LIETUVOS RESPUBLIKOS

LIETUVOS RESPUBLIKOS REPUBLIC OF LITHUANIA LAW ON CORPORATE INCOME TAX 20 December 2001 – No IX-675 (As last amended on 22 July 2009 – XI-388) Vilnius CHAPTER I GENERAL PROVISIONS Article 1.  Purpose and Scope of the Law 1. This Law shall establish the procedure for imposing corporate income tax on earned profits and/or received income. 2. The Law shall apply in the territory of the Republic of Lithuania. 3. The provisions of this Law shall be in compliance with the EU legal acts listed in Appendix 3 to this Law. Article 2.  Definitions 1. Taxable entity (hereinafter referred to as the “entity”) shall mean a Lithuanian taxable entity and a foreign taxable entity. 2. Lithuanian taxable entity (hereinafter referred to as the “Lithuanian entity” shall mean a legal person registered in accordance with the procedure prescribed by the legal acts of the Republic of Lithuania. 3. Foreign taxable entity (hereinafter referred to as the “foreign entity”) shall mean any foreign legal entity or organisation having its registered office in a foreign state and established or otherwise organised under the legal acts of that foreign state as well as any other taxable entity established, incorporated or otherwise organised abroad. 4. Controlled taxable entity (hereinafter referred to as the “controlled entity” shall mean any entity deemed to be under the control of another entity or a resident of Lithuania (hereinafter referred to as the “controlling person”), provided that: 1) it is controlled by the controlling person on the last day of the tax period, and 2) the controlling person holds directly or indirectly over 50% of the shares (interests, member shares) in the controlled entity or other rights to a portion of distributable profits or pre-emptive rights to the acquisition thereof, or 3) the controlling person, together with related persons, holds over 50% of the shares (interests, member shares) in the controlled entity or other rights to a portion of distributable profits or pre-emptive rights to the acquisition thereof, and the portion controlled by the controlling person accounts for at least 10% of the shares (interests, member shares) or other rights to a portion of distributable profits or pre-emptive rights to the acquisition thereof. 5. Non-profit entity shall mean an entity which is established for other than profit-making purposes and which cannot distribute the profits generated under the legal acts regulating its activities among its founders and/or members. 6. Member of an entity shall mean any person who has title to the assets of an entity or any person who fails to secure title to the assets of an entity, but acquires rights and/or duties arising from obligations related to the entity. 7. Group of entities shall mean a group consisting of a parent entity and one or more taxable subsidiaries, in each of which the parent entity holds more than 25% of shares (interests, member shares). 8. Associated persons shall mean persons (entities or natural persons) where they meet at least one of the following criteria: 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 other than those where a maximum economic benefit is sought by each of the said persons. 9. Performing activities shall be interpreted as defined in the Law of the Republic of Lithuania on Personal Income Tax. 10. Fixed rate corporate income tax shall mean corporate income tax, which may be paid in the cases specified in Article 38(1) of this Law and the base of which shall be calculated depending on the payload capacity of each sea-going vessel whose payload capacity is at least 100 payload capacity units.   11. Royalties shall mean remuneration for the right to use any work under a copyright licensing agreement, remuneration for the neighbouring rights granted, income received as remuneration for the right to use an object of industrial property or franchise under a license agreement, remuneration for information concerning industrial, commercial or scientific experience (know-how). 12. Deposit shall mean monetary funds kept at a credit institution, where the credit institution undertakes to return such funds and pay interest on them. Monetary funds in respect of which a depositor has claims arising from financial operations with deposits performed by a credit institution or from investment services provided shall not be treated as a deposit. 121. Investment project shall mean the entity’s investment in the fixed assets specified in subparagraph 1 of paragraph 1 of Article 461 of this Law intended for the production of new, additional products or the provision of services or the increase in the production (service provision) capacity or the introduction of a new process of production (provision of services) or a substantial change in the existing process (part thereof) also the introduction of technologies protected by international invention patents.  The entity’s investment intended only for the replacement of the held fixed assets with fixed assets of an equivalent class shall not be treated as an investment project (or part thereof). 13. Derivative financial instrument shall mean a financial instrument (a futures contract, forward contract, etc.) the value or price whereof is linked to the value or price of the goods on which the instrument is based as well as a financial instrument (a futures contract, forward contract, etc.) the value or price whereof is linked to the price of securities, exchange rate, interest rate, stock exchange index, determination of creditworthiness or any other variable. 14. Payload capacity of a sea-going vessel (net capacity of a sea-going vessel) (hereinafter referred to as the “PC of a sea-going vessel”) shall mean a payload capacity specified in the international tonnage certificate of a sea-going vessel issued in accordance with the International Convention on Tonnage Measurement of Ships, signed in London in 1969. 15. Shipping entity shall mean a Lithuanian taxable entity or a foreign taxable entity registered or otherwise organised in any state of the European Economic Area that carries out activities in the territory of the Republic of Lithuania through a permanent establishment and is engaged in international carriage by sea-going vessels and activities directly related thereto.   16. Computer (software) programme shall be interpreted as defined in the Law of the Republic of Lithuania on Copyright and Related Rights. 17. Territory of the Republic of Lithuania shall mean the territory of the Republic of Lithuania and the area adjacent to the territorial waters of the Republic of Lithuania within which, under the laws of the Republic of Lithuania and in accordance with international law, the rights of the Republic of Lithuania may be exercised with respect to exploring and exploiting the sea bed and its sub-soil and their natural resources.  18. Scientific research and experimental development shall be interpreted as defined in the Law of the Republic of Lithuania on Science and Studies. 