OFFICIAL TRANSLATION

OFFICIAL TRANSLATION OFFICIAL TRANSLATION REPUBLIC OF LITHUANIA LAW ON CORPORATE INCOME TAX 2001 December 20 No IX-675 (As last amended on 25 October 2007 – X-1304) 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 of 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 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 country and established or otherwise organised under the legal acts of that foreign country 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, 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 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. Fixed rate corporate income tax shall mean corporate income tax, which can be paid in the cases specified in Article 38(1) of this Law and the base whereof shall be calculated depending on the payload capacity of each sea-going vessel whose payload capacity is at least 100 payload capacity units.   *Note. The provisions of paragraph 9 shall apply for the purpose of calculating taxable profits for the tax period beginning with 2007 and subsequent tax periods. 10. 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 conducted by a credit institution or from investment services provided shall not be treated as a deposit. 11. 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. *12. 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 International Convention on Tonnage Measurement of Ships, signed in London in 1969. *Note. The provisions of paragraph 12 shall apply for the purpose of calculating taxable profits for the tax period beginning with 2007 and subsequent tax periods. *13. Shipping entity shall mean a Lithuanian taxable entity or a foreign taxable entity registered or otherwise organised in a member 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 the activities directly related thereto.   *Note. The provisions of paragraph 13 shall apply for the purpose of calculating taxable profits for the tax period beginning with 2007 and subsequent tax periods. 14. Computer (software) programme shall be interpreted as defined in the Law of the Republic of Lithuania on Copyright and Related Rights. 15. Territory of the Republic of Lithuania shall mean the territory of the Republic of Lithuania and any other 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. 16. 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 business, that is to say an entity capable of functioning by its own means, 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. 17. 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. 18. Permanent establishment shall mean manifestation of activities of a foreign entity in the Republic of Lithuania.  A foreign entity is deemed to carry on its activities through a permanent establishment in the territory of the Republic of Lithuania, provided that it: permanently carries on its activities in Lithuania; or carries on its permanent activities in the Republic of Lithuania through a dependent representative (agent); or uses a building site, a construction, assembly or installation project in Lithuania; or makes continuous use of installations or structures in Lithuania for prospecting or extracting natural resources, including wells or vessels used for that purpose. The permanency status 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. 19. Resident shall be interpreted as defined in the law of the Republic of Lithuania regulating the taxation of personal income. 20. Income shall mean any type of income earned or received in cash and/or in kind from a source in or outside Lithuania. 21. 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. 22. 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 by foreign entities from Lithuanian residents, Lithuanian entities and permanent establishments, income from distributed profits, royalties, including remuneration for the related 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), compensations for violation of copyright or related rights 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 received by Lithuanian entities; 3) income from activities in the Republic of Lithuania; 4) 50% of income from transportation that either begins or ends in the territory of the Republic of Lithuania earned through a permanent establishment, except for income listed in subparagraph 1 of this paragraph; 5) income from international telecommunications earned through a permanent establishment situated in the Republic of Lithuania. 23. 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. 24. Interest shall mean proceeds for borrowing money. 25. Positive income shall mean all income received by a controlled entity, registered or otherwise organised in the countries or zones referred to in paragraph 4 of Article 39 of this Law, or part of such income 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. 26. 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 business, that is to say an entity capable of functioning by its own means, 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. 27. Costs shall mean all expenses incurred while earning income. 28. 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) entity and its members; 2) entity and members of its management bodies; 3) an entity and the spouses, fiancés and cohabitants of its members or members of its managing bodies, other natural persons related to members of the entity or members of its managing 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 managing 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 managing 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), or 4) members of a group of entities; 5) entity and members of another entity where such entities comprise a single group of entities; 6) entity and members of the managing 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 managing bodies, other natural persons related to members of another entity or members of its managing 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 managing 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 managing 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 activity with the other entity or has undertaken to be liable for the obligations of the other entity in respect of third persons 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) entity and its permanent establishment; 11) two entities where one of them holds decision-making rights in the other entity. *29. 