Tax on company reorganisation in Lithuania: corporate tax, VAT, losses

When Lithuanian companies whose profit is taxed at the rates set by the Law on Corporate Income Tax are reorganised, that law, if its conditions are met, does not tax the transfer of assets in a merger, division or separation: the increase in value is not income of the transferring company, and the successor keeps the acquisition price and continues the depreciation. In a division this relief depends on the shares received in exchange being kept for three years. The successor may carry forward the tax losses of the reorganised company if it continues the business it took over for at least three years. For VAT, a transfer of assets when a company ends is treated as a supply, but the VAT shown on the ending company’s VAT invoice is accounted for and paid by the VAT payer taking over the assets. The successor to the rights and obligations must meet all tax obligations of the reorganised company, including those that come to light later. These rules can be lost if obtaining a tax advantage is the main purpose, or one of the main purposes, of the reorganisation.

When the special corporate tax rules apply

Chapter IX of the Law on Corporate Income Tax sets special rules for reorganisations. Article 41(1) of the Law on Corporate Income Tax of the Republic of Lithuania (PMĮ) applies them where assets, rights and obligations pass between Lithuanian entities whose profit is taxed at the 17 or 7 per cent rate, or between Lithuanian entities and certain entities of EU Member States, or between such EU entities themselves.

The law lists which cases count as a reorganisation or transfer (Article 41(2) PMĮ). They include merger by absorption, merger by forming a new company, division by absorption and division into new companies, and also separation, where a continuing company separates a part and a new company is created on that basis. If shareholders receive part of the difference in share values in cash, in merger and division cases that part may not exceed 10 per cent of the nominal value of the shares or, where there is no nominal value, 10 per cent of their book value (Article 41(2) PMĮ).

If the entity taking over the assets is a foreign entity, these rules apply only if it continues the business in Lithuania through a permanent establishment after the reorganisation (Article 41(3) PMĮ).

Assets pass without corporate income tax

When a company transfers assets to another entity in a reorganisation, the increase in their value is not income of the transferring company (Article 42(2) PMĮ). For the receiving company, the acquisition price of the assets stays the same as it was in the transferring company. The successor continues to calculate depreciation or amortisation in the same way as the transferring company did (Article 42(8) PMĮ).

A positive difference arising at the moment of reorganisation, where more is paid than the value of the net assets acquired, is not deductible. A negative difference is not included in income (Article 42(9) PMĮ).

An important condition applies to divisions and some transfers of a business unit. The relief applies only if the company or its shareholders do not sell or otherwise transfer the shares received in exchange for three years, except where the shares are transferred because the law requires it or in a later reorganisation or transfer of the kinds listed in Article 41(2)(4) to (7) PMĮ (Article 42(10) PMĮ). The law does not set this condition for mergers.

Can the successor use the tax losses

The acquiring company may carry forward the unused tax losses of the reorganised company if it continues the business or business unit it took over for no less than 3 years (Article 43(1) PMĮ). Only losses related to the business that was taken over and is continued pass across. Losses from the transfer of securities and derivatives (for entities other than financial institutions) do not pass in this way.

The Supreme Administrative Court of Lithuania (LVAT) has held that the word “business” in this rule means a specific business, that is, a type of activity (LVAT ruling of 31 July 2019 in administrative case No. eA-1607-575/2019, para. 45). It is therefore not enough that the successor is active in general. It must continue the very business in which the losses arose. The same court held that before deciding on the carry-forward, the reality of the losses and their compliance with the Law on Corporate Income Tax are also assessed (LVAT eA-1607-575/2019, para. 49).

If the business taken over stops before three years have passed, the condition in Article 43(1) PMĮ is not met. And after the three-year period, the losses taken over can no longer be carried forward from the tax period in which the successor stops continuing the business taken over (Article 43(2) PMĮ). Where a company continues and transfers only part of its business, it reduces its own losses by the amount attributable to the business transferred (Article 43(3) PMĮ). Losses carried forward, together with other deductible losses, may reduce no more than 70 per cent of the income for the tax period, calculated as the law sets out (Article 43(7) PMĮ). This cap does not apply to entities whose profit is taxed at the 7 per cent rate (Article 43(7) PMĮ).

