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Corporate Tax Lithuania 2014

2013-10-23 11:00
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1 Tax Treaties and Residence

1.1 How many income tax treaties are currently in force in Lithuania?

Lithuania currently has fifty treaties on the avoidance of double taxation of income and capital in force.

1.2 Do they generally follow the OECD or another model?

The treaties follow the Lithuanian Model Tax Treaty that is based both on OECD and United Nations Model Tax Conventions, taking into consideration the remarks of OECD experts.

1.3 Do treaties have to be incorporated into domestic law before they take effect?

These treaties are applied directly and do not have to be incorporated into domestic laws. The treaties come into force after they have been signed and ratified by the Lithuanian Parliament. The treaties themselves may also indicate a later moment of coming into force.

1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)?

Lithuanian treaties on avoidance of double taxation usually do not incorporate special anti-treaty shopping rules, with minor exceptions (e.g. the treaties with the USA and UK, etc.). Nevertheless, most of them contain beneficial ownership requirements in the articles regulating taxation of dividends, interest and royalties and an arm’s length requirement applicable to the transactions between related parties.

1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced subsequently)?

International treaties have supremacy over domestic laws in Lithuania. As the treaty comes into force, it overrides the domestic laws of the same field, unless it is stated otherwise in the treaty itself or if the national law provides a more favourable regime.

1.6 What is the test in domestic law for determining corporate residence?

According to the Law of the Republic of Lithuania on Corporate Income Tax (the Law on Corporate Income Tax), a Lithuanian taxable entity is a legal person registered under the requirements of the legal acts of the Republic of Lithuania.
Still, under the same Law, the foreign entity shall be considered as having its permanent establishment in Lithuania and therefore the income received through it shall correspondingly be taxed here, if the foreign entity permanently (in general – for a period exceeding six months) either:
- engages into commercial activity in the Republic of Lithuania;
- engages into commercial activity in the Republic of Lithuania through the dependant agent;
- uses construction territory or an object of construction, installation or equipment in the Republic of Lithuania; or
- uses mechanisms or constructions for the research or mining of natural resources, including borings and ships.

2 Transaction Taxes

2.1 Are there any documentary taxes in Lithuania?

Stamp duties and State fees of exact established amounts are applied only for the precisely defined formal services of State institutions, e.g. review of the application or an issue of the document, etc.

2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates?

Lithuania has value added tax which is harmonised with the EU acquis. The standard VAT rate currently is equal to 21%. Still, for some goods and services reduced rates are applied, namely:
- Heat energy for the heating of residential premises, hot water supplied to these premises or cold water for preparing hot water and heat energy to warm it, are taxed with 9% VAT until 31 December 2013.
- Books and non-periodic publications are taxed at a 9% VAT rate.
- Newspapers, journals and other periodic publications with some exceptions shall be taxed at a 9% VAT rate from 1 January 2013.
- Partly or wholly compensated pharmaceuticals and medical aid devices are taxed with 5% VAT until 31 December 2012.
- Passenger transport by regular routes determined by the Ministry of Transport and Communications or by the municipality, as well as transportation of passenger luggage referred to these passengers, are taxed at a 9% VAT rate.
- Supply of medicines and medical aid equipment when such supply is made to persons to whom the acquisition costs are compensated in whole or in part pursuant to the Law on Health Insurance are taxed at a 5% VAT rate until 31 December 2013.
- Technical assistance devices to the disabled and their repair are taxed at a 5% VAT rate.
0% rate VAT is charged mainly on goods exported from the EU and certain related services of transportation and insurance, as well as on the certain supply of goods to another EU Member State; 0% VAT is also charged in a few other instances prescribed by law.

2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions?

In general, VAT is charged on every supply of goods or services, when the supply is effected by a taxable person in the performance of his economic activities, if the supply is for consideration and effected within the territory of Lithuania. Still, certain supplies of goods and services (such as of a healthcare, social, education, culture and sport nature, as well as certain mail services, radio, television, insurance, financial services, rent or sale of some real property, betting, gambling and lottery services, special marks, etc.), as well as some intra-community acquisitions, stay exempt from VAT.

2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions?

