Acquisitions (from the buyer’s perspective)Tax treatment of different acquisitions
What are the differences in tax treatment between an acquisition of stock in a company and the acquisition of business assets and liabilities?
Regarding tax on corporate income, the acquisition of stock as such usually does not influence the balance of the profit and loss of the Lithuanian company being acquired. However, under specific conditions, Lithuanian tax laws allow the transfer of all or a part of losses for 2010 and subsequent years within the group of legal entities, including cross-border transfers. On the other hand, an acquisition of stock or an acquisition of business assets will affect the balance of the acquirer. Moreover, in an acquisition of a separate unit of property, rights or obligations, and subject to further activities in Lithuania, the acquirer may be recognised as acting through its permanent establishment in Lithuania, which may lead to the taxation of income of that activity in Lithuania.
The taxation of profit from further sales of purchased property differs as well. Profit on the sale of shares received by an acquirer with no other presence in Lithuania is not subject to tax on corporate income, but the sales of separate units of assets and liabilities might be. For example, subject to the Law on Corporate Income Tax (Law on CIT), profit from the sale of real property located in Lithuania is subject to a 15 per cent tax on corporate income.
The above-mentioned two forms of acquisition differ with respect to VAT. Pursuant to the Law on Value Added Tax (Law on VAT) the sale-purchase of stock is not subject to VAT in Lithuania, even if the company whose stock is being purchased owns the real property. The transfer of the whole or a part of a business, as a complex unit of rights and obligations (including cases where the whole or a part of a business, as a complex, is transferred as a contribution of a member of the legal person), to the taxable person who continues the acquired activity, is also not subject to VAT. According to the currently valid laws, the transfer of property during a reorganisation where the transferor is being dissolved may be subject to VAT. If the purchase or import VAT from a particular property or business activity was deducted, the corresponding acquisition of such property shall be subject to VAT in Lithuania.
If only a separate unit of property, rights or obligations is being purchased by the investor, such a purchase must be evaluated individually with respect to VAT. For example, the sale or purchase of real property that is deemed to be old according to the provisions of the Law on CIT in general is not subject to VAT in Lithuania, contrary to the sale or purchase of new real property.
It should also be noted that a foreign company owning real property in Lithuania must be registered in the register of taxpayers and pay the tax on real property, which is between 0.3 per cent and 3 per cent of the property’s taxation value per year. The owner of the stock of a Lithuanian company does not have to pay any taxes related to the ownership itself.
Finally, a transaction concerning a sale or purchase of stock needs to be certified by a notary only in particular cases (eg, in cases where 25 per cent or more shares of private limited company are sold or where the sales price exceeds €14,500 despite the number of shares on sale), but the transfer of a whole or a part of business as a complex unit of rights and obligations must always be certified by a notary.Step-up in basis
In what circumstances does a purchaser get a step-up in basis in the business assets of the target company? Can goodwill and other intangibles be depreciated for tax purposes in the event of the purchase of those assets, and the purchase of stock in a company owning those assets?
The purchaser may get a step-up in basis if the business assets of the company are purchased or exchanged for other property.
Under the Law on CIT, the income of a Lithuanian or foreign entity through its permanent establishment in Lithuania, received from the increase in the value of assets resulting from transfer of shares of a target entity, shall not be taxed in Lithuania in the event that:
- the target entity is registered or otherwise organised in a state of the European Economic Area (EEA) or in a state with which a treaty for the avoidance of double taxation is in force; the target entity is a payer of corporate income tax or an equivalent tax; the entity transferring the shares held more than 10 per cent of voting shares in the target entity for an uninterrupted period of at least two years; and the entity transferring the shares does not transfer them to the entity that has issued these shares; or
- the shares of a target entity are transferred during the specific types of reorganisation referred to in the Law of CIT; the transferring entity held more than 10 per cent of voting shares in the target entity for an uninterrupted period of at least three years; and the entity transferring the shares does not transfer them to the entity that has issued these shares.
In accordance with the Law on CIT, the acquisition price of assets comprises expenses incurred for acquiring the assets, including commission paid and taxes related to the acquisition, except for VAT. Still, in an exchange of business assets for other assets, the acquisition price of the newly acquired assets is the acquisition price of the assets exchanged. If the acquisition price of the assets exchanged cannot be determined, the acquisition price of the newly acquired assets will be their actual market price. It should also be noted that where securities are exchanged for other assets, the acquisition price of such assets shall be the actual market price of these securities at the moment of the acquisition of the assets.
Long-term assets and goodwill can be depreciated or amortised pursuant to the provisions of the Law on CIT.