19. Negative goodwill shall mean the amount by which the price paid in cash by the acquiring entity for the purpose of acquiring all or one or more branches of activity of another entity in the form of its rights and obligations which from an organisational point of view constitute an independent economic entity, operating and capable of functioning at its own discretion, or for the purpose of controlling the net assets and activity of another entity through the acquisition of its shares is lower than the value of the acquired share evaluated at actual market price of net assets in another entity.  When calculating the net assets, the acquired entity’s assets that were not recognised in its accounting shall not be taken into consideration as these assets did not possess features required for recognition (it was reasonably not expected that the entity will earn economic profit from the assets in the future periods and there was no possibility of reliably determining the acquisition price of the assets) or were received gratuitously from the state, municipality or public legal person, whose founder is a state or municipal institution, but have their actual market price. 20. Property immovable by nature shall mean an object which is immovable by nature, i.e. land or any other object that cannot be transferred from one location to another without changing its nature or substantially reducing its value. 21. Fixed base shall be interpreted as defined in the Law of the Republic of Lithuania on Personal Income Tax. 22. Permanent establishment shall mean manifestation of activities of a foreign entity in the Republic of Lithuania.   A foreign entity shall be considered to operate through a permanent establishment in the territory of the Republic of Lithuania where:  it permanently carries out its activities in the Republic of Lithuania; or carries out its activities in the Republic of Lithuania through a dependent representative (agent); or uses a building site, a construction, assembly or installation object in the Republic of Lithuania; or makes use of installations or structures in the Republic of Lithuania for prospecting or extracting natural resources, including wells or vessels used for that purpose.  The definition of permanency and the criteria for establishing the dependent or independent status of a representative (agent) shall be determined by the Government of the Republic of Lithuania or an institution authorised by it. 23. Permanent resident of Lithuania shall be interpreted as defined in the Law of the Republic of Lithuania on Personal Income Tax.  24. Income shall mean any type of income earned and/or received in cash and/or in kind from a source in or outside Lithuania. 25. Income from distributed profits shall mean the profit received through the distribution of profits among members of an entity, including dividends.  After the profit generated by an entity of unlimited civil liability is subject to taxation, the income received by a member of the said entity or the taking of assets that belong to such a member from the entity shall not be treated as the distribution of profits. 26. Income sourced in the territory of the Republic of Lithuania (hereinafter referred to as “income sourced in the Republic of Lithuania”) shall mean: 1) interest received from permanent residents of Lithuania, non-permanent residents of Lithuania through their fixed bases, Lithuanian entities and foreign entities through their permanent establishments, compensations for violation of copyright or related rights, royalties as well as income from the sale, other transfer into ownership or lease of property immovable by nature located in the Republic of Lithuania; 2) income from distributed profits of Lithuanian entities and annual bonuses to members of the Supervisory Board; 3) income from activities in the Republic of Lithuania; 4) income from transportation which begins in the territory of the Republic of Lithuania and ends abroad or begins abroad and ends in the territory of the Republic of Lithuania; 5) income from international telecommunications. 27. Income sourced outside the territory of the Republic of Lithuania (hereinafter referred to as “income sourced outside the Republic of Lithuania”) shall mean all income, except for income sourced in the Republic of Lithuania. 28. Interest shall mean a fee paid for borrowing money. 281. Income from agricultural activity shall be interpreted as defined in the Law of the Republic of Lithuania on Personal Income Tax. 29. Positive income shall mean all income or part thereof, received by a controlled entity, registered or otherwise organised in the states or zones referred to in paragraph 4 of Article 39 of this Law, included in the income of a controlling entity of Lithuania in proportion to the number of the shares (interests, member shares), votes or rights to the profits of the controlled entity held by the Lithuanian entity. 30. Goodwill shall mean the amount by which the price paid in cash by the acquiring entity for the purpose of acquiring all or one or more branches of activity of another entity in the form of its rights and obligations which from an organisational point of view constitute an independent economic entity, operating and capable of functioning at its own discretion, or for the purpose of controlling the net assets and activity of another entity through the acquisition of its shares exceeds the value of the acquired share evaluated at actual market price of net assets in another entity, from which the acquiring entity expects to derive economic benefit.  When calculating the net assets, the acquired entity’s assets that were not recognised in its accounting shall not be taken into consideration as these assets did not possess features required for recognition (it was reasonably not expected that the entity will earn economic profit from the assets in the future periods and there was no possibility of reliably determining the acquisition price of the assets) or were received gratuitously from the state, municipality or public legal person whose founder is a state or municipal institution, but have their actual market price. 31. Costs shall mean all expenses incurred while earning income. 32. Sports activities shall be interpreted as defined in the Law of the Republic of Lithuania on Personal Income Tax. 33. Related persons shall be treated as such if on any day of the current tax period or the tax period preceding the current tax period they meet at least one of the following criteria, i.e. they are: 1) an entity and its members; 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 members of the entity or members of its management bodies 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 line up to the second degree, in the 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 line up to the second degree, in the 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 (interests, member 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 line up to the second degree, in the collateral line up to the second degree)), and also a natural person and the relatives of his cohabitant (in the direct line up to the second degree, in the 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 (interests, member 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. 