submit their tax returns electronically through a self-reported system, with the tax authority conducting compliance assessments to ensure corporations fulfill their tax obligations.<sup>4</sup>

**Data** . We use microdata on the universe of limited liability corporate taxpayers between 2015 and 2020 to characterize firms’ responses to the existence of different CIT rates.<sup>5</sup> In Table 1 we present key descriptive statistics for the data. The entire panel is composed of almost 600,000 firm-year observations, with between 90,000 and 105,000 filers per year in the more recent periods. We highlight a key change in the composition of limited liability firms in the period.<sup>6</sup> In 2015 over 90% of them were joint stock companies (UAB) and 7% were small partnerships—the remaining entities are a mix of agricultural companies, cooperatives and a range of public institutions. Between 2015 and 2020, the share of small partnerships increased by 12 p.p., with an equivalent decrease in the share of private companies. Geographically, 80% of firms are from the three main regions of the country—Vilnius, Kaunas and Klaipeda. As in most countries, the distribution of firms is characterized by a long right-tail of large firms and a majority of small ones. While the average turnover (gross revenue) in 2020 was close to €1 million, the median was below €50,000 and over 15% of firms reported zero turnover. Approximately 20,000 firms (or 20% of those filing corporate income taxes) report turnover above the €300,000 threshold that defines larger firms (those not receiving the preferential 5% income tax rate). Across years, the average tax liability is quite stable at approximately €13,000 (median below €1,000). The same dispersion is observed for number of employees: the average number is 62 but the median is only 2 employees.<sup>7</sup>

> 4The tax authorities focus their enforcement activities on taxpayers with a higher likelihood of non-compliance, utilizing a risk-based approach that encompasses a variety of methods, including general risk reviews, questionnaires, reviews of specific issues, and tax audits (see https://taxsummaries.pwc.com/lithuania/corporate/tax-administration).

> 5To streamline our analysis, we have chosen to exclude other corporate structures, such as sole proprietorships, general partnerships, and limited partnerships that file a different tax form. Furthermore, we have limited our time frame to years when the threshold remained constant, omitting observations between 2011 and 2014.

> 6That change in the nature of corporate entities is likely a result of incentives in the personal income tax system, which provides benefits for owners of small partnerships. This illustrates the important links between Personal Income Taxes (PIT) and the choice of corporate form.

7While the median number of employees is stable over time, the average increases steeply from about 11 in 2015 to over 60 in 2020. That is driven by an increase in the number of very large firms: the largest firm by number of employees in 2015 has approximately 45,000 employees and only 5 firms have more than 10,000 employees. In contrast, the largest firm in 2020 has almost 100,000 employees and almost 100 firms declare 10,000 employees or more.

5