Taxation of a Permanent Establishment Using Construction Object in Lithuania

ECOVIS Miškinis, Kvainauskas ir partneriai advokatų kontora, Pylimo g. 6, Vilnius
Tel. 8 5 2124084; fax: 8 5 2122741

According to the Law on Corporate Income Tax of the Republic of Lithuania, permanent establishment means the manifestation of activities of a foreign entity in the Republic of Lithuania. A foreign entity is considered to operate through a permanent establishment in the territory of Lithuania where: it permanently carries out its activities in Lithuania; carries out its activities in Lithuania through a dependent representative (agent); uses a building site, a construction, assembly or installation object in Lithuania; makes use of installations or structures in 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) is determined by the government of the Republic of Lithuania, or an institution authorised by it.
As mentioned above, usage of a building site, a construction, assembly or installation object in Lithuania is a sufficient indication that the foreign entity acts through a permanent establishment in Lithuania. The necessity to declare and pay corporate income tax according to the Law on Corporate Income Tax of the Republic of Lithuania emerges only if such activity is carried out for a particular period of time. According to ruling 27-02-2002, Nr. 57 of the Ministry of Finance, regarding the definition of permanency and the criteria for establishing the dependent or independent status of a representative (agent), temporary activity is defined as the activity of the foreign entity in the Republic of Lithuania carried out for less than 6 months.

This would lead to the conclusion that usage of a building site, a construction, assembly or installation object in Lithuania for more than 6 months emerges the necessity to declare and pay corporate income tax in Lithuania. Nevertheless, permanent establishment is defined in numerous Conventions signed between the governments of Lithuania and foreign countries for the avoidance of double taxation and the prevention of fiscal evasion, with respect to taxes on income and on capital. According to such Conventions, the term ‘permanent establishment’ means a fixed place of business through which the business of an enterprise is wholly or partly carried on. The main point is that international treaties – Conventions for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital – give different definitions regarding the period of activity carried out.

For example, Conventions signed with Ukraine, Israel and China give 12 months; Conventions with Poland, Italy, Russia and Germany give 9 months; Conventions with Sweden, Norway, Estonia and Latvia give 6 months. The Law on Tax Administration of the Republic of Lithuania provides the principle of supremacy of international treaties, which says that where the rules of taxation laid down in the international treaties of the Republic of Lithuania are other than stipulated in the relevant tax laws, and where such treaties are ratified, brought into effect and applied in the Republic of Lithuania, the rules set forth in the aforementioned international treaties shall have primacy over respective national legislation.

To sum up, permanent establishment has to be registered in the Republic of Lithuania the first day of manifestation of activities of a foreign entity in Lithuania; nevertheless, the necessity to declare and pay corporate income tax in Lithuania emerges only if such activities last for a period of more than the particular number of months, determined in the particular Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital, signed between the government of Lithuania and the government of the foreign country involved.