34. Activity directly related to international carriage by sea-going vessels shall mean services required for international carriage by sea-going vessels and other measures of economic importance: 1) management, administration, operation and maintenance services of a sea-going vessel directly related to international carriage by sea-going vessels (purchase of fuel, hiring of the crew that can be transferred to the third party, reservation of cargo and passengers, repair of a sea-going vessel, its maintenance, ensuring of safety requirements, etc.); 2) insurance services directly related to international carriage by sea-going vessels; 3) services of embarkation and/or disembarkation of passengers into and from sea-going vessels; 4) services of loading and/or unloading of cargo into and from sea-going vessels, including transfer or packing and/or unpacking before loading or immediately after unloading; 5) leasing or any other supply to a client of containers required for transportation of goods by a sea-going vessel; 6) provision of services required and performed on a sea-going vessel and sale of goods required for use or used on the sea-going vessel during international carriage of passengers, except for the provision of luxury services (gambling and table games, excursions for passengers, etc.) and sale of luxury goods (jewellery, souvenirs, etc.);  7) rescue and other assistance at sea services when a sea-going vessel provides these services at sea; 8) lease of a sea-going vessel under a charter-party as stipulated in Article 2 of the Law of the Republic of Lithuania on Merchant Shipping where a shipping entity engaged in international carriage by sea-going vessels and managing the vessel retains control over the operation and the crew of the sea-going vessel; 9) short-term investment from income received during a tax period from international carriage by sea-going vessels and/or types of activities directly related to international carriage by sea-going vessels; 10) advertising and marketing services, where this activity is related to the provision of advertising space on sea-going vessels; 11) agent and broker services provided by shipping entities for their own sea-going vessels; 12) disposal of assets in operation, where these assets, by their nature, are attributed to maritime transport. 35. International carriage by sea-going vessels shall mean the carriage of passengers and/or cargo by a shipping entity using sea-going vessels that belong to that shipping entity by the right of ownership or financial lease contract providing for the transfer of ownership rights or under a purchase and sale or lease contract providing for the transfer of ownership rights to the shipping entity after the total value of the assets has been paid up or under a bareboat charter contract and that are registered in the Lithuanian Maritime Register or in the register of sea-going vessels of any other state of the European Economic Area, except for the cases where sea-going vessels sail only between the ports of the Republic of Lithuania.  36. Income from international telecommunications shall mean income received from telecommunications services (as defined in the Law of the Republic of Lithuania on Electronic Communications), provided that when providing the services signals are conveyed and switched and programmes are emitted from the territory of the Republic of Lithuania abroad or to the territory of the Republic of Lithuania from abroad. 37. Actual market price shall mean the amount for which assets may be exchanged or mutual obligations settled between willing independent buyers or sellers in a direct transaction. 38. Target territory shall mean a foreign state or zone included in the List of Target Territories established by the Minister of Finance, which meets at least two of the criteria set out in this paragraph: 1) the equivalent tax rate in that territory accounts for less than 75% of the rate set out in subparagraph 1 of paragraph 1 of Article 5 of this Law; 2) different rules for equivalent taxation are applied in that territory, depending on the state in which the controlling person is registered or otherwise organised; 3) different rules for equivalent taxation are applied in that territory, depending on the state in which activities are carried out; 4) the controlled taxable entity has concluded an agreement with the tax administrator of that state concerning the tax rate or base; 5) there is no effective exchange of information in that territory; 6) there is no financial and administrative transparency in that territory:  the rules for tax administration are not entirely clear and the procedure for the application of these rules is not presented to the tax administrators of other states. 39. Income from transportation shall mean income received from the carriage of goods by rail, road, waterways or air by means of private or rented vehicles, vessels, aircraft, rolling stock, cargo receptacles (containers, tanks, etc.), and also from transportation by pipeline. Income from services directly related to the carriage or transportation of goods shall be also attributed to such income. 40. Activity shall mean any type of commercial or production activity which is pursued to derive and/or earn income or any other economic benefit. 41. Other terms in this Law shall be interpreted as defined in the Law of the Republic of Lithuania on Tax Administration (hereinafter referred to as the “Law on Tax Administration”) and the Civil Code of the Republic of Lithuania (hereinafter referred to as the “Civil Code”) to the extent that they do not contravene this Law (except for the cases explicitly stated in the Civil Code).  Article 3.  Taxpayers 1. Corporate income tax shall be paid by: 1) Lithuanian entities; 2) foreign entities. 2. In accordance with the procedure laid down in this Law, corporate income tax shall not be paid by: 1) budgetary institutions; 2) the Bank of Lithuania; 3) the State and municipalities; 4) state and municipal institutions, agencies, services or organisations; 5) the state company “Deposit and Investment Insurance”; 6) European Economic Interest Groupings. Article 4.  Tax Base 1. The tax base of a Lithuanian entity shall be all income earned in the Republic of Lithuania and foreign states, which is sourced inside and outside the Republic of Lithuania. 2. The income of a Lithuanian entity shall also include the positive income of its controlled foreign entity or part of such income in accordance with the procedure laid down in Article 39 of this Law.  