LithuaniaLithuania

Legal ReferenceArticle 40 of the Law on Corporate Income Tax (CIT Law) Article 15 of the Law on Income Tax of Individuals (ITI Law) Clause 3 of the Rules for Implementation of paragraph 2 of Article 40 of the Republic of Lithuania Law on Corporate Income Tax and paragraph 2 of Article 15 of the Republic of Lithuania Law on Personal Income Tax approved by the Minister of Finance of the Republic of Lithuania (hereinafter the Transfer Pricing (TP) Rules)

For the purpose of calculating taxable profits in accordance with the procedure laid down in the CIT Law and for the purpose of calculating taxable income in accordance with the procedure laid down in the ITI Law, entities and individuals must recognise: - the amount, which is in line with the actual market price of a transaction or economic operation as income from such transaction or economic operation; and - the total amount of costs incurred in a transaction or economic operation, which is in line with the actual market price of said transaction or economic operation as allowable deductions or limited allowable deductions. Where the conditions created or prescribed by mutual transactions or economic operations between associated persons are other than those created or prescribed by a mutual transaction or economic operation between non-associated persons, any profit (income) that would be attributed, if no such conditions existed, to one of such persons, but due to such conditions is not attributed to him, may be included in the income of that person and taxed accordingly. The “Arm’s Length Principle” shall mean the principle according to which the prices of the controlled transactions should not differ from the actual market price and the profits earned or the income received from the performance of the controlled transactions should not differ from the profits (income) that should be earned if the transaction was carried out at the actual market price. The arm’s length principle shall be based on comparison of the controlled transaction with the comparable transaction or transactions.

Legal ReferenceTP Rules

The Lithuanian TP rules are mainly in-line with the OECD Transfer Pricing Guidelines (‘OECD TPG’). Moreover, Lithuanian TP Rules recommend the use of the OECD TPG insofar as the provisions do not contradict the provisions of the TP Rules.

Legal ReferenceArticle 2 of CIT Law and Article 2 of ITI Law

The Arm’s Length Principle applies to associated parties. This concept encompasses both related parties and other associated entities (persons). Article 2 of CIT Law provides with the following definitions: Associated persons mean persons (entities or natural persons) where at least one of the following criteria is met: 1) they are related persons. 2) they may have an influence over each other, resulting in the conditions of their mutual transactions or economic operations being other than those where a maximum economic benefit is sought by each person. Related persons are treated as such if, on any day of the relevant tax period or the tax period preceding the relevant tax period, at least one of the following criteria is met, they are: 1) an entity and its members (e. g. shareholders); 2) an entity and members of its management bodies; 3) an entity and the spouses, fiancés and cohabitants of its members or members of its management bodies, other natural persons related to them by consanguinity (in the direct line up to the second degree, in the collateral line up to the fourth degree) or by marriage - a natural person and the relatives of his spouse (in the direct or collateral line up to the second degree), and also the relatives of the cohabitants of members of the entity or members of its management bodies (in the direct or collateral line up to the second degree), the spouses or cohabitants of the relatives of members of the entity or members of its management bodies (in the direct line up to the first degree, in the collateral line up to the second degree) as well as the relatives of the said spouses or cohabitants (in the direct line up to the first degree, in the collateral line up to the second degree); 4) members of a group of entities; 5) an entity and members of another entity where such entities comprise a single group of entities; 6) an entity and members of the management bodies of another entity where such entities comprise a single group of entities; 7) an entity and the spouses, fiancés and cohabitants of members of another entity or members of its management bodies, other natural persons related to members of another entity or members of its management bodies by consanguinity (in the direct line up to the first degree, in the collateral line up to the second degree) or by marriage (a natural person and the relatives of his spouse (in the direct line up to the first degree, in the collateral line up to the second degree), and also the relatives of the cohabitants of members of another entity or members of its management bodies (in the direct line up to the first degree, in the collateral line up to the second degree), the spouses or cohabitants of the relatives of members of another entity or members of its management bodies (in the direct line up to the first degree, in the collateral line up to the second degree) where the said taxable entities comprise a single group of entities; 8) two entities where one of them controls directly or indirectly (through a single or several entities or natural persons) over 25% of the shares of the other entity or holds the right to over 25% of the decisive votes of the other entity or has undertaken to coordinate its decisions regarding the activities with the other entity or has undertaken to be liable for the obligations of the other entity in respect of third parties or has undertaken to transfer all or part of its profits to the other entity or has granted the other entity the right to use over 25% of its assets; 9) two entities where their members or the spouses, fiancés and cohabitants of such members, natural persons related by consanguinity (in the direct line up to the second degree, in the collateral line up to the fourth degree) or by marriage (a natural person and the relatives of his spouse (in the direct or collateral line up to the second degree)), and also a natural person and the relatives of his cohabitant (in the direct or collateral line up to the second degree), a natural person and the spouses or cohabitants of his relatives (in the direct line up to the first degree, in the collateral line up to the second degree) as well as the relatives of the said spouses or cohabitants (in the direct line up to the first degree, in the collateral line up to the second degree) control directly or indirectly 25% of the shares in each of such entities; 10) an entity and its permanent establishment; 11) two entities where one of them holds decision-making rights in the other entity. Related persons are treated as such if on any day of the relevant tax period or the tax period preceding the relevant tax period, at least one of the following criteria is met, they are: 1) an individual, who is a member of an entity, and that entity, or 2) an individual, who is a member of the managing bodies of an entity, and that entity, or 3) an individual whose spouse, fiancé or cohabitant is a member of the managing bodies of an entity, and that entity, or 4) an individual and his spouse, fiancé, cohabitant; an individual and persons related to him by consanguinity (in the direct line up to the second degree, in the collateral line up to the fourth degree) or by marriage (an individual and the relatives of his spouse (in the direct or collateral line up to the second degree)); an individual and the relatives of his cohabitant (in the direct or collateral line up to the second degree); an individual and the spouses or cohabitants of his relatives (in the direct line up to the first degree, in the collateral line up to the second degree) as well as the relatives of the said spouses or cohabitants (in the direct line up to the first degree, in the collateral line up to the second degree), or 5) two individuals who are members of the same entity and each of whom directly or indirectly controls over 25% of the shares (interests, member shares) in that entity, or 6) two individuals who are members (e. g. shareholders) of the same entity and each of the individuals, together with other persons (a spouse, fiancé, cohabitant or relatives of the said cohabitant (in the direct or collateral line up to the second degree), persons related to him by consanguinity (in the direct line up to the second degree, in the collateral line up to the fourth degree) or by marriage (an individual and the relatives of his spouse (in the direct or collateral line up to the second degree)), also the spouses or cohabitants of his relatives (in the direct line up to the first degree, in the collateral line up to the second degree) as well as the relatives of the said spouses or cohabitants (in the direct line up to the first degree, in the collateral line up to the second degree), controls directly or indirectly over 25% of the shares (interests, member shares) in that entity, or an individual and his fixed base.