Under the Law on VAT of the Republic of Lithuania (the Law on VAT), input/import VAT may be entered for deduction if the goods or services purchased are used for the taxable supply. With some exceptions, input/import VAT that is directly or proportionally attributed to the supply which is exempt from VAT cannot accordingly (in whole or proportionally) be deducted. Under the Law on VAT, in some cases input/import VAT on the acquisition of entertainment and representation goods and services, motor vehicles, passenger transport services and also VAT paid on behalf of another person cannot be deducted, or its deduction is limited.
In general, VAT paid in Lithuania is recoverable; still, a few circumstances exist which should be noted. According to the laws, the difference between input and output VAT will firstly be included to cover the tax arrears of the same tax-payer, the overdue State loans to the tax-payer or the overdue loans, warranted by the State. The Law also restricts the maximum recoverable VAT sum to the sum of conditional or calculated VAT on taxable amounts of particular categories goods and services prescribed by the Law on VAT, such as goods and services in respect of which the 0% VAT rate was applied, acquired capital assets, etc.
As regards a foreign person’s right to recover VAT, under the Law on VAT, a taxable foreign person that: (i) is established in another EU Member State; (ii) is established in a third country and registered as a VAT-payer in an EU Member State for the electronic supply of services; or (iii) is established in a third country where the VAT paid (or any equivalent tax) is refundable to taxable persons of Lithuania, has a right to recover the VAT paid in Lithuania. With some exceptions, the foreign taxable person may apply for recovery of VAT only when he had no subdivision or place of residence and did not engage in commercial activity in Lithuania, which is subject to VAT, during the period in which he paid the VAT he is asking to be refunded.
With respect to the foreign taxable persons, the laws also establish the shortest period for which the VAT may be recovered, the minimal recoverable sum and the term (quite short) during which the request for VAT recovery may be submitted.
From 1 January 2010, a taxable person registered in another EU Member State and seeking to recover the Lithuanian VAT must submit the request to the Tax Administrator of the country of his establishment.

2.5 Are there any other transaction taxes?

No, there are no other transaction taxes.

2.6 Are there any other indirect taxes of which we should be aware?

According to the EU Customs Code and related legal acts, custom duties on particular goods imported into the EU within the territory of Lithuania are levied.
Excise duties are charged on ethyl alcohol and alcoholic beverages, manufactured tobacco, energy products (fuel, oil, gas, coal, etc.) and electricity.
Environment pollution tax is levied on subjects that in the course of their economic activity emit pollution, or manufacture or import into the Lithuanian market goods and/or packing that are potential sources of pollution (tyres, accumulators, batteries, oil and air filters, oil buffers, glass, plastic, metallic and other packing). Tax-payers that implement anti-pollution or treatment of waste standards may be exempt from corresponding taxation.

3 Cross-border Payments

3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident?

According to the Law on Corporate Income Tax, dividends paid by the Lithuanian entity to the non-resident entity in general are subject to 15% withholding tax on corporate income.
Still dividends paid by the Lithuanian entity to a foreign entity that incessantly for at least twelve months controls not less than 10% of voting shares/member shares in the Lithuanian entity shall not be subject to taxation, except for cases where the foreign entity receiving the dividends is registered or otherwise organised in target (“tax haven”) territories.
These provisions shall also be applicable when the treaty on avoidance of double taxation provides a less favourable regime. In case the treaty on avoidance of double taxation provides a more favourable regime, provisions of this treaty should be followed.
Dividends paid to the natural person, who is treated as a non-resident in Lithuania for taxation purposes, are taxable by tax on personal income at the rate of 20% until 31 December 2013. From 1 January 2014, dividends paid to the natural persons (incl. non-residents in Lithuania) shall be taxed at a rate of 15%.

3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident?

In general, under the Law on Corporate Income Tax, the royalties (for use or transfer of copyright and related rights, rights to use franchise, industrial ownership – patents, trademarks, models and know-how) paid by a Lithuanian company to a non-resident company having no permanent establishment in Lithuania are subject to 10% withholding tax (without any deductions).
Still, the royalties, paid by a Lithuanian company to a related EU company (the beneficial owner of royalties), both corresponding to the criteria established by the Law on Corporate Income Tax, are exempt from withholding tax in Lithuania.
The Lithuanian company, while paying a royalty to a foreign natural person that is not engaging in any related commercial activity in Lithuania, must deduct 15% tax on personal income.
However, the applicability of the Lithuanian tax rate on royalties may be mitigated by the Lithuanian treaties on the avoidance of double taxation in force.

