Tax on Inbound Investment in 33 Jurisdictions Worldwide

Tax on Inbound Investment in 33 jurisdictions worldwide

Contributing editors: Peter Maher and Lew Steinberg 2012

Published by Getting the Deal Through in association with:

A&L Goodbody Abraham & Co (Solicitors, Advocates and Notary Public) ADMD Law Firm Anzola Robles & Associates Berwin Leighton Paisner LLP BLP Abogados BMR Advisors Boga & Associates Borden Ladner Gervais LLP Carey y Cía CMS Bureau Francis Lefebvre CMS Hasche Sigle CMS Reich-Rohrwig Hainz CMS Reich-Rohrwig Hainz doo Doria, Jacobina, Rosado e Gondinho Advogados Associados Hoet Pelaez Castillo & Duque Iason Skouzos & Partners Law Firm Juridicon Law Firm KPMG LLP Kromann Reumert Mallesons Stephen Jaques MMLC Group Molitor Avocats à la Cour Nagashima Ohno & Tsunematsu Poledna Boss Kurer AG Posse, Herrera & Ruiz Abogados Raidla Lejins & Norcous Salaberren & López Sansón Salans Skeppsbron Skatt AB Spigthoff Advocaten & Belastingadviseurs (Curaçao) NV Tron Abogados, SC Vieira de Almeida & Associados contents

Tax on Inbound Albania Alketa Uruçi and Jonida Skendaj Boga & Associates 3 Investment 2012 Argentina Sebastián López–Sansón and Fernando Esteban Morera-Martínez Contributing editors: Salaberren & López Sansón 6 Peter Maher, A&L Goodbody Lew Steinberg, Credit Suisse Australia Richard Snowden and Cory Hillier Mallesons Stephen Jaques 9 Business development managers Brazil Rodrigo Jacobina Doria, Jacobina, Rosado e Gondinho Advogados Associados 16 Alan Lee George Ingledew Robyn Hetherington Canada Stephanie Wong and Richard Eisenbraun Borden Ladner Gervais LLP 21 Dan White Chile Jaime Carey and Manuel José Alcalde Carey y Cía 28 Marketing managers Ellie Notley China Matthew Murphy and Yu Du MMLC Group 32 Sarah Walsh Alice Hazard Colombia Juan Guillermo Ruiz Posse, Herrera & Ruiz Abogados 36 Costa Rica Alonso Arroyo, Randall Madriz and Vittoria Di Gioacchino BLP Abogados 40 Marketing assistants William Bentley Sarah Savage Croatia Wolfgang Auf CMS Reich-Rohrwig Hainz 44 Curaçao Xandra M Kleine-van Dijk and Jeroen Starreveld Business development manager (subscriptions) Spigthoff Advocaten & Belastingadviseurs (Curaçao) NV 49 Nadine Radcliffe Subscriptions@ Denmark Arne Møllin Ottosen and Michael Nørremark Kromann Reumert 54 GettingTheDealThrough.com France Michel Collet and Xenia Lordkipanidzé CMS Bureau Francis Lefebvre 59 Assistant editor Germany Wolf-Georg von Rechenberg CMS Hasche Sigle 65 Adam Myers

Editorial assistant Greece Theodoros Skouzos Iason Skouzos & Partners Law Firm 69 Lydia Gerges India Mukesh Butani and Shefali Goradia BMR Advisors 74 Senior production editor Jonathan Cowie Ireland Peter Maher and Philip McQueston A&L Goodbody 80 Chief subeditor Jonathan Allen Japan Yushi Hegawa Nagashima Ohno & Tsunematsu 84

Subeditors Latvia Sandija Novicka and Elina Bedanova Raidla Lejins & Norcous 89 Martin Forrest Davet Hyland Lithuania Laimonas Marcinkevicˇius and Ingrida Steponavicˇiene˙ Juridicon Law Firm 93 Caroline Rawson Sarah Morgan Luxembourg Olivier Gaston-Braud Molitor Avocats à la Cour 99

