When a company is merged, divided or has a part separated, and the shareholders exchange their shares for shares of another company, the difference in value arising on the exchange is not treated as the shareholder's income. This applies if the transaction matches one of the cases listed in Article 41 of the Law on Corporate Income Tax. The rule covers both individual and corporate shareholders. The acquisition price of the new shares stays the same as that of the shares given up, so the gain will be assessed when you dispose of the new shares. The exemption does not cover a cash payment of the difference in share value. In some cases the relief holds only if you do not transfer the shares received for three years, and the tax administrator may apply the substance-over-form principle to transactions made to obtain a tax advantage.<\/p>\r\n
Article 41(1) of the Law on Corporate Income Tax of the Republic of Lithuania (PM\u012e) sets out between which entities this regime applies. These are Lithuanian entities whose taxable profits are taxed at the 17 or 7 percent rates set in Article 5 PM\u012e and entities of EU Member States meeting the requirements of Directive 90\/434\/EEC, as well as transactions between them. On the wording of the law, the regime does not apply to entities whose profits are taxed at the 0 percent rate (Article 5(2) PM\u012e).<\/p>\r\n
Article 41(2) PM\u012e lists the cases. The most relevant for shareholders are:<\/p>\r\n
Where part of the difference in share value is paid in cash, in cases 1, 2, 4, 5 and 7 it may not exceed 10 percent of the nominal value of the shares or, if there is no nominal value, 10 percent of their book value (Article 41(2) PM\u012e). Company law sets a similar limit: cash payments may not exceed 10 percent of the nominal value of the new shares the shareholders receive (Article 67(6) of the Law on Companies of the Republic of Lithuania (AB\u012e)).<\/p>\r\n
Note the word \"in proportion\". Article 67(2) AB\u012e allows the shares of a company being divided to be distributed disproportionately too, and the rules on division by formation apply to a separation (Article 71(2) AB\u012e). However, Article 41(2)(4) and (5) PM\u012e speak of shares received in proportion. For point 8 (separation) to apply, assets, equity and liabilities must be allocated to the new entity proportionately. Company law does not require such proportionality (Supreme Court of Lithuania ruling of 2020-12-02 in civil case No. e3K-3-325-823\/2020, para 38). Also, point 8 does not itself describe shareholders exchanging their shares, while Article 2(14)(7)\u2013(8) GPM\u012e and Article 42(1) PM\u012e apply where shares are exchanged. The text of the law does not directly answer whether a separation in which shareholders receive shares of the new company counts as such an exchange. Assess any disproportionate distribution of shares from a tax angle before approving the terms. How the share exchange ratio is written into the terms of separation is covered in Terms of separation: contents, documents and steps<\/a>.<\/p>\r\n Article 2(14)(7) and (8) of the Law on Personal Income Tax of the Republic of Lithuania (GPM\u012e) do not treat as income the difference in asset value arising in the reorganisation or transfer cases set in Article 41(2) PM\u012e, where the participants' shares are exchanged for shares of another entity. Both points apply only to entities referred to in Article 41(1) PM\u012e, and both make an exception: the rule does not cover a cash payment of the difference in share value.<\/p>\r\n When you later sell or otherwise transfer the shares received in the exchange, their acquisition price equals the acquisition price of the shares you held before (Article 19(5) GPM\u012e). Only amounts supported by documents may be deducted from income (Article 19(3) GPM\u012e). So keep the documents by which you acquired the original shares, and the terms of reorganisation.<\/p>\r\n Article 42(10) PM\u012e sets a three-year condition of not transferring the shares, to be met by \"the entity or its participants\" (see below). The GPM\u012e does not repeat this condition. The text of the law does not directly answer whether it applies to an individual. If you plan to transfer the shares received in the exchange within three years, assess this in advance.<\/p>\r\n Where, in the cases set in Article 41 PM\u012e, participants receive shares of another entity in exchange for their shares, the increase in value is not treated as their income. The acquisition price of the shares received is the acquisition price of the shares given up (Article 42(1) PM\u012e). A cash payment of the difference in share value is income of the participant who received it (Article 42(11) PM\u012e).<\/p>\r\n The three-year condition.<\/strong> Article 42 PM\u012e applies only if, in the cases set in Article 41(2)(4), (5), (6) and (7) PM\u012e, the entity or its participants that received shares in exchange do not sell or otherwise transfer them for three years. The exceptions are transfers required by law and later cases under the same points 4 to 7 (Article 42(10) PM\u012e). Separation (point 8) is not listed. However, the same transaction may also match point 5, so check which point your transaction falls under.<\/p>\r\n Link with the participation exemption.<\/strong> The entity that issued the shares must be registered in a European Economic Area state or a state with which a double tax treaty is in force, and must pay corporate income tax or an equivalent tax. Capital gains on the transfer of its shares are then not taxed if the transferring entity held more than 10 percent of the voting shares without interruption for at least 2 years. If the shares are transferred in the reorganisation or transfer cases referred to in Article 41(2) PM\u012e, they must be held for at least 3 years. The exemption does not apply where the assets are relocated, or where the shares are transferred to the entity that issued them. Holding periods are disregarded where shares are transferred because the law requires it (Article 12(15) PM\u012e). From 1 January 2027 the term \"share\" in this point will also cover parts of certain foreign limited liability entities (Article 12(15) PM\u012e, version from 2027-01-01).<\/p>\r\n When calculating corporate income tax, an arrangement or series of arrangements is ignored 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) PM\u012e). Article 69(1) of the Law on Tax Administration of the Republic of Lithuania (MA\u012e) allows the tax administrator, such as the State Tax Inspectorate (VMI<\/em>), to apply the substance-over-form principle where a transaction, an economic operation or any group of them was made to obtain a tax advantage.<\/p>\r\n So if you plan a further share exchange step after a separation, the tax administrator may assess both steps together. The arrangement is assessed as a whole: if it was not put in place for valid commercial reasons reflecting economic reality, it is ignored when calculating corporate income tax (Article 11(8) PM\u012e).<\/p>\r\n The tax exemption is conditional: it applies only when all the conditions above are met, so each transaction needs to be checked from a tax angle. We covered the share exchange in a reorganisation and the related dates in Company reorganisation: dates, shareholders and the notary<\/a>.<\/p>\r\n Send us a recent extract from the Centre of Registers (Registr\u0173 centras<\/em>) and a list of shareholders with their holdings, and tell us what you want to separate and what shareholder structure you want at the end. Together with your tax adviser we will assess which statutory case the planned transaction matches.<\/p>\r\n Phone +370 5 212 1506, email info@linden.lt<\/p>\r\nIndividual shareholders<\/h2>\r\n
Corporate shareholders<\/h2>\r\n
Rules against artificial arrangements<\/h2>\r\n
What to check before approving the terms<\/h2>\r\n
More on reorganisation<\/h2>\r\n
How to start<\/h2>\r\n