Taxation of Corporate Transactions in Lithuania: Practical Approach

Corporate mergers, consolidations, acquisitions and divisions recently have become quite often in Lithuania, therefore their tax implications should be carefully considered and effectively applied in line with the rules of Lithuanian tax legislation.

Applicable legislation

The tax regime for corporate deals and non-resident investors acquiring shares or assets of Lithuanian companies is mainly set out in the Corporate Profit Tax Law of 20 December 2001 and Law on Value-Added Tax of 5 March 2002. The Corporate Profit Tax Law establishes taxation rules on profit earned and/or income received by Lithuanian and foreign resident companies, including branches and permanent establishments. The Law on Value-Added Tax provides for taxable persons and objects, and the obligations of VAT payers and other persons. Tax authorities' rulings and commentaries on tax laws do not have the status of legal acts and have no binding effect on taxpayers. But they have considerable influence on the application of tax legislation.

Corporate taxation of M&A and financial transactions

Reorganisations

According to Lithuanian company and civil law, reorganisation is described as the end of a legal entity without a liquidation procedure. According to Lithuanian law, a limited liability company may be reorganised in the following principal ways: (a) merging; (b) splitting (dividing). As a matter of transaction law, reorganisation typically involves M&A transactions or is the result thereof.

Nevertheless, regardless of how a reorganisation is described under company or civil law, the Lithuanian corporate tax system treats reorganizations as such, where the following parties are taking part: (1) the acquired or transferor company, (2) the shareholders of the transferor, (3) the acquiring or transferee company, (4) the shareholders of the transferee. Reorganizations can be distinguished according to whether or not a legal entity (a party to the reorganization) disappears as part of the transaction. In mergers, consolidations, and corporate divisions, one of the parties may disappear as a result of the transaction. In asset and share acquisitions, the transferor may or may not disappear depending on whether it is liquidated or not.

The Lithuanian corporate tax system is aimed at "neutralization" of tax consequences of business reorganizations so that reorganizations would involve neither tax advantage nor tax disadvantage. This is mainly because it is recognized that it would be economically inefficient to tax corporate reorganizations, as such taxation would discourage reorganizations. On the other hand, where there is a continuation of business activities and of the interest of the shareholders in the company, a corporate reorganization may be considered as legal restructuring of the same business, which does not constitute any operation subject to taxation.

The principle of tax neutrality implies (1) that no tax is imposed at the time of the reorganization and (2) that, after the reorganization, the taxable profits of the transferee company and its shareholders are calculated on the basis of tax elements that were present in the transferor company and its shares before the reorganization.

The conditions on a tax-free reorganization are provided by the tax law, rather than by company laws.

A reorganisation will qualify as tax free in Lithuania if the following conditions are met:

both types of mergers are caught-up by the tax-free regime - both a merger where one company is consolidated to the company surviving the merger, and a merger where two companies are consolidated to form a new company and the former companies cease to exist;

spin-off, split-off, and...