Editor-in-chief Mexico Manuel E Tron and Elías Adam Tron Abogados, SC 103 Callum Campbell Nigeria Lolade Ososami Abraham & Co (Solicitors, Advocates and Notary Public) 108 Publisher Richard Davey Panama Ramon Anzola and Maricarmen Plata Anzola Robles & Associates 112

Tax on Inbound Investment 2012 Portugal Tiago Marreiros Moreira, Conceição Gamito and Frederico Antas Published by Vieira de Almeida & Associados 120 Law Business Research Ltd 87 Lancaster Road London, W11 1QQ, UK Russia Boris Bruk Salans 126 Tel: +44 20 7908 1188 Fax: +44 20 7229 6910 Slovenia Wolfgang Auf CMS Reich-Rohrwig Hainz doo 131 © Law Business Research Ltd 2011 Sweden Niklas Bång, Maria Norlin and Carin Gerding Skeppsbron Skatt AB 135 No photocopying: copyright licences do not apply. Switzerland Walter H Boss and Stefanie M Monge Poledna Boss Kurer AG 140 ISSN 1753-108X Turkey Orhan Yavuz Maviog˘lu ADMD Law Firm 144 The information provided in this publication is general and may not apply in a specific United Kingdom Gary Richards and Aude Delechat Berwin Leighton Paisner LLP 147 situation. Legal advice should always be sought before taking any legal action United States Christian J Athanasoulas, Jason R Connery and Jennifer Blasdel-Marinescu based on the information provided. This information is not intended to create, nor KPMG LLP 152 does receipt of it constitute, a lawyer–client relationship. The publishers and authors Venezuela Francisco Castillo-García and Raul Stolk Hoet Pelaez Castillo & Duque 158 accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of October 2011, be advised that this is a developing area.

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Law Business Research Juridicon Law Firm lithuania

