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Tax and Legal Newsletter, September 2012


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TAX NEWS

REGARDING THE AMENDMENTS AND SUPPLEMENTS OF THE COMMENTARY OF ARTICLE 24 OF THE LAW ON CORPORATE INCOME TAX

State Tax Inspectorate under the Ministry of Finance of the Republic of Lithuania (hereinafter – STI under MF) has prepared an amendment and supplement of the Commentary of Article 24 of the Law on Corporate Income Tax (hereinafter – CIT), which explains the procedure of deduction of taxes and charges from the taxable income of a tax payer.

Subparagraph 5 of the Commentary of Article 24 Paragraph 2 provides that where sponsorship in the form of tangibles is made in accordance with the Law on Charity and Sponsorship and where input value added tax (hereinafter – VAT) of such tangibles has not been deducted, input VAT of such tangibles cannot be attributed to the support amount, however, it can be attributed to allowable deductions in line with the Law on CIT.

Subparagraph 6 provides that if during the course of a tax audit the Tax Authorities determine that any transaction or operation of the tax payer was performed in order to gain tax benefits, the Tax Authorities shall adjust the input VAT deduction by the amount of VAT paid in such transaction or operation. As VAT cannot be deducted on the basis of the Law on Tax Administration, this amount of VAT cannot be regarded as limited allowable deductions for the CIT purposes.

Subparagraph 7 comments on the attribution of VAT paid in the foreign countries to allowable deductions.

Generally (but with exceptions), taxable persons of the Republic of Lithuania have a right to refund input VAT paid for the goods or services in the majority of European Union (hereinafter – EU) countries, if:

• these persons are not registered as VAT payers in that country at the moment of VAT refund (and they do not have the obligation to register as such);

• they do not conduct the activities that are subject to VAT in that country;

• purchased goods and services are used only for the economic activities of these persons.

Taxable persons of Lithuania are eligible for VAT refund in some other non-EU countries: Armenia, Croatia, Norway, Switzerland, Turkey, Iceland and Canada. The list of the countries is not finite and VAT is refunded applying the principle of reciprocity by the procedures established by the tax authority of that country.

It should be noted that VAT calculated by the seller established in EU countries cannot be attributed to the limited allowable deductions when the Lithuanian entity has an obligation to calculate VAT in Lithuania for the goods (services) acquired. However, the amount of non-refunded VAT can be attributed to limited allowable deductions if this amount does not exceed the minimum refundable VAT amount established by the legislation of that EU country.

If a taxable person purchases goods (services) in non-EU countries, where legislation does not give a right to refund VAT (or VAT is not refunded after utilizing all options established in the legislation), the whole amount of input VAT as well as the acquisition price of the goods (services) shall be attributed to allowable deductions when calculating the taxable income. If VAT is refunded later, the allowable deductions of the tax period in which input VAT amount of purchased goods (services) was deducted have to be reduced by the refunded VAT amount. If VAT is refunded after the end of the tax period, the allowable deductions of current tax period shall be reduced by this amount.

More information is available here and here.

REGARDING THE COMMENTARY OF ARTICLE 25 OF THE LAW ON CIT

STI under MF, referring to the amended version of the Rules on Proving the Badness of Debts and Efforts to Recover the Debts and Calculation of the Amounts of Bad Debts (hereinafter – the Rules) adopted by the Order No. 1K-188 of the Minister of Finance dated 10 June 2010, has prepared the amendments and supplements of Article 25 of the Law on CIT.

The Commentary has been prepared in accordance with and mostly contains the provisions established in the new edition of the Rules.

More information is available here.

REGARDING THE AMENDMENTS AND SUPPLEMENTS OF THE COMMENTARY OF ARTICLE 32 PARAGRAPH 1 OF THE LAW ON CIT

STI under MF has prepared the amendments and supplements of the Commentary of Article 32 Paragraph 1 of the Law on CIT, in accordance with the new amended versions of the Law on Pension (17 November 2011, No. XI-1676), Law on Complementary Voluntary Pension Accumulation (hereinafter – CVPA, 26 June 2012, No. VIII-1212), Law on Collective Investment Undertakings (hereinafter – CIU, 26 June 2012, No. 77-3977).