3.3 Would there be any withholding tax on interest paid by a local company to a non-resident?

In general, interest paid by a Lithuanian company to non-residents (both natural and legal persons) is taxable at the same general rates as indicated in question 3.2.
However, the following interest paid by a local company to a non-resident is tax-exempt in Lithuania:
• interest paid to a foreign legal person that is registered or otherwise organised within a Member State of the European Economic Area or within a State with which Lithuania has a treaty on the avoidance of double taxation in force, and received not through the foreign person’s permanent establishment in Lithuania;
• interest on securities issued by the Government and interest accrued and paid on deposits and interest on subordinated loans which meet the criteria set down by the legal acts of the Bank of Lithuania, under condition that these interests are received not through the foreign person’s permanent establishment in Lithuania;
• from 1 January 2014 – only a part of interest not exceeding LTL 10,000 during tax period (calendar year), received by a natural person on all kinds of non-equity securities as well as on deposits held in banking and other credit institutions in Lithuania or any foreign country if such securities are acquired and deposit contracts are signed from 1 January 2014; and
• until 31 December 2013 with minor exceptions:
 interest received by a natural person on the loans granted, if the repayment of the loans commences not earlier than 366 days after the date of the granting of the loan, and interest received by the natural person on securities, if the redemption of those securities commences not earlier than 366 days after the date of the issue of those securities; and
 interest received by a natural person on securities of the Governments and political or geographic administrative subdivisions of the Member States of the European Economic Area, as well as interest on deposits held in banking and other credit institutions, established in the Member States of the European Economic Area.

3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules?

Firstly, Lithuanian “thin capitalisation” rules apply only to the extent to which the ratio between the capital borrowed from the controlling creditor and the fixed capital of the Lithuanian entity-debtor exceeds 4:1. The interest for the part of the loan exceeding the above-mentioned ratio cannot be deducted from the taxable income of the entity-debtor, unless the debtor proves that the same loan could be provided/received on the same conditions between unrelated persons.
For the purposes of the application of “thin capitalisation” rules, the controlling creditor shall be held to be any Lithuanian or foreign legal or natural person: (i) directly or indirectly possessing more than 50% of the Lithuanian debtor’s capital; or (ii) possessing at least 10% of the debtor’s capital and at the same time together with related persons possessing more than 50% of the debtor’s capital. Any member of a group of entities (a group consisting of a parent entity and one or more taxable subsidiaries, in each of which the parent entity holds more than 25% capital), as well as the creditor’s spouse, fiancé, cohabitating partner and relatives up to first grade, shall also be held to be controlling creditors.
While applying “thin capitalisation” rules, the borrowed capital covers loans granted and convertible bonds issued by the controlling creditor, loans granted by third persons, but guaranteed by the controlling creditor, and even loans guaranteed by third persons to whom, at the same time, the controlling creditor issued the guarantee.
The fixed capital for “thin capitalisation” purposes means the equity capital of the debtor, excluding the debtor’s financial result (profit/loss) of the current financial year.
The above-mentioned rules are not applicable against the financial institutions providing financial rent or financial leasing services.
Secondly, the interest or rent fee that depends on debtor’s turnover, income, profit and so on, and interest that may be converted into the creditor’s right to the debtor’s capital, cannot be deducted from the taxable income of the debtor.
As regards interest paid by a Lithuanian entity or permanent establishment to foreign entities registered or otherwise organised in target (“tax haven”) territories, see also question 4.3.

3.5 If so, is there a “safe harbour” by reference to which tax relief is assured?

As indicated in question 3.4, “thin capitalisation” rules shall not be applied to the borrowed capital if the debt and fixed capital ratio of 4:1 is not exceeded; and even when exceeded, if the arm’s length principle in respect to the amount and interest of the borrowed capital is followed.

3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company?

See questions 3.4 and 3.5.

3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non-resident?

Until 31 December 2013, in case a natural person provided a loan to a local company, of which he is the owner/member or to a local company in which he works, and the interest paid out by this company exceeds the real market price, the relief from the tax on personal income on this interest (see question 3.3) shall not be applied.
From 1 January 2014, in case a natural person received an interest on non-equity securities issued by a person connected with an individual by employment relations or relations in their essence corresponding to employment relations is higher than the interest paid by the same person to other holders of such securities, the relief from the tax on personal income on this interest (see question 3.3) shall not be applied.

3.8 Is there any withholding tax on property rental payments made to non-residents?

When a foreign entity (non-resident) having no permanent establishment in Lithuania rents out immovable property owned by him and located in Lithuania to the Lithuanian entity, to the foreign entity’s permanent establishment in Lithuania or to the natural person-resident of Lithuania, the rental payments received from these tenants are taxed with 15% withholding tax on corporate income.
When a natural person (non-resident) rents out the immovable property owned by him and located in Lithuania to the Lithuanian entity, to the foreign legal entity having permanent establishment in Lithuania or to the non-resident natural person through his permanent base in Lithuania, the income from rental payments received from these tenants is taxed with 15% withholding tax on personal income.

3.9 Does Lithuania have transfer pricing rules?

Where the conditions created or prescribed by mutual transactions or economic operations between associated persons (both resident and non-resident) are different from the similar ones created or prescribed between non-associated persons, the tax administrator may: re-evaluate the transactions according to their market value in similar conditions; reassess the taxable income and consequently the payable tax on income; and impose fines and penalties for the delayed payments, if any.

