Corporate profit tax
The Corporate profit tax is levied on:
- Lithuanian entities, i.e. legal persons incorporated in accordance with Lithuanian law;
- foreign entities, i.e. a legal persons or an organisations with their headquarters located in the territory of a foreign state and incorporated or founded in accordance with the laws of the foreign state, as well as any other taxable entity incorporated or founded in a foreign state.
The taxable income of a Lithuanian entity is income earned in the Republic of Lithuania and abroad. The taxable income of a foreign entity is income from activities carried on through a permanent establishment situated in the territory of Lithuania as well as income earned in foreign countries and attributed to the said permanent establishment in Lithuania.Income of a foreign entity sourced in Lithuania and received otherwise than through a permanent establishment situated in the territory of Lithuania is also subject to Lithuanian corporate profit tax and is as follows: interest income; income from distributed profits; royalties; income from the sale, transfer or rent of immovable property situated in the territory of Lithuania; compensations for the breach of copyright and neighboring rights; income received from the sport or entertainment activity, annual bonus paid for the activity of members of the supervisory council.
The taxable profit of a Lithuanian entity is calculated by deducting the non-taxable income and deductible expenses, including deductible expenses of limited amounts, from the income received over the taxable period. The deductible expenses include all the usual costs that the entity actually incurs for the purpose of earning the income of the entity or receiving the economic benefits of the entity. The annual corporate profit tax return accompanied by financial accounts shall be filed after the end of the taxable period and before the fifteenth day of the sixth month of the next tax period.
In principle, the accounting year should coincide with the calendar year for tax purposes. The local tax administrator may, at the request of the taxpayer and having considered the business features of that taxpayer, set another taxable period provided that it is at least twelve months.
The taxable profit of Lithuanian entities is taxed at a rate of 15%. The taxable profit of the entities whose average number of employees does not exceed 10 and whose income over the taxable period does not exceed the maximum of EUR 300 thousand is taxed at a rate of 0% in the first taxable period and 5 % in the other taxable periods.If more than 50% of entity’s income during the taxable period comes from agricultural activities, including cooperative societies (cooperatives) income from the sale of their members’ agricultural products, taxable profit is taxed at 5% corporate tax rate.
Valuation of assets
In general, business assets must be valued at cost. But for the purpose of calculating taxable profit the acquisition price of assets shall comprise expenses incurred in the course of acquiring assets, including the commissions and taxes (levies) paid, except for VAT, in connection with the acquisition of such assets.
Depending on the sort of assets, depreciation shall be charged subject to the expenditures and deducted from income over the following periods:
- Buildings including renovations (own property) 8 to 20 years
- Plant and machinery 2 to 5 years
- Office equipment 3 to 6 years
- Cars 4 to 10 years
- Trucks and buses 4 years
- Software 2 to 3 years
- Goodwill 15 years
Assets should be depreciated down to a residual value.
Interest (thin capitalisation)
Interest payable related to external financing which is in accordance with true market value is an allowable deduction for tax purposes. The maximum permissible related-party debt/equity ratio is 4:1 (thin capitalisation rule).
If losses are incurred during the taxable period after deducting the non-taxable income and allowed deductions, such losses will be carried forward to the following taxable period (fiscal year), but not exceeding 70 % of the net taxable income, except for the losses that have been incurred as a result of trading in securities and/or derivatives. Losses incurred as a result of transferring securities and/or derivative financial instruments shall be carried forward to the following taxable period, however, this rule will apply if such losses will cover only the income received from the transfer of securities and/or derivative financial instruments.Losses of taxable period may be carried forward for unlimited period while losses incurred as a result of trading in securities and/or derivatives may be carried forward no longer than for 5 consecutive taxable periods. Losses may not be carried back.
Losses may be carried forward within the group companies under certain conditions: 1) on the day of transfer of the tax losses, the parent entity in the group of entities holds, directly or indirectly, at least 2/3 of shares (interests, member shares) or other rights to distributable profits of each of the subsidiaries taking part in the transfer of the tax losses; and2) tax losses are transferred between the entities within a group of entities which have been part of that group for an uninterrupted period of at least two years calculating until the day of transfer of the tax losses; or 3) tax losses are transferred or taken over by the entity (entities) of the group of entities which have been part of the group since the date of the entity’s (entities’) registration and will be part of the group of entities for an uninterrupted period of at least two years calculating from the date of the entity’s (entities’) registration.
A foreign entity may transfer tax losses (or part thereof) to a Lithuanian entity only where: 1) the foreign entity is a resident in EU Member States for tax purposes, which takes on one of the forms of business organisation listed in Annex to Council Directive 90/434/EEC and which is subject to tax specified in Article 3(c) of Directive 90/434/EC; and 2) tax losses transferred by the foreign entity may not be carried forward to the following fiscal year (or deducted from its income (profit)) under the requirements of legal acts of the EU Member State a resident of which the transferring foreign entity is for tax purposes, and 3) tax losses transferred by the foreign entity have been calculated (recalculated) in accordance with the provisions of local CIT Law.