According to the Commentary, dividends paid out by the Lithuanian entity to the pension fund or investment fund are not subject to CIT in line with Article 34 of the Law on CIT, if the certain conditions are met: the fund is established on the territory of EU or European Economic Area, does not have a status of a legal person, meets the requirements applied to it by the Law on CVPA and Law on CIU.

Commentary also explains that the provisions of Article 34 of the Law on CIT are applied to the payment of dividends to variable capital companies and closed-end investment companies established in foreign countries.

More information is available here.

REGARDING THE COMMENTARIES OF ARTICLE 4 PARAGRAPH 4 SUBPARAGRAPH 6 AND ARTICLE 53 PARAGRAPHS 1 AND 3 OF THE LAW ON CIT

STI under MF has prepared the Commentaries of Article 4 Paragraph 4 Subparagraph 6 and Article 54 Paragraphs 1 and 3 of the Law on CIT that explain taxation of income earned for the performers’ and sports activities carried out not through a permanent establishment of the foreign entities in the Republic of Lithuania.

Commentary of Article 4 Paragraph 4 Subparagraph 6 explains that income earned for the performers’ and sports activities is subject to withholding tax irrespective of its origin when the recipient of the income is a foreign entity operating not through a permanent establishment and conducting performers’ and sports activities.

Commentary also establishes that when a foreign entity receives income not through a permanent establishment for the performers’ and sports activities in the Republic of Lithuania from a resident of Lithuania, a legal entity of Lithuania or a permanent establishment (altogether hereinafter – a Lithuanian entity), the entity paying out such income shall withhold the tax. Foreign entity has a right to inquire to local STI for the recalculation of the tax.

However, if a foreign entity operating not through a permanent establishment receives the analogical income from a non-Lithuanian entity, such foreign entity shall register as a tax payer and submit the Return of Income Paid out to Foreign Taxable Persons and CIT Calculated on it (FR0313), as well as to pay the tax on all received income, or, if the entity has the documents needed for the recalculation of the tax, on the taxable profit received for the activities in Lithuania.

If the foreign entity is a non-profit organization and receives income from the Lithuanian entity CIT may not be calculated, if the foreign entity provides the documents to the Lithuanian entity, proving that it is regarded as a non-profit organization in the foreign country and income received for the performers’ and sports activities is not considered to be income from its commercial activities. When income is received from the non-Lithuanian entity, such documents have to be submitted to the Tax Authorities.

Commentary of Article 54 Paragraph 1 explains that income received by the foreign entity operating not through a permanent establishment for performers’ or sports activities and (or) for the sale or transfer of immovable property situated in Lithuania is taxed when payments are made without any deductions.

Foreign entity, on whose income the tax was withheld, has a right to inquire to a local STI of the territory in which the person withholding the tax is registered for a recalculation of the tax paid. The overpayment of the tax is refunded in accordance with the provisions of the Law on Tax Administration.

More information is available here.

REGARDING THE SUPPLEMENT OF THE COMMENTARY OF ARTICLE 69 PARAGRAPH 1 OF THE LAW ON VAT

STI under MF has supplemented the Commentary of Article 69 Paragraph 1 of the Law on VAT, which explains in which cases the deducted amount of input (import) VAT of the tax payer who deregisters as a VAT payer or is liquidated has to be adjusted.

A Commentary has been supplemented with a new Subparagraph 7 which provides that when an entity conducting agricultural activities deregisters as a VAT payer, VAT deduction of the biological assets used for the VAT taxable activities and on which depreciation has not been calculated (e.g. cattle, milk of which has been sold with VAT), shall not be adjusted. Adjustments to input VAT amounts of the purchased (manufactured) biological assets and related amounts shall be made when such biological assets purchased or manufactured by the entity has not been used for the VAT taxable activities (e.g. pigs, which have not been sold) before the deregistration as a VAT payer.

More information is available here.