Lithuania

Laimonas Marcinkevicˇius and Ingrida Steponavicˇiene˙ Juridicon Law Firm

Acquisitions (from the buyer’s perspective) of a Lithuanian company does not have to pay any taxes related to the ownership itself. 1 Tax treatment of different acquisitions Finally, a transaction concerning a sale or purchase of stock does What are the differences in tax treatment between an acquisition not need to be certified by a notary, but the transfer of a whole or of stock in a company and the acquisition of business assets and a part of business as a complex unit of rights and obligations must liabilities? be. Regarding tax on corporate income, the acquisition of stock as such usually does not influence the balance of the profit and loss of the 2 Step-up in basis Lithuanian company being acquired. However, under specific condi- In what circumstances does a purchaser get a step-up in basis in tions Lithuanian tax laws allow transfer of all or a part of losses for the business assets of the target company? Can goodwill and other 2010 and subsequent years within the group of legal entities, includ- intangibles be depreciated for tax purposes in the event of the ing the cross-border transfers. On the other hand, an acquisition of purchase of those assets, and the purchase of stock in a company stock or an acquisition of business assets will affect the balance of the owning those assets? acquirer. Moreover, in an acquisition of a separate unit of property, rights or obligations, and subject to further activities in Lithuania, the The purchaser may get a step-up in basis if the business assets of the acquirer may be recognised as acting through its permanent estab- company are purchased or exchanged for other property. lishment in Lithuania, which may lead to the taxation of income of Under the Law on CIT, the income of a Lithuanian or foreign that activity in Lithuania. entity through its permanent establishment in Lithuania, received The taxation of profit from further sales of purchased prop- from the increase in the value of assets resulting from transfer of erty differs as well. Profit on the sale of shares received by an shares of a target entity, shall not be taxed in Lithuania in the event acquirer with no other presence in Lithuania is not subject to tax that: on corporate income, but the sales of separate units of assets and • the target entity is registered or otherwise organised in a state of liabilities might be. For example, subject to the Law on Corporate the European Economic Area (EEA) or in a state with which a Income Tax (the Law on CIT), profit from the sale of real property treaty for the avoidance of double taxation is in force; the target located in Lithuania is subject to a 15 per cent tax on corporate entity is a payer of corporate income tax or an equivalent tax; income. the entity transferring the shares held more than 25 per cent of The above-mentioned two forms of acquisition differ with voting shares in the target entity for an uninterrupted period of respect to VAT. Pursuant to the Law on Value Added Tax (the Law at least two years; and the entity transferring the shares does not on VAT) the sale-purchase of stock is not subject to VAT in Lithua- transfer them to the entity that has issued these shares; or nia, even if the company whose stock is being purchased owns the • the shares of a target entity are transferred during the specific real property. From 1 January 2010 the transfer of whole or a part types of reorganisation referred to in the Law of CIT; the trans- of business, as a complex unit of rights and obligations (from 1 Janu- ferring entity held more than 25 per cent of voting shares in the ary 2011 including cases where whole or a part of business, as a target entity for an uninterrupted period of at least three years; complex, is transferred as a contribution of a member of the legal and the entity transferring the shares does not transfer them to person), to the taxable person who continues the acquired activity, the entity that has issued these shares. is also not subject to VAT. According to the currently valid laws, the transfer of property during a reorganisation where the transferor is In accordance with the Law on CIT, the acquisition price of assets being dissolved may be subject to VAT: if the purchase or import comprises expenses incurred for acquiring the assets, including com- VAT from a particular property or business activity was deducted, mission paid and taxes related to the acquisition, except for VAT. the corresponding acquisition of such property shall be subject to Still, in an exchange of business assets for other assets the acquisition VAT in Lithuania. price of the newly acquired assets is the acquisition price of the assets If only a separate unit of property, rights or obligations is being exchanged. If the acquisition price of the assets exchanged cannot be purchased by the investor, such a purchase must be evaluated indi- determined, the acquisition price of the newly acquired assets will be vidually with respect to VAT. For example, the sale-purchase of real their actual market price. It should also be noted that where securities property that is deemed to be old according to the provisions of the are exchanged for other assets, the acquisition price of such assets Law on CIT in general is not subject to VAT in Lithuania, contrary shall be the actual market price of these securities at the moment of to the sale-purchase of new real property. the acquisition of the assets. It should also be noted that a foreign company owning real prop- Long-term assets and goodwill can be depreciated or amortised erty in Lithuania must be registered in the register of taxpayers and pursuant to the provisions of the Law on CIT. pay the tax on real property, which is between 0.3 per cent and 1 per Where the activity of another company as a complex, or a part cent of the property’s taxation value per year. The owner of the stock of an activity constituting an independent unit capable of engaging www.gettingthedealthrough.com 93 lithuania Juridicon Law Firm in the commercial activity at its own discretion, is acquired, the value 4 Company mergers and share exchanges of positive goodwill is subject to depreciation for tax purposes for at Are company mergers or share exchanges common forms of least 15 years applying the linear method. Negative goodwill, created acquisition? as a result of the above-indicated acquisition of the activity of the Both mergers and share exchanges have their own pros and cons. For other company or a part thereof, shall be attributed to income at the example, if the merger corresponds to the requirements