Income in Kind and Personal Income Tax in Lithuania

It should be noted that income in kind is property or services received free of charge, in exchange or at a reduced price (set lower than the actual market price for a specific resident due to certain interests or transactions) for ownership or use (without acquiring ownership rights) property or services received, as well as other benefits received (if the provider of the benefit had the intention to provide the benefit to a specific person), where the monetary equivalent of the property, services or other benefits received would be classified as income under the provisions of this Law. 

Therefore, in such cases, income received in kind is subject to personal income tax, except for the exceptions provided for in the Personal Income Tax Act.

So, what is the practice of the Supreme Administrative Court of Lithuania? However, there are various interpretations.

For example, the Supreme Administrative Court of Lithuania has stated in some cases that it is necessary to prove and justify that a specific resident has received a certain benefit at a price lower than the actual market price due to certain interests or transactions, if certain services have been provided free of charge. 

The Supreme Administrative Court of Lithuania specifically referred to the necessary condition that the property must have been transferred due to certain interests or transactions. This case states that, in response to the parties' arguments, the panel of judges of the court of appeal stated that in this administrative case, unlike in the aforementioned appeal, the applicant received the sums of money (loans) at a preferential price to satisfy the investment interests of the persons who transferred them (which the applicant himself acknowledges).

In this context, for the purposes of applying the provisions of Article 2(15) of the GPMĮ, it is not important how the sums of money received are described (loan, etc.), but rather that the providers of the sums had an interest in receiving a return and transferred the money to the applicant at a preferential price. 

Similarly, for the purposes of applying the provisions of Article 2(15) of the Income Tax Act, it is irrelevant that the interests of the providers of the money were not realised. Consequently, both the tax administrators and the Commission in this administrative case correctly applied and interpreted the provisions of Article 2(15) of the Income Tax Act in the context of the established facts. In other words, such a specific interest must be justified. 

In addition, it should be noted that the Supreme Administrative Court of Lithuania pointed out that, when calculating the loan interest rates applicable to the applicant, the tax administrator reasonably relied on the official data provided by the Bank of Lithuania on the average interest rates on loans for other purposes to residents (or households).

Another example: a tax dispute in which the tax administrator attempted to reopen proceedings on the grounds that there was no need to prove anything if there was no interest, while the court itself stated that it is necessary to prove and substantiate that a specific resident, due to certain interests or transactions, received a certain benefit at a price lower than the actual market price, if certain services were provided free of charge.

The question raised in this case is whether, in the case under consideration, the condition specified in Article 2(15) of the Income Tax Act had to be proven – that a specific resident was granted a benefit lower than the actual market price due to certain interests or transactions. The defendant stated that, given that the loan was granted free of charge, there was no need to prove the conditions referred to in the case in question, but this circumstance was not refuted in the practice of the Supreme Administrative Court of Lithuania referred to in the defendant's request.

In view of the above arguments, there is no reason to conclude that the Supreme Administrative Court of Lithuania, in assessing the facts of the case and applying the law, deviated unreasonably from judicial practice. Simply put, a specific interest must be proven in order for income in kind to be recognised as income subject to personal income tax. 

Why does this question often arise in tax disputes? This is because the wording of the Income Tax Act itself is such that "income in kind – free of charge, in exchange or at a preferential price (set for a specific resident due to certain interests or transactions at a price lower than the actual market price)", which gives the impression that this interest may only need to be proven in the case of a preferential price. 

However, if services or certain benefits are provided to a resident free of charge, i.e., without compensation, then the market itself and its conditions imply that there is no need to prove this interest, as it is clear that the resident has received a specific benefit that is not available under market conditions compared to others.

It should be noted that, for example, with regard to income in kind, the Supreme Administrative Court of Lithuania stated that the case established that a person related to the applicant by kinship had granted a long-term interest-free loan, part of which he had lent to another person. According to point 7 of the Procedure for the Assessment of Income Received in Kind, when preferential loans are received at interest rates lower than those existing on the market, or when no interest is paid at all, the amount of such unpaid interest may be recognised as the person's income in kind.

In another dispute, the Supreme Administrative Court of Lithuania explained that the condition set out in Article 2(15) of the Income Tax Law, namely that "the price set for a specific resident due to certain interests or transactions is lower than the actual market price", had to be proven in this case as well. The granting of an interest-free loan is considered to be a loan received at a preferential rate, and on the basis of the legal provisions set out, it had to be assessed whether there were relevant interests and transactions for which the interest-free loan was granted.

Having established that the applicant, by not paying interest on the loans received, received a benefit, i.e. income in kind, the tax administrator did not additionally prove the specific conditions set out in Article 2(15) of the Income Tax Act, i.e. the reasons (the influence of certain interests or transactions) why the lenders granted interest-free loans to the borrower (the applicant) in this particular case, incorrectly interpreted the provision of Article 2(15) of the Income Tax Act (Income in kind).

Thus, the provisions of the Income Tax Act on the taxation of income in kind may be applied when the property, services, or other non-monetary benefits received by a resident are considered income as defined in the Income Tax Act and all the conditions specified in the definition of income in kind are met. i.e., the relationship between the provider of the property or services and the recipient of the benefit is based on the desire to give (receive) economic benefit; and the desire to give (receive) the benefit arises from certain interests or transactions; and the provider of the benefit seeks to give the benefit to a specific resident.

Incidentally, income received in kind is recognised as a benefit received by a resident for personal purposes through the use of property belonging to another person.

For example, the tax administrator has clarified that the use of property belonging to another person for the needs of a resident, especially when such use of property is based exclusively on personal relationships (friendship, neighbourliness, kinship, etc.), is not in itself considered income received in kind, as in such cases the benefit cannot be objectively identified in economic terms. 

Therefore, income in kind is recognised only in cases where the provision of property for personal use is considered to be a benefit (income) received, i.e., when the benefit arises from certain economic interests, relationships related to work or similar activities, and the influence of transactions between the provider and recipient of the property in kind. 

The benefit that a resident receives for personal use of a car belonging to the employer is recognised as income in kind. Driving a car from work to home/from home to work is considered to be the use of a car for personal purposes. Keeping a car at home is not considered to be the use of a car for personal purposes only if the employee performs work functions that may require him to leave for work in this car at any time of the day or night, etc.