Corporate Tax Lithuania 2016 - International Corporate Legal Guide

Lithuania currently has 53 treaties on the avoidance of double taxation of income and capital in force.  At the moment, two more treaties with Kuwait and Morocco are pending.  However, it is expected that they will come into force in the near future and will increase the number of treaties in force to 55.

The treaties follow the Lithuanian Model Tax Treaty, which is based on the OECD Model Tax Convention, taking into consideration the remarks of OECD experts.

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.

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.

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 stated otherwise in the treaty itself or the national law provides a more favourable regime.

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 in commercial activity in the Republic of Lithuania;
• engages in commercial activity in the Republic of Lithuania through a dependent agent;
• uses construction territory or an object of construction, installation or equipment in the Republic of Lithuania; or
• uses mechanisms or constructions, including borings and ships, for research into or mining of natural resources.

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

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 subject to VAT at 9% until 31 December 2016.
• Books and non-periodic publications are taxed at a 9% VAT rate.
• Newspapers, journals and other periodic publications with some exceptions are taxed at a 9% VAT rate.
• Passenger transport by regular routes determined by the Ministry of Transport and Communications or by the municipality, as well as transportation of luggage of these passengers, are taxed at a 9% VAT rate.
• Accommodation services being provided in accordance with the legal acts regulating tourism activities are taxed at a 9% VAT rate.
• Partly or wholly compensated pharmaceuticals and medical aid devices are taxed at a 5% VAT rate.
• Technical assistance devices for the disabled, and their repair, are taxed at a 5% VAT rate.

A 0% rate VAT is charged mainly on goods exported from the EU and certain related services of transportation and insurance, as well as on certain supplies of goods to another EU Member State; 0% VAT is also charged in a few other instances prescribed by law.

In general, VAT is charged on every transaction entailing the 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 those of a healthcare, social, educational, cultural and sporting 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.

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 taxable supply.  Accordingly, with some exceptions, input/import VAT that is directly or proportionally attributed to supply which is exempt from VAT cannot (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 of 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 if 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 foreign taxable persons, the laws also establish the shortest period for which VAT may be recovered, the minimal recoverable sum and the term (quite short) during which the request for VAT recovery may be submitted.

A taxable person registered in another EU Member State and seeking to recover Lithuanian VAT must submit the request to the Tax Administrator of the country of his establishment.

No, there are no other transaction taxes.

According to the EU Customs Code and related legal acts, customs 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.

Environmental 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 the corresponding taxation.

According to the Law on Corporate Income Tax, dividends paid by the Lithuanian entity to the non-resident entity are in general subject to a 15% withholding tax on corporate income.

However, 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 a natural person (including non-residents in Lithuania for taxation purposes), are taxable by the tax on personal income, at the rate of 15%.

In general, under the Law on Corporate Income Tax, the royalties (for the use or transfer of copyright and related rights, rights to use a franchise, or 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 a 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.

In general, interest paid by a Lithuanian company to non-residents (both natural and legal persons) is taxable at the same general rates 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 the condition that these interests are received not through the foreign person’s permanent establishment in Lithuania;

•           a part of interest not exceeding EUR 3,000.00 during a 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;

•           interest received by a natural person on non-equity securities, if those securities were acquired on or before 31 December 2013 and the redemption of those securities commenced not earlier than 366 days after the date of the issue of those securities;

•           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 if those securities were acquired on or before 31 December 2013;

•           interest on deposits held by a natural person in banking and other credit institutions established in the Member States of the European Economic Area, if those deposit contracts were signed on or before 31 December 2013.

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 degree, 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.

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 the 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.

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 of the amount and interest of the borrowed capital is followed.

See questions 3.4 and 3.5.

In case a natural person receives interest on non-equity securities, issued by a person connected with an individual through employment relations or relations which in their essence correspond to employment relations, that 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.  This provision is applicable only if the non-equity securities were acquired after 1 January 2014.

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

Where the conditions created or prescribed by mutual transactions or economic operations between associated persons (both resident and non-resident) are different from 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.

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 a 5% tax on corporate profits.

With some exceptions (see questions 3.1 to 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.

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.

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 the entity’s 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, are 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; and losses for the tax period.  The law specifies which of the 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 since 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 a maximum of 50% 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 the four succeeding taxation years.

Lithuanian tax laws also allow, under specific conditions, the transfer of all or a part of the losses within the group of legal entities, including 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 applicable laws, 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 the case when the costs were actually incurred.

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 that which is 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 himself holds 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.); or (ii) is not registered or otherwise organised either in the “white list” or 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 a 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 (or, 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 2/3rds 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:

i)          the foreign entity is a resident of an EU Member State for taxation purposes, has the organisation form indicated in the Annex to 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 its losses to the subsequent taxation year according to the tax laws of the country of its 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 the case that it has tax arrears, or in the case that it is released from the tax on corporate income during that particular taxation year because of the tax exemptions applied to it.