of the Law moment of its acquisition. on CIT, the increase in the value of assets emerging from the merger Negative goodwill, as well as positive goodwill, created as a shall be exempt from the tax on corporate income in Lithuania. result of acquisition of stock aiming for control over the target’s net Moreover, if the acquiring entity continues the activity taken over, or assets and activity, can correspondingly be attributed to income or a part thereof, for a period not shorter than three years, it may carry can be included in the limited allowable deductions for taxation pur- forward the losses of the acquired or transferring entity or entities poses only after a subsequent merger of these companies or merger (except for the losses resulting from transfer of the securities or from by acquisition of one company by another, if any. derivative financial instruments) related to the transferred activity The other purchased long-term intangibles can be depreciated for incurred before the completion of the reorganisation or transfer and a minimum of two to four years, depending on the class of the assets not carried forward to the following year. On the other hand, the and the manner of their use, applying the linear or double declining merger may be an incentive for the Tax Inspectorate to start a tax balance method. inspection of the transferor, the acquirer or the target, which may significantly prolong the merger process. 3 Domicile of acquisition company Some share exchanges can provide the above-mentioned tax Is it preferable for an acquisition to be executed by an acquisition advantages as well. In addition, they usually do not trigger tax company established in or out of your jurisdiction? inspections and the procedures are less time-consuming in comparison with company mergers. For taxation purposes the acquirer can profit from tax exemptions Therefore, the most acceptable and efficient form of acquisi- in Lithuania if it is established in another EU member state, taking tion of a business or a part thereof should be investigated carefully into consideration that the taxes due in that state are lower than the with respect to the individual situation, the kind of business being Lithuanian rates. acquired and the goals of the acquisition. However, in practice merg- For example, dividends paid by a Lithuanian company to a for- ers are more common than share exchanges in Lithuania. eign 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 recipi- 5 Tax benefits in issuing stock ent of dividends is registered or otherwise organised in target (tax Is there a tax benefit to the acquirer in issuing stock as consideration haven) territories. For comparison, dividends paid out to a company rather than cash? that does not correspond to the above criteria are taxed at 15 per In general, Lithuanian tax laws do not provide obvious tax benefits cent on profit in Lithuania, unless a particular treaty on avoidance of to the acquirer in issuing stock as a consideration rather than cash. double taxation provides for a more favourable regime. Still, if the issue of stock as a consideration falls under the provi- Regarding taxation of interest, according to the currently valid sions of the Law on CIT regulating tax-free mergers and acquisitions, Lithuanian tax laws the interest on loan paid by a local company to a the acquirer may benefit from the exemption of taxation of capital foreign company organised within the EEA, or within a state that has gains resulting from the merger and from the possibility of carry- a treaty on avoidance of double taxation with Lithuania in force, and ing forward the losses of the acquired or transferring entity. On the not received through the foreign company’s permanent establishment other hand, issuing stock as consideration may lead to the different in Lithuania, is exempt from withholding tax on profit in Lithuania. estimation of the acquisition price of either stock or business assets For comparison, interest paid out to a foreign company that does not acquired that may be important for the acquirer for future transfers correspond to the above criteria is taxed at 10 per cent on corporate of the acquired property. income in Lithuania, unless a particular treaty on avoidance of double taxation provides for a more favourable regime. From 1 July 2011 the royalties paid by a Lithuanian company 6 Transaction taxes to a related EU company (the beneficial owner), both correspond- Are documentary taxes payable on the acquisition of stock or business ing to the criteria established by the Law on CIT, are exempt from assets and, if so, what are the rates and who is accountable? Are any withholding tax in Lithuania. For comparison, until 1 July 2011 other transaction taxes payable? the royalties paid by a Lithuanian company to a foreign company There are no stamp duties payable for the acquisition of stock or with no permanent establishment in Lithuania were subject to 10 business assets as such. per cent withholding tax on profit in Lithuania, unless a particular However, subject to the Civil Code, some transactions, such treaty on avoidance of double taxation provides for a more favour- as transactions on transfer of ownership of real property and on able regime. transfer of all or part of a company as a complex unit of rights and Furthermore, only a foreign entity, being the EU resident for obligations, must be certified by a notary. This requirement means taxation purposes, is able to transfer all or a part of its losses to the additional notary expenses for the parties, amounting to 0.45 per cent related Lithuanian entity. of the value of the transaction, but no more than 20,000 litas. The Finally, under the Law on CIT only mergers, divisions or acquisi- transfer of stock does not have to be certified by a notary, although tions with participants residing in the EU may be exempt from tax it is possible at a party’s request. on corporate income on the capital gains and award a benefit for the Additionally, the Register of Legal Persons of Lithuania must acquirer to carry forward the losses of the acquired or transferring be informed of the arrival, change or exit of a sole shareholder. In entity. In other cases the increase in the value of assets emerging from this case the state levy of 10 litas must be paid for registration of the mergers and other forms of reorganisation or transfer shall be subject change of registry data. Transfer of the ownership of some kinds of to tax on corporate income in Lithuania. 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 5,000 litas, depending mostly on the type and value of the acquired property.