4 Tax on Business Operations: General

4.1 What is the headline rate of tax on corporate profits?

Currently profits of Lithuanian entities and permanent establishments of foreign entities in general are taxed at the 15% rate. Profits of small entities satisfying the requirements prescribed by the law are taxable by 5% tax on corporate profits.
With some exceptions (see questions 3.1-3.3 above), profits sourced in Lithuania and received by foreign entities other than through their permanent establishments in Lithuania are currently levied by a 10% (e.g. for interest, royalties, compensations for violation of copyrights or related rights) or 15% (e.g. for transfer or lease of immovable property located in Lithuania, distributable profits, including dividends, annual bonuses for the members of a supervisory or management board) tax on corporate profits.

4.2 When is that tax generally payable?

The taxation period usually is the calendar year or another twelve-month period requested by the entity. If the income during the previous year exceeds LTL 1,000,000 the tax on corporate profit for the next year must be payable in advance in quarterly instalments, the first three of which must be paid before the end of the current quarter, and the fourth instalment before the 25th day of the last month of the quarter.
The newly-incorporated entities are released from the obligation to pay tax on corporate profit in advance for the first year after incorporation.
The annual declaration must be submitted and the tax must be paid completely (taking into consideration that it may need to be paid in quarterly advance payments) before the first day of the sixth month of the next tax year.

4.3 Is the tax base accounting profit subject to adjustments, or something else?

Financial accountability of Lithuanian entities must be conducted following the Business Accounting Standards, approved by the Institute of Accounting of the Republic of Lithuania, or the International Accounting Standards, as defined in Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards. The taxable income of the entities must be calculated according to the Law on Corporate Income Tax. As the provisions of these legal acts differ in various aspects, including calculating both income and expenses/deductions, the profit calculated for financial accountability purposes may differ (and usually does) from the profit calculated for corporate income tax purposes.

4.4 If the tax base is accounting profit subject to adjustments, what are the main adjustments?

Differences between accounting profit and profit for corporate income tax purposes basically result from the differences in calculating both income and expenses/deductions.
For example, according to the provisions of the Law on Corporate Income Tax, the tax base of a Lithuanian entity is not just all income earned in Lithuania and foreign countries, but also the positive income of the controlled foreign entity or a part of it, as well as the income or a part of such income of the relevant European Economic Interest Grouping.
On the other hand, when calculating the taxable profits of a Lithuanian entity or of a foreign company’s permanent establishment, non-taxable income, allowable deductions and deductions of limited amounts shall be deducted from income. It should also be noted that taxable profits, earned by a foreign entity otherwise than through a permanent establishment, shall include all of its income sourced in Lithuania without any deductions.
According to the Law on Corporate Income Tax, income from the re-evaluation of assets and obligations performed in accordance with the procedure prescribed by legal acts, received default interest (except for default interest received from foreign entities organised in target territories or from residents of such territories), received compensation for damage, received insurance benefits which are not in excess of the value of the property lost or losses/damage incurred, profits resulting from transfer of shares if the transferor and amount of shares held by him correspond to the requirements of the Law on Corporate Income Tax (see question 5.1), and some other income, is treated as non-taxable.
Subject to the same law, allowable deductions shall include all usual costs that an entity (or permanent establishment) actually incurs for the purpose of earning income or deriving economic benefit, and all expenses for the benefit of employees in case this benefit is subject to taxation by tax on personal income in Lithuania.
Deductions of limited amounts foreseen by the law are the following: depreciation or amortisation costs of fixed assets; operating, repair and renovation costs of tangible fixed assets; costs of business trips; costs of advertising and promotional activities; natural losses; taxes; bad debts; expenses for the benefit of employees and/or their family members where the benefit is not subject to tax on personal income; special provisions of credit institutions and insurance undertakings; sponsorship; membership fees, payments and contributions; losses for the tax period. The law specifies what above-mentioned costs may be deducted partly and which of them fully, but in instalments during a few tax periods.
It should also be noted that from 1 January 2009, the taxable profit of the entity may be reduced by deducting expenses, incurred during 2009-2018 for acquisition of long-term property, used by the entity in the investment project. The taxable profit of the entity may be reduced by 50% at the maximum per one taxation year. The part of expenses not deducted during the first year may be used to reduce the taxable profit of the entity during four succeeding taxation years.
Lithuanian tax laws under specific conditions also allow transfer of all or a part of losses within the group of legal entities, including the cross-border transfers (see question 4.5).
Finally, costs such as VAT and tax on corporate income, default interest, fines and late payment interest paid to the budget and state funds and other sanctions for violations of legal acts of the Republic of Lithuania, interest or other payments made in respect of defaulting on contractual obligations by related persons, compensation for damage caused by an entity, payments which are not supported by the evidence specified in the law or are not taxed at source (when they should be), dividends or otherwise distributed profits, allowable deductions attributed to non-taxable income and limited allowable deductions, and some other costs indicated by the law, are treated as non-allowable deductions and cannot be deducted from the taxable income.
In addition, payments made by a Lithuanian entity or permanent establishment to foreign entities registered or otherwise organised in target (“tax haven”) territories shall be treated as non-allowable deductions, unless the Lithuanian entity or permanent establishment supplies evidence to the tax administrator that such payments are related to the usual activities of both parties, that the receiving foreign entity controls the assets needed to perform such usual activities, and that there exists a link between the payments and the economically grounded operation.
It should also be noted that amounts for deduction must be supported by the documents required by the laws and containing all the mandatory requisites of accounting documents, or if executed by the foreign persons – such documents must allow the identification of the content of the economic operation. Failing to have such documents shall result in impossibility to reduce the base of tax on corporate income even in case the costs were actually incurred.

