Group taxation legislation and regimes are not available in Lithuania. Each Lithuanian entity is regarded as a separate taxpayer and may not deduct tax losses accumulated from previous tax periods at the level of any other group entity.
Transfer of current year operating tax losses incurred to an entity of the same group of companies is allowed if certain requirements are met.
All transactions between associated parties must be performed at arm’s length. The tax authorities have a right to adjust transaction prices if they do not conform to market prices.
The Lithuanian rules refer to the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations established by the OECD to the extent that they do not contradict with the domestic rules.
According to the Lithuanian transfer pricing regulations, companies may apply the following methods, although traditional methods should be given preference:
- Comparable uncontrolled price method.
- Resale price method.
- 'Cost plus' method.
- Profit split method.
- Transactional net margin method.
Transfer pricing documentation consists of two files: (i) Master File, which describes inter-company transactions in the worldwide context of an entity’s group, and (ii) Local File, which includes more detailed information and analysis about the local entity's inter-company transactions.
Local File should be prepared by all Lithuanian entities and foreign entities’ PEs with annual previous period’s revenue exceeding EUR 3 million, as well as all banks, insurance companies, and credit institutions (disregarding revenue).
Master File is mandatory if an entity belongs to the international group of companies and its previous period’s revenue in Lithuania exceeds EUR 15 million.
Intra-group transactions that exceed a threshold of EUR 90,000 per year must be documented in the Local File. If an entity enters into multiple similar transactions with one associated party, the threshold is applicable for the total amount of all transactions with that party. If the transaction is inextricably linked to another transaction, the same threshold of EUR 90,000 for the two transactions is applied jointly. No threshold is applied on transactions with associated parties that are registered or otherwise organised in blacklisted territories.
Starting from 1 January 2020, transfer pricing documentation requirements are not applicable to controlled transactions of a Lithuanian entity or a foreign entity operating through a PE in the Republic of Lithuania that are concluded with another Lithuanian entity or a foreign entity operating through a PE in the Republic of Lithuania, a permanent resident of Lithuania, and/or a non-permanent resident of Lithuania carrying out individual activities under a business certificate on a permanent basis if such transactions are related to their activities in Lithuania.
Starting from 1 January 2021, the possibility of applying a simplified transfer pricing approach for low value-adding intra-group services transactions was enacted. Under this simplified approach, a 5% mark-up on costs related to the provision of services that can be defined as low value-adding could be applied without requiring a formal benchmarking study. Domestic legislation regarding low value-adding intra-group services is in line with the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations established by the Organisation for Economic Co-operation and Development (OECD).
Transfer pricing documentation can be prepared in any language; however, tax authorities may request to provide translations to Lithuanian.
Transfer pricing documentation should be prepared by the 15th day of the sixth month after the end of the tax period when such transaction between associated parties took place. At the request of the tax administrator, documentation must be submitted within 30 days.
Information about the transactions provided in the documentation should be updated annually. If the economic circumstances of the controlled transactions remain the same and the relevant market situation does not change significantly, the benchmarking studies/comparative transaction data may be updated every three years; however, information on the controlled intra-group transactions still must be documented annually.
Penalties, amounting from EUR 1,820 to EUR 6,000, for non-compliance with the transfer pricing documentation requirements for transactions between associated persons could be imposed. Penalties are imposed on the head of the company or an authorised person.
Advance pricing agreements (APAs) and binding rulings are available in Lithuania. Taxpayers can apply for an APA or a binding ruling from the Lithuanian tax authority in respect of future transactions for the current and next five financial periods.
Decisions in the form of a binding ruling or APA will be issued by the Lithuanian tax authority regarding the application of tax legislation provisions and pricing principles. The above-mentioned decisions will be particularly relevant to companies planning to undertake new transactions where the taxation principles of such transactions are not clearly defined in the tax legislation and to international companies planning to perform significant transactions with associated parties.
Country-by-country (CbC) reporting
The CbC reporting obligation applies for multinational groups of companies with consolidated revenue of not less than EUR 750 million. According to the approved rules, the CbC report must be submitted electronically within 12 months after the last day of the taxpayer’s financial year.
The CbC report can be submitted in parts and it will be considered to be submitted when the last part of the CbC report is submitted.
The Lithuanian rules on the preparation and submission of the CbC report also provide that the CbC report notification (i.e. information for the Lithuanian Tax Authority about the legal entity filing the CbC report on behalf of the multinational group of companies) is to be submitted in a free form by the end of the Lithuanian company's financial year.
Thin capitalisation and EBITDA rules
The Lithuanian thin capitalisation rules apply in respect to borrowings from related parties as well as borrowings from third parties guaranteed by related parties. The controlled debt-to-fixed-equity ratio is 4:1. Interest expenses calculated on the exceeding part of the controlled debt are non-deductible unless a Lithuanian company (borrower) can prove that the same loan under the same conditions would have been granted by a non-related entity.
Additionally, as of 1 January 2019, a new interest limitation rule has been introduced. An entity is given the right to deduct interest costs exceeding interest revenue up to 30% of taxable EBITDA or up to EUR 3 million. If an entity belongs to the group of entities, the above criteria shall be applied jointly for all Lithuanian entities and PEs of foreign entities in Lithuania that belong to the same group. Restrictions do not apply if an entity's financial results are included in the consolidated financial results of a group, and the equity-to-asset ratio of that entity is not more than 2 percentage points lower than the equivalent ratio of the group. Interest costs exceeding interest revenue could be carried forward without time limitation. The mentioned rules do not apply to financial institutions and insurance companies.
Controlled foreign companies (CFCs)
Positive income of a CFC, i.e. income not derived from operating activity (including interest, royalties, leasing, dividend income, etc.), shall be included in the taxable income of a controlling Lithuanian company if:
- a CFC is established or organised in a country that is a blacklisted territory (see Blacklisted territories in the Deductions section)
- the passive income of a CFC exceeds 1/3 of the total taxable income, and
- the effective CIT of a CFC in its country of residence is less than 50% of the actual CIT that would be calculated on the income of that CFC based on the provisions of the Lithuanian Law.
An entity is treated as a CFC if more than 50% of its voting rights or shares are owned, directly or indirectly, by the Lithuanian entity.
A Lithuanian company may reduce tax payable in Lithuania by the tax paid in a foreign country on the positive income of CFC included in the tax base of that Lithuanian company.