94 Getting the Deal Through – Tax on Inbound Investment 2012 Juridicon Law Firm lithuania

Regarding VAT taxation of the acquisition of stock or business, 8 Interest relief please refer to question 1. Does an acquisition company get interest relief for borrowings to acquire the target? Are there restrictions on deductibility where the lender is foreign, a related party, or both? Can withholding taxes 7 Net operating losses, other tax attributes and insolvency on interest payments be easily avoided? Is debt pushdown easily proceedings achieved? In particular, are there capitalisation rules that prevent the Are net operating losses, tax credits or other types of deferred tax pushdown of excessive debt? asset subject to any limitations after a change of control of the target or in any other circumstances? If not, are there techniques for According to the tax laws, the interest on borrowings to acquire the preserving them? Are acquisitions or reorganisations of bankrupt or target does not constitute a part of the target’s price. The interest insolvent companies subject to any special rules or tax regimes? payments on loans taken by the Lithuanian company to finance the acquisition might, however, be treated as allowable deductions for In a purchase of stock, the losses of the target will be carried forward corporate income tax purposes. The tax laws also provide a few to the following fiscal year according to the ordinary rules prescribed restrictions on the deductibility of interest payments where the lender by the Law on CIT. Losses for the tax period, except for the losses is foreign or a related person. incurred as a result of transferring the securities and derivative finan- Subject to the Law on CIT, payments to the lender organised in cial instruments, may be carried forward for an unlimited period. the target territory can be treated as allowable deductions for calcula- However such carry-forward shall be terminated if the entity ceases tion of tax on corporate income only if the paying Lithuanian entity the activities due to which the losses were incurred, except where or permanent establishment supplies to the Tax Administration evi- the entity ceases the activities for reasons beyond its control. Losses dence that such payments are related to the usual activities of the incurred as a result of transferring the securities and derivative finan- paying and receiving entities, the receiving foreign entity controls the cial instruments may be carried forward for no more than five con- assets needed to perform such usual activities and there exists a link secutive tax periods and can only be covered by the income received between the payment and the economically reasonable operation. from the transfer of securities and derivative financial instruments. The possibility of deducting interest for the loan received from The Law on CIT provides a special regime for carrying forward the controlled party is restricted by reference to ‘thin capitalisation’ losses in reorganisations or transfers corresponding to requirements rules. Lithuanian thin capitalisation rules apply only to the extent to of the said Law (see question 4). Under this Law, the acquiring entity which the ratio between the capital borrowed from the controlling continuing the activity taken over, or a part thereof, for a period creditor and the fixed (equity) capital of the Lithuanian company not shorter than three years, may carry forward the losses of the debtor exceeds 4:1. The interest for the part of the loan exceeding the acquired or transferring entity or entities (except for losses resulting above-mentioned ratio cannot be deducted from the taxable income from transfer of securities and from derivative financial instruments) of the company debtor, unless the debtor proves that the same loan related to the transferred activity incurred before the completion of could be provided or received on the same conditions between unre- the reorganisation or transfer and not carried forward to the fol- lated persons. lowing year. Finally, the interest on other loans received from related parties, Change of control of the target as such should not impact the even if not falling under thin capitalisation rules, must still comply tax credits of the target or other taxes deferred by the Law. Still, it with the arm’s-length principle. Otherwise, the Tax Inspectorate is should be noted that at application for the tax credit the taxpayer able to recalculate the taxable profits of the Lithuanian company must submit to the tax inspectorate information on the current com- borrower engaged in the transaction. position of shareholders and planned changes, if any. Although the Lithuanian withholding taxes on interest payments can be composition of shareholders should not directly impact the possi- avoided only by using the tax exemptions prescribed by the Law on bilities to get the tax credit or to execute properly the received one, CIT (see question 13). every case of tax credit is considered individually, thus information Debt pushdown can be achieved only by having the consent of on shareholders might be important while evaluating the reliability the creditor and of other shareholders of the target company. 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 fur- 9 Protections for acquisitions ther implement the unexpired contracts, such contracts are deemed What forms of protection are generally sought for stock and business to have expired, and claims of the creditors arising by reason thereof asset acquisitions? How are they documented? How are any payments are met according to the ordinary procedures specified by the Enter- made following a claim under a warranty or indemnity treated from a prise Bankruptcy Law of the Republic of Lithuania. Thus, in such a tax perspective? Are they subject to withholding taxes or taxable in the case the tax credits, or other types of deferred tax asset of the com- hands of the recipient? pany being bankrupt, shall not be preserved and shall be recovered Since the area of taxation is quite sensitive and risky, all possible by the state as a creditor of the company. forms of protection of the acquirer with respect to the target’s fulfil- Lithuanian tax laws do not provide any special rules or regimes ment of its tax obligations for previous periods are recommended. for the taxation of acquisitions or reorganisations of bankrupt or Usually the representations and warranties of the seller regarding insolvent companies, except for the provision of the Law on CIT and the proper fulfilment of all of its or the target’s tax obligations are its official commentary stating that income received by the bankrupt primarily related to the acquisition price of stock or business assets; Lithuanian company from the sale of its assets shall not be subject if it becomes clear that these representations and warranties do not to the tax on corporate income. It should also be noted that accord- correspond to the real situation, the purchase price is accordingly ing to the provisions of the Law on CIT, the same exemption should decreased or the agreement on acquisition may be terminated. As be applied to the income of a bankrupt foreign company received an additional warranty, the payment of a part of the acquisition through its permanent establishment in Lithuania. Unfortunately, price may be postponed for the period during which potential practice on this question is lacking and the position of the Tax Inspec- risks are expected to arise or disappear. In a stock acquisition, it is torate is controversial. 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. www.gettingthedealthrough.com 95 lithuania Juridicon Law Firm