4.5 Are there any tax grouping rules? Do these allow for relief in Lithuania for losses of overseas subsidiaries?

In general, each Lithuanian entity or permanent establishment of a foreign entity in Lithuania is treated as a separate tax-payer. However, income and losses of foreign permanent establishments of a Lithuanian entity must be included while calculating taxable corporate income of the Lithuanian entity. Depending on the treaties on the avoidance of double taxation, the income earned through permanent establishments abroad and taxed there may be either released from the Lithuanian tax on corporate income, or there may be a possibility to deduct, proportionally, the tax paid abroad from the one payable in Lithuania.
Secondly, the positive income of the controlled foreign entity shall, proportionally to its shares which are owned by the Lithuanian entity, be included in the taxable profits of the Lithuanian entity if:
• on the last day of the tax period, the Lithuanian entity holds directly or indirectly over 50% of the shares (interests, member shares) or other rights/pre-emptive rights to a part of distributable profits in the controlled entity; or
• on the last day of the tax period, the controlling person, together with related persons, holds over 50% of the shares (interests, member shares) or other rights/pre-emptive rights to a part of distributable profits in the controlled entity, and at the same time holds himself at least 10% of the shares (interests, member shares) or other rights to distributable profits or pre-emptive rights to the acquisition thereof; and
• the controlled foreign entity: (i) is organised in a country which is listed in the special list (“white list”) approved by the Ministry of Finance of Lithuania, but acquires special tax exemptions according to the laws of the country of registration (e.g. the holding company registered in the Grand Duchy of Luxembourg, the Trieste Free Zone Financial and Insurance Centre in Italy, Limited Liability Company in the USA, etc.); (ii) is not registered or otherwise organised both in the “white list” and in the “black list” (“tax haven”) countries, but is the payer of corporate income tax which amounts to less than 75% of the Lithuanian one; or (iii) is registered or otherwise organised in target (“tax haven”) territory.
The above-indicated rule shall not be applicable in cases where the income of a controlled foreign entity comprises only those payments made by the controlled entity which are treated as non-allowable deductions, or when the income of a controlled foreign entity comprises less than 5% of the income of the controlling entity.
Thirdly, the income of a European Economic Interest Grouping shall, according to the requirements of the laws and in the proportions laid down in the memorandum of association of the grouping (in the absence of any such provision – in equal shares), also constitute a part of the Lithuanian entity’s taxable profits.
Lithuanian tax laws allow the transfer of all, or a part of, any losses within the group of legal entities, including the cross-border transfers. According to the Law on Corporate Income Tax, only the losses of one entity calculated for 2010 or subsequent taxation periods may be transferred in order to decrease the taxable profits earned by the other entity during corresponding taxation periods. Additionally, the cross-border transfer of losses is possible only when the following conditions are met:
• the losses are transferred between the members of a group of entities, consisting of a parent entity and one or more taxable subsidiaries;
• the parent entity directly or indirectly holds not less than 2/3 of shares (interests, member shares) or other rights to the distributable profit of every subsidiary participating in the transfer of losses;
• the entities are the members of the same group incessantly for a period not shorter than two years, or they are the members of the said group for a shorter term from their registration, and shall incessantly stay in the group for a period not shorter than two years from their registration; and
• in case the foreign entity is transferring the losses to the Lithuanian entity, that foreign entity:
i) is the resident of the EU Member State for taxation purposes, has the organisation form indicated in the Annex to the Directive 90/434/EB and is the payer of the tax indicated in Point c Article 3 of the said Directive;
ii) the foreign entity cannot transfer his losses to his subsequent taxation year according to the tax laws of the country of his registration; and
iii) the losses of the foreign entity being transferred are calculated (recalculated) according to the provisions of the Law on Corporate Income Tax of Lithuania.
It should also be noted that the entity cannot transfer its losses in case it has tax arrears, or in case it is released from the tax on corporate income during that particular taxation year because of the tax exemptions applied to it.

