This question is one of the first that foreign investors address to their local advisors, as evaluation and optimization of their tax burden in exit scenarios is crucial for investment profitability. The question is also relevant for Lithuanian conglomerates in deciding on the model for group structures. Individuals should also be aware of potential taxes in the event of transfer of shares they hold.
Lithuania does not apply transfer taxes to the transfer of shares in Lithuanian companies. Since it is sufficient to execute the share transfer by a simple written agreement, parties to a transaction do not incur notary fees. Further, in terms of VAT, the share transfer is regarded as a VAT-exempt transaction. This rule also applies in cases of transfers of shares in a company that merely owns real estate 's e.g., a shopping mall.
In terms of income tax, foreign residents 's both corporate entities and individuals 's are not taxed in Lithuania on the capital gains from share transfers. However, Lithuanian taxes are applicable if the shares are transferred via a permanent establishment or a fixed base.
Capital gains received by a Lithuanian corporate enterprise increase its taxable base, which as a rule is taxed at the 15 percent corporate income tax rate. Due to the application of a temporary social tax in 2007, the effective corporate income tax rate in 2007 is 18 percent. As of 2007 capital gains realized from a transfer of shares in a company registered in a EEA state or a state which has an in-force tax treaty with Lithuania are not taxed provided that the seller, a Lithuanian company, holds more than 25 percent of the shares during three years.
In cases where a share transfer occurs at a loss, Lithuanian companies should be aware of the so called "income basket limitation" for carrying forward the losses. According to the general rule, losses as tax deductibles may be carried forward for five years. Meanwhile, the losses deriving from the transfer of shares and derivatives have to be accounted separately and can be carried forward only for three years. Such losses may be covered only from capital gains accruing from transfer of shares and derivatives.
Resident individuals pay 15 percent individual income tax on capital gains derived from share transfers, unless the transaction qualifies for the exemption. For instance, shares that were acquired before 1999 are not taxed. Another exemption is applicable for transfers by small shareholders.
Consequently, Lithuania has established a rather attractive tax regime for share transfers. Nevertheless, it is advisable to plan the transaction beforehand and monitor it; otherwise, the tax on the capital gains might come as unpleasant surprise for the seller.
Tomas Davidonis is a senior associate at Sorainen Law Offices in Vilnius
