Corporate income tax

Corporate income tax is payable by taxable entities:

1) Lithuanian entity -  legal person registered in accordance with the procedure established by legal acts of the Republic of Lithuania;

2) Foreign entity -  a legal person or organisation of a foreign state which has its registered office in the foreign state and which has been established or otherwise organised in accordance with the laws of that state; any other taxable entity established, formed or otherwise organised abroad.

Tax Base. All income earned in the Republic of Lithuania and foreign states form the tax base of a Lithuanian entity.

For a foreign entity, the tax base includes:

1) income from activities carried out by a foreign entity through its permanent establishments in the territory of the Republic of Lithuania;

2) income other than that received through  permanent establishments in the territory of the Republic of Lithuania, the source of which is in the Republic of Lithuania: 

• income received from interest;
• income received as profit allocation;
• income from authors' fees including fees for the granting of related rights;
• income received as a fee for the granting of the right to use an object of industrial property;
• franchise fee;
• fee for the provision of information on production, commercial or research experience (know-how);
• income received from sale, transfer or lease of property, which is immovable by nature and located in the territory of the Republic of Lithuania;
• income from compensation for the infringement of copyright or related rights.

Corporate Income Tax Rates. Taxable profit earned by Lithuanian entities and foreign entities in permanent establishments is taxed at 15%.

Income from a foreign entity which was received from a source in the Republic of Lithuania and not through the permanent establishment of the entity in Lithuania is taxed at the source at 10%.

Dividends and other income from profit allocations are taxed at 15%.

A 15% profit tax rate is imposed, without applying deductions, on support which has not been used according to the purpose as established in the Republic of Lithuania Law on Charity and Support. This tax is also imposed on the share of support received in cash from a single support provider during the tax period and exceeding an amount equal to 250 MSL (minimum standard of living).

Taxable profit earned by an entity whose average number of staff does not exceed ten people and whose income in the tax period does not exceed LTL 500,000 is taxed at 13% with the exception of cases established by the law.

Where an entity has an average number of staff not exceeding ten people and its income in the tax period does not exceed LTL 1 million - LTL 25,000 of the taxable profit is taxed at 0%, and the remainder at 15%, with the exception of cases established by the law. This rule applies to sole proprietor enterprises, general partnerships and limited partnerships.

A 0% tax rate is applied to taxable profit of entities having the status of a social enterprise and meeting certain conditions established by the law.

Tax Period. One calendar year is the tax period for corporate income tax. The local tax administrator may establish another tax period based on the taxpayer's application, taking into account the specificity of the taxpayer's activities.

Calculation of Taxable Profit. For the purposes of calculation of taxable profit of a Lithuanian entity, the amount of non-taxable income and allowed deductions (including limited-size deductions) are deducted from income received during the tax period. Allowed deductions include all costs of the entity usual for its relevant type of activities which are actually incurred, as such costs are necessary for receiving income or economic benefit for the entity. Limited-size deductions include:

• costs of depreciation/amortisation of fixed assets (asset depreciation/amortisation period is from 3 to 20 years depending on asset group); for tax purposes, two methods - straight-line or double-balance - are permitted;
• costs of operation, repairs and reconstruction of fixed tangible assets;
• business trip costs;
• advertising and entertainment costs;
• costs of natural loss;
• taxes;
• bad debts;
• contributions for the benefit of employees;
• special provisions of credit institutions and insurance companies;
• support;
• membership dues, contributions and payments;
• losses incurred during the tax period.

Income and deductions must be supported by documents containing all the mandatory details of accounting documents - established by legal acts governing accounting - and any other additional details established by the Government of the Republic of Lithuania or an institution authorised by it.

The law also establishes deductions from income that are not permitted:

• value-added tax payable to the state budget and corporate income tax;
• penalties; fines, and other sanctions paid to the state budget and public funds;
• interest or other payments pertaining to related parties' failure to discharge obligations;
• amount in excess of a limited-size deduction;
• dividend and other profit allocations;
• allowed deductions and limited-size allowed deductions assigned to non-taxable income;
• other costs not related to the earning of income and not typical of the entity's activities and costs not treated as allowed deductions under the law.