4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits?

In general, both distributed and retained profits are taxed at the same rate, with the exemption of special relief for reinvestment executed during 2009-2018 (see question 5.4 below).

4.7 Are companies subject to any other national taxes (excluding those dealt with in "Transaction Taxes") - e.g. tax on the occupation of property?

Tax on immovable property is levied on immovable property located in the territory of the Republic of Lithuania and belonging to the legal person by the right of ownership, or managed by a legal person under a financial lease (leasing) agreement providing for transfer of the right of ownership, also under a hire purchase contract or a lease contract, as well as on immovable property (or a part of it) belonging to or acquired by a natural person but being transferred to the legal person for use for an indefinite period or for a period exceeding one month. The tax amounts to 0.3-3% (depending on the decision of the municipality where the property is located) of the taxing value of the property per year.
Private land (excluding public road and forest land, also land owned by diplomatic or consular representatives) owners are charged 1.5% tax on the land per year, calculated from the cost of the land. With some exceptions, since 1 January 2013 owners of private land (excluding forest land and land of agriculture purpose planted by forest) shall be taxed by 0.01-4% (depending on the decision of the municipality where the property is located) tax on the land per year, calculated from the taxing value of the land.
According to the Law of the Republic of Lithuania on Lottery and Gaming Tax, legal persons operating lotteries and gaming must pay lottery and gaming tax in the following amounts: 5% of the total face value of the tickets distributed in a lottery; in respect of bingo, totalisator and betting – 15% of the total amount of gamers’ stakes after deduction of the amount of gainings actually paid out; and in the case of machine gaming and table games, a fixed amount for each gaming device per calendar month, amounting to LTL 300-6,000.

4.8 Are there any local taxes not dealt with in answers to other questions?

In addition to the above-mentioned taxes, Lithuanian law prescribes State natural resources tax, petroleum and gas resources tax, overstock and production tax in the sector of sugar production, tax on additional quota for white sugar production, deductions from income under the Law of the Republic of Lithuania on Forestry, tax on use of State property by trust, inheritance tax, contributions to the Guarantee Fund, State social insurance contributions, compulsory health insurance contributions, fees for the registration of industrial property objects, stamp duties, State-imposed fees and charges, and consular fees.

5 Capital Gains

5.1 Is there a special set of rules for taxing capital gains and losses?

Capital gains constitute a part of the taxable income of a taxable entity and in general are taxed at the ordinary tax rate. Expenses incurred for the acquisition of the property transferred are, in general, deductible (see also question 5.5).
The participation exemption on capital gains tax still exists. The income from the increase in the value of assets, resulting from transfer of shares, received by a Lithuanian or foreign entity through its permanent establishment, is exempt from tax on profit in Lithuania, in case:
• the shares of an entity, registered or otherwise organised in a Member State of the European Economic Area or in a State with which a treaty for the avoidance of double taxation has been concluded and brought into effect and which is a payer of corporate income tax or an equivalent tax, are sold;
• the entity that transfers the shares held more than 25% of voting shares in the entity being transferred for an uninterrupted period of at least two years; or the entity that transfers the shares held more than 25% of voting shares in the entity being transferred for an uninterrupted period of at least three years in case the shares were previously transferred during special tax-exempt reorganisation or transfer indicated in the Law on Corporate Income; and
• the shares are not being acquired by the issuer of the shares itself.
The Law on Corporate Income Tax establishes special rules for the recognition and taxation of income from the increase in the value of assets in certain cases where entities are reorganised, liquidated or transferred, where a European company or a European cooperative society with a registered office in Lithuania transfers its registered office to another EU Member State.

5.2 If so, is the rate of tax imposed upon capital gains different from the rate imposed upon business profits?

See question 5.1.

5.3 Is there a participation exemption for capital gains?

See question 5.1.

5.4 Is there any special relief for reinvestment?

From 1 January 2009, the taxable profit of the entity may be reduced by deducting expenses, incurred during 2009-2018 for acquisition of long-term property, used by the entity in the investment project. The conditions, under which the project shall be held as investment project, are determined by the Law on Corporate Income Tax.
The taxable profit of the entity may be reduced by 50% at the maximum per one taxation year. The part of expenses not deducted during the first year may be used to reduce the taxable profit of the entity during four succeeding taxation years.

5.5 Does Lithuania impose withholding tax on the proceeds of selling a direct or indirect interest in local assets/shares?

