Lithuania amends corporate income tax law

By Robertas Degesys, Partner, TGS Baltic, Lithuania

The Lithuanian Parliament on 7 December adopted several important amendments to the Law on Corporate Income Tax of the Republic of Lithuania No. IX-675, including changes to the additional corporate income tax for banks and credit unions, hybrid rules, and investment incentives.

Bank taxation

According to an amendment effective from 1 July 2022, the additional 5% corporate income tax on profits of banks and credit unions (subject to special calculation rules) exceeding EUR 2 million (USD 2.26 million) shall apply indefinitely. Under the previous law, the additional corporate income tax would have applied temporarily through 2022. The additional tax applies on top of the standard corporate income tax rate of 15%.

Earlier in 2021, the Constitutional Court of the Republic of Lithuania reaffirmed that the additional corporate income tax that is applicable only to banks and credit unions does not contradict the constitutional principles of equality and rule of law. This is because, from the corporate income tax perspective, the legal position of banks and credit unions is fundamentally different from that of other economic operators (i.e., banks and credit unions can deduct special provisions for doubtful assets) and, therefore, the differentiation in taxation is substantiated.

Hybrid rules

The legislative amendments introduced a hybrid entity mismatch eliminating rule with effect from 1 January 2023. A hybrid entity mismatch occurs due to differences in the tax treatment of an entity in several jurisdictions, often leading to avoidance of corporate income tax.

According to the amended law, a hybrid entity is understood as any entity or arrangement (except for a collective investment undertaking) when certain persons directly or indirectly hold more than 50% of the shares, voting rights or rights to distributed profits or exclusive rights to acquire them. The definition applies if the person holding such shares or rights is a foreign tax resident who is deemed as a separate entity under the laws of a foreign state but whose income and expenses under the Lithuanian tax rules are deemed to be the income and expenses of the other persons. Alternatively, it applies if such shares or rights are held by several associated persons, at least one of whom is a foreign tax resident and who is deemed as a separate entity under the laws of a foreign state but whose income and expenses under the Lithuanian tax rules are deemed to be the income and expenses of the other persons.

Under the amended law, the hybrid entity mismatch shall be eliminated by treating the hybrid entity as a Lithuanian taxable entity. To avoid double taxation, the Lithuanian tax base of the hybrid entity shall include only the portion of income that is not otherwise subject to corporate income tax or an equivalent tax under the laws of the Republic of Lithuania or any other foreign state of which the member (shareholder) of the hybrid entity is a resident for tax purposes.

Investment incentives

The amended law modifies the conditions for application for relief from corporate income tax for a period of up to 20 years for companies implementing large investment projects. Under the amended law, the incentive tax regime shall apply to the income from the use of intellectual property only by those corporate income taxpayers who actually perform research and development activities and subsequently derive the income from commercialisation of created intellectual property, in accordance with the requirements set forth by the law. This amendment shall take effect as of 1 July 2022.

—Robertas Degesys is a partner with TGS Baltic in Vilnius, Lithuania.