Depending on the particular circumstances and selected strategy, exchange for the shares held in it, receive pro rata shares issued the warranty measures may constitute a part of the sale-purchase by the receiving companies; agreement, its annex or may be written in separate documents. (iii) a company, continuing its activity, transfers all its activity or one Following a claim under a warranty or indemnity, compensa- or a few parts thereof to another company in exchange for the tion for losses or payment of forfeit (fines or penalties for delay) are shares of the receiving company; or usually received. (iv) a company, continuing its activity, divides proportionally a part The compensation of losses or forfeit received by a foreign legal of its assets, equity and obligations, and based on the divided entity that has no permanent establishment in Lithuania is not treated part one or a few new companies are established. as sourced in Lithuania and therefore is not subject to Lithuanian tax on corporate income. The capital gains resulting from the spin-off of business correspond- In general, the compensation for losses, including received related ing to the specific requirements above are exempted from taxes on insurance benefits, that is not in excess of the value of losses or dam- profit on the condition that the shares acquired during the spin-offs ages actually incurred and that is received by a Lithuanian or by indicated in points (i) to (iii) are not disposed of for three years. a foreign entity through its permanent establishment in Lithuania, The acquiring entity, continuing the activity taken over, or a part is exempt from tax on corporate income in Lithuania. Still, in this thereof, for a period not shorter than three years, may carry for- case all expenses attributed to the said non-taxable income shall be ward the losses of the transferring entity (except for the losses result- treated as non-allowable deductions for the purpose of calculation ing from transfer of securities and derivative financial instruments) of tax on corporate income. related to the transferred activity incurred before the completion of The forfeit received by the local company or foreign entity the reorganisation or transfer. through its permanent establishment in Lithuania is treated as non- Depending on the substance and form of the spin-off the transfer taxable income except in cases where the forfeit is received from of assets may be subject to VAT. As mentioned in question 1, if the a foreign entity registered or otherwise organised in target (tax spin-off is not executed through the reorganisation and the transferee haven) territory or from a natural person being the resident of such continues the acquired activity, the transfer of whole or a part of territory. business, as a complex unit of rights and obligations, including cases It should also be noted that compensation for the caused dam- where whole or a part of business, as a complex, is transferred as a ages or forfeit paid for the breach of the agreement is treated as contribution of a member of the legal person, shall not be taxable non-allowable deductions of the payer and therefore they can not be by VAT. deducted from taxable income of the default party. If the division of a part of business is executed as a special type According to the Law on VAT, the forfeit and other similar sums of reorganisation corresponding to the requirements of the Law on are not treated as remuneration for goods or services and therefore Companies, during which the transferor is ending its activities or if are not subject to VAT in Lithuania. the assets, not comprising whole or a part of business as a complex, are transferred as a contribution to the capital of legal entity, the Post-acquisition planning transfer of the assets shall be subject to VAT provided that the purchase or import VAT from particular property or business activity 10 Restructuring was deducted by the transferor. What post-acquisition restructuring, if any, is typically carried out and why? 12 Migration of residence The post-acquisition restructuring depends on many aspects, such Is it possible to migrate the residence of the acquisition company or as the objectives of the acquisition, current or planned activities and target company from your jurisdiction without tax consequences? the structure of the group the acquirer belongings to. Restructuring is usually intended to increase the effectiveness of the acquired business The Law on CIT provides the possibility to migrate residence from and to integrate it into the acquirer’s team. It usually starts from a Lithuania to another EU member state only for European compa- review of financial flows and labour resources. nies or European cooperative societies. In such case the capital gains shall not be treated as taxable income in Lithuania and the losses of the former Lithuanian company may be carried forward by the 11 Spin-offs foreign company. The mentioned exemptions will be applied pro- Can tax neutral spin-offs of businesses be executed and, if so, can vided that, following the transfer of its registered office to another the net operating losses of the spun-off business be preserved? Is it EU member state, the company continues to carry out its activities possible to achieve a spin-off without triggering transfer taxes? through a permanent establishment in Lithuania on the basis of the The Law on CIT provides for a few cases of tax neutral spin-offs of assets, rights and obligations formerly attributed to the Lithuanian businesses. Pursuant to it, the participants in a tax neutral spin-off company. must be Lithuanian companies, or foreign companies tax resident in other EU member states continuing the acquired activities through 13 Interest and dividend payments permanent residence in Lithuania after the spin-off is executed. Addi- Are interest and dividend payments made out of your jurisdiction tionally, the conditions of the spin-off must satisfy the following legal subject to withholding taxes and, if so, at what rates? Are there requirements: domestic exemptions from these withholdings or are they treaty- (i) a company, on being dissolved through a reorganisation, dependent? divides all its assets, rights and obligations into a few parts and transfers them to a few existing or new companies. As the Pursuant to the Law on CIT, the interest and the dividends paid result the members of the divided company, in exchange for the by a Lithuanian company to a non-resident company are subject to shares held in it, receive pro rata shares issued by the acquiring Lithuanian withholding tax on corporate income. In general, interest entity; is taxable at 10 per cent and dividends at 15 per cent. (ii) a company, continuing its activity, transfers one or a few parts From 1 January 2010 interest paid to a foreign legal person reg- of its activity constituting an independent unit able to engage in istered or otherwise organised within a member state of the EEA commercial activity, to one or a few existing or new companies. or within a state that has and applies a treaty on the avoidance of This results in a decrease of the transferring company’s author- double taxation with Lithuania is exempt from withholding tax on ised capital and the members of the transferring company, in corporate income in Lithuania. In addition, interest paid to a foreign

