Lithuania Tax Loss Transfers: SAC Clarifies Rules

The Supreme Administrative Court of Lithuania (hereinafter referred to as the SAC) has provided clarification on tax losses that are classified as limited deductible expenses when companies calculate their income tax.

Understanding Tax Loss Transfers Within Groups of Companies

First, it should be noted that Article 561  of the Income Tax Law (hereinafter referred to as ITL) provides that tax losses may be transferred between entities within a group of entities, and according to the provisions of this article, a group of entities is considered to be a group in which the parent entity owns shares (parts, stakes) in a subsidiary or other rights to a share of distributable profits. Therefore, tax losses may only be transferred between (or to) Lithuanian entities whose legal form is a public limited company (private limited company), including a European company, a cooperative (including a European cooperative), an agricultural company, or an economic association.

Conditions for Transferring Tax Losses

Therefore, it is important to know that an entity may transfer tax losses (hereinafter referred to as tax losses) (or part thereof) to another entity in the group of entities if all of the following cumulative (i.e. must exist together) conditions are met: 

1) on the date of transfer of losses, the parent entity in the group of entities directly or indirectly controls at least 2/3 (or at least 66.67%) of the shares (parts, units) or other rights to a share of the distributable profit of each subsidiary participating in the loss transfer; 

2) tax losses for the relevant tax period are transferred between entities belonging to this group of entities; 

3) tax losses are transferred between entities belonging to the group of entities that have been in that group without interruption for at least two years prior to the date of transfer of tax losses, or tax losses are transferred or taken over by an entity belonging to the group of entities (entities) that has (have) been in that group since the date of its (their) registration and will remain in the group of entities without interruption for at least two years from the date of its (their) registration.

 The requirement for uninterrupted membership of the same group of entities shall be understood and interpreted in accordance with the definition of a group of entities and the requirements set out in Article 2(7) of the PMĮ, i.e. that the parent entity of the group directly or indirectly controls more than 25 per cent of the shares (parts, units) or other rights to a share of the distributable profit of one or more subsidiaries (daughter entities) forming the group; 

4) tax losses are transferred to the entity that has the right to reduce the amount of taxable profit calculated for the tax period for which the losses (or part thereof) transferred by another entity were calculated by the amount of the losses transferred to it.

Case Study: Dispute Over Transfer of Tax Losses

Below, we will examine a very interesting tax dispute arising from the transfer of tax losses within a group of companies.

The tax dispute in the case arose from the tax administrator's decision, which required the applicant to pay income tax and related amounts, stating that the applicant had unjustifiably reduced its taxable profit by the losses incurred by the parent company. 

The case established that the applicant calculated its taxable profit in its annual income tax return (PLN204), which it reduced by the amount of losses for the tax period taken over from the parent company. During the tax audit, the applicant submitted an agreement on the transfer of the parent company's losses to the applicant to justify the losses taken over. 

Regional Administrative Court Decision

It is interesting to note that during the tax audit it was established that the parent company had not calculated the specified tax losses, as it had not submitted an annual PM declaration (form PLN204) and had not declared the tax result before its deregistration from the Register of Legal Entities; the parent company also failed to submit financial reporting documents from which the amount of profit (loss) before tax is transferred to the annual income tax return.

In this case, the Vilnius Regional Administrative Court dismissed the applicant's complaint. The court stated that, pursuant to the provisions of Article 78 of the Tax Administration Act, a bankrupt company is not exempt from submitting declarations to the tax administrator, and the declarations must be submitted. The bankruptcy administrator's company did not submit an annual profit tax return (form PLN204); the tax losses were transferred to the applicant unjustifiably under the aforementioned agreement on the transfer of tax losses. 

In addition, the court found that the bankruptcy administrator's company had not submitted the financial reporting documents from which the amount of profit (loss) before taxation is transferred to the annual income tax return. An interesting circumstance is that the bankruptcy administrator's company and the applicant are associated persons under Article 2(8) of the Income Tax Act, i.e., related persons, as they belonged to the same group of companies. Therefore, in the court's opinion, the applicant should have and could have known about the bankruptcy administrator's company's failure to submit a PM declaration.

SAC Ruling on Tax Loss Submission Requirements

Accordingly, in this dispute, the Supreme Administrative Court of Lithuania noted that, pursuant to Article 78 of the Tax Administration Act, must submit to the tax administrator within 30 days of the commencement of bankruptcy or restructuring proceedings a tax return for the tax period ending before the commencement of the aforementioned proceedings, if the deadline for submitting this return has not yet expired under the relevant tax law. The MAĮ and PMĮ impose the obligation to submit a PM declaration within the specified time limits on the taxpayer, i.e., in this case, the Parent Company as a legal entity. 

Therefore, in the opinion of the Supreme Administrative Court of Lithuania, the arguments of the appeal regarding which of the representatives of the Parent Company (the insolvency administrator or the manager of this company) should have submitted the Parent Company's PM declaration but failed to do so are legally irrelevant in the context of the case under consideration. 

This circumstance, as well as the appellant's related arguments regarding his inability to influence the insolvency administrator, do not change the legally significant circumstance that the Parent Company did not submit the PM declaration. In addition, the Supreme Administrative Court of Lithuania noted that legal recognition of tax losses requires the transfer/assignment of only those losses for the tax period that are real, substantiated by a declaration, for the accuracy of which the person submitting the declaration is responsible, and accounting documents. 

Therefore, contrary to the applicant's claim, the fact that the parent company has been liquidated constitutes grounds for refusing to assess the documents submitted on its behalf after the termination of this legal entity in the present case. 

The refusal to consider documents submitted on behalf of a legal entity that no longer exists, drawn up after the termination of that legal entity (there is no evidence in the case to prove the contrary, i.e. that the parent company's documents were submitted, which were drawn up and signed by persons with such powers before the termination of the legal entity) does not negate the applicant's right to prove the correctness of the calculation of the transferred losses, as such documents do not meet the admissibility requirements for evidence. 

Thus, the Supreme Administrative Court of Lithuania agreed with the tax administrator's position on the requirement to submit a declaration to carry forward tax losses.