According to the Law on Corporate Income Tax, income from the sale, other transfer into ownership or lease of property immovable by nature and located in the territory of the Republic of Lithuania, received by a foreign entity, otherwise than through its permanent establishment in Lithuania are subject to 15% withholding tax on corporate income.
However, in case of sale or other transfer of property, and after the tax is paid, the foreign entity is entitled to apply to the Tax Inspectorate asking for recalculation of the tax (i.e. to calculate it from the profit, but not from the income) and for returning the overpaid tax amount.

6 Local Branch or Subsidiary?

6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary?

No taxes are imposed, except for State and notary fees.

6.2 Are there any other significant taxes or fees that would be incurred by a locally formed subsidiary but not by a branch of a non-resident company?

No, there are no other such significant taxes.

6.3 How would the taxable profits of a local branch be determined in its jurisdiction?

The taxable profits of a local branch cover all the income attributable to the activities of the branch and sourced both in Lithuania and in foreign countries, after allowable deduction of the expenses incurred for the purposes of the branch.

6.4 Would such a branch be subject to a branch profits tax (or other tax limited to branches of non-resident companies)?

Income earned by the foreign company through the branch registered in Lithuania shall be subject to Lithuanian corporate income tax at the standard rate of 15%.

6.5 Would a branch benefit from double tax relief in its jurisdiction?

No, usually a branch would not benefit from tax treaty provisions.

6.6 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the branch?

Remittance of profits by the branch is not subject to any withholding tax or any other tax (except bank fees).

7 Overseas Profits

7.1 Does Lithuania tax profits earned in overseas branches?

In general, the tax base of a Lithuanian entity is all income earned in Lithuania and in foreign countries, including income earned in an overseas branch of a Lithuanian entity. However, according to the Law on Corporate Income Tax, income received from activities carried out through permanent establishments of Lithuanian entities in a state of the European Economic Area is not attributable to the tax base of the Lithuanian entities, whereas income from activities carried out through these permanent establishments is subject to corporate income tax or equivalent tax in this State. Moreover, depending on the particular treaty on the avoidance of double taxation, the income earned through the permanent establishment abroad and taxed there may be either released from the Lithuanian tax on corporate income, or there may be a possibility to deduct, proportionally, the tax paid abroad from the one payable in Lithuania.

7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company?

According to the Law on Corporate Income Tax, dividends received by a Lithuanian entity from the non-resident entity, in general, are subject to 15% corporate income tax.
Still dividends received by a Lithuanian entity from a foreign entity which is registered or otherwise organised in a State of the European Economic Area and whose profit is subject to corporate income tax or an equivalent tax shall not be subject to taxation. Also, dividends received by a Lithuanian entity from another foreign entity in which the Lithuanian entity incessantly, for at least twelve months, controls not less than 10% of voting shares/member shares shall not be subject to taxation, provided that the dividends are received from a foreign entity whose profit is subject to corporate income tax or an equivalent tax and which is not registered and is not otherwise organised in target territories.
These provisions shall also be applicable when the treaty on avoidance of double taxation provides a less favourable regime. In case the treaty on avoidance of double taxation provides a more favourable regime, provisions of this treaty should be followed.

7.3 Does Lithuania have “controlled foreign company” rules and, if so, when do these apply?

According to the Law on Corporate Income Tax, the positive income of the controlled foreign entity shall be included into the taxable profits of the controlling Lithuanian entity. Conditions for applying “controlled foreign company” rules are described in question 4.5.

8 Taxation of Real Estate

8.1 Are non-residents taxed on the disposal of real estate in Lithuania?

Income received by non-residents (legal entities as well as natural persons) from the sale or other transfer into ownership of real estate located in Lithuania is taxable by income taxes. Income received by legal entities as well as natural persons is taxed accordingly with 15% corporate income tax or personal income tax.
However, in some cases income of natural persons from disposals of real estate is tax exempted:
• income from the sale of immovable property located in the European Economic Area Member State, if the property was acquired more than five years prior to its sale or other transfer into ownership;
• income from the sale of the residential housing (including attributed land) located in the European Economic Area Member State, if the residence of the owner was registered in accordance with the laws in that residential housing for more than two years prior to its sale or other transfer into ownership; and
• income from the sale of the residential housing (including attributed land) located in the European Economic Area Member State, if the residence of the owner was registered in accordance with the laws in that residential housing for less than two years prior to its sale or other transfer into ownership subject to the condition that this income is used to buy other residential housing in a European Economic Area Member State within a period of less than one year from the date of the sale.

8.2 Does Lithuania impose tax on the transfer of an indirect interest in real estate located in Lithuania and, if so, what constitutes an indirect interest?