Where the activity of another company as a complex, or a part of an activity constituting an independent unit capable of engaging in the commercial activity at its own discretion, is acquired, the value of positive goodwill is subject to depreciation for tax purposes for at least 15 years applying the linear method. Negative goodwill, created as a result of the above-indicated acquisition of the activity of the other company or a part thereof, shall be attributed to income at the moment of its acquisition.
Negative goodwill, as well as positive goodwill, created as a result of acquisition of stock aiming for control over the target’s net assets and activity, can correspondingly be attributed to income or can be included in the limited allowable deductions for taxation purposes only after a subsequent merger of these companies or merger by acquisition of one company by another, if any.
The other purchased long-term intangibles can be depreciated for a minimum of two to four years, depending on the class of the assets and the manner of their use, applying the linear or double declining balance method.Domicile of acquisition company
Is it preferable for an acquisition to be executed by an acquisition company established in or out of your jurisdiction?
For taxation purposes, the acquirer can profit from tax exemptions in Lithuania if it is established in another EU member state, taking into consideration that the taxes due in that state are lower than the Lithuanian rates.
For example, dividends paid by a Lithuanian company to a foreign company that uninterruptedly for at least 12 months controls not less than 10 per cent of the voting stock in a Lithuanian company shall not be subject to taxation in Lithuania, except where the recipient of dividends is registered or otherwise organised in target (tax haven) territories. For comparison, dividends paid out to a company that does not correspond to the above criteria are taxed at 15 per cent on profit in Lithuania, unless a particular treaty on avoidance of double taxation provides for a more favourable regime.
Regarding taxation of interest, according to the currently valid Lithuanian tax laws, the interest on a loan paid by a local company to a foreign company organised within the EEA, or within a state that has a treaty on avoidance of double taxation with Lithuania in force, and not received through the foreign company’s permanent establishment in Lithuania, is exempt from withholding tax on profit in Lithuania. For comparison, interest paid out to a foreign company that does not correspond to the above criteria is taxed at 10 per cent on corporate income in Lithuania, unless a particular treaty on avoidance of double taxation provides for a more favourable regime.
The royalties paid by a Lithuanian company to a related EU company (the beneficial owner), both corresponding to the criteria established by the Law on CIT, are also exempt from withholding tax in Lithuania when the royalties paid by a Lithuanian company to another foreign company with no permanent establishment in Lithuania are subject to 10 per cent withholding tax on profit in Lithuania, unless a particular treaty on avoidance of double taxation provides for a more favourable regime.
Furthermore, only a foreign entity, being the EU resident for taxation purposes, is able to transfer all or a part of its losses to the related Lithuanian entity.
Finally, under the Law on CIT only mergers, divisions or acquisitions with participants residing in the EU may be exempt from tax on corporate income on the capital gains and award a benefit for the acquirer to carry forward the losses of the acquired or transferring entity. In other cases the increase in the value of assets emerging from mergers and other forms of reorganisation or transfer shall be subject to tax on corporate income in Lithuania.Company mergers and share exchanges
Are company mergers or share exchanges common forms of acquisition?
Both mergers and share exchanges have their own pros and cons. For example, if the merger corresponds to the requirements of the Law on CIT, the increase in the value of assets emerging from the merger shall be exempt from the tax on corporate income in Lithuania. Moreover, if the acquiring entity continues the activity taken over, or a part thereof, for a period not shorter than three years, it may carry forward the losses of the acquired or transferring entity or entities (except for the losses resulting from transfer of the securities or from derivative financial instruments) related to the transferred activity incurred before the completion of the reorganisation or transfer and not carried forward to the following year. On the other hand, the merger may be an incentive for the Tax Inspectorate to start a tax inspection of the transferor, of the acquirer or of the target, which may significantly prolong the merger process.
Some share exchanges can provide the above-mentioned tax advantages as well. In addition, they usually do not trigger tax inspections and the procedures are less time-consuming in comparison with company mergers.
Therefore, the most acceptable and efficient form of acquisition of a business or a part of it should be investigated carefully with respect to the individual situation, the kind of business being acquired and the goals of the acquisition. However, in practice, mergers are more common than share exchanges in Lithuania.Tax benefits in issuing stock
Is there a tax benefit to the acquirer in issuing stock as consideration rather than cash?
In general, Lithuanian tax laws do not provide obvious tax benefits to the acquirer in issuing stock as a consideration rather than cash. However, if the issue of stock as a consideration falls under the provisions of the Law on CIT regulating tax-free mergers and acquisitions, the acquirer may benefit from the exemption of taxation of capital gains resulting from the merger and from the possibility of carrying forward the losses of the acquired or transferring entity. On the other hand, issuing stock as consideration may lead to the different estimation of the acquisition price of either stock or business assets acquired that may be important for the acquirer for future transfers of the acquired property.Transaction taxes
Are documentary taxes payable on the acquisition of stock or business assets and, if so, what are the rates and who is accountable? Are any other transaction taxes payable?
