What main points to consider when having transactions with foreign companies?

When foreign company has permanent establishment in Lithuania, it is clear, that it must calculate and pay corporate income tax. Is there are any other obligations for the foreign companies?

Additional obligations for foreign companies

When a foreign company registers a permanent establishment in Lithuania, it is common to calculate and file corporate income tax report.

However, not only foreign companies having permanent establishments in Lithuania are subject to corporate income tax. Depending on the type of income it might be required to withhold corporate income tax (WHT) and submit tax return. This requirement is indicated in the Law on Corporate Income Tax (Article 4 (4)).

If the foreign company does not operate in Lithuania through a permanent establishment but receives the following income:

  1. Interest.
  2. Income from distributed profits (for example dividends).
  3. Royalties.
  4. Income from the sale, other transfer of ownership or lease of immovable property located in Lithuania.
  5. Income from the transfer of computer programs.
  6. Compensation for infringement of copyright or related rights.
  7. Income derived from sports activities or performers’ activities.
  8. Annual payments (tantiems) to the members of the board or supervisory board.

it should be evaluated whether this income is subject of WHT. If any of these payments mentioned above are made to foreign companies WHT should be deducted. The rates of WHT indicated below:

Type of incomeRate
Interest10%,
0%
Income from distributed profits15%,
0%
Royalties10%
Income from the sale, other transfer of ownership or lease of immovable property located in Lithuania15%
Income from the transfer of computer programs10%
Compensation for infringement of copyright or related rights15%
Income derived from sport activities or performers’ activities15%
Annual payments (tantiems) to the members of the board or supervisory board15%

Rates and exemptions

Depending on the type of income and whether Lithuania has concluded double taxation treaty (DTT) with the country where the foreign company is established, the WHT rates may vary.

For example, if interest is paid to a foreign company incorporated in a State of the European Economic Area or in a State with which a DTT has been concluded, the WHT rate is 0 %.

When paying royalties to a foreign company set up in country where DTT is applied, it is worth to note whether exemptions can be applied. For example, if royalties are paid to a Latvian company WHT 0% rate is applied (Article 12(1) of the DTT). In this case, the Lithuanian company needs to have DAS-1 form as a proof that income is received by Latvian tax resident.

If exemption or lower rate is indicated in DTT it can be applied only if Lithuanian company has DAS – 1 form, which indicates the payment receiver’s country of tax residency.

It is worth to mention that according to the Law on Corporate Income tax (Article 37-1) royalties paid to a foreign entity can be exempt from WHT if certain criteria are met. Thus, if the lower rate under the DTT is not applicable, the availability of the relief provided in Article 37-1 should be assessed.

If dividends are paid to a foreign company, the applicable rate may be 0% if the provisions of Article 34(2) of Law on Corporate Income tax are met, i.e., if the recipient company has held not less than 10% of the voting shares in the distributing company for at least a 12-month period without interruption. However, this relief is not applied if the foreign entity (recipient) is registered or otherwise organised in blacklisted territories. This provision shall not apply if the main purpose of this transactions is to get tax benefits.

Obligation to file tax return

The liability to withhold WHT arises only when payments are made to a foreign company. Once WHT is withheld liability to submit tax return FR0313 arises (the tax return should be submitted no later than on 15th of the following month).

Alternatively, the Lithuanian company may not deduct the WHT but pay it from its own funds, in this case these costs will be treated as non-allowable deductions.

In practice, there are cases where the foreign company has to pay WHT itself. In such cases, the foreign company must first register in the Lithuanian taxpayers register and only then fulfil its tax obligations.

For example, if a foreign company which does not operate in Lithuania transfers/sells its own real estate located in Lithuania to other foreign company which also does not operate in Lithuania, the obligation to register as a taxpayer and withhold tax falls on the first company (which transfers/sells the property).

One important aspect is that the obligation to deduct WHT from falls on actual recipient of the payment. For example, if a Lithuanian company pays interest to a company incorporated in the countries of the European Economic Area or in the countries with which the DTT is concluded, through intermediaries, i.e. such a Lithuanian company may not deduct WHT only if it has in its possession a list provided by the foreign intermediaries disclosing the beneficial owners of the interest.

Royalties or other income?

In many cases, the invoice does not clearly define the type of payments made to foreign companies. We would recommend in all cases to review the contract to make sure that the payment does not fall within the scope of Article 4(4) of the Law on Corporate Income tax, as the invoice cannot be the main document to determine the type of income. For example, if company makes “other payments” to a foreign company, but the contract specifies that the foreign company is paid for a licence, liability to deduct WHT may arise.

In practice, it is often the case that other payments can be treated as royalties. In general, royalties relate to rights or property which take various forms, such as ownership of literary and artistic works, elements of intellectual property, commercial or scientific know-how.

The following are examples of payments that are not considered to be a subject to WHT, but are considered to be remuneration for the provision of services:

  • Payments received as remuneration for warranty service.
  • payments for services provided by the seller to the buyer under warranty.
  • payments for strictly technical assistance.
  • payments for a list of potential customers, where this list is drawn up specifically for the payer on the basis of generally available information (however, a payment for a confidential list of customers to whom the payee has supplied a specific product or service is a payment for know-how, as it would relate to the payee’s commercial expertise in its dealings with those customers).
  • payments for a conclusion given by an engineer, lawyer or accountant.

Thus, when assessing whether a payment falls within the scope of Article 4(4) of Law on Corporate Income tax, it is worth reviewing contracts and other arrangements with foreign companies and not just relying on the subject of the payment indicated in the invoice.

If you have any doubts as to whether a payment is subject to WHT, please contact our tax advisors. We will be happy to help you.

Virginija Guleva

Head of Tax and Legal

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