This summer the Lithuanian Ministry of Finance introduced amendments to the Law on Corporate Income Tax (CIT). The draft amendments are currently being considered by the Parliament and, if adopted, they will likely come into effect in 2007. The amendments will abolish the taxation of capital gains that are realized from a transfer of shares from a company registered in an EEA state or from a state which has signed a tax treaty with Lithuania, provided that the seller is a Lithuanian company and holds more than 25 percent of the shares during a 3 year period.
Combined with the low CIT rate (15%) and the dividend participation exemption, the proposed amendments might make Lithuania an attractive location for holding structures, which is the declared aim of the authors of the draft amendments. A number of tax provisions hamper Lithuania's wish to become competitive with other traditional holding jurisdictions, such as Belgium, Netherlands or Estonia.
First of all, Lithuania has an unfavorable debt financing regime, which is crucial for the profitable operation of holding companies. Interest paid on foreign loans in Lithuania is taxed with a 10% withholding tax and, as a rule, no exemptions are allowed. Also, since Lithuania has been granted a six-year transitional period to apply the EU Interest & Royalties Directive, qualifying EU companies can only start to benefit from that Directive in 2011. It should also be noted that Lithuania generally has thin capitalization restrictions.
Moreover, Lithuania has CFC (controlled foreign company) legislation in place, and application of the CFC rules is rather broad. In addition to traditional low-tax territories, Lithuanian CFC rules might cover entities operating in the so called "White List" territories, such as Delaware, U.S.A.. Another important aspect of CFC rules is that they are applied irrespective of the holding level that the CFC has.
Additionally, Lithuania still has not adopted the advance ruling mechanism. Keeping in mind the wide set of instruments granted for tax administrators to fight against aggressive tax planning (transfer pricing and thin capitalization regulations, application of "SoF" principle etc.), the absence of the advance ruling possibility places a taxpayer in an inferior position.
Lithuania applies restrictions on transactions with offshore companies which might discourage investors to set up a holding company in Lithuania. In addition to other restrictions, the established regime for offshore companies leads to a situation where the Lithuanian holding company is required to withhold Lithuanian CIT on dividends payable to the parent company located in Panama, Hong Kong, Monaco or another offshore territory.
Consequently, the draft amendments to the law on CIT could be regarded as a good start for the creation of an attractive situation for holding companies, however, there still is more work to be done.
Tomas Davidonis is a senior associate at Sorainen Law Offices in Vilnius