There are no stamp duties payable for the acquisition of stock or business assets as such.
However, subject to the Civil Code, some transactions, such as transactions on transfer of ownership of real property and on transfer of all or part of a company as a complex unit of rights and obligations, must be certified by a notary. This requirement means additional notary expenses for the parties, amounting to 0.45 per cent of the value of the transaction, but no more than €5,792.40. Since 2015, particular sales of shares have also required certification at the notary (see question 1), which leads to additional notary expenses amounting to 0.4-0.5 per cent of the securities’ sales price, but no more than €5,792.40. Other transfers of stock do not have to be certified by a notary, although that is possible at a party’s request.
Additionally, the Register of Legal Persons of Lithuania must be informed of any change in shareholders or their share in the company by submitting the renewed list of shareholders to the Register. In this case, the state levy of approximately €5.80 must be paid for registration of the change of registry data. Transfer of the ownership of some kinds of tangible property (real property, motor vehicles, etc) should also be registered in the official register for an established registry fee that may amount to a maximum of €1,448.10, depending mostly on the type and value of the acquired property.
Regarding VAT taxation of the acquisition of stock or business, see question 1.Net operating losses, other tax attributes and insolvency proceedings
Are net operating losses, tax credits or other types of deferred tax asset subject to any limitations after a change of control of the target or in any other circumstances? If not, are there techniques for preserving them? Are acquisitions or reorganisations of bankrupt or insolvent companies subject to any special rules or tax regimes?
In a purchase of stock, the losses of the target will be carried forward to the following fiscal year according to the ordinary rules prescribed by the Law on CIT. Losses for the tax period, except for the losses incurred as a result of transferring the securities and derivative financial instruments, may be carried forward for an unlimited period. However, such carry-forward shall be terminated if the entity ceases the activities due to which the losses were incurred, except where the entity ceases the activities for reasons beyond its control. Losses incurred as a result of transferring the securities and derivative financial instruments may be carried forward for no more than five consecutive tax periods and can only be covered by the income received from the transfer of securities and derivative financial instruments.
The Law on CIT provides a special regime for carrying forward losses in reorganisations or transfers corresponding to its requirements (see question 4). Under the Law on CIT, the acquiring entity continuing the activity taken over, or a part thereof, for a period not shorter than three years, may carry forward the losses of the acquired or transferring entity or entities (except for losses resulting from transfer of securities and from derivative financial instruments) related to the transferred activity incurred before the completion of the reorganisation or transfer and not carried forward to the following year.
From the tax period of 2014 and subsequent tax periods, the transfer of the amount of deductible tax losses, except the small companies, may not exceed 70 per cent of the taxpayer’s income from the tax period, calculated as the income minus tax-exempt income, allowable deductions and limited allowable deductions, with the exception of tax losses from the previous tax year carried forward. This limitation is not applied in the case of losses incurred as a result of transferring the securities and derivative financial instruments because these losses may be carried forward for a limited period and can be covered only by the income received from the same activities.
Change of control of the target as such should not affect the tax credits of the target or other taxes deferred by the Law on CIT. However, it should be noted that on application for the tax credit, the taxpayer must submit to the Tax Inspectorate information on the current composition of shareholders and planned changes, if any. Although the composition of shareholders should not directly affect the possibility of getting the tax credit or properly executing the received one, every case of tax credit is considered individually, thus information on shareholders might be important while evaluating the reliability and credit solvency of the taxpayer.
After the court decision to institute bankruptcy proceedings to the company becomes effective, and if the company is not able to further implement the unexpired contracts, such contracts are deemed to have expired, and claims of the creditors arising by reason thereof are met according to the ordinary procedures specified by the Enterprise Bankruptcy Law of the Republic of Lithuania. Thus, in such a case, the tax credits or other types of deferred tax asset of the company being bankrupt, shall not be preserved and shall be recovered by the state as a creditor of the company.
Lithuanian tax laws do not provide any special rules or regimes for the taxation of acquisitions or reorganisations of bankrupt or insolvent companies, except for the provision of the Law on CIT and its official commentary stating that income received by the bankrupt Lithuanian company from the sale of its assets shall not be subject to the tax on corporate income. It should also be noted that according to the provisions of the Law on CIT, the same exemption should be applied to the income of a bankrupt foreign company received through its permanent establishment in Lithuania. Unfortunately, practice on this question is lacking and the position of the Tax Inspectorate is controversial.Interest relief
Does an acquisition company get interest relief for borrowings to acquire the target? Are there restrictions on deductibility generally or where the lender is foreign, a related party, or both? In particular, are there capitalisation rules that prevent the pushdown of excessive debt?