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 packaging 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, board games and 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 it 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 operation and the crew of the sea-going vessel; 9) short-term investment from income earned from international carriage by sea-going vessels and/or types of activities directly related to international carriage by sea-going vessels during a tax period; 10) advertising and marketing services when this activity is related to the use 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 operating assets, if these assets, by their nature, are attributed to maritime transport. *Note. The provisions of paragraph 29 shall apply for the purpose of calculating taxable profits for the tax period beginning with 2007 and subsequent tax periods. *30. International carriage by sea-going vessels shall mean carriage of passengers and/or cargo performed by a shipping entity using sea-going vessels that belong to that shipping entity by 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 only after the total value of the assets has been paid up or under a bareboat charter contract and that are registered at the Lithuanian Maritime Register or in the register of sea-going vessels of any other member state of the European Economic Area, except for the cases when sea-going vessels sail only between the ports of the Republic of Lithuania.  *Note. The provisions of paragraph 30 shall apply for the purpose of calculating taxable profits for the tax period beginning with 2007 and subsequent tax periods. 31. Income received from international telecommunications shall mean income received from telecommunications services within the meaning of the Law of the Republic of Lithuania on Telecommunications, provided that signals are conveyed and/or 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. 32. 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. 33. Target territory shall mean a foreign country 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 country where the controlling person is registered or otherwise organised; 3) different rules for equivalent taxation are applied in that territory, depending on the country where activities are carried on; 4) the controlled taxable entity has concluded an agreement with the tax administrator of that country 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 completely clear and the procedure for the application of such rules is not communicated to the tax administrators of other countries. 34. 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. 35. Activity shall mean any type of commercial or productive activity which is pursued to derive and/or earn income or any other economic benefit. 36. Agricultural activity shall mean an activity comprising the production and treatment of agricultural products, the processing of own-produced and treated agricultural products, the production of foodstuffs from own-produced and treated agricultural products and the sale of such foodstuffs, and also the provision of services included in the list of services for agriculture which are subject to a corporate income tax relief as coordinated with the Minister of Agriculture and approved by the Minister of Finance. 37. Other terms in this Law shall be interpreted as they are 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) budget-financed institutions; 2) the Bank of Lithuania; 3) the State and municipalities, except for the cases specified in Chapter VII of this Law; 4) state and municipal institutions, agencies, services or organisations; 5) 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 countries, which is sourced inside and outside the Republic of Lithuania. 2. The income of a Lithuanian entity shall also include, in accordance with the procedure laid down in Article 39 of this Law, the positive income of its controlled foreign entity or part of such income. The income of a Lithuanian entity (European Economic Interest Grouping) shall also include, in accordance with the procedure laid down in Article 39(1) of this Law, the income of the relevant European Economic Interest Grouping. 3. The tax base of a foreign entity shall be: 1) income from activities carried on through a permanent establishment situated in the territory of the Republic of Lithuania as well as income earned in foreign countries and attributed to the said permanent establishment in the Republic of Lithuania in the event that such income relates to the activities of a foreign entity carried on through a permanent establishment situated in the Republic of Lithuania; 2) income sourced in Lithuania and received otherwise than through a permanent establishment situated in the territory of the Republic of Lithuania. 