96 Getting the Deal Through – Tax on Inbound Investment 2012 Juridicon Law Firm lithuania legal person on securities issued by the government on international financial markets, interest accrued and paid on deposits and interest Update and trends on subordinated loans that meet the criteria set down by the legal acts of the Bank of Lithuania is also not subject to Lithuanian with- Tax on corporate income holding tax. Implementing the Directive of the Council of the European Union 2003/49/EC of 3 June 2003 on a common system of taxation Regarding exemptions for taxation of dividends, the dividends applicable to interest and royalty payments, since 1 July 2011 paid out to a foreign company that is not organised in a target (tax the royalties and the compensations for violation of copyright or haven) territory and that uninterruptedly for at least 12 months related rights, paid by the Lithuanian company to the related EU controls not less than 10 per cent of voting shares in a Lithuanian company (the beneficial owner), both corresponding to the criteria established by the Law on CIT, are exempt from withholding tax on company shall not be subject to taxation in Lithuania (participation corporate income in Lithuania. exemption). The exemptions provided for in the national legislation are also VAT applicable when the treaty on avoidance of double taxation provides According to the decision of the Council of the European Union a less favourable regime. If the treaty on avoidance of double taxa- 2011/335/EU of 30 May 2011, Lithuania is allowed to increase the VAT registration threshold from e29,000 to e45,000 and tion provides a more favourable regime, the provisions of this treaty apply it from 1 January 2012 until 31 December 2014 or until should be followed and the lower tax rate should be applied. the entry into force of the new directive on the annual turnover threshold below which taxable persons may be exempt from VAT. Related changes of the law on VAT are currently being considered 14 Tax-efficient extraction of profits by Lithuanian government. What other tax-efficient means are adopted for extracting profits from your jurisdiction? Because of exemptions available for the taxation of interest (see Disposals (from the seller’s perspective) question 13), the payment of interest for loans received from the shareholder is a quite popular way for extracting profits. However, 15 Disposals this possibility is restricted by thin capitalisation rules and the arm’s- How are disposals most commonly carried out – a disposal of the length principle (see question 8). business assets, the stock in the local company or stock in the Payment of dividends is used for extracting profits mostly where foreign holding company? the recipient is able to profit from the tax exemptions in Lithuania (see question 13), taking into consideration the taxation of dividends The manner of disposal depends on the particular situation and in the home country of the recipient. needs of the parties (preserving confidentiality, minimising taxes or Decrease of the authorised capital of the company and payment other expenses, meeting deadlines, etc). of the released funds out to the shareholders is also tax free, if the In general, capital gains received by a Lithuanian company on part of the authorised capital being reduced previously was formed the disposal of business assets and stock are taxed at the same rate by the contributions of the shareholders. Otherwise the sums paid of tax on corporate income (currently 15 per cent). Still, in event of out to the shareholders as a result of a decrease of the authorised disposal of stock, the Lithuanian company could benefit from the capital shall be treated as dividends and shall be subject to taxation at participation exemption for capital gains resulting from transfer of the ordinary rates, taking into consideration the participation exemp- stock of a company that is registered or otherwise organised in a tion (see question 13). state of the EAA or in a state with which a treaty for the avoidance Purchase of services from the shareholder may also be used as of double taxation has been concluded and is applied, and which is a device to extract profits. However, the services must be necessary a payer of corporate income tax or an equivalent tax if: for the activities of the daughter company, they must be provided in • the company transferring the shares held more than 25 per cent fact and the arm’s-length principle with respect to the price for the of the voting shares in the transferred entity for an uninterrupted services must be followed. period of at least two years; or • the shares are transferred during a tax-exempt reorganisation or transfer and the transferor held more than 25 per cent of the voting shares in the transferred company for an uninterrupted period of at least three years.