In a purchase of shares, the losses of the company will be carried forward to the following financial year according to the ordinary rules prescribed by the Law on Corporate Income Tax.  Losses for the tax period may be carried forward for an unlimited period (except the losses incurred as a result of transferring the securities and derivative financial instruments, which can be carried forward for five consecutive years only).  However, such carry-forward shall be terminated if the entity ceases the activities due to which the losses were incurred, except where the entity ceases the activities for reasons beyond its control.

It should be also noted that from the year 2014 the amount of tax losses carried forward (except those of small companies and those resulting from the transfer of securities and derivative financial instruments) may not exceed 70% of the tax-payer’s taxable profits of that tax period before deduction of the previous years’ tax losses.

The Law on Corporate Income Tax provides a special regime for carrying forward losses in reorganisations or transfers.  Under this law, the acquiring entity or entities continuing the activity taken over, or a part thereof, for a period not shorter than three years, may carry forward the losses of the acquired or transferring entity or entities (except for losses resulting from the transfer of securities and derivative financial instruments) related to the transferred activity incurred before the completion of the reorganisation or transfer and not carried forward to the following year.  Only the losses for the tax periods that are related to the transferred activity, or a part thereof, transferred by the acquired or transferring entity(-ies) and continued in the acquiring entity(-ies), can be transferred to the acquiring entity(-ies).

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 5.3 below).

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.

Owners of private land (excluding public road and forest land, and land owned by diplomatic or consular representatives) are charged 1.5% tax on the land per year, calculated from the cost of the land.  With some exceptions, owners of private land (excluding forest land and land with an agricultural purpose planted as forest) shall be taxed at 0.01-4% (depending on the decision of the municipality where the property is located) tax on the land per year, calculated from the tax 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 winnings 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 EUR 87.00-1,738.00.

According to the Law on Personal Income Tax, the Law on State Social Insurance, the Law on Health Insurance and the Law on Guarantee Fund, all employers having employees shall withhold 15% of personal income tax and social contributions in a total of 9% (6% for the State Social Insurance and 3% for compulsory Health Insurance) from gross salary at the expense of the employees.  In addition, employers shall also have to pay out of their expenses the social insurance contribution of 30.98% and the contribution of 0.2% to the Guarantee Fund, both calculated from the gross salary of the employees.

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.

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.

See question 5.1.

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 an investment project, are determined by the Law on Corporate Income Tax.

The taxable profit of the entity may be reduced by a maximum of 50% 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 the four succeeding taxation years.

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, which is received by a foreign entity otherwise than through its permanent establishment in Lithuania, is subject to 15% withholding tax on corporate income.

However, in the 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 a recalculation of the tax (i.e. to calculate it from the profit, but not from the income) and for the return of the overpaid tax amount.

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

Taxable profits of a local subsidiary cover income sourced both in Lithuania and in foreign countries.  Taxable profits of a Lithuanian branch of a non-resident company also cover income sourced both in Lithuania and in foreign countries, but only the one  attributable to the activities of that branch.

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.

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%.

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

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

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 either be released from the Lithuanian tax on corporate income, or there may be a possibility to deduct, proportionally, the tax paid abroad from that which is payable in Lithuania.

According to the Law on Corporate Income Tax, dividends received by a Lithuanian entity from a non-resident entity are, in general, subject to corporate income tax at 15%.

Nevertheless, 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 12 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 or 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.

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 4.4.

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 subject to income taxes.  Income received by legal entities as well as natural persons is taxed accordingly, through a 15% corporate income tax or personal income tax.

However, in some cases the income of natural persons from disposals of real estate is tax-exempt, for example:

• income from the sale of immovable property located in a 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 residential housing (including attributed land) located in a 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;
• income from the sale of residential housing (including attributed land) located in a 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.

No, there is no such kind of tax.

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 cannot be normally registered in the name of a foreign trust.  So there is no special tax regime either.

However, it is possible under the Civil Code to make a 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.

Starting from 2002, the issue of preventing tax avoidance has been 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 of these is concluded with a view to gaining a tax benefit (i.e. deferring the deadline for the payment of tax, reducing or fully avoiding the payable amount of tax, increasing the tax overpayment/difference to be refunded/credited or shortening 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-mentioned principle, particular tax laws establish specific anti-avoidance rules, such as the right of the tax administrator to re-evaluate the transactions between associated persons (see question 3.9), and “thin capitalisation” rules relating to 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 4.4); the obligation to include into the taxable profits the positive income of the controlled foreign entity (see questions 4.3, 4.4 and 7.3); and not allowing the decrease of the taxable profits by losses of financial activities, etc.