The income of a Lithuanian entity (member of a European Economic Interest Grouping) shall also include the income of the respective European Economic Interest Grouping in accordance with the procedure laid down in Article 39(1) of this Law. 3. The tax base of a foreign entity shall be: 1) income from activities carried out by a foreign entity through permanent establishments situated in the territory of the Republic of Lithuania, income from international telecommunications earned through permanent establishments in the Republic of Lithuania as well as 50% of income from transportation which begins in the territory of the Republic of Lithuania and ends abroad or begins abroad and ends in the territory of the Republic of Lithuania and income earned in foreign states attributed to the permanent establishments in the Republic of Lithuania in the event that such income is related to the activities of the foreign entity carried out through the permanent establishments situated in the Republic of Lithuania; 2) income sourced in the Republic of Lithuania and received by a foreign entity otherwise than through permanent establishments situated in the territory of the Republic of Lithuania.   4. Income sourced in the Republic of Lithuania and received by a foreign entity otherwise than through permanent establishments situated in the territory of the Republic of Lithuania shall include: 1) interest, except for interest on government securities, interest accrued and paid on deposits and interest on subordinated loans which meet the criteria laid down by the legal acts of the Bank of Lithuania; 2) income from distributed profits; 3) royalties, including the cases specified in paragraph 5 of this Article; 4) income from the sale, other transfer into ownership or lease of property immovable by nature located in the territory of the Republic of Lithuania; 5) compensations for violation of copyright or related rights; 6) income from performing activities and sports activities carried out in the Republic of Lithuania; 7) annual bonuses to members of the Supervisory Board. 5. In the case of transfer of a computer (software) programme, the provisions laid down in subparagraph 4 of paragraph 4 of this Article shall apply where the transfer concerns works not protected by copyright and where the following rights are granted by the computer (software) programme: 1) the right to make copies of the computer (software) programme with the purpose of distributing them to the public or otherwise transferring into ownership, renting or lending, or 2) the right to prepare derivative computer (software) programmes based on the copyrighted software, or 3) the right to publicly display the computer (software) programme. 6. The tax base of an entity shall also be: 1) sponsorship received which is used for purposes other than specified in the Law of the Republic of Lithuania on Charity and Sponsorship; 2) part of the sponsorship received in cash from a single provider of sponsorship during the tax period, which exceeds the amount of 250 minimum living standards (hereinafter referred to as the “MLS”). 7. The provisions of this Article shall not apply to income of a shipping entity received from international carriage by sea-going vessels and activities directly related thereto if, at the choice of the shipping entity, income from international carriage by sea-going vessels and activities directly related thereto are subject to a fixed rate corporate income tax under the provisions of Article 38(1) of this Law.    Article 5.  Tax Rates 1. The following tax rates shall apply: 1) a 15% tax rate shall be imposed on the taxable profits of Lithuanian entities and permanent establishments unless this Law provides otherwise; *Note. The provisions of subparagraph 1 of paragraph 1 shall apply for the purpose of calculating corporate income tax for the tax period beginning before 2009.   1) a 20% tax rate shall be imposed on the taxable profits of Lithuanian entities and permanent establishments unless this Law provides otherwise; *Note. The provisions of subparagraph 1 of paragraph 1 shall apply for the purpose of calculating corporate income tax for the tax period of 2009 and subsequent tax periods. [Version of the subparagraph before 1 January 2010] 2) a 10% tax rate (without any deductions) shall be imposed on the income of a foreign entity, sourced in the Republic of Lithuania, received otherwise than through its permanent establishments situated in the Republic of Lithuania listed in subparagraphs 1, 3 and 5 of paragraph 4 of Article 4 of this Law, and a 20% tax rate shall be imposed on the income specified in subparagraphs 4, 6 and 7 of paragraph 4 of Article 4 of this Law unless this Law provides otherwise; [Version of the subparagraph as of 1 January 2010] 2) a 10% tax rate (without any deductions) shall be imposed on the income of a foreign entity, sourced in the Republic of Lithuania, received otherwise than through its permanent establishments situated in the Republic of Lithuania listed in subparagraphs 3 and 5 of paragraph 4 of Article 4 of this Law, and a 20% tax rate shall be imposed on the income specified in subparagraphs 4, 6 and 7 of paragraph 4 of Article 4 of this Law unless this Law provides otherwise;  The income of foreign entities, which are registered or otherwise organised in a state of the European Economic Area or in a state with which a treaty for the avoidance of double taxation has been concluded and is applied, sourced in the Republic of Lithuania and received otherwise than through their permanent establishments situated in the Republic of Lithuania listed in subparagraph 1 of paragraph 4 of Article 4 of this Law shall not be subject to taxation.  A 10% tax rate (without any deductions) shall be imposed on the income of a foreign entity, which is not registered or otherwise organised in a state of the European Economic Area or in a state with which a treaty for the avoidance of double taxation has been concluded and is applied, sourced in the Republic of Lithuania and received otherwise than through its permanent establishments situated in the Republic of Lithuania listed in subparagraph 1 of paragraph 4 of Article 4 of this Law; 3) a 20% tax rate shall be imposed on income from distributed profits; 4) sponsorship received, which is used for purposes other than specified in the Law of the Republic of Lithuania on Charity and Sponsorship, as well as part of the sponsorship received in cash from a single provider of sponsorship during the tax period, which exceeds the amount of 250 MLS, shall be taxed at 15% (without any deductions). *Note. The provisions of subparagraph 4 of paragraph 1 shall apply for the purpose of calculating corporate income tax for the tax period beginning before 2009.  4) sponsorship received, which is used for purposes other than specified in the Law of the Republic of Lithuania on Charity and Sponsorship, as well as part of the sponsorship received in cash from a single provider of sponsorship during the tax period, which exceeds the amount of 250 MLS, shall be taxed at 20% (without any deductions). *Note. The provisions of subparagraph 4 of paragraph 1 shall apply for the purpose of calculating corporate income tax for the tax period of 2009 and subsequent tax periods. 