Setting up a holding company: paying for shares with shares, and tax

Shares in a holding company can be paid for not in cash but with shares of another company. This is a non-cash contribution, so it must be valued by an independent property valuer, and the holding company’s initial contribution on formation is paid in cash. The shares can be contributed after the holding company is formed or when its share capital is increased. For tax, what matters most is how many votes the holding company acquires. If it acquires more than half of the votes in the target company and the other conditions of the Law on Corporate Income Tax are met, the increase in value is not the shareholder’s income, and the acquisition price of the new shares stays the same as that of the shares contributed. Otherwise the contribution may give rise to personal income tax.

Two routes: forming the holding company or increasing its capital

On formation. Article 8(5) of the Law on Companies of the Republic of Lithuania (ABĮ) requires each founder’s initial contribution to be paid in cash and to be at least 1/4 of the nominal value of the shares subscribed plus the share premium. The rest may be paid with non-cash contributions after the company is formed (Article 8(7) ABĮ), including shares of another company. Such a contribution must be valued by an independent property valuer (Article 8(8) ABĮ). All founders’ shares must be paid in full within the period set in the founding agreement or founding act, which may not exceed 12 months (Article 8(2) ABĮ).

When increasing the capital of an existing holding company. Share capital is increased by additional contributions only by issuing new shares (Article 50(1) ABĮ). The general meeting of shareholders decides on the increase by a majority of at least 2/3 of the votes (Article 28(1)(10) ABĮ). If not all shareholders acquire the new shares, the shareholders’ pre-emption right to acquire the shares being issued must be withdrawn; it can be withdrawn only for all shareholders (Article 57(7) ABĮ), by a decision taken by a majority of at least 3/4 of the votes (Article 28(2) ABĮ). The decision names each person paying for shares with a non-cash contribution, and the nominal value of those shares and the amount for which they are issued (Article 45(6) ABĮ). In a UAB, each subscriber’s initial cash contribution must be at least 1/4 of the nominal value of the shares it has subscribed (Article 45(4) ABĮ). If the whole amount for which the subscribed shares are issued is paid with non-cash contributions, the whole contribution is transferred to the company within the period for paying initial contributions (Article 45(9) ABĮ).

The law does not say directly how Article 45(4) and (9) ABĮ fit together. More on this, and on the case where only one of several shareholders acquires the new shares, in Non-cash contributions to a UAB’s capital: assets, valuation and loans.

Valuing the contributed shares, and the exceptions

When capital is increased, the non-cash contribution is valued by an independent property valuer, and the valuation report is given to the company before the shares are subscribed (Article 45(5) ABĮ). The total nominal value of the holding company shares issued for the contributed shares may not exceed the value of the contribution stated in the report (Article 45(7) ABĮ).

On a capital increase, Article 45¹ ABĮ allows the valuation requirements to be set aside in two cases, but neither fits UAB shares. The first covers only securities traded on a regulated market (Article 45¹(1)(1) ABĮ), and UAB shares may not be offered or traded publicly unless the law provides otherwise (Article 2(4) ABĮ). The second does not apply to transferable securities (Article 45¹(1)(2) ABĮ), and Article 3(52)(1) of the Law on Markets in Financial Instruments of the Republic of Lithuania counts shares of private limited companies among them. So contributed UAB shares are valued by an independent property valuer (Article 45(5) ABĮ).

Transferring the shares to the holding company

Form. The share subscription agreement is in simple written form. Notarial form is required only where the shares are paid for with real estate (Article 44(2) ABĮ). Article 1.74(1)(3) of the Civil Code (CK) requires notarial form for certain sale and purchase agreements for UAB shares, and contributing shares as a contribution is not a sale. The Supreme Court of Lithuania has said that the legislature set the notarial form requirement only for the share sale and purchase agreement (LAT e3K-3-27-381/2023, para. 72), but it has not ruled directly on contributing shares as a contribution. When a notary is needed for a share sale is explained in When a UAB share sale agreement must be notarised.

The contributed shares must be fully paid. A shareholder may not transfer shares that are not fully paid (Article 46(7) ABĮ). A transfer of uncertificated shares is recorded by entries in the personal securities accounts of the transferor and the acquirer (Article 46(2) ABĮ). The account keeper must be given a written agreement containing the data listed in Article 46(3) ABĮ: the company’s name, legal form, code and registered office, the number of shares transferred by class and their nominal value, and so on. If even one of these items is missing, the agreement is void from the moment it is made and the account keeper may not make entries under it (Article 46(4) ABĮ). The holding company shares are paid when the whole non-cash contribution stated in the agreement passes into the company’s ownership (Article 45(10) ABĮ).

