Allowable deductions include all the usual costs that an entity actually incurs for the purpose of earning income or receiving economic benefit unless the law on CIT provides otherwise.
Tangible and intangible assets may be depreciated using a directly proportional (straight-line) depreciation method, a production depreciation method, or a double-declining-balance depreciation method. Depreciation may not exceed maximum rates established by the law. For certain typical assets, depreciation rates relevant for tax purposes are shown in the chart below:
|Asset||Depreciation period (years)||Annual depreciation rate (%)|
|New buildings used for business activities||8||12.5|
|Plant and machinery||5||20|
|Trucks (not older than 5 years)||4||25|
|Computer and communications equipment||3||33.3|
Goodwill can be amortised for tax purposes using a straight-line method over 15 years after a merger of a purchasing company and an acquired company, provided that certain conditions are met.
Generally, start‑up expenses are deductible for tax purposes.
Interest expenses are generally deductible for tax purposes. Interest expenses should be generally recognised as non-deductible for tax purposes if, after acquisition, a purchasing company and an acquired company are merged and debt used for acquisition of shares is pushed down to the acquired company (possibility to deduct interest after merger remains only if certain conditions are met, e.g. economic benefit for surviving entity from such exercise is substantiated).
Interest paid to related parties may be non-deductible for tax purposes if thin capitalisation rules are infringed, limits of the EBITDA rule are exceeded, or the interest rate on a debt from the related party does not correspond to a fair market interest rate (see Thin capitalisation and EBITDA rules and Transfer pricing in the Group taxation section).
Bad debts are deductible only if proved that they cannot be recovered and specific criteria are met. Provisions are non-deductible.
Generally, double the amount of donation/sponsorship can be deducted for tax purposes (i.e. 200% deduction is available) but only if donation/sponsorship was provided to registered recipients and only up to a limit of 40% of taxable result before deduction of donation/sponsorship and utilisation of tax losses carried forward.
Fines and penalties
Fines and penalties are generally non-deductible for tax purposes.
All taxes, fees, and other compulsory payments to the state budget are deductible for CIT purposes, except VAT and CIT paid to the budget. Note that VAT can be treated as deductible for CIT purposes if it is treated as fully or partly non-deductible for VAT purposes and this input/import VAT relates to deductible expenses.
Other significant items
Limited deductible expenses also include the following:
- Maintenance, repair, and reconstruction expenses of tangible fixed assets: If the repair or reconstruction increase the service period and improve the qualities (useful characteristics of the fixed assets), the value of repair or reconstruction shall be added to the acquisition value of the tangible fixed assets.
- Business travel expenses: Deductible with restrictions.
- Advertising and representation expenses: 50% of representation expenses not exceeding 2% of the company’s income for the tax period are deductible.
- Natural losses: Deduction limited to not more than 1% (3% for fresh fruits, vegetables, and some other cases) of turnover.
- Contributions and expenses for the benefit of employees: Deductible with restrictions.
- Special provisions of credit institutions and insurance companies: Deductible when calculated according to the methods established by the Bank of Lithuania and the Commission of Insurance Supervision.
- Membership fees, contributions, and premiums: Deductible with restrictions.
Non-deductible expenses also include the following:
- Default interest (forfeit), fines, and late interest paid to the state budget as well as other sanctions imposed for violations of laws and regulations of Lithuania.
- Interest or any other indemnity paid due to non-performance of contractual obligations by related parties.
- Amount of the limited deductible expenses in excess of the established limits.
- Expenses attributed to allowable deductions more than 18 months past, although the payments for goods or services supplied by the entities registered or otherwise organised in blacklisted territories (see below) have not been made.
- Sponsorship and gifts that do not correspond to the requirements of CIT law.
- Payments to blacklisted territories (see below) if they are not verified and payments are not subject to WHT.
- Indemnification for damages inflicted by the entity.
- Dividends or otherwise distributed profits.
- Other expenses not related to the deriving of income and not attributed to operating activities of the entity, as well as the expenses that are not considered allowable deductions under the law.
- Amounts resulting from adjustments and corrections of errors of previous tax periods.
- Expenses related to revaluation of fixed assets and securities, except for financial instruments acquired for hedging purposes.
- Expenses incurred while earning non-taxable income.
- Expenses related to income from certain international maritime activities if a maritime entity chose to apply a fixed CIT.
Net operating losses
Operating losses may be carried forward for an indefinite period, provided that certain requirements are met.
Current year operating losses can be transferred to another legal entity of the group if certain conditions are met.
Losses incurred due to the transfer of securities and/or derivative financial instruments may be carried forward for five years (indefinitely for financial institutions).
Reduction of taxable profit by accumulated tax losses is limited to 70% of the taxable profit for the current year (except for entities that are subject to the reduced CIT rate of 5%). The rest of the accumulated tax losses can be carried forward for an unlimited period of time.
No carryback of losses is available in Lithuania.
Payments to foreign affiliates
Payments to foreign affiliates (e.g. interest, royalties, management fees, fees for other services) are deductible for tax purposes if the payment serves a business purpose, provides a benefit to the payer, is at arm’s length, and is substantiated by sufficient documentation. Payments to foreign affiliates may also be subject to various WHTs. Certain payments to affiliates located in tax haven (blacklisted) countries are subject to a 15% WHT rate.
A blacklisted territory is a foreign country or territory that is included on a list of offshore territories established by the Minister of Finance that meets at least two of the following criteria:
- Similar tax rate in such territory is below 75% of that set in the Lithuanian CIT law.
- In such territory, different rules for levying a similar tax are applied, depending on the country where the parent company (controlling entity) is registered or otherwise organised.
- In such territory, different rules for levying a similar tax are applied, depending on the country where the business is conducted.
- The company (the controlled taxable entity) has entered into agreement with the tax administrator of that territory with regard to the application of a tax rate or tax base.
- There is no effective exchange of information in such territory.
- There is no financial and administrative transparency in such territory, the tax administration rules are not quite clear, and the application thereof is not communicated to tax administrators of other countries.
A list of 49 offshore territories has been published. With certain exceptions specified in the law, all payments to offshore companies or their branches for any work or services, commodities, interest on funding, insurance premiums, guarantees, etc. are non-deductible for CIT purposes unless the Lithuanian entity provides evidence to the state tax authorities that:
- the payments are related to usual activities of the paying and the receiving business entities
- the receiving foreign business entity manages the property necessary to carry out such usual activities, and
- there is a connection between the payment and the economically grounded business operation.