Tax returns and Reports
Corporate profit tax returns are of the following types:
- annual corporate profit tax return;
- advance corporate profit tax return;
- tax return on income (amounts) paid to a foreign entity and on corporate profit tax calculated and entered in the budget;
- corporate profit tax return of a foreign entity carrying on its activities in the Republic of Lithuania (permanent establishment);
- tax return on corporate profit tax calculated and paid in respect of the dividends received and paid out;
- annual fixed corporate profit tax return.
Supplements to the annual corporate profit tax return:
- reports on mutual transactions or economic operations between associated entities;
- reports on controlled and controlling entities and individuals.
- report on derivative financial instruments;
- other returns and reports in the form established by the tax authorities.
10% withholding tax is imposed on interest and royalties paid to foreign (non-resident) taxable entities, compensations for violation of the copyright or neighboring rights, except for interests on deposits and subordinated loans that meets the criteria established by the Lithuanian Bank that are not subject to taxation. Interest on the Government securities is exempt from taxation as well.0% withholding tax is imposed on interest paid to EEA registered entities and entities established in countries where Lithuania has double tax avoidance treaties in place.0% withholding tax is imposed on royalties and compensations for violation of the copyright or neighboring rights paid to the EU registered company if the paying and receiving companies or the third EU company owning them both are related at least 2 years with holding of at least 25% in the capital.
15% withholding tax is imposed on income of foreign entities received on distributed profits (without any deductions), income from the sale, transfer or rent of immovable property situated in the territory of Lithuania; income received from the sport or entertainment activity and annual bonus paid for the activity of members of the supervisory council.
Following the participation exemption rule, the corporate profit tax is not imposed on dividends received from an entity in which the entity receiving the dividends has been holding an amount of shares entitling it to more than 10% of the total amount of votes for at least 12 subsequent months including the moment of dividend distribution. However, this rule is not applicable if foreign entity paying the dividends is registered or otherwise organised in offshore territories.
For the purpose of calculating taxable profit, entities shall accept the amount which is in line with the actual market price of a transaction or economic operation as income from such a transaction or economic operation and they must recognise the total amount of costs incurred during a transaction or economic operation which is in line with the actual market price of such transaction or economic operation as allowable deductions or limited allowable deductions. Transfer pricing documentation (local file) is obligatory for a company that sales income exceeding EUR 3,000,000 during the tax period of the last year.The transfer pricing documentation must be prepared for each controlled transaction exceeding EUR 90,000.
According to the legislation, the tax administrator has been given the right to adjust the prices fixed in the agreements between associated entities, where those prices are not in line with the actual market price, or/and revalue the income or payments. To find the effective market price the tax administrator may apply transaction value adjustment methods. Such methods and their application are defined by the supporting legislation.
Binding Ruling is also introduced into Lithuanian legislation. According to the supporting legislation, a tax payer may apply to the tax authorities for a binding decision to approve application of the tax legislation for perspective transactions, i.e. a tax payer before entering into certain transactions may ask for the Binding Ruling. The tax payer must describe the transaction, provide related documents and submit one or more reasoned taxation options. The decision of the tax authorities has to be taken within 60 calendar days, but this term may be extended for additional 60 calendar days period.The tax authorities shall approve or refuse to approve a taxation option provided by the tax payer, however, if the taxation option was not approved, the tax authorities are not required to provide the tax payer with suitable taxation option. It is noteworthy that applications have to be submitted for the prospective transactions only and shall not include considerations on the tax rate.
The tax authorities must follow the approved taxation option for the period set in the decision, however, Binding Ruling shall not have binding effect onto the tax payer. Term of the Binding Ruling cannot not exceed 5 years. The Binding Ruling shall cease to be effective upon amendment of legislation or case law. The tax authorities may not follow the Binding Ruling if factual circumstances of the transaction are different from those provided by the tax payer in the application or tax payer was only seeking for the tax benefits, etc.
Advance Pricing Agreements
According to the local legislation, taxpayers may conclude binding agreements with the tax authorities on transfer pricing of the perspective controlled transaction(-s) (Advance Pricing Agreements), i.e. a possibility to agree on certain transfer pricing principles and methods. The Advance Pricing Agreement on transaction that has already in progress or has been accomplished, is not available. The rules establishing that the Advance Pricing Agreements have to be concluded for the complex and unique controlled transactions, meaning that the tax authorities has a right to refuse to conclude the Advance Pricing Agreements for the transactions that are rather simple or do not raise doubts on application of arm’s length principles. Furthermore, the tax authorities have a right to refrain from concluding the Advance Pricing Agreement, if both associated parties are Lithuanian registered entities. If other counter-party is a foreign taxpayer – there is a possibility to initiate the mutual agreement procedure, i.e. the coordinate transfer pricing between Lithuanian and foreign tax authorities.The decision of the tax authorities has to be taken within 60 calendar days, but this term may be extended for additional 60 calendar days period.
The tax authorities must follow the Advance Pricing Agreement, however, it shall not have binding effect onto the tax payer. Term of the Advance Pricing Agreements cannot not exceed 5 years. The Advance Pricing Agreement shall cease to be effective upon amendment of legislation or case law. The tax authorities may not follow the Advance Pricing Agreement if factual circumstances of the transaction are different from those provided by the tax payer in the application and similar cases.