On 1 January 2019 important changes in Lithuania’s Law on Corporate Income Tax, determining interest expense limitations, came into force. These changes are relevant to group companies and companies with related undertakings.
The new rules are designed to prevent profit transfer occurring due to profit-reducing interest payments between group companies, and to encourage equity financing.
To whom applicable
The new limitations are applicable to all group companies or companies with related undertakings. Along with the new interest deduction limitation rules, the definition of a group of companies is also expanded to include indirectly controlled companies and companies in which the parent undertaking directly or indirectly owns more than 25% of the voting rights or rights to a part of the distributable profits or exclusive rights to acquire them (ie not only stocks and shares).
Exceptions and exemptions
The new rules limiting interest deduction will not apply to financial institutions and insurance companies, or to interest on loans for long-term public infrastructure projects. Nor will the new rules apply to interest on transactions that took place before 1 January 2019, except where transaction terms concerning the duration of the transaction and / or the amount change after 1 January 2019.
Companies will be able to deduct only interest expenses that:
- do not exceed interest income; and
- exceed interest income but the excess does not exceed the following thresholds:
- 30% unit EBITDA (profit before interest, taxes, depreciation and amortization); or
- EUR 3 000 000
Applying the rules to groups of companies
For a company that belongs to a group, interest expenses will have to be calculated for all Lithuanian companies in that group and for permanent establishments of foreign companies in Lithuania (except financial institutions and insurance companies).
How much interest will be deductible? If the total amount of group companies’ interest expenses exceeding interest income stands below or equals the set limit, all group companies will be able to deduct all interest expenses exceeding interest income.
How is deductible interest calculated? The deductible interest expense portion of each group entity will be calculated proportionally, taking into account the portion of the interest expenses of that enterprise in the total interest expenses of the group.
Applying the rules to consolidated groups
Companies whose financial statements are included in group consolidated financial statements and whose equity-to-total-assets ratio is not more than 2 percentage points lower than the corresponding group of companies’ ratio as determined by the consolidated financial statements of the group, will be able without restriction to deduct all interest expenses exceeding interest income.
Other significant changes concerning corporate income tax
Since this year, application of the general anti-abuse rule has been expanded, in order to limit access to corporate income tax incentives and tax exemptions where tax benefits are sought, and where such benefits are the main or one of the main objectives of a structure or several structures (ie transaction, economic activity, etc.). Application of the rule has until now been limited to preferential dividends received from foreign taxable entities and paid to foreign entities.
From this year, the new rules on taxation of positive income (ie controlled foreign unit income) will also apply in Lithuania. For more, read here (information in Lithuanian).