After Seimas (Lithuania's parliament) amended the Law on Charity and Sponsorship and the Law on Corporate Income Tax, regulations of providing charity and sponsorship has become stricter and new rules for the taxation of charity and sponsorship have been implemented.
Earlier provisions of the Law on Corporate Income Tax stated that sponsorship received by nonprofit subjects is not considered income, so it is not taxed even when sponsorship might not be used for the specified purposes. Such a legal environment provided for abuse of charity and sponsorship, avoidance of taxes and money-laundering.
The new amendments state that income tax base shall also be: 1) sponsorship received that is used for purposes other than specified in the Law on Charity and Sponsorship; 2) that part of sponsorship received in cash from a single provider of sponsorship during the tax period exceeding the amount of 250 minimum living standards. These provisions are applied when calculating income of the tax period beginning in 2006 and later tax periods. Sponsorship stated above is taxed without deductions with 15 percent income tax tariff.
The Law on Charity and Sponsorship states that sponsorship can be provided to recipients of sponsorship for the purposes of public benefit prescribed in their incorporation documents. The law provides a model list of activities corresponding to the purposes of public benefit 's e.g., activities for the purpose of promotion of cultural, religious and ethical values, educational, scientific and vocational development, non-formal and civic education, sports, social security and labor, health care, national security and defense, law and order, crime prevention, adjustment of living environment and development of housing, protection of copyright and related rights, environmental protection. The list is not finite; the law states that activities in other selfless and beneficial to society fields may also be recognized as corresponding to the purposes for the public benefit.
It's difficult to determine all the purposes of public benefit, so such generality of the provisions of the Law on Charity and Sponsorship may potentially cause disputes between recipients of sponsorship and the State Tax Inspectorate, which controls usage and taxation of sponsorship. Such disputes may have tax consequences to the recipients of sponsorship in those cases it is established that the sponsorship was used not for its purposes.
In order to avoid negative consequences, one should follow provisions of laws, establishing cases when sponsorship is recognized as used not for its purposes 's i. e.:
1) when sponsorship is used to finance political parties or political campaigns as well as for paying debts of participants of political campaigns or debts related to political campaigns;
2) when sponsorship received is transferred as a contribution to any legal person, whose member (shareholder, stakeholder, etc.) is the recipient of sponsorship;
3) when sponsorship is used not in accordance with the Law on Charity and Sponsorship 's i.e., not for recipients of charity stated in the law;
4) when sponsorship is used not following restrictions of laws regulating activities of non-profit organizations;
5) when sponsorship is used not for public benefits, but for private needs.
Changes to the Law on Charity and Sponsorship also call for stricter accounting rules for charity and sponsorship providers and sponsorship recipients.
Providers of charity and sponsorship as well as recipients of sponsorship are obliged by this law to provide annual and monthly reports on sponsorship and its use to the State Tax Inspectorate. Monthly reports should be provided in cases when from the beginning of calendar year the sum of sponsorship or charity provided by one provider to one recipient exceeds 50,000 litas (15,000 euros).
The above changes in the Law on Charity and Sponsorship and the Law on Corporate Income Tax were passed in order to reduce possibilities of financial abuse and to ensure better transparency of receiving and providing charity and sponsorship. However, it might happen that the new provisions may reduce the overall amount of charity and sponsorship.
Kestutis Puscius a lawyer at Jurevicius, Balciunas & Bartkus, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms including Teder Glikman & Partnerid in Estonia and Kronbergs & Cukste in Latvia, dedicated to providing a quality 'one-stop shop' approach to clients' needs in the Baltics.