Payments by a Lithuanian entity or a permanent establishment to foreign entities registered or otherwise organised in target areas are treated as disallowed deductions if evidence that the payments are related to typical activities of both paying and receiving entities is lacking - and if there is a relation between the payment and the economic transaction justified from an economic point of view.

Bringing Forward of Losses. Losses incurred during a tax period can be carried forward for up to a maximum of five consecutive tax periods except for cases where losses have formed as a result of transfer of securities and/or derivative financial instruments. The latter losses can be carried forward for up to a maximum of three consecutive tax periods; however, they shall only be covered by income from the transfer of securities and/or derivative financial instruments.

Taxation of Dividend. In accordance with the law any dividend shall be taxed only once.

No corporate income tax is imposed on a dividend received by an entity through the application of the "participation exception" principle, provided that the dividend has been received from an entity which the recipient has been controlling (more than 10% of the voting shares [or other units]) for at least 12 months without interruption.

Reorganisation, Transfer or Liquidation of Entity. Aspects of taxation in case of entities' reorganisation, and transfer of assets have been harmonised with the provisions of Directive 90/434/EEC. Taxing of income from the asset value appreciation earned in transactions specified by the law is postponed both for participants and entities until the sale of the assets is complete.

Where the entity under liquidation distributes its assets to its members, such distribution is treated as sale of assets at real market value, while the difference in the asset acquisition cost and the selling price is treated as income from appreciation of the value of the asset. Upon liquidation of the entity any costs related to the transfer of assets are considered to be losses of the entity under liquidation.

Fighting Tax Avoidance. For the purposes of calculation of corporate income tax, the following main rules are applied as preventive tax policy measures to fight tax avoidance:

1. thin capitalisation rules: interest paid on the use of controlled borrowed capital, which is calculated based on the ratio of equity capital and borrowed capital, is considered to be unrelated to the earning of income, and the share of this interest is not deducted from the Lithuanian entity's income for the purposes of calculation of taxable profit;
2. rules of taxation for controlled foreign entities: in certain cases, positive income of a foreign entity controlled by a Lithuanian entity is included in the profit tax base of the Lithuanian controlling entity in proportion to the number of shares held.

The above provisions do not apply in cases where income of the controlled foreign entity consists only of payments made by the controlling entity comprising disallowed deductions, or where income of the controlled entity accounts for less than 5% of income of the controlling entity.

Transfer Pricing. In order to ensure appropriate distribution of the global corporate income tax base, the Law on Corporate Income Tax establishes that all transactions shall be conducted at real market price, i. e. entities shall recognise as income, or allowed deductions, any amount received from any transaction or any economic operation which corresponds to the real market price of the transaction/economic operation. In cases where transactions or economic operations between associated persons are conducted at a price other than the real market price, the tax administrator may correct prices of such transactions/economic operations. Rules for the implementation of these provisions in line with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration have been established by order of the Minister of Finance and have been in effect in Lithuania since 2004.

Administration. Taxpayers may calculate advance corporate tax amounts based on results of operations in a previous tax period or expected results for a tax period.  The annual corporate income tax return is to be submitted and the tax is to be paid on completion of the tax period, not later than the first day of the tenth month of the subsequent tax period.

Avoidance of Double Taxation. Lithuanian entities may deduct the amount of corporate income tax or equivalent tax paid in a foreign state, on the income received in that state, from the corporate income tax amount calculated in accordance with the procedure established by the law.

The Law on Corporate Income Tax adopted on 20 December 2001, came into effect on 1 January 2002. This law has replaced the Law on Income Tax of Legal Persons that had been in effect since 1990.   

Information from the website www.finmin.lt of The Ministry of Finance of the Republic of Lithuania.