4. Income sourced in Lithuania and received by a foreign entity otherwise than through a permanent establishment situated in the territory of the Republic of Lithuania shall include: 1) interest, except for interest on securities issued by the Government on international financial markets, interest accrued and paid on deposits, and interest on subordinated loans which meet the criteria set down by the legal acts of the Bank of Lithuania; 2) income from distributed profits; 3) royalties, including remuneration for the related rights granted and also including the cases specified in paragraph 5 of this Article; 4) income received as remuneration for the right to use an object of industrial property or franchise under a license agreement; 5) remuneration for information concerning industrial, commercial or scientific experience (know-how); 6) income from the sale, other transfer into ownership or lease of property immovable by nature located in the territory of the Republic of Lithuania; 7) compensations for violation of copyright or related rights. 5. In the case of transfer of software, the provisions laid down in subparagraph 3 of paragraph 4 of this Article shall apply where the transfer concerns copyrighted works and where the following rights are granted by the software: 1) the right to reproduce the software in copies with the purpose of distributing them to the public or otherwise transferring into ownership, renting or lending, or 2) the right to prepare derivative software based on the copyrighted software, or 3) the right to demonstrate software to the public. 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) that part of 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 earned 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.    *Note. The provisions of paragraph 7 shall apply for the purpose of calculating taxable profits for the tax period beginning with 2007 and subsequent tax periods. Article 5. Tax Rates 1. The following tax rates shall be imposed: 1) a 15% tax rate shall be imposed on the taxable profits of Lithuanian entities and permanent establishments, unless this Law provides otherwise; Subparagraph 2 of paragraph 1 (version before the expiry of four calendar years from the beginning of the application of Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments): *2) a 10% tax rate shall be imposed on income (without any deductions) listed in paragraph 4 of Article 4, which is sourced in the Republic of Lithuania and received by foreign entities otherwise than through their permanent establishments situated in the Republic of Lithuania; Subparagraph 2 of paragraph 1 (version after the expiry of four calendar years from the beginning of the application of Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments): *2) a 10% tax rate shall be imposed on income (without any deductions) listed in paragraph 4 of Article 4, which is sourced in the Republic of Lithuania and received by foreign entities otherwise than through their permanent establishments situated in the Republic of Lithuania, unless this Law provides otherwise; *Note: Member States shall apply the provisions of Council Directive 2003/48/EC from 1 July 2005 (given specific conditions). 3) a 15% 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 and that part of 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). 2. Entities (except for non-profit entities), which meet the criteria set out in this paragraph, shall have the right to apply the following rules for the purpose of calculating taxable profits: 1) taxable profits of entities whose number of employees does not exceed 10 and whose income over 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) that part of taxable profits of entities, whose number of employees does not exceed 10 and whose income over the tax period does not exceed LTL 1 000 000, which amounts to LTL 25 000 shall be taxed at a rate of 0% and the remaining part of 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. 3. Paragraph 2 of this Article shall 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 entities) whose members and/or family members of such members control, on the last day of the tax period, over 50% of the shares (interests, member shares) in other entities as well as entities in which members of other entities (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. That part of taxable profits of non-profit entities, whose income from economic and commercial activity over the tax period does not exceed LTL 1 000 000, which amounts to LTL 25 000 shall be taxed at a rate of 0% and the remaining part of taxable profits shall be taxed at a rate of 15%. 5. Taxable profits of Lithuanian entities shall be taxed at 0% if: 1) over 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) over the tax period, an entity does not perform 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 over the tax period accounts for not more that 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. Article 6. Tax Period 1. The tax period shall be the 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 its 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 subject to condition that the 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 the 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 the Lithuanian laws, the first tax period shall begin from the start of its activities. The last tax period of a Lithuanian entity shall end when the entity ceases to exist. 4. Where a Lithuanian entity has actually carried on its activities for less than 12 months, the tax period shall begin from its registration in the Republic of Lithuania or, in the event that the Lithuanian entity is not registered in accordance with the procedure prescribed by the Lithuanian laws, 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 acccrual basis and in accordance with other accounting principles laid down in the legal acts that regulate accounting, except for the cases where subject to the provisions of this Chapter income may be recognised in accordance with the principle of cash accounting, and also according to the provisions of this Article. 