1.To approve the Rules for the Requalification of Income or Payments (as appended);

2. To set that the Rules for the Requalification of Income or Payments approved by this Resolution shall apply for calculating taxable corporate income and taxable personal income received in the tax period starting in 2004 and in subsequent tax periods.

 

 

 

Prime Minister                                                                                   Algirdas Brazauskas

 

 

Minister of Finance                                                                           Dalia Grybauskaitė

 

 

APPROVED by

Resolution No 1575 of the Government of the Republic of Lithuania of 9 December 2003

 

 

 

1.The Rules for the Requalification of Income or Payments (hereinafter referred to as these Rules) define the cases when income or payments must be requalified. Income or payments requalified in accordance with these Rules shall be subject to taxation rules set forth in the Law of the Republic of Lithuania on Corporate Income Tax (Valstybės žinios (Official Gazette) No 110-3992, 2001) and the Law of the Republic of Lithuania on Personal Income Tax (Valstybės žinios (Official Gazette) No 73-3085, 2002), depending on the nature of such requalified income or payments.

2. For the purpose of these Rules:

Fixed capital means the equity of a Lithuanian taxable entity (hereinafter referred to as the Lithuanian entity) as of the last day of the taxable period, excluding the financial result (profit/loss) of the taxable period concerned.  For the purpose of calculating fixed capital, equity of the Lithuanian entity shall not include the revaluation result of assets transferred to it by the controlling lender, if such assets have been used by that Lithuanian entity for less than two years.

If the Lithuanian entity is an individual/personal enterprise (sole proprietorship) or a partnership and does not therefore keep its accounts as an entity of limited civil liability, its equity shall be deemed to be 3000 euros plus the acquisition price, reduced by the depreciation value included into the allowable deductions of limited amounts, of its fixed tangible assets owned by the sole proprietorship or the partnership and used longer than one year for the purpose of earning income or generating an economic benefit for that sole proprietorship or the partnership.

Controlling lender means a taxable entity or an individual, i.e. a Lithuanian or foreign taxable entity or a Lithuanian permanent resident or a Lithuanian non-permanent resident who controls the Lithuanian entity as on the last day of the Lithuanian entity’s taxable period, and who owns, directly or indirectly, more than 50% of shares (interests, member shares) or other participation in the distributable profits of the Lithuanian entity or exclusive rights to the acquisition thereof, or who owns, together with related persons, more than 50% of shares (interests, member shares) or other participation in the distributable profits of the Lithuanian entity or exclusive rights to the acquisition thereof provided that such controlling person owns more than 10% of shares (interests, member shares) or other participation in the distributable profits or exclusive rights to the acquisition thereof, which has lent capital for remuneration to the Lithuanian entity.

The term “controlling lender” also includes a member of the group of entities, which the Lithuanian entity belongs to, also the spouse, fiancé, partner of the controlling individual or a relative of the controlling individual up to the first degree of kinship inclusive, who has lent capital for remuneration to the Lithuanian entity.

Lent capital for remuneration means the capital borrowed by the Lithuanian entity from the controlling lender(s), also convertible bonds issued by the Lithuanian entity and bought by the controlling lender(s) for certain agreed interest or other kind of remuneration.  Lent capital for remuneration includes loans taken from third persons and guaranteed by the controlling lender(s), also loans granted to the Lithuanian entity and guaranteed by third persons, when such guaranteed loans are also guaranteed, in favour of such third persons, by the controlling lender(s).

Other terms used in these Rules shall have the meanings defined in the Law of the Republic of Lithuania on Corporate Income Tax, Law of the Republic of Lithuania on Personal Income Tax and legal acts governing the financial accounting of the entity as far as they are consistent with the provisions of the Law of the Republic of Lithuania on Corporate Income Tax and the Law of the Republic of Lithuania on Personal Income Tax.

 

3. The share of capital lent for remuneration to the Lithuanian entity by the controlling lender(s), which is in excess of the ratio 4:1 between such lent capital for remuneration and fixed capital, shall be qualified as controlled lent capital.

4. The ratio between lent capital for remuneration and fixed capital set in Paragraph 3 of these Rules above shall be calculated as of the last day of the taxable period of the Lithuanian entity.

5. If lent capital is denominated in foreign currency, the ratio between such lent capital and fixed capital shall be calculated in euros by applying the euro foreign exchange reference rates as on the last day of the taxable period in accordance with the Accounting Law of the Republic of Lithuania.

6. Interest payable on the use of controlled lent capital shall be considered unrelated with the earning of income and shall not be deductible, for the purpose of calculating taxable profit of the controlled Lithuanian entity, from income of the Lithuanian entity.

Currency exchange losses related to controlled lent capital shall not be deductible from income of the Lithuanian entity.

7. The provisions of this Chapter shall not apply, if the Lithuanian entity proves that an equivalent loan might be taken on the same conditions between independent (unrelated) persons.  The provisions of this Chapter shall neither apply to financial institutions providing financial lease (leasing) services.

 

8. Interest payments related to profit, income or similar performance indicators (e.g. sales) of the Lithuanian entity and interest payable under debt-claims entitling the lender to exchange its right to interest with the right to the borrower’s profit or a part thereof, also rent payments related to profit, income or similar performance indicators of the Lithuanian entity shall be qualified as unrelated to the earning of income and shall not be deductible, for the purpose of calculating taxable profit of the controlled Lithuanian entity, from income of the Lithuanian entity.

 

9. Income received as a result of liquidation of a sole proprietorship shall be qualified as income of the sole proprietor other than income derived from the sale of assets created by the proprietorship’s activity or from other transfer of ownership, taxable in accordance with the provisions of the Law of the Republic of Lithuania on Personal Income Tax that apply to income other than income derived from the sale of assets created by the proprietorship’s activity or from other transfer of ownership.

 

10. A payment received by a member (sharer) of an agricultural company, cooperative enterprise (a cooperative) or credit union from the agricultural company, cooperative enterprise (the cooperative) or credit union, when such member (sharer) terminates his/her membership (sharership) and his/her contribution or a part thereof is paid back to him/her, shall be qualified as income derived from the sale of the member share or a part thereof to the agricultural company, cooperative enterprise (the cooperative) or credit union, taxable in accordance with the provisions of the Law of the Republic of Lithuania on Personal Income Tax that apply to income other than income derived from the sale of assets created by the proprietorship’s activity or from other transfer of ownership.