Other shareholders of the target company. Article 47 ABĮ gives the other shareholders a pre-emption right when a shareholder intends to sell shares (Article 47(1) and (2) ABĮ). The articles of association may disapply the pre-emption right or set a different sale procedure (Article 47(9) ABĮ). The law does not say directly whether this pre-emption right applies when shares are contributed as a non-cash contribution, so read the target company’s articles and shareholders’ agreement before contributing.

Spouse’s consent. Property acquired after marriage is joint property of the spouses (Article 3.88(1)(1) CK). Transactions transferring such securities may be concluded only by both spouses, unless one holds a power of attorney from the other (Article 3.92(4) CK). Until it is shown that property is one spouse’s personal property, it is presumed joint (Article 3.88(2) CK). Personal property includes, for example, property given to or inherited by a spouse after the marriage, unless the deed of gift or the will says it passes into joint ownership (Article 3.89(1)(2) CK). So if the contributed shares were acquired during the marriage and are not one spouse’s personal property, the share subscription agreement is signed by both spouses or by a spouse holding a power of attorney.

Centre of Registers and JADIS

The decision to increase the holding company’s capital is filed with the Register of Legal Entities, kept by the Centre of Registers (Registrų centras), within 10 days of its adoption (Article 49(5) ABĮ). The valuation report is filed with the register together with the amended articles (Article 45(5) ABĮ). The capital counts as increased only once the amended articles are registered (Article 49(9) ABĮ). If the amended articles are not filed with the register keeper within 6 months of the day of the decision, the decision is treated as invalid, and the contributions must be returned without delay on the subscriber’s written demand (Article 49(9) ABĮ). Until the amended articles are registered, the person who subscribed for the new holding company shares may not transfer them (Article 46(6) ABĮ). From 1 November 2026 the law says “entered in the information system of the Register of Legal Entities” instead of “registered in the Register of Legal Entities”, and calls the register keeper the register data controller; the substance does not change.

Shareholder data changes in both companies. The holding company becomes a shareholder of the target company, and the holding company’s shareholder data changes when the new shares are issued. The manager of each company files the data with the keeper of the Information System of Legal Entity Participants (JADIS) within 5 days of receiving the documents on which the entries in the shareholders’ accounts are based (Article 41¹(2) and (3) ABĮ). More: UAB shareholders changed: what to file in JADIS, and who does it.

Tax when an individual contributes the shares

When no income arises. Article 41(2)(7) of the Law on Corporate Income Tax of the Republic of Lithuania (PMĮ) describes a share exchange: an entity seeking to acquire more than 1/2 of the votes of another entity, or already holding a majority and acquiring more shares, transfers the shares it issues to that other entity’s participants in exchange for their shares. A cash payment of the difference in share value may not exceed 10 percent of the nominal value of the shares or, where there is no nominal value, 10 percent of their balance sheet value. If part of the holding company shares is paid for in cash (Article 8(5) ABĮ, Article 45(4) ABĮ), the law does not say directly whether that part counts as a share exchange, so assess this in advance. Both entities must meet Article 41(1) PMĮ: Lithuanian entities whose profits are taxed at the 17 or 7 percent rates set in Article 5 PMĮ, or certain European Union entities. The profit of a newly established entity whose participants are individuals may be taxed at a 0 percent rate for its first two tax periods (Article 5(2) PMĮ), and Article 41(1) PMĮ does not list that rate, so if the holding company has just been set up, assess this condition in advance.

In those cases, Article 2(14)(7) and (8) of the Law on Personal Income Tax of the Republic of Lithuania (GPMĮ) does not treat as income the difference in value arising when shares are exchanged for shares of another entity, except a cash payment of the difference. When you later sell the holding company shares, their acquisition price will equal the acquisition price of the contributed shares (Article 19(5) GPMĮ). Keep the documents by which you acquired the target company shares, because only amounts supported by documents may be deducted (Article 19(3) GPMĮ).