2. Negative goodwill shall be attributed at the moment of its acquisition to income, 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 and included in the accounts separately from other assets 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 shall be recognised in the same manner. 2. Where the principle of cash accounting 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, but only those costs shall be recognised which are related to the income actually received during the tax period. Article 9. Applying the Cash Accounting Principle 1. Only those Lithuanian entities which had recognised their income on a cash accounting basis before this Law came into effect and whose income over the last 3 tax periods did not exceed LTL 100 000 for each single tax period as well as newly registered Lithuanian entities whose expected income over the first tax period will not exceed LTL 100 000 may apply the principle of cash accounting. 2. Lithuanian entities which apply the cash accounting principle must adopt the accrual accounting principle in the tax period following the tax period over 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. A Lithuanian entity, even though it meets the criterion set out in paragraph 1 of Article 9, may move from cash accounting to accrual accounting as of the beginning of any tax year. The Lithuanian entity shall inform the local tax administrator thereof. 2. Where a Lithuanian entity moves from cash accounting to accrual accounting, the buyers’ debts carried over to the fiscal year during which the said accounting principle was applied shall be included in the income of the Lithuanian entity after repayment, but not later than within 3 years after 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 move from cash accounting to accrual accounting, may not do so 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) deductions of limited amounts. 2. The taxable income of permanent establishments shall be calculated by deducting from the income earned the non-taxable income, deductions of limited amounts 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 prescribed in Article 37 of this Law. 4. Expenses on the basis of which costs are recognised shall be supported by legally valid documents containing all the mandatory requisites of accounting documents provided for by the legal acts that regulate accounting. In addition to such requisites, the supporting documents shall 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 documents executed by foreign entities or natural persons where such documents allow identifying the content of the economic operation. *7. The provisions of this Article shall not apply to income of a shipping entity earned 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.    *Note. The provisions of paragraph 7 shall apply for the purpose of calculating taxable profits for the tax period beginning with 2007 and subsequent tax periods. 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; that part of insurance premiums reimbursed which is in excess of insurance premiums deducted from income in accordance with the procedure laid down in Article 26 of this Law, and also that part of insurance benefits which is in excess of insurance premiums deducted from 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 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; Version of paragraph 5 before 1 May 2008: *5) investment income of variable capital investment companies operating in accordance with the Law of the Republic of Lithuania on Undertakings for Collective Investment, except for dividends and other distributed profits, and also life insurance premiums received by insurance undertakings, provided that the term of the insurance contract exceeds 10 years or the insurance benefit is paid out to the insured after he has reached retirement age under the provisions of the Law on Supplementary Voluntary Accumulation of Pensions, as well as investment income of insurance undertakings, except for dividends and other distributed profits; *Note. The provisions of subparagraph 5 shall apply for the purpose of calculating taxable profits for the tax period beginning with 2007 and subsequent tax periods. Version of paragraph 5 after 1 May 2008: 5) investment income of variable capital investment companies and closed-end investment companies operating in accordance with the Law of the Republic of Lithuania on Undertakings for Collective Investment, except for dividends and other distributed profits, and also life insurance premiums of insurance undertakings, provided that the term of the insurance contract exceeds 10 years or 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, as well as insurance investment income of insurance undertakings, except for dividends and other distributed profits and insurance investment income of insurance undertakings under life assurance contracts concluded in accordance with the provisions of the Law on the Accumulation of Occupational Pensions; 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 under this Law and whose income is subject to corporate income tax under this Law or an equivalent tax under the respective legal acts of foreign countries, 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 on Accounting; 12) compensations for damage 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 to the Republic of Lithuania programmes for handing over fishing vessels for metal scrap; *15) income from the increase in the value of assets resulting from transfer of shares of an entity registered or otherwise organised in a member state of the European Economic Area or in a state with which a treaty for the avoidance of double taxation has been concluded and brought into effect and which is a payer of corporate income tax or an equivalent