Research & Development Incentives

R&D Incentives

According to the Corporate Tax Law of the Republic of Lithuania, when calculating corporate income tax, the costs of scientific research and experimental development, except for depreciation or amortisation costs of fixed assets, shall be deducted three times from income for the tax period during which they are incurred where the scientific research and/or experimental development works carried out are related to the usual or intended activities of the entity which generate or will generate income or economic benefit.

The legal entities may establish their own depreciation and amortisation norms (shorter than standard ones) of fixed assets used in scientific research and experimental development set by the legislation.

In order to claim R&D tax incentives, these have to meet the certain criteria set below, i.e. factually have tangible novelty and possess scientific or technological indeterminacy decision. There are no activities, size, turnover or other requirements for claiming R&D tax incentives, except meeting the above criteria.

In order to benefit from R&D tax incentives, the legal entity must possess research and experimental development documentation confirmed by the CEO or its authorized person where tangible novelty and scientific or technological indeterminacy decision have to be disclosed, methods and targets to be met.

According to the local legislation, research and experimental development means a systematic creative activity of the study of the nature, human being, culture and society, and the use of the results of such activity. Research and experimental development include 3 activity spheres: 1) basic research (that means experimental and/or theoretical operations which are carried out primarily to acquire new knowledge about the essence of phenomena and/or observed reality without aiming, at the time of research, to use the obtained results for a specific purpose); 2) applied research (that means the experimental and/or theoretical operations carried out for acquiring knowledge and primarily aimed at attaining specific practical objectives or at solving tasks); 3) experimental development (that means a systematic activity based on the knowledge acquired through research and practical experience, the aim of which is to create new materials, products and equipment, develop new process, systems and services or to essentially improve those already created or developed; also to create, develop or to essentially improve solutions to problems faced by human beings, culture and society, based on the knowledge acquired through research and practical experience).

Where scientific research and experimental development works are acquired from another entity or a natural person, the costs incurred due to such acquisition shall be deducted from income only if the acquired scientific research and experimental development works have been carried out in a country of the European Economic Area or a state outside the European Economic Area which has concluded and brought into effect a treaty for the avoidance of double taxation with the Republic of Lithuania.

No review or consent of the tax authorities is required to benefit from R&D tax incentives.

The following R&D expenses may be included in the calculation for R&D tax incentive purposes:

 

  • wages of employees who directly involved in scientific research and experimental development works;
  • business trips directly related to scientific research and experimental development works;
  • costs of stock, materials and other short term assets;
  • costs for acquisition of services directly related to scientific research and experimental development works (consulting, leasing, repair, warehousing, telecommunication, etc.);
  • costs for acquisition of scientific research and experimental development works from other natural persons or legal entities;
  • import and input VAT from the above costs that was not deducted.

 

R&D tax incentives are permanent and simply deducted three times from income of the legal entity in the tax period during which they are incurred where the scientific research and/or experimental development works carried out. Costs of scientific research and/or experimental development works are based on accounting documents.

The transfer pricing methods used for determining arm’s length payments for R&D services are not set by the local legislation and general transfer pricing rules apply in this case. Cost sharing arrangement for R&D tax incentive purposes is not provided in the local legislation.

R&D cost sharing agreements are not regulated in our country.

Withholding tax rate applicable to a payment for the license of patents: 0% withholding tax rate if 25% of shares are hold by EU registered company for not less than 2 years (otherwise – 10%).

Withholding tax applicable to payments/royalties for know-how (i.e., under a licensing arrangement): 0% or 10% withholding tax.

If activities are acquired from a state of the European Economic Area or a state outside the European Economic Area which has concluded and brought into effect a treaty for the avoidance of double taxation with the Republic of Lithuania, these activities have to be stated at the market value.