Legal ReferenceClauses 20 and 25 of the TP Rules

The TP Rules also provide for the option to combine and modify the methods if this achieves a result in line with the arm’s length principle. In exceptional cases, valuation methods can also be applied.

• CUP (provided)
• Resale Price (provided)
• Cost Plus (provided)
• TNMM (provided)
• Profit Split (provided)
• Other (provided)

Legal ReferenceClauses 21-25 of the TP Rules

A taxpayer must select the most appropriate transfer pricing method taking into account the characteristics of the transaction, the reliability of the data available, the validity of assumptions and forecasts, the degree of similarity between the transaction for which the pricing method is selected and the comparable transactions.

• Hierarchy of methods (not selected)
• Most appropriate method (selected)
• Other (if so, please explain) (not selected)

Due to the requirement in domestic legislation to use the OECD TPG insofar as the provisions do not contradict the provisions of the TP Rules, for controlled transactions involving commodities, the guidance contained in paragraphs 2.18-2.22 of the TPG should be followed.

Legal ReferenceClauses 6 -13 of the TP Rules

The TP Rules determine the following evaluation process: Step I: the evaluation of the controlled transaction; Step II: the selection of the most suitable uncontrolled transaction (or transactions) as a comparable (or comparables); Step III: the evaluation of the selected uncontrolled transaction; Step IV: the application of the proper transfer pricing method. The evaluation of the controlled and uncontrolled transactions is performed according to five comparability factors: characteristics of the subject of the transaction; functions performed, risks assumed, assets used of the parties to the transaction when carrying out the functional analysis; contractual provisions; economic circumstances; and business strategy.

Legal ReferenceClauses 54-57 of the TP Rules

Determination of the arm’s length range is established in Clauses 54-57 of the TP Rules: ‒ If the application of the pricing method or methods by a taxpayer provides an arm’s length range, rather than a single arm’s length price or profit, the transaction price or profit is considered to comply with the arm's length principle if it is within the arm’s length range. Statistical methods are used to determine an arm’s length range, where more reliable approaches to reject potential comparables are not available; ‒ If the selection and analysis of comparable transactions show that not all comparable transactions selected meet the comparison criteria and/or exhibit other characteristics that prevent achieving equally reliable results of comparison actions, these transactions must be eliminated to ensure that an arm's length range is established using equally reliable comparable transactions; ‒ When an arm’s length range has been determined, the tax administrator makes an adjustment to the median of the arm’s length range, unless it is possible to determine or a taxpayer proves that a different point in the arm’s length range in more appropriate. Where a taxpayer does not cooperate with the tax administrator, the tax administrator has the right to make an adjustment to any point in the arm’s length range; There shall be no adjustment if it is determined that the transaction price or profit is within the arm‘s length range.