When income may arise. If the holding company acquires no more than half of the votes in the target company and did not already hold a majority, or the companies do not meet Article 41(1) PMĮ, Article 41(2)(7) PMĮ does not apply. The general rule of Article 2(14) GPMĮ then applies: income includes consideration for invested property. The acquisition price of the shares may be deducted from the income (Article 19(1) GPMĮ). Income is recognised when it is received (Article 8(1) GPMĮ). The law does not say directly whether, in this case, the holding company shares are received on the day the contribution is transferred to the holding company (Article 45(10) ABĮ) or when the articles with the increased capital are registered (Article 49(9) ABĮ).

The three-year condition. In an exchange under Article 41(2)(7) PMĮ, Article 42 PMĮ applies only if the entity or its participants that received shares in the exchange do not sell or otherwise transfer them for three years, except a transfer required by law and later exchanges listed in that article (Article 42(10) PMĮ). The GPMĮ does not repeat this condition, and the text of the law does not say directly whether it applies to an individual, so if you plan to sell the holding company shares within three years, assess this in advance. The same condition applies to the holding company that received the target company’s shares in the exchange (Article 42(10) PMĮ).

When a company contributes the shares

If the shareholder of the target company is a company, Article 42(1) PMĮ applies: where participants receive shares of another entity in exchange in the cases set out in Article 41 PMĮ, the increase in value is not their income, and the acquisition price of the shares received is the acquisition price of the shares exchanged. A cash payment of the difference in share value is income of the participant who receives it (Article 42(11) PMĮ). This relief applies only if the company does not sell or otherwise transfer the holding company shares received in the exchange for three years, except a transfer required by law and later exchanges listed in Article 42(10) PMĮ.

Holding company dividends and a later sale of shares

Dividends. Dividends received by a Lithuanian entity from a Lithuanian entity in which it has held at least 10 percent of the voting shares without interruption for at least 12 months are not subject to corporate income tax (Article 33(2) PMĮ). That period includes the moment the dividends are distributed.

Selling the subsidiary’s shares. Capital gains on a transfer of shares are not taxed if the subsidiary is registered in a European Economic Area state or a state with which a double tax treaty is concluded and applied, pays corporate income tax or an equivalent tax, and the transferring entity held more than 10 percent of the voting shares without interruption for at least 2 years. If the shares were transferred in the reorganisation or transfer cases listed in Article 41(2) PMĮ, the shares must be held for at least 3 years. The exemption does not apply where the assets are relocated, or when the shares are transferred to the entity that issued them (Article 12(15) PMĮ). From 1 January 2027 the term “share” in this point will also cover interests in certain foreign limited liability entities (Article 12(15) PMĮ, version from 2027-01-01).

Anti-avoidance rules and an advance commitment from the tax administrator

In calculating corporate income tax, an arrangement is disregarded if its main purpose, or one of its main purposes, is to obtain a tax advantage and it was not put in place for valid commercial reasons reflecting economic reality. An arrangement may comprise more than one step (Article 11(8) PMĮ). Article 69(1) of the Law on Tax Administration of the Republic of Lithuania (MAĮ) allows the tax administrator to apply the substance-over-form principle where a transaction or group of transactions is made to obtain a tax advantage. So write down the business reasons for setting up the holding company.

If you want to know the tax administrator’s position in advance, you can ask the tax administrator to approve your proposed application of tax law to a future transaction. The request must describe the future transaction precisely and unambiguously, and it may not concern the amount of tax (Article 37¹(1) MAĮ). The request concerns a transaction that will start after the day the request is filed (Article 37¹(1) MAĮ). The decision is taken within 60 days, and where further investigation is needed the period may be extended by another 60 days (Article 37¹(2) MAĮ). The decision does not apply if the actual facts of the transaction differ from those stated in the request (Article 37¹(6) MAĮ).

More on shareholders and shares

• Shareholders and shares
• Annual general meeting and filing accounts: deadlines and fines
• Sole shareholder resolution instead of a meeting in Lithuania
• Shareholder meeting minutes in Lithuania: form, language, signatures
• Paying dividends in a Lithuanian UAB: when, interim dividends, tax

How to start

Send us the latest Centre of Registers (Registrų centras) extracts and articles of association of both companies, the shareholders’ agreement if there is one, and tell us how many target company shares are to be contributed and by whom. We recommend assessing the tax consequences together with your tax adviser.

Phone +370 5 212 1506, email info@linden.lt

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