According to the tax laws, the interest on borrowings to acquire the target does not constitute a part of the target’s price. The interest payments on loans taken by the Lithuanian company to finance the acquisition might, however, be treated as allowable deductions for corporate income tax purposes. The tax laws also provide a few restrictions on the deductibility of interest payments where the lender is foreign or a related person.
Subject to the Law on CIT, payments to the lender organised in the target territory can be treated as allowable deductions for calculation of tax on corporate income only if the paying Lithuanian entity or permanent establishment supplies the Tax Administration with evidence that such payments are related to the usual activities of the paying and receiving entities, the receiving foreign entity controls the assets needed to perform such usual activities and there exists a link between the payment and the economically reasonable operation.
The possibility of deducting interest for the loan received from the controlled party is restricted by reference to thin capitalisation rules. Lithuanian thin capitalisation rules apply only to the extent to which the ratio between the capital borrowed from the controlling creditor and the fixed (equity) capital of the Lithuanian company (debtor) exceeds 4:1. The interest for the part of the loan exceeding the above-mentioned ratio cannot be deducted from the taxable income of the debtor, unless the debtor proves that the same loan could be provided or received on the same conditions between unrelated persons.
The Anti-Tax Avoidance Directive (ATAD) has been transposed into Lithuanian national law. The Law on CIT says that if the interest costs of the entity exceed the interest income, an amount of the interest costs exceeding interest income that does not exceed 30 per cent of the taxable EBITDA (earnings before interest, tax, depreciation and amortisation) of the entity and an amount of the interest costs exceeding the interest income that does not exceed €3,000,000 can be deducted from income.
Finally, the interest on other loans received from related parties, even if not falling under thin capitalisation rules, must still comply with the arm’s-length principle. Otherwise, the Tax Inspectorate is able to recalculate the taxable profits of the Lithuanian company (borrower) engaged in the transaction.
Lithuanian withholding taxes on interest payments can be avoided only by using the tax exemptions prescribed by the Law on CIT (see question 13).
Debt pushdown can be achieved only by having the consent of the creditor and of other shareholders of the target company.Protections for acquisitions
What forms of protection are generally sought for stock and business asset acquisitions? How are they documented? How are any payments made following a claim under a warranty or indemnity treated from a tax perspective? Are they subject to withholding taxes or taxable in the hands of the recipient? Is tax indemnity insurance common in your jurisdiction?
Because the area of taxation is quite sensitive and risky, all possible forms of protection of the acquirer with respect to the target’s fulfilment of its tax obligations for previous periods are recommended. Usually the representations and warranties of the seller regarding the proper fulfilment of all of its or the target’s tax obligations are primarily related to the acquisition price of stock or business assets; if it becomes clear that these representations and warranties do not correspond to the real situation, the purchase price is accordingly decreased or the agreement on acquisition may be terminated. As an additional warranty, the payment of a part of the acquisition price may be postponed for the period during which potential risks are expected to arise or disappear. In a stock acquisition, it is always recommended for the acquirer to get official confirmation from the tax, social security and customs authorities proving the proper and complete settlement of the target with the appropriate institution.
Depending on the particular circumstances and selected strategy, the warranty measures may constitute a part of the sale-purchase agreement, its annex or may be written in separate documents.
Following a claim under a warranty or indemnity, compensation for losses or payment of forfeit (fines or penalties for delay) is usually received.
The compensation of losses or forfeit received by a foreign legal entity that has no permanent establishment in Lithuania is not treated as sourced in Lithuania and therefore is not subject to Lithuanian tax on corporate income.
In general, the compensation for losses, including received related insurance benefits, that is not in excess of the value of losses or damages actually incurred and that is received by a Lithuanian or by a foreign entity through its permanent establishment in Lithuania, is exempt from tax on corporate income in Lithuania. However, all expenses attributed to the said non-taxable income shall be treated as non-allowable deductions for the purpose of the calculation of tax on corporate income.
The forfeit received by the local company or foreign entity through its permanent establishment in Lithuania is treated as non-taxable income, except in cases where the forfeit is received from a foreign entity registered or otherwise organised in target (tax haven) territory or from a natural person being the resident of such territory.
It should also be noted that compensation for the damages caused or forfeit paid for the breach of the agreement is treated as non-allowable deductions of the payer and therefore they cannot be deducted from taxable income of the default party.
According to the Law on VAT, the forfeit and other similar sums are not treated as remuneration for goods or services and are therefore not subject to VAT in Lithuania.