tax, if the entity that transfers the shares held more than 25% of voting shares in that entity for an uninterrupted period of at least two years. *Note. The provisions of paragraph 15 shall apply for the purpose of calculating corporate income tax for 2007 and subsequent tax periods. CHAPTER IV ASSETS Article 13. Entity’s Assets 1. The assets of an entity consist of tangible, intangible and financial valuables acquired by the said entity. They belong to the entity by the right of ownership or they were 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 only after the total value of the assets has been paid up or in the manner prescribed by paragraph 6 of Article 14 of this Law; or they belong to the entity by the right of trust where state and municipal assets have been transferred to such entity on the basis of 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 (receive 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 over the depreciation or amortisation period. The amounts directly paid by the entity to the educational establishments of EEA Member States and foreign countries other than EEA Member States, which have concluded a treaty for the avoidance of double taxation with the Republic of Lithuania, for the education of natural persons connected with the said entity by employment relations or for the education of natural persons who have assumed an obligation under an agreement concluded with the said entity to work therein after completing education where such education provides for higher or college-level education and/or qualification, may be attributed to intangible fixed assets. 4. Current assets shall mean assets that are used by an entity to earn income (receive 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 were put into use. Article 14. Acquisition Price of Assets 1. The acquisition price of assets shall comprise expenses incurred in the course of acquiring assets, including the commissions and taxes (levies) paid, except for VAT, in connection with the acquisition of such assets. 2. The acquisition price of assets acquired for goods and services shall comprise the relevant amount included in the income received by an entity for such goods and services as well as expenses incurred in the course of acquiring assets, including the commissions and taxes (levies) paid in connection with the acquisition of such 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. In the event that 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. In the event that a member of the entity uses assets to pay for its shares (interests, member shares), the acquisition price of such assets with respect to the entity shall be 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 shareholder’s (interest or member-share holder’s) assets, which was earned from the transfer of such assets and included in the shareholder’s (interest or member-share holder’s) taxable income. 5. Where securities are exchanged for other assets, the acquisition price of such assets shall be the actual market price of securities at the moment of the acquisition of 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 a person who was engaged in individual activities, except for the cases when these assets are used to pay up for the shares of this entity (interests and 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 assets after deducting from it the taxes (levies) paid, except for VAT, in connection 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 of 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 assets and the acquisition price of such assets. Expenses relating to the acquisition of 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 deductions of limited amounts. 3. (Repealed on 14 February 2004) 4. (Repealed on 14 February 2004) 5. In the event that an entity transfers a bond, such a 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 which has been 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 paid 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 DEDUCTIONS OF LIMITED AMOUNTS 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 receiving 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. 2. Deductions of limited amounts: 1) depreciation or amortisation costs of fixed assets; 2) operating, repair and renovation costs of tangible fixed assets; 3) costs of business trips; 4) costs of advertising and promotional activities; 5) costs of natural loss; 6) taxes; 7) bad debts; 8) contributions for the benefit of employees; 9) specific provisions of credit institutions and insurance undertakings; 10) sponsorship; 11) membership fees, payments and contributions; 12) losses for the tax period. Article 18. Depreciation or Amortisation Costs of Fixed Assets 1. Fixed assets and the value of goodwill shall be depreciated or amortised, unless this Law provides otherwise. The acquisition price of fixed assets shall be charged to costs and deducted from income in portions over the depreciation or amortisation period for such assets determined according to paragraph 2 of this Article. For the purpose of calculating corporate income tax, research and development costs shall not be accrued and included in deductions of limited amounts; they shall be deducted from income as allowable deductions for the tax period in which they were actually incurred and they shall meet the criteria prescribed for allowable deductions in this Law. 2. Classes of fixed assets and their maximum depreciation or amortisation rates (in years) are set out in Appendix 1 to this Law. The entity itself shall determine (select) the depreciation or amortisation periods for its fixed assets, which may not be less than the depreciation or amortisation rates (in years) for fixed assets set out in Appendix 1 to this Law, and their liquidation value, which may not be lower than LTL 1 and which may not exceed 10% of the acquisition price. 