Permanent establishment

Lithuanian legislation requirements

Permanent establishment

Article 2 of the Corporate Tax Law defines permanent establishment as a form of a foreign company’s activity in Lithuania. A foreign company is treated having a permanent establishment in Lithuania, if business of that foreign company is permanently conducted in the territory of Lithuania without being organised in any form described above; the conduct of activity through a dependent person (agent) also could give rise to treatment of such activity as the permanent establishment. The definition of the permanent establishment also includes use of a construction site, object of a construction, equipment, or use of a construction for exploring and extraction of natural resources in Lithuania including drilling equipment and vessels.

The beginning of the permanent establishment’s activity is the date when the first transaction is concluded and the end of the activity is the date when all transactions are completed. Temporary interruptions in the activity of the permanent establishment (interruptions due to seasonal breaks, etc.) do not constitute a termination of activity.

Permanent establishment is not registered in the Register of Legal Entities and requires registration with the tax authorities only.

International treaties

Double tax avoidance treaty

Article 5 of the Double Tax Avoidance Treaty (hereinafter referred to as the “Treaty”) provides that for the purposes of this Treaty, the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. The term permanent establishment includes especially a place of management, a branch, an office, a factory, a workshop, and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

Notwithstanding the preceding provisions, the term permanent establishment shall be deemed not to include:

  • the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;
  • the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;
  • the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
  • the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;
  • the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character;
  • the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs above, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

Notwithstanding the above provisions, where a person – other than an agent of an independent status is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State (i.e. Lithuania) an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State (i.e. Lithuania) in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to of preparatory or auxiliary character, which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment.

According to the Treaty, the enterprise shall not be deemed to have a permanent establishment in a Contracting State (i.e. Lithuania) merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of an independent status.

Summing up provisions of the local and international legislation

According to the effective Lithuanian legislation, if provisions of the local tax legislation provides for other regulation than those established by the international treaties ratified by the Republic of Lithuania, then provisions of the international treaties shall prevail. Therefore, then considering the circumstances giving rise to a permanent establishment, the preference should be given to the Treaty.

According to the Treaty, the Parent is considered having a permanent establishment in Lithuania if all the below conditions are met:

  • Parent has a fixed place of business. Registered office of RO maybe considered as a fixed place of business;
  • Business of the Parent is wholly or partly carried out through a fixed place of business. Certain documentation on services performed possessed at RO’s premises, RO’s employees assistance to the above transactions maybe considered as performance of business through a fixed place of business;
  • Business is carried out permanently, i.e. services shall be carried out permanently.

However, the Treaty provides for exception stating that a fixed place of business and activity performed through this fixed place of business shall not give rise to a permanent establishment if the activity is limited to of preparatory or auxiliary character, like use of facilities solely for the purpose of storage, display or delivery of goods, maintenance of a stock of goods belonging to the company solely for the purpose of processing by another enterprise or maintenance of a fixed place of business solely for the purpose of carrying on any other activity of a preparatory or auxiliary character, etc.

Considering whether the activity performed by the Parent in Lithuania maybe attributed to the activity of preparatory or auxiliary character, number of factors have to be evaluated for the purpose. According to the official interpretation of the OECD Model Tax Convention, the decisive criterion is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole. Each individual case will have to be examined on its own merits. In any case, a fixed place of business whose general purpose is one which is identical to the general purpose of the whole enterprise, does not exercise a preparatory or auxiliary activity.