2. Entities (except for non-profit entities), which meet the criteria set out in this paragraph, shall have the right to apply one of the following rules when calculating taxable profits: 1) taxable profits of entities whose average number of employees on the staff list does not exceed 10 and whose income during the tax period does not exceed LTL 500 000 shall be taxed at a rate of 13%, except for the cases specified in paragraph 3 of this Article; 2) the part of taxable profits of entities, whose average number of employees on the staff list does not exceed 10 and whose income during the tax period does not exceed LTL 1 million, amounting to LTL 25 000, shall be taxed at a rate of 0% and the remaining part of the taxable profits shall be taxed at a rate of 15%, except for the cases specified in paragraph 3 of this Article. This rule shall apply to individual/personal enterprises, general partnerships and limited partnerships. *Note. The provisions of subparagraph 2 of paragraph 2 shall apply for the purpose of calculating corporate income tax for the tax period beginning before 2009.   2) the part of the taxable profits of entities, whose average number of employees on the staff list does not exceed 10 and whose income during the tax period does not exceed LTL 1 million, amounting to LTL 25 000, shall be taxed at a rate of 0% and the remaining part of the taxable profits shall be taxed at a rate of 20%, except for the cases specified in paragraph 3 of this Article. This rule shall apply to individual/personal enterprises, general partnerships and limited partnerships. *Note. The provisions of subparagraph 2 of paragraph 2 shall apply for the purpose of calculating corporate income tax for the tax period of 2009 and subsequent tax periods. 3. The provisions of paragraph 2 of this Article shall not apply to:  1) entities (individual/personal enterprises) whose members or family members of such members are members of other entities (individual/personal enterprises); 2) entities (individual/personal enterprises) whose members and/or family members of such members control, on the last day of the tax period, over 50% of shares (interests, member shares) in other entities as well as entities in which the members of the entity (individual/personal enterprise) and/or family members of such members control, on the last day of the tax period, over 50% of the shares (interests, member shares); 3) entities in which the same member controls, on the last day of the tax period, over 50% of the shares (interests, member shares); 4) entities in which the same members jointly control, on the last day of the tax period, over 50% of the shares (interests, member shares). 4. The part of the taxable profits of non-profit entities, whose income from economic and commercial activity during the tax period does not exceed LTL 1 million, amounting to LTL 25 000, shall be taxed at a rate of 0% and the remaining part of the taxable profits shall be taxed at a rate of 15%. *Note. The provisions of paragraph 4 shall apply for the purpose of calculating corporate income tax for the tax period beginning before 2009. 4. The part of the taxable profits of non-profit entities, whose income from economic and commercial activity during the tax period does not exceed LTL 1 million, amounting to LTL 25 000, shall be taxed at a rate of 0% and the remaining part of the taxable profits shall be taxed at a rate of 20%. Income received from the activities carried out to satisfy public interests, which is intended for the funding of such activities, shall not be attributed to the income received from economic and commercial activities of non-profit entities. *Note. The provisions of paragraph 4 shall apply for the purpose of calculating corporate income tax for 2009 and subsequent tax periods. 5. Taxable profits of Lithuanian entities shall be taxed at 0% if: 1) during the tax period, the number of employees of an entity who are attributed to the target groups listed in Article 4 of the Law of the Republic of Lithuania on Social Enterprises accounts for not less than 40% of the annual average number of the employees on the staff list; and 2) during the tax period, an entity does not carry out the activities included in the list of non-supported activities of social enterprises as approved by the Government of the Republic of Lithuania or the income received from such activities during the tax period accounts for not more than 20% of the total income received by the entity;  and 3) on the last day of the tax period, entities have the status of a social enterprise. *Note. The provisions of paragraph 5 shall apply for the purpose of calculating corporate income tax for the tax period beginning before 2009. 5. Taxable profits of Lithuanian entities shall be taxed at 0% if: 1) during the tax period, the number of employees of an entity who are attributed to the target groups listed in Article 4 of the Law of the Republic of Lithuania on Social Enterprises accounts for not less than 40% of the annual average number of the employees on the staff list; and 2) during the tax period, an entity does not carry out the activities included in the list of non-supported activities of social enterprises as approved by the Government of the Republic of Lithuania or the income received from such activities during the tax period accounts for not more than 20% of the total income received by the entity; and 3) on the last day of the tax period, entities have the status of a social enterprise. *Note. The provisions of paragraph 5 shall apply for the purpose of calculating taxable profits for the tax period beginning with 2009 and subsequent tax periods. 6. Taxable profits (or part thereof) of cooperative societies (cooperatives), attributed proportionately to the value of the contributions in member shares of holders of member shares, whose property/farm or holding meets the criteria set out in subparagraph 23 of paragraph 1 of Article 17 of the Law of the Republic of Lithuania on Personal Income Tax, on the last day of the tax period, shall be taxed at 0% if: 1) during the tax period, income from agricultural activities accounts for more than 50% of the total amount of income of the cooperative society (cooperative); or 2) during the tax period, income from agricultural activities and/or income from the sold agricultural products produced by and acquired from its own members and/or fuels, fertilisers, seeds, feeding stuffs, pest and weed control products sold to its own members as well as tangible assets intended solely for the agricultural activities of its members, accounts for more than 85% of the total amount of income of the cooperative society (cooperative). *Note. The provisions of paragraph 6 shall apply for the purpose of calculating corporate income tax for 2009 and subsequent tax periods. Article 6.  