Seeking to reinforce the tax avoidance prevention and anti-abuse rules, numerous amendments to the Law on Tax Administration were adopted.  For example, since 1 January 2013 natural persons (permanent residents of Lithuania) are obliged to submit to the Tax Inspectorate, once a year, information on particular transactions (see question 9.2); the Tax Inspectorate is entitled 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 of up to one year; the Tax Inspectorate is also entitled 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.

A number of new amendments related to information exchange in the area of taxation are to come into force in the very near future: from 1 January 2016 banks and other financial entities shall have to inform the Tax Inspectorate of opened and closed bank accounts of persons, annual turnovers, balances thereof and any other information which is required by the Tax Inspectorate.  The Tax Inspectorate shall provide the aforementioned information on members of EU or other foreign countries in accordance with international agreements.  Furthermore, until 30 June 2016 natural persons shall inform the Tax Inspectorate of the sources of income and assets acquired (including borrowed monetary funds) after 1 January 2011, except in cases where this information has already been provided to the Tax Administrator at an earlier date.

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 to the Tax Inspectorate, once a year, information on every transaction meeting all of the following conditions:

• the transaction is not certified by the notary;
• under this transaction 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 EUR 15,000.00 during one calendar year; and
• income received under this transaction 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 for economic purposes, it will apply the content-over-form principle (see question 9.1).

As mentioned in question 9.1 above, recently the Law on Tax Administration was amended and from 1 January 2016 new measures related to information disclosure and exchange are to be introduced.

First of all, banks and other financial entities shall have to inform the Tax Inspectorate of opened and closed accounts of the persons, annual turnover in the bank accounts (when it exceeds EUR 15,000.00), balances of accounts at the end of the year (if balance exceeds EUR 5,000.00), interests, loans and any other information which is required by the Tax Inspectorate.  The banks and other financial entities shall also provide the same information about foreign residents (except data about turnover and balances) to the Tax Inspectorate and the latter shall be entitled to provide it further to other EU Member States and other foreign countries in accordance with its international obligations deriving from Council Directive 2014/107/EU of 9 December 2014 amending Directive 2011/16/EU as Regards Mandatory Automatic Exchange of Information in the Field of Taxation, and international agreements on information exchange in the taxation area concluded between Lithuania and foreign countries.  Lithuania has relationships on exchange of information with 54 jurisdictions through 53 Treaties for the Avoidance of Double Taxation and one Tax Information Exchange Agreement.

From 1 January 2016, legal entities shall also be obliged to periodically inform the Tax Inspectorate of: their particular debts against natural persons as well as of particular debts of the natural persons before the legal entities, should the outstanding amounts exceed EUR 15,000.00 at the end of the financial year; the services they received from foreign legal entities if their value exceeded EUR 15,000.00 per year; as well as the employees hired by the lease agreements.

Furthermore, until 30 June 2016 natural persons shall inform the Tax Inspectorate of the sources of income and assets acquired (including borrowed monetary funds) after 1 January 2011 except in cases where this information has already been provided to the Tax Administrator at an earlier date.  Should the natural person fail to fulfil this obligation, the Tax Administrator shall not accept later the information on the sources of that income and those assets.

Finally, anti-money laundering rules are also applicable to business transactions.  According to these rules, the banks, insurance undertakings, closed-ended investment companies, trusts, company service providers, auditors, notaries, bailiffs and some other service providers, having established that their customer is performing a suspicious transaction or monetary operation, must suspend that operation or transaction and report it to the competent institution (in most cases, the Financial Crime Investigation Service).

In August 2014, Lithuania and the United States signed the Foreign Account Tax Compliance Act (FATCA), an agreement on improvement of the enforcement of international tax obligations.  The first exchange of information between Lithuania and the United States will take place in September 2015.

In 2014, Council Directive 2014/107/EU of 9 December 2014 amending Directive 2011/16/EU as Regards Mandatory Exchange of Information in the Field of Taxation was amended.  Lithuania set the deadline to implement its provisions into national law by the end of 2015.  On 1 June 2014 Lithuania also joined the Multilateral Convention on Mutual Assistance in Tax Matters issued by OECD in 1988, and, in accordance with Article 6 of Convention, signed the OECD Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information.  As a member of early implementation of the Standard for Automatic Information Exchange of Financial Account Information in Tax Matters (the Common Reporting Standard), Lithuania is committed to perform the Common Reporting Standard according to a strict schedule, and to implement legal measures for automatic information exchange by the end of 2015, in order to start real information exchange in September 2017 (providing information for 2016).  Meeting these international obligations, a number of amendments to the Law on Tax Administration related to information disclosure and exchange have already been adopted (see questions 9.1 and 9.2 above).

There are no preferential tax regimes in Lithuania.