Capital gains of the foreign company on transfer of stock and on transfer of business assets in general are not treated as sourced in

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Lithuania and therefore are not subject to Lithuanian tax on cor- 17 Avoiding and deferring tax porate income, except for the income received from the transfer of If a gain is taxable on the disposal either of the shares in the local ownership to the immoveable property located in Lithuania. company or of the business assets by the local company, are there For VAT on the disposal of stock and business assets see ques- any methods for deferring or avoiding the tax? tion 1. If the gain subject to taxation in Lithuania is received by the foreign company, the tax on corporate income must be deducted and trans- 16 Disposals of stock ferred to the budget of Lithuania no later than 15 days after the end Where the disposal is of stock in the local company by a non-resident of the month during which the income was paid out. If the gain is company, will gains on disposal be exempt from tax? Are there special received by the Lithuanian company, the tax on corporate income rules dealing with the disposal of stock in real property, energy and must be paid before the first day of the tenth month of the next tax natural resource companies? year. Capital gains of a foreign company on transfer of stock are not treated as sourced in Lithuania and therefore are not subject to Lithuanian tax on corporate income. Lithuanian laws do not provide for special rules dealing with the disposal of stock in real property, energy or natural resource companies.

98 Getting the Deal Through – Tax on Inbound Investment 2012 ®

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Tax on Inbound Investment 2012 ISSN 1753-108X