Tax Period 1. The tax period shall be a fiscal year.    It shall coincide with a calendar year unless this Article provides otherwise. 2. At the request of the tax payer and taking into account the characteristics of his activity, the local tax administrator may, in accordance with the procedure established by the central tax administrator, set a tax period other than specified in paragraph 1 of this Article, on condition that this tax period is 12 months.   Such a tax period may be changed only for objective reasons with the consent of the local tax administrator. 3. The first tax period shall begin from the registration of a Lithuanian entity in the Republic of Lithuania or, in the event that the Lithuanian entity has not registered in accordance with the procedure prescribed by law, the first tax period shall begin from the start of activities.  The last tax period of the Lithuanian entity shall end when the entity ceases to exist. 4. Where a Lithuanian entity has actually carried out its activities for less than 12 months, the tax period shall be counted from its registration in the Republic of Lithuania or, in the event that the Lithuanian entity has not registered in accordance with the procedure prescribed by law, from the start of its activities until the Lithuanian entity ceases to exist. 5. The first and last tax periods of a permanent establishment shall be determined in accordance with the procedure established by the Government of the Republic of Lithuania or an institution authorised by it. CHAPTER II RECOGNITION OF INCOME AND COSTS Article 7.  Recognition of Income and Costs 1. Income and costs shall be recognised on an accrual basis and in accordance with other accounting principles laid down in the legal acts that regulate accounting, except for the cases where, in accordance with the provisions of this Chapter, income may be recognised in accordance with the principle of cash accounting and in accordance with the provisions of this Article. 2. Negative goodwill shall be attributed to income at the moment of its acquisition unless this Article provides otherwise. 3. Where the shares of another entity are acquired for the purpose of controlling its net assets and activity, the negative goodwill determined at the moment of acquisition shall be attributed to income at the moment of subsequent reorganisation or transfer (if any) of such entities. Article 8.  Recognition of Income and Costs under the Principle of Cash Accounting 1. Where the cash accounting principle is applied, the income of a Lithuanian entity shall be recognised at the actual moment of its receipt.  Income specified in Article 37 of this Law shall be recognised in the same manner. 2. Where the cash accounting principle is applied, the costs of a Lithuanian entity shall be recognised in accordance with the same procedure as they are recognised on an accrual basis, however, only the costs related to the income actually received during the tax period shall be recognised. Article 9.  Applying the Cash Accounting Principle 1. The principle of cash accounting may only be applied by those Lithuanian entities which had recognised their income using the cash accounting principle before this Law came into effect and whose income during the last three tax periods did not exceed LTL 100 000 for each single tax period as well as newly registered Lithuanian entities whose expected income during the first tax period will not exceed LTL 100 000. 2. Lithuanian entities applying the cash accounting principle must switch to the accrual accounting principle in the tax period following the tax period during which their income exceeded LTL 100 000. 3. The provisions of this Article shall not apply to Lithuanian entities in bankruptcy. Article 10.  Selection and Change of Accounting Principles 1. Even if it meets the criterion set out in paragraph 1 of Article 9, a Lithuanian entity may switch from cash accounting to accrual accounting as of the beginning of any given tax year. The Lithuanian entity shall inform the local tax administrator thereof. 2. Where a Lithuanian entity switches from cash accounting to accrual accounting, the buyers’ debts carried over to the fiscal year during which the said accounting principle is applied shall be included in the income of the Lithuanian entity after repayment, but not later than within three years from the beginning of the tax period during which the accrual accounting principle was introduced. 3. The Lithuanian entity, which had applied the accrual accounting principle before this Law entered into force, and the Lithuanian entity, which has an obligation under the provisions of this Law to switch from cash accounting to accrual accounting, may not switch from accrual accounting to cash accounting until the Lithuanian entity is either liquidated or ceases to exist. CHAPTER III PROCEDURE FOR THE CALCULATION OF TAXABLE PROFITS Article 11.  Taxable Profits 1. Unless this Article provides otherwise, for the purpose of calculating taxable profits of a Lithuanian entity, the following shall be deducted from income: 1) non-taxable income; 2) allowable deductions; 3) limited allowable deductions. 2. The taxable profits of permanent establishments shall be calculated by deducting from the income earned the non-taxable income, limited allowable deductions and deductions relating to the income earned by a foreign entity through a permanent establishment.  The procedure for making deductions relating to the costs incurred for the purpose of earning income through permanent establishments shall be established by the Government of the Republic of Lithuania or an institution authorised by it. 3. The taxable profits earned by a foreign entity otherwise than through a permanent establishment shall include all of its income sourced in the Republic of Lithuania and the obligation to tax it at source (without any deductions) as set forth in Article 37 of this Law. 4. Expenses on the basis of which costs are recognised may only be supported by legally valid documents which must contain all the mandatory requisites of accounting documents provided for by the legal acts that regulate accounting.  In addition to such requisites, the documents supporting the expenses, on the basis of which the costs are recognised, must also contain other requisites prescribed by the Government of the Republic of Lithuania or an institution authorised by it. 5. (Repealed on 30 June 2005) 6. The requirements of paragraph 4 of this Article shall not apply to the documents executed by foreign entities or natural persons.  Costs shall be recognised on the basis of the documents executed by foreign entities or natural persons where such documents allow identification of the content of an economic operation. 