No, there is no such kind of tax.

8.3 Does Lithuania have a special tax regime for Real Estate Investment Trusts (REITs) or their equivalent?

Lithuania does not have any special regime for Real Estate Investment Trusts or their equivalents because the common law trust is not a generally recognised legal concept in Lithuanian law. Lithuania also has not ratified the Hague Trust Convention of 1 July 1985.
So there is no possibility to set up a Trust in Lithuania and trusts governed by the laws of foreign jurisdiction may be not recognised as having legal personality. As a result legal title to Lithuanian real estate property could not be normally registered in the name of foreign Trust. So there is no special tax regime as well.
However, it is possible under the Civil Code to make the property trust agreement where the trustor assigns to the trustee its property including immovable things by the trust right for a certain period of time, and the other party undertakes to possess, use and dispose of such property in the interests of the trustor or its beneficiary. Despite that, the trustor still remains the owner of the assigned property and has his ordinary tax obligations.

9 Anti-avoidance

9.1 Does Lithuania have a general anti-avoidance or anti-abuse rule?

Starting from 2002, the issue of preventing tax avoidance was resolved by a combination of general and specific anti-avoidance rules established in Lithuanian tax laws.
The main principle and general rule established in the Law on Tax Administration indicates that in respect of taxes, the content of the activities carried on by the participants of legal relations shall take precedence over their form. It means that where a tax-payer’s transaction, economic operation or any combination is concluded with a view to gaining a tax benefit (i.e. to defer the deadline for the payment of tax, to reduce or fully avoid the payable amount of tax, to increase the tax overpayment/difference to be refunded/credited or to shorten the time limit for refunding the tax overpayment/difference), the tax administrator shall apply the content-over-form principle for the purpose of calculating the tax. In this case, the tax administrator shall not take into account the formal expression of the tax-payer’s activity and shall recreate the distorted or hidden circumstances associated with taxation, as provided for in tax laws, and calculate the tax pursuant to the relevant provisions of the said tax laws.
Complementing the above-said principle, particular tax laws establish the specific anti-avoidance rules, such as the right of the tax administrator to re-evaluate the transactions between associated persons (see question 3.8), “thin capitalisation” rules relating to: the interest paid to controlling persons (see question 3.4); treating payments made to foreign entities in target (“tax haven”) territories as non-allowable deductions (see question 4.3); allowing the cross-border use of losses on strict conditions (see question 4.5); the obligation to include into the taxable profits the positive income of the controlled foreign entity (see questions 4.3, 4.5 and 7.3); and not allowing the decrease of the taxable profits by losses of financial activities, etc.
Seeking to reinforce the tax avoidance and anti-abuse prevention, the Law on Tax Administration was amended by the obligation of the natural person (permanent resident of Lithuania) to submit, once a year, to the Tax Inspectorate information on particular transactions (see question 8.2), by the right of the Tax Inspectorate to instruct the tax-payer to perform his settlements (i.e. to receive or to pay the money) only in a non-cash way for a period up to one year, and by the right of the Tax Inspectorate to determine, on its own judgment, the tax-payer’s tax liabilities at the level of the preceding fiscal year in case the tax-payer failed to submit the tax declaration in time. All above-mentioned amendments come into force on 1 January 2013.

9.2 Is there a requirement to make special disclosure of avoidance schemes?

There is no such general requirement to disclose tax avoidance schemes in Lithuania. However, from 1 January 2013, natural persons (permanent residents of Lithuania) have an obligation to submit, once a year, to the Tax Inspectorate, information on every transaction:
- which is not certified by the notary;
- under which the person receives money (including in the form of loans) from natural persons or from foreign legal persons;
- the amount of cash received under this transaction if it exceeds LTL 5,000 (apprx. EUR 1,448) during one calendar year; and
- income received under that which is not subject to declaration under other laws.
In addition, during the tax inspection the tax administrator may require the disclosure of the economic purposes of transactions which the company has performed. In case the tax administrator considers that the company’s transactions were performed with a view to gaining a tax benefit, but not to economic purpose, it will apply the content-over-form principle (see question 8.1).
Furthermore, anti-money laundering rules are also applicable to business transactions. According to these rules, the banks, insurance undertakings, close-ended investment companies, trusts, company service providers, auditors, notaries, bailiffs and some other service providers having established that their customer performs a suspicious transaction or monetary operation, must suspend that operation or transaction and report it to the competent institution (in most cases – to the Financial Crime Investigation Service).

Contact 
Attorney at Law, Tax Lawyer, Legal Project Manager
Telephone 
+370 5 2691101
Fax 
+370 5 2691010
Mobile 
+370 612 11222
Email 
laimonas.marcinkevicius@juridicon.lt