Lithuania SAC on Income in Kind & Interest-Free Loans

The Supreme Administrative Court of Lithuania (hereinafter referred to as the SAC) has provided relevant explanations on income in kind and whether it is necessary to prove justify that a specific resident has received a certain benefit at a price lower than the actual market price due to the influence of certain interests or transactions, if certain services were provided free of charge. Let us now examine the relevant clarifications in detail, as it is precisely this issue that gives rise to uncertainty.

The confusion arises because certain practices do not specify whether such an interest needs to be proven, but confirm the calculation of personal income tax itself. Therefore, let us examine this in more detail.

For example, the Supreme Administrative Court of Lithuania stated that, based on Articles 2(14) and (15), Article 3, Article 5(1), Articles 6, 22, 25 and 27 of the Income Tax Law, the court of first instance agreed with the conclusions of the tax administrator and the MGK that the applicant's benefit, from not paying interest on loans received (income in kind) may be exempt from income tax if there is no identifiable economic motive to give or receive benefits, i.e. evidence is provided confirming that there is no benefit to the applicant. 

In the opinion of the court of first instance, the fact that the applicant received loans and did not pay interest on them allows us to conclude that interest-free loans should be recognised as economic benefit, as the applicant did not incur the costs that are normally incurred when disposing of borrowed funds. The fact that the applicant received loans from persons with whom he had friendly relations is not a basis for recognising that there is no income in kind.

Therefore, in this dispute, the court of first instance agreed with the defendant's position that this relationship shows that the lender, through his actions provided the recipient of the service with economic benefits that the latter could not have obtained under market conditions, and there are no objective circumstances that would suggest otherwise. 

The applicant did not provide evidence that he did not receive economic benefits by borrowing money on preferential terms (without interest). The fact that all loans have been repaid does not change the above circumstances and their legal assessment. The court of first instance also noted that the late payment interest provided for in the event of a delay in the performance of the contract does not constitute interest for the use of the loan money. 

The applicant's arguments that he lent all the money he received to finance the development of the companies, that these companies went bankrupt, did not settle their accounts with the applicant and are unable to do so, and that the applicant therefore did not receive any economic benefit, the court of first instance considered them to be legally irrelevant, since the case concerns the taxation of income in kind with personal income tax, and income is recognised at the moment of its receipt (Article 8(1) of the Personal Income Tax Law).

The Supreme Administrative Court of Lithuania found that the court of first instance, in assessing the interest-free loans received by the applicant (which do not provide for interest), had assessed the totality of the evidence in the case in a detailed, comprehensive and objective manner and therefore determined the economic benefit received by the applicant, as the applicant did not incur any costs ( ) that are normally incurred when disposing of borrowed funds. In this respect, the court of first instance did not deviate from the practice of the Supreme Administrative Court of Lithuania in similar cases.

It is also interesting that, with regard to the new evidence submitted to the Supreme Administrative Court, the panel of judges stated that, pursuant to Article 142(3) of the Law on Administrative Proceedings, new evidence that was not submitted to the court of first instance shall be examined only if the court recognises reasonable grounds for not having done so earlier or if the need to submit new evidence arose later. 

The Supreme Administrative Court accepted the new evidence, assessed it and stated that the additional evidence did not refute the fact that the loans were interest-free but rather substantiates that penalty interest is payable for failure to repay them, which proves that the lender also lent the funds with a view to obtaining economic benefit.

The Supreme Administrative Court noted that the criminal case dealt with the validity of the crimes incriminated to the applicant and the issue of criminal liability, while the tax audit assessed the applicant's tax liability: even if the applicant was acquitted, this circumstance should not be regarded as eliminating the applicant's tax liability in the case under consideration.

In addition, it should be noted that the panel of judges of the Supreme Administrative Court of Lithuania, commenting on the claims in the appeal that, due to the lengthy tax audit in the case at hand, the applicant was forced to reconstruct the circumstances of old periods, which is contrary to the principles of justice and reasonableness and the applicant's right to a fair trial, stated that the tax audit took a long time due to an objective reason, namely the criminal proceedings against the applicant (as a result of which the tax audit was reasonably suspended), and therefore the applicant's right to a fair trial could not have been violated. It mentioned that, for this reason, the defendant had exempted the applicant from 70% of the calculated personal income tax penalties.

In tax disputes concerning income in kind, the Supreme Administrative Court of Lithuania often cites and recalls that income in kind is received free of charge, in exchange or at a preferential 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) of 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.

For example, the Supreme Administrative Court of Lithuania has indicated that, in view of this, the condition set out in Article 2(15) of the Income Tax Act, namely that "a specific resident has been granted a price lower than the actual market price due to certain interests or transactions", should also have been proven in this case. The granting of interest-free loans should be considered as a loan received at a preferential price, and on the basis of the legal provisions set out, it should have been assessed whether there were relevant interests and transactions for which interest-free loans were granted. 

Having established that the applicant, by not paying interest on the loans received, received a benefit, i.e. income in kind, without additionally proving 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).

In addition, it should be noted that the tax administrator has clarified that, having established that the property, services or other benefits received by a resident are recognised as income received in kind in accordance with the provisions of Article 9(1) of the Income Tax Act in force at the time of receipt of the income, such non-monetary benefits must be assessed, i.e. the amount from which the resident's income tax must be calculated in accordance with the procedure laid down in the Income Tax Act, or which is classified as the resident's non-taxable income in accordance with the provisions of the Income Tax Act, must be determined. Income received in kind is assessed in accordance with the procedure laid down in Article 9(3) of the Income Tax Act.  

In order to correctly apply the provisions of the Income Tax Act governing income in kind, each specific situation must be assessed individually, taking into account the actual circumstances, the nature of the relationship between the parties, the content of their agreements, etc.