REGARDING THE SUPPLEMENT OF THE COMMENTARY OF ARTICLE 20 PARAGRAPH 1 OF THE LAW ON VAT

STI under MF has supplemented Subparagraph 4 of the Commentary of Article 20 Paragraph 1 of the Law on VAT with the seventh example.

The example provides that the oral health services provided by the licenced dental technology laboratory are regarded as personal and public health care services and, therefore, are not VAT taxable. In the exemplary case the purpose of the provided services is therapeutic as they aim to restore the mastication function of the patient.

Considering the arguments made in the case C-106/05 of the European Court of Justice, denture correction services provided by both the laboratory to the clinic and by the clinic to the individual are non VAT taxable.

More information is available here.

OTHER NEWS

REGARDING THE RULES ON PROVING THE BADNESS OF DEBTS AND EFFORTS TO RECOVER THE DEBTS AND CALCULATION OF THE AMOUNTS OF BAD DEBTS

By the Order No. 1K-311 of the Minister of Finance dated 19 September 2012 the amendments to the Rules on Proving the Badness of Debts and Effort to Recover the Debts and Calculation of the Amounts of Bad Debts (hereinafter – Rules) were adopted.

The amendments specify the concept of a “tax payer” by determining that provisions of the Rules are applied to the entities for CIT purposes, to individuals performing individual activities for the personal income tax purposes and to taxable persons for the VAT purposes.

Considering the Law on the Bankruptcy of Natural Persons, as of 1 March 2013 the provisions come into effect, according to which the tax payer can deem the debts as bad, when they cannot be recovered because the debtor is a natural person, for whom bankruptcy proceedings were completed, except the cases when the proceedings were after documents proving that the natural person shall be able to fulfil his/hers obligations were submitted to the court. In this case in order to consider debts as bad the tax payer shall have to possess the documents, proving the effective court ruling or the decision to complete the bankruptcy proceedings of the individual.

It is also explained that in cases when a debt is recognized as bad due to the bankruptcy of the entity in line with the legislation of the foreign country, the tax payer shall have the documents issued in the foreign country proving the bankruptcy.

More information is available here.

REGARDING THE AMENDMENT OF THE COMMENTARY OF ARTICLE 33 SUBPARAGRAPH 20 OF THE LAW ON TAX ADMINISTRATION

STI under MF, considering the changes of the Law on Tax Administration (hereinafter – the Law) as of 19 June 2012, has amended a Commentary of Article 33 Subparagraph 20 of the Law.

The Commentary explains that in a process of exempting the tax payer from the fulfilment of the requirements of the laws attributed to its competence, the tax administrator evaluates the equivalence of the alternative means applied and approves them as suitable, considering the objectives and nature of the requirements established in the legislation. These actions are approved in a form of orders, decisions and other documents. Alternative means applied have to ensure the tax payer’s compliance with the obligation.

More information is available here.

LEGAL NEWS

AMENDMENTS TO THE COMPANY LAW WERE SUBMITTED TO THE PARLIAMENT

Draft of amendments to the Company Law No. XIP-4757 (Draft) was submitted to the Parliament on 7 September 2012.

According to this Draft, in addition to other amendments and supplements, it is intended to supplement the Company Law with a new Article 57¹ which enables companies to provide natural persons and legal entities, seeking to acquire shares in the company, with financial assistance. Such financial assistance could only be granted in the form of direct/indirect loans or security of obligation fulfillment.

It is also suggested that the Board should be granted particular supervisory functions given that there is no Supervisory Board formed within the company and that such authorization of the Board is established by the Articles of Association. The Board would supervise the activities of the Managing Director, for instance, it would consider whether the Managing Director is suitable for the position, offer to revoke his decisions, provide the General Shareholders‘ Meeting with reports and suggestions related to the activities of the Managing Director, etc.

The Draft is also aimed at granting the General Shareholders‘ Meeting the possibility to freely set the date of the beginning of activities of the Board and Supervisory Board. Furthermore, according to the Draft, when the company is held by the sole shareholder, the requirements related to submission of shareholders’ list to the Commercial Register shall not be applied.

 

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