By Robertas Degesys, Partner, TGS Baltic, Lithuania
On December 7, the Lithuanian Parliament adopted several important amendments to the Law on Corporation Tax of the Republic of Lithuania No. IX-675, including amendments to the additional corporation tax for banks and cooperatives credit, hybrid rules and investment incentives.
According to an amendment that entered into force on July 1, 2022, the additional 5% corporate tax on the profits of banks and credit unions (subject to special calculation rules) exceeding 2 million euros (2.26 million US dollars) will apply indefinitely. Under the previous law, the additional corporate tax would have been applied temporarily until 2022. The additional tax applies in addition to the standard corporate tax rate of 15%.
Earlier in 2021, the Constitutional Court of the Republic of Lithuania reaffirmed that the additional corporation tax which applies only to banks and credit unions is not at odds with the constitutional principles of equality and rule of law. Indeed, from a corporate tax point of view, 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 bad debts) and, therefore, the differentiation of taxation is justified.
The legislative changes introduced a rule for eliminating mismatches of hybrid entities with effect from January 1, 2023. A mismatch of hybrid entities occurs due to differences in the tax treatment of an entity in several jurisdictions, often leading to corporate income tax avoidance.
According to the amended law, a hybrid entity means any entity or structure (with the exception of an undertaking for collective investment) where certain persons directly or indirectly hold more than 50% of the shares, voting rights or rights on distributed profits or exclusive rights to acquire them. The definition applies if the person holding these shares or rights is a foreign tax resident who is considered a separate entity under the laws of a foreign state but whose income and expenses under Lithuanian tax rules are deemed to be the other people’s income and expenses. Alternatively, it applies if those shares or rights are held by more than one associated person, at least one of whom is a foreign tax resident and who is considered a separate entity under the laws of a foreign state but whose income and expenses under Lithuanian tax are deemed to be the income and expenses of other persons.
Under the amended law, the hybrid entity asymmetry is to be eliminated by treating the hybrid entity as a Lithuanian taxable entity. To avoid double taxation, the Lithuanian tax base of the hybrid entity includes only the part of the income which is not otherwise subject to corporation tax or equivalent tax under the laws of the Republic from Lithuania or any other foreign state whose member (shareholder) of the hybrid entity is a tax resident.
The amended law modifies the conditions for requesting exemption from corporation tax for a period of up to 20 years for companies carrying out large investment projects. Under the amended law, the incentive tax regime will only apply to income derived from the use of intellectual property by taxable legal persons who actually carry out research and development activities and then derive the income from commercialization. of the intellectual property created, in accordance with the requirements laid down by law. This amendment will take effect on July 1, 2022.