3. Entities whose average number of employees on the staff list does not exceed 10 and whose income over the tax period does not exceed LTL 500 000, but which do not meet the criteria set out in paragraph 3 of Article 5 of this Law, may themselves determine the maximum depreciation or amortisation rates for classes of fixed assets, irrespective of the rates set out in Appendix 1 to this Law, except for new buildings used in operations and except for renovations completed in buildings listed in the Register of Immovable Cultural Property of the Republic of Lithuania where such buildings were constructed or renovated after 1 January 2002, and also except for dwelling houses and other buildings. *4. Depreciation or amortisation of fixed assets shall be calculated according to the directly proportionate (linear) method (hereinafter referred to as the “linear method”) or double declining value (double declining balance) method (hereinafter referred to as the “double declining balance method) pursuant to Appendix 1 to this Law. The method selected should be applied consistently: the same depreciation or amortisation method selected by the entity shall be applied to every class of fixed assets set out in Appendix 1 to this Law and each item of assets within that class over the total depreciation or amortisation period for fixed assets. *Note. The provisions of paragraph 4 shall apply for the purpose of calculating taxable profits for the tax period beginning before 2007. *4. Depreciation or amortisation of fixed assets shall be calculated according to the directly proportionate (linear) method (hereinafter referred to as the “linear method”), double declining value (double declining balance) method (hereinafter referred to as the “double declining balance method) or production methods pursuant to Appendix 1 to this Law. The method selected should be applied consistently: the same depreciation or amortisation method selected by the entity shall be applied to every class of fixed assets set out in Appendix 1 to this Law and each item of assets within that class over the total depreciation or amortisation period for fixed assets. *Note. The provisions of paragraph 4 shall apply for the purpose of calculating taxable profits for the tax period beginning with 2007 and subsequent tax periods. 5. Where the linear method is applied, the annual amount of depreciation or amortisation shall be calculated as a ratio of the difference between the acquisition price of fixed assets to the liquidation value of such assets and the depreciation or amortisation period (in years). 6. Where the double declining balance method is applied: 1) the depreciation or amortisation coefficient (hereinafter referred to as the “depreciation coefficient”) shall be calculated by multiplying the ratio between 100% and the depreciation or amortisation period (in years) for fixed assets by 2; 2) for the purpose of calculating the amount of depreciation or amortisation for the tax period during the first year, the acquisition price of fixed assets shall be multiplied by the depreciation coefficient; 3) as regards the depreciation or amortisation of fixed assets during the other years, except for the last year, the amount of depreciation or amortisation of such assets for the tax period shall be calculated by multiplying the residual value of fixed assets at the beginning of the tax period by the depreciation coefficient; 4) during the last year of depreciation or amortisation, the difference between the residual value of fixed assets at the beginning of the tax period and the liquidation value of the entity as determined according to paragraph 2 of this Article shall be depreciated or amortised. *7. Where applying the production method, the annual amount of depreciation shall be calculated by multiplying the difference between the acquisition price of tangible fixed assets and the liquidation value of such assets by the ratio between the amount of the output produced or raw materials processed during the tax period and the maximum amount of output that can be produced or raw material that can be processed using these assets. *Note. The provisions of paragraph 7 shall apply for the purpose of calculating taxable profits for the tax period beginning with 2007 and subsequent tax periods. 8. Where an entity acquires fixed assets and puts them into use before the last day of the sixth month of the tax period, the depreciation or amortisation of such assets shall start in the same tax period. Where an entity acquires fixed assets and puts them into use after the last day of the sixth month of the tax period, the depreciation or amortisation of such assets shall start in the tax period following the tax period during which the assets were acquired and put into use. 9. Where an entity transfers, for consideration or free of charge, fixed assets before the last day of the sixth month of the tax period, depreciation or amortisation shall not be calculated during the said tax period. Where an entity transfers, for consideration or free of charge, fixed assets after the last day of the sixth month of the tax period, ½ of the annual amount of depreciation or amortisation, calculated according to the prescribed rates, shall be charged to the costs of the entity during the said tax period. 10. Where 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 engaged in activities and capable of functioning by its own means, are acquired, the accumulated value of goodwill shall be included in the deductions of limited amounts in a manner similar to fixed assets subject to the procedure laid down in this Article. Where the shares of another entity are acquired for the purpose of …