in loan agreements to the VILIBOR rate will automatically be regarded as references to the EURIBOR rate from the conversion date, unless the parties agree otherwise. Where a VILIBOR rate applies to a certain interest period starting before and ending after the conversion day, that rate will apply for the whole interest period. Meanwhile, references to overnight VILIBOR will be regarded as references to EONIA.
As the parties are free to agree on provisions to be applied in relation to euro introduction, it is advisable to carefully assess existing and new loan agreements from this perspective.
Changes to share capital
The Ministry of Economy has drafted a package of new laws and amendments on corporate matters. These, for example, include amendments to the Law on Companies and a draft Law on Expressing the Share Capital of Public and Private Companies and the Nominal Value of Securities in Euro and Changes to Articles of Association (the Law on Nominal Value). These draft laws have not yet been adopted and therefore are not final.
Under the draft amendment to the Law on Companies, the nominal value of shares in companies established from 2015 must be expressed in euro. However, the nominal value of shares in an existing private company (UAB) or public company (AB) can technically be changed from litas to euro only from 1 January 2015 when the draft Law on Nominal Value and the amendments to the Law on Companies will come into force.
From 1 January 2015, the nominal value of shares in newly established UABs should be expressed in whole euro (the minimum nominal value per share being EUR 1) and in newly established ABs in euro and tens of cents (the minimum nominal value being EUR 0.10). While converting share denominations in existing companies, the nominal value of shares in both ABs and UABs can be expressed in euro and decimal cents where the nominal value is rounded up to eurocents. For example, a nominal share value of LTL 10 will be converted to EUR 2.90.
The proposed amendments to the Law on Companies also include a decrease of the minimum share capital, which for a UAB will be EUR 2,500 (currently LTL 10,000, ie about EUR 2,896) and for an AB – EUR 40,000 (currently LTL 150,000, ie about EUR 43,443). This would slightly decrease company formation costs after 1 January 2015.
Existing UABs and ABs will have a deadline of 1 January 2017 to change their share capital denomination by amending their articles of association.
The procedure for amending articles of association will be significantly simplified if only the nominal share value is converted:
- the decision to amend the articles of association may be adopted at the general shareholders meeting by a simple majority of votes;
- the documents (eg, amended articles of association) will not require certification by a notary public;
- no register fees need be paid for registering these amendments to the articles of association.
These exceptions will not apply when the articles of association also contain other changes.
Lessons from Latvia and Estonia
SORAINEN clients operating in the Baltic States who have already undergone the transfer to the euro from the kroon in Estonia (in 2011) or the lat in Latvia (in 2014) have not experienced major inconvenience, though a few noted some issues that require more preparation.
For example, it is advisable to pay special attention to adjustments and calibration required by IT and accounting systems. Larger banks, insurance, retail and some other major companies in Estonia and Latvia required extra temporary staff for the transitions. In these cases it is wise to plan in advance to arrange for additional employees on a short-term basis or for overtime work by existing employees. It is also advisable to perform in advance a review of company procedures and key documents in order to identify whether and what changes would be required due to the currency change.