7. The provisions of this Article shall not apply to income of a shipping entity received from international carriage by sea-going vessels and activities directly related thereto if, at the choice of the shipping entity, the income from international carriage by sea-going vessels and activities directly related thereto is subject to a fixed rate corporate income tax under the provisions of Article 38(1) of this Law.    Article 12.  Non-Taxable Income The following income earned and/or received by a Lithuanian or foreign entity through permanent establishments shall not be taxed: 1) (Repealed on 1 January 2006); 2) insurance benefits received which are not in excess of the value of the property lost or losses/damage incurred; the part of insurance premiums reimbursed which is in excess of the insurance premiums deducted from the income in accordance with the procedure laid down in Article 26 of this Law and also the part of insurance benefits which is in excess of the insurance premiums deducted from the income in accordance with the procedure laid down in Article 26 of this Law; 3) income received by a bankrupt entity from the sale of the assets; 4) balance of the organisational fund of an insurance undertaking in accordance with the procedure laid down in the Law of the Republic of Lithuania on Insurance; 5) investment income of variable capital investment companies and closed-end investment companies operating in accordance with the Republic of Lithuania Law on Undertakings for Collective Investment, except for dividends and other distributed profits; 6) income received by health care institutions from services financed from the Compulsory Health Insurance Fund; 7) income resulting from the revaluation of assets and obligations performed in accordance with the procedure prescribed by legal acts, except for income resulting from the revaluation of derivative financial instruments acquired to cover the risks; 8) default interest, except for default interest received from foreign entities registered or otherwise organised in target territories or from residents of such territories; 9) profits or part of profits received from legal persons of unlimited civil liability that are corporate income taxpayers, whose income is subject to corporate income tax under this Law or an equivalent tax under the respective legal acts of foreign states, except for the cases specified in Article 39 of this Law; 10) seaport and airport charges, air navigation charges and funds collected from the lease of seaport land; 11) correction of errors and inaccuracies of the previous tax periods in accordance with Article 18 of the Law of the Republic of Lithuania on Accounting; 12) compensation for damages received by an entity, except for the cases specified in subparagraph 2 of this Article; 13) (Repealed on 30 June 2005); 14) compensations received under the EU financial support scheme to the Republic of Lithuania for decommissioning of fishing vessels; 15) income from the increase in the value of assets resulting from transfer of shares of an entity, registered or otherwise organised in a state of the European Economic Area or in a state with which a treaty for the avoidance of double taxation has been concluded and is applied and which is a payer of corporate income tax or an equivalent tax, to another entity or a natural person where the entity transferring the shares held more than 25% of voting shares in that entity for an uninterrupted period of at least two years.  This relief shall not apply if the entity transferring the shares transfers them to the entity that has issued these shares;  *Note. The provisions of subparagraph 15 shall apply for the purpose of calculating corporate income tax for the tax period beginning before 2009.   15) income from the increase in the value of assets resulting from transfer of shares of an entity, registered or otherwise organised in a state of the European Economic Area or in a state with which a treaty for the avoidance of double taxation has been concluded and is applied and which is a payer of corporate income tax or an equivalent tax, to another entity or a natural person where the entity transferring the shares held more than 25% of voting shares in that entity for an uninterrupted period of at least two years or, where the shares were transferred in the cases of reorganisation or transfer referred to in paragraph 2 of Article 41 of this Law, held more than 25% of voting shares in that entity for an uninterrupted period of at least three years.  This relief shall not apply if the entity transferring the shares transfers them to the entity that has issued these shares;  *Note. The provisions of subparagraph 15 shall apply for the purpose of calculating corporate income tax for 2009 and subsequent tax periods. 16) life insurance premiums of insurance undertakings, where the term of the insurance contract exceeds 10 years or where the insurance benefit is paid out to the insured after he has reached retirement age under the provisions of the Law on the Accumulation of Occupational Pensions, investment income of insurance undertakings, except for dividends and other distributed profits, and investment income of insurance undertakings under life assurance contracts concluded in accordance with the provisions of the Law on the Accumulation of Occupational Pension; 17) direct and other compensatory benefits, to maintain the income level, established by the laws and other legal acts of the Republic of Lithuania, received by entities engaged in agricultural activities. *Note. The provisions of subparagraph 17 shall apply for the purpose of calculating corporate income tax for 2009 and subsequent tax periods. CHAPTER IV ASSETS Article 13.  Entity’s Assets 1. The assets of an entity shall be tangible, intangible and financial valuables acquired by the said entity.  They shall belong to the entity by the right of ownership or shall be acquired under a leasing (financial lease) contract providing for the transfer of ownership rights or under a purchase and sale or lease contract providing for the transfer of ownership rights to the entity after the total value of the assets has been paid up or in the manner set out in paragraph 6 of Article 14 of this Law; or, where state and municipal assets have been transferred to the entity by the right of trust, they shall belong to the entity under the right of trust. 2. The assets of an entity shall be divided into fixed and current assets.  The entity’s fixed and current assets shall be tangible and intangible. 3. Fixed assets shall mean assets used by an entity to earn income (derive economic benefit) for a period exceeding one year and the acquisition price whereof is not less than the price set by the entity according to the class of fixed assets listed in Appendix 1 to this Law.  The acquisition price of such assets shall be included in the entity’s costs spread over the depreciation or amortisation period.  