Legal ReferenceClauses 3.12, 16, 28, 34-35, 40-41 of the TP Rules.

The TP Rules provide for comparability adjustments where there are significant differences between the controlled and the comparable transactions and making adjustments increases reliability and accuracy of comparables. Where significant adjustments are required, this implies that another transfer pricing method may be more appropriate. In cases, where the adjustment changes the price materially, this should be regarded with caution. The tax administration follows the OECD TPG provisions on the comparability adjustments.

Legal ReferenceClauses 58 to 67 of the TP Rules

Yes. If so, does your domestic transfer pricing framework follow (or largely follow) the guidance in Chapter VI of the TPG? Yes.

Legal ReferenceClauses 3.12-1 and 67^1 of the TP Rules

Yes. If so, does your domestic transfer pricing framework follow the guidance on HTVI in Chapter VI of the TPG? Yes.

Legal ReferenceClauses 3.12-1 and 67^1 of the TP Rules

There are no special conditions. The HTVI approach is applied in accordance with the OECD TPG.

No, common requirements applies. However, certain aspects, which correspond to the conditions for application of the HTVI, should be taken into more careful consideration, i.e.: detailed forecasts established at the time of conclusion of the transaction (ex ante) on which the price was based, including data (calculations) showing how the risks were assessed, as well as information revealing how the impact of foreseeable circumstances or other risks and the probability of their occurrence were assessed.

Legal ReferenceSubparagraph 4 of Article 68(4) of the Law on Tax Administration of the Republic of Lithuania

Statute of limitations for HTVI approach applies the same as for all transfer pricing adjustment cases, i.e. current and 5 preceding years.

Existing rules do not allow the use of hindsight, with the single exception for the HTVI approach (if the conditions for HTVI have not been met). Uniform administrative and judicial practice in transfer pricing cases ensure that no hindsight is allowed in ordinary cases.

No (unless merits of the particular case allow some aspects of such approach could be taken into consideration during mutual agreement procedure only).

Legal ReferenceClauses 68-76 of the TP Rules

Yes. If so, does your domestic transfer pricing framework follow (or largely follow) the guidance in Chapter VII of the TPG? Yes.

Legal ReferenceClauses 3-1 and 76-1 of the TP Rules

Yes. If so, does it follow (largely follow) the low value-adding services approach in Chapter VII? Yes.

Lithuania’s domestic legislation or regulations do not contain specific guidance on financial transactions and tend to rely on the OECD TPG (Chapter X).

Legal ReferenceParagraph 3 of Article 40 and Article 30-1 of CIT Law

Limitations on interest deductibility: 1. Thin Capitalization rule. Interest on debt in excess of a debt/equity ratio of 4:1 are non-deductible for corporate income tax purposes. 2. From the taxable period of 2019, a new interest rate deduction rule is established, which is based on the provisions of the EU Anti-Tax Avoidance Directive. Under this rule, an entity can deduct interest costs which: - do not exceed interest income; or - exceed interest income, but in such cases the deduction is limited to 30% of the taxable earnings before interest, taxes, depreciation and amortization (EBITDA). However, this limitation does not apply to entities and groups of entities whose total interest costs exceeding interest income are lower than EUR 3 million.

Lithuania allows cost contribution arrangements, however, Lithuania’s domestic legislation or regulations do not contain specific guidance on CCAs and tend to rely on the OECD TPG as far as they do not contradict the TP Rules.

Legal ReferenceClauses 77-93 of the TP Rules Article 61 of the Law on Tax Administration of the Republic of Lithuania Rules implementing obligations related to CbC Report

• Master file consistent with Annex I to Chapter V of the TPG (selected)
• Local file consistent with Annex II to Chapter V of the TPG (selected)
• Country-by-country report consistent with Annex III to Chapter V of the TPG (selected)
• Specific transfer pricing returns (separate or annexed to the tax return) (selected)

Legal ReferenceClauses 19, 77-93 of the TP Rules Rules implementing obligations related to CbC Report

Taxpayers have to prepare transfer pricing documentation (Master and Local files) by the 15th day of the sixth month of the tax period, which is a period other than that during which the controlled transaction took place. The transfer pricing documentation may be stored in a form and language chosen by the taxpayer until the request by the tax administrator. When the tax administrator requests for the documentation, it has to be provided in an original language. In case, the language is different than Lithuanian, the tax administrator may require the translation. In practice, the transfer pricing documentation is usually prepared in Lithuanian or English – both languages are accepted. The transfer pricing documentation has to be submitted within 30 days after receipt of a special request of the tax administration. Transfer pricing documentation requirements are in line with the Action 13 approach. Regarding Country-by-country report, taxpayers have to notify the tax administration of the identity and tax residency of the reporting entity no later than the last day of the reporting fiscal year. The Country-by-country report has to be submitted to Lithuanian Tax Administrations within 12 months from the last day of the reporting financial year.