When the tax authority may disregard a reorganisation

The special rules are not unconditional. When corporate income tax is calculated, an arrangement whose main purpose, or one of whose main purposes, is to obtain a tax advantage is disregarded. An arrangement is treated as non-genuine if it was not put in place for valid commercial reasons that reflect economic reality (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 principle of substance over form where a transaction or operation is carried out to obtain a tax advantage. The tax is then calculated on the real circumstances. It is therefore worth describing clearly, in the terms of reorganisation and related documents, the business reasons for the reorganisation.

VAT: is the transfer of assets a supply

Article 9(3) of the Law on Value Added Tax of the Republic of Lithuania (PVMĮ) provides that a transfer of assets because a VAT payer ends by way of reorganisation is treated as a supply of goods or services for consideration. This applies where input or import VAT on those assets, or part of it, was deducted by the company that ends.

That VAT, calculated in the document issued by the company that ends, must be accounted for and paid by the VAT payer that takes over the assets because of the other VAT payer’s reorganisation (Article 96(1)(1) PVMĮ). The successor deducts the input VAT on the assets taken over on the basis of the VAT invoice documenting that supply (Article 64(7) PVMĮ).

The VAT law also has a general rule: where a business or part of it is transferred as a going concern to a taxable person who continues it, the transfer is neither a supply of goods nor a supply of services (Article 9(1) PVMĮ). The rule on contributions in kind expressly carves these cases out (Article 9(2) PVMĮ), while Article 9(3) has no such exception. On the text of the law, therefore, Article 9(3) applies where a VAT payer ends by way of reorganisation. We found no Lithuanian case law on this point.

In a separation the company does not end, so Article 9(3) does not apply. If a business is transferred as a going concern to a VAT payer in a separation, the obligations to adjust the VAT deduction pass to the transferee (Article 68(2) PVMĮ). Where assets whose input VAT was deducted are transferred to another VAT payer in a division by separation under the Law on Companies, the transferee is treated as having deducted that VAT and must adjust the deduction (Article 68(3) PVMĮ).

Article 96(1)(1) PVMĮ shifts the duty to account for and pay the VAT only to a successor that is a VAT payer. If the successor is not a VAT payer, that rule does not apply, and the VAT obligations of the ending company are met by its successor to rights and obligations (Article 91(1) MAĮ). A person deregistered from the VAT register files a special VAT return within 20 days of deregistration (Article 88(1) PVMĮ). The law sets no separate deadline for a reorganisation.

The successor answers for all taxes

The tax obligation of a reorganised legal person must be met by its successor to rights and obligations (Article 91(1) MAĮ). The obligation to pay all unpaid taxes and related amounts passes to the successor, including those that come to light after the reorganisation (Article 91(2) MAĮ). If the reorganised company has a tax overpayment and no tax arrears, the overpayment is refunded or offset to the successor (Article 91(3) MAĮ). Article 91(1) and (3) MAĮ also apply to public and private limited companies that separate (Article 91(4) MAĮ).

In a reorganisation the usual limits on the frequency of tax audits do not apply (Article 117(3)(1) MAĮ). It is therefore worth putting the accounts and returns of all companies involved in order before the reorganisation. When a reorganisation is complete and from when rights and obligations pass to the successor is covered in our article Company reorganisation: dates, shareholders and the notary. The course of a separation is described in Company separation: timeline and what cannot be transferred.

Tax at shareholder level, for example on a share exchange, is a separate question and this article does not cover it. Each reorganisation needs its own tax assessment based on its facts.

More on reorganisation

• Reorganisations and separations of companies: service page
• Spin-off and share exchange in Lithuania: tax for shareholders
• Company reorganisation in Lithuania: what to tell VMI and Sodra
• Invoices after a merger: when the continuing company takes over

How to start

Send us the latest financial statements of the companies involved, information on unused tax losses, their VAT status and the planned method of reorganisation. Tell us which business the successor will continue after the reorganisation.

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

More about this service: Reorganisations and separations of companies.