The amounts directly paid by the entity to the educational establishments of EEA states and foreign states other than EEA states, which have concluded a treaty for the avoidance of double taxation with the Republic of Lithuania, for the training of natural persons who are not connected with the entity by employment relations, which results in post secondary or higher education and/or qualification, where such education and/or qualification is required by the entity to earn income, may be attributed to intangible fixed assets after the said natural persons commence their employment at the entity. 4. Current assets shall mean assets that may be used by an entity to earn income (derive economic benefit) for a period not exceeding one year and the acquisition price whereof is included in the deductible costs of the entity for the tax period in which such assets are put into use. Article 14.  Acquisition Price of Assets 1. The acquisition price of assets shall comprise expenses incurred in the course of acquiring the assets, including the commissions and taxes (levies) paid, except for VAT, in relation with the acquisition of the assets. 2. The acquisition price of assets acquired for goods and services shall comprise the respective amount included in the income received by an entity for such goods and services as well as expenses incurred in the course of acquiring the assets, including the commissions and taxes (levies) paid, in relation with the acquisition of the assets. 3. Where assets are exchanged for other assets, the acquisition price of the newly acquired assets shall be the acquisition price of the assets exchanged.  Where the acquisition price of the assets exchanged cannot be determined, the acquisition price of the newly acquired assets shall be the actual market price of such assets. 4. Where a member of an entity uses assets to pay for its shares (interests, member shares), the acquisition price of such assets for the entity shall be the same as the acquisition price paid by the member (holder of interests or member shares).  The above mentioned acquisition price of assets may be increased by the amount of income resulting from the increase in the value of a shareholder’s (holder’s of interests or member shares) assets, earned from the transfer of such assets and included in the shareholder’s (holder’s of interests or member shares) taxable income. 5. 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. 6. Where a person terminates individual activities and transfers the unsold goods to a new entity established by him or his spouse, the acquisition price of these goods for the entity shall be the acquisition price specified in the acquisition documents of the goods of the person engaged in individual activities, except for the cases when these assets are used to pay up for this entity’s shares (interests or member shares).  Article 15.  Selling Price of Assets 1. The selling price of assets or the price of other transfer into ownership thereof shall comprise all income earned from the sale or other transfer into ownership of the assets after deducting the taxes (levies) paid, except for VAT, in relation with the sale or other transfer into ownership of such assets. 2. (Repealed on 14 February 2004) 3. Where insured assets have been lost for any reason, the selling price of such assets shall be the amount set as compensation for the assets lost. Article 16.  Income from the Increase in the Value of Assets 1. Income from the increase in the value of assets shall be income earned which comprises the difference between the price of the sale or other transfer into ownership of the assets and the acquisition price of such assets.  Expenses relating to the acquisition of the assets must be supported by documents specified in Article 11 of this Law and/or by valid transactions. 2. For the purpose of calculating income from the increase in the value of assets where an entity’s assets, in respect of which depreciation or amortisation was estimated to calculate corporate income tax, are transferred, the acquisition price of such assets shall be reduced by the amount of depreciation or amortisation included in the limited allowable deductions. 3. (Repealed on 14 February 2004) 4. (Repealed on 14 February 2004) 5. Where an entity transfers a bond, such transfer shall result, with respect to the transferring entity, in the reduction of income from the increase in the value of assets by the amount of discount already included in the income of the transferring entity. 6. In certain cases where entities are reorganised, liquidated or transformed or where a Lithuanian entity (a European company with registered office in the Republic of Lithuania (hereinafter referred to as the “European company”) established pursuant to Council Regulation (EC)  No 2157/2001 of 8 October 2001 on the Statute for a European company (SE) and Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees or a European cooperative society with registered office in the Republic of Lithuania (hereinafter referred to as the “European cooperative society”) established pursuant to Council Regulation (EC)  No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE) and Council Directive 2003/72/EC of 22 July 2003 supplementing the Statute for a European Cooperative Society with regard to the involvement of employees) transfers its registered office to another EU Member State, the procedure for the recognition and taxation of income from the increase in the value of assets shall be laid down in Chapter IX of this Law. 7. In other cases, the Government of the Republic of Lithuania or an institution authorised by it shall establish the procedure for calculating the acquisition price of assets, the selling price of assets or income from the increase in the value of assets. CHAPTER V ALLOWABLE DEDUCTIONS AND LIMITED ALLOWABLE DEDUCTIONS Article 17.  Procedure for the Recognition of Allowable Deductions 1. Allowable deductions shall include all the usual costs that an entity actually incurs for the purpose of earning income or deriving economic benefit unless this Law provides otherwise.  Additional deductions allowed by the Government of the Republic of Lithuania for the Ignalina Nuclear Power Plant shall be attributed to allowable deductions. *Note. The provisions of paragraph 1 shall apply for the purpose of calculating corporate income tax for the tax period beginning before 2010. 1. Allowable deductions shall include all the usual costs that an entity actually incurs for the purpose of earning income or deriving economic benefit unless this Law provides otherwise.  Additional deductions allowed by the Government of the Republic of Lithuania for the Ignalina Nuclear Power Plant shall be attributed to allowable deductions. The amount from which the state social insurance contributions of a member of the entity (owner of an individual enterprise, general partner of a partnership or a limited partnership) are calculated and paid in accordance with the provisions of the Law of the Republic of Lithuania on State Social Insurance shall also be attributed to allowable deductions of the ent …