Legal ReferenceArticle 188 of Code of Administrative Offences

Article 188 of the Code on Administrative Offences establishes a specific penalty related to the transfer pricing documentation imposed on the manager (or other delegated person of an enterprise, i.e. personal liability). Non-compliance with the requirements of transfer pricing documentation rules incurs a penalty ranging from EUR 1 820 to EUR 5 590, while an offense committed repeatedly incurs a penalty ranging from EUR 3 770 to EUR 6 000.

Legal ReferenceClause 84, 85 and 87 of the TP Rules

The Master file must be prepared by Lithuanian entities and foreign entities operating in Lithuania through a permanent establishment, whose income (income attributable to a permanent establishment in Lithuania) during a tax period preceding the tax period during which the controlled transactions are conducted exceeded EUR 15 million if the entity (permanent establishment) belongs to an international group of entities. The Local File must only be prepared by the Lithuanian entities and permanent establishments of the foreign entities acting in Lithuania with turnover of a previous taxable year when a controlled transaction was actually carried out exceeding EUR 3 million (this limitation is not applied to financial undertakings, credit institutions and insurance companies which are obliged to prepare the transfer pricing documentation irrespective of the size of their turnover). The entity (permanent establishment) mentioned above are not subject to the requirements of preparation of transfer pricing documentation (neither master file, nor local file) if it conducts controlled transactions only with other Lithuanian entities and/or with foreign entities operating through a permanent establishment or entered in a controlled transaction with a value of less than EUR 90 000 during a tax period, except where: - several identical transactions with the total value of more than EUR 90 000 are entered into with the same associated person during a tax period; - such a transaction is inextricably linked to another transaction in excess of EUR 90 000 and therefore they must be assessed together; - a transaction has been entered into with a person registered in a targeted territory (tax heaven). The taxpayers that do not have an obligation to prepare the transfer pricing documentation according to the aforementioned requirements are allowed to justify the application of the arm’s length principle in a free manner.

Legal ReferenceArticle 37-1 of the Law on Tax administration of the Republic of Lithuania; Tax Rulings VA-105; APA rules VA-106; Law on Resolution of Double Taxation Disputes; MAP and APA; Lithuania’s MAP Profile

Relevant regulations on this topic include: - The Rules for the Submission of a Taxpayer’s Request to Consent to the Application of the Provisions of Tax Laws to a Future Transaction, Examination of the Request, Adoption and Amendment of the Decision Obligating the Tax Administrator, adopted by 19 October 2011 order of Head of State Tax Inspectorate under Ministry of Finance No. VA-105 (VA-105); - The Rules for the Submission of a Taxpayer’s Request to Consent to the Principles of Pricing of a Future Controlled Transaction, Adoption and Amendment of the Decision Obligating the Tax Administrator, adopted by 21 October 2011 order of Head of State Tax Inspectorate under Ministry of Finance No. VA-106; - Double Tax Avoidance Treaties; - Convention 90/436/EEC on the elimination of double taxation in connection with the adjustment of profits of associated enterprises; - Law on Resolution of Double Taxation Disputes (which implements Council directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union); - The Rules for the Initiation and Execution of the Mutual Agreement Procedure.

• Rulings (selected)
• Advance Pricing Agreements (APA) (selected)
• Unilateral APAs (selected)
• Bilateral APAs (selected)
• Multilateral APAs (selected)
• Mutual Agreement Procedures (selected)

Lithuania is still assessing implementation possibilities, but no concrete decisions have been made yet.

• Other (please elaborate) (selected)

• N/A (selected)

• N/A (selected)

N/A: Lithuania is still assessing implementation possibilities, but no concrete decisions have been made yet.

Taxpayers have to adjust transfer prices in cases they are not compatible with the arm’s length principle. However, if the price is within arm’s length range, adjustment will not be appropriate. Taxpayer is required to substantiate the reasonableness of the adjustment proving the rightness and relevance of transfer pricing policy (e. g. that the factual circumstances did not change and taxpayer did not start performing more functions which should be additionally rewarded). Any price adjustments have to be formalised by issuing accounting documents (i. e. invoices).

Legal ReferenceLithuanian Tax Treaties

Please see the answer provided for question 44.

• Article 7 as it read before 2010. (selected)
• Article 7 as it reads after 2010. (selected)

The Authorized OECD Approach (AOA) is not explicitly implemented in national tax law. Taxation of income of the permanent establishment is aligned with the concept of a functionally separate enterprise insofar as the current regulation does not specifically restrict the calculation of the taxable profit of the permanent establishment by attributing the respective costs to the deductions of the permanent establishment.