Lithuania’s 2025 Green Tax: New Limits on Car Depreciation Based on CO2 Emissions

The article deals with the new amendments to the Corporate Income Tax Law, which are related to the reflection of the greenback in the calculation of corporate income tax in Lithuania.  Depending on the pollution (CO2 emissions) of cars, from 2025 onwards, there are restrictions on the depreciation of cars.

The green rate and corporation tax

Taxes have a variety of functions, not only fiscal, to collect taxes for the budget, or regulatory, where, for example, tax incentives are used to encourage certain initiatives or business activities, but also environmental, where, for example, certain tax incentives are used to encourage the purchase of less polluting assets.

The EU and OECD (Organisation for Economic Co-operation and Development) tax initiatives have placed considerable emphasis on the so-called "green deal" - a tax system that encourages environmentally friendly consumption, reduces pollution, protects the environment, etc. These initiatives include various proposals, such as tax breaks for electric cars, renewable energy (solar, wind, hydro, etc.), corporate tax breaks for companies that invest in their facilities to make them more efficient and less polluting, etc.

Are there any examples in the Lithuanian tax system where a "green course" is being promoted? Yes, the new restrictions of the Corporate Income Tax Act (CIT) will come into force from this year (1 January 2025).

Until this year, Lithuania did not have any restrictions on deductions for car expenses for corporation tax purposes. Previously, the purchase price of cars used in the business of generating income or economic benefit could always be deducted from income on a pro rata basis over the depreciation period of the car.

Foreign countries have different depreciation models for corporate tax purposes to encourage a "green course": either by allowing cars that are less polluting to be depreciated more quickly, thus paying less corporate tax; or, as in Lithuania, by imposing certain depreciation limits depending on how polluting the car is.

So, in the following article, we will look at the specific provisions of the TCJA - what is most important for all companies in Lithuania to know about them.

Car groups and restrictions

For a long time, depreciation of passenger cars used in the economic activities of an enterprise has been calculated in the normal way as provided for in the Corporation Tax Law (the "CIT Law").

However, new restrictions in the ITA come into force on 1 January 2025. Deductions for the purchase and lease costs of cars will be limited depending on how much CO2 the car emits.

The gist of the restrictions is that a portion of the purchase price of a passenger car, which is treated as an asset of the company, can be deducted from the company's income in accordance with the procedure set out in Article 18 of the ITA (depreciation costs of fixed assets).

The restrictions will be applied in four steps, depending on the pollution level of the car.

• When the car is clean and has CO2 emissions of 0 g/km, a maximum of €75,000 of the cost of the car can be deducted from income.

• If the car's CO2 emissions exceed 0 g/km but do not exceed 130 g/km, a deduction of up to €50,000 will be allowed.

• Where CO2 emissions exceed 130 g/km but do not exceed 200 g/km, a maximum of €25,000 can be deducted from income.

• Finally, if the car is polluting and has carbon dioxide emissions of more than 200 g/km, a deduction of up to €10,000 of the purchase price of the car can be taken from income.

So from this year onwards, deductions for the purchase and lease of cars in Lithuania will be limited depending on how much CO2 the car emits.

Accents, what's important to know?

·         When does the restriction apply?

The amendment to the ITA in question will apply to the calculation and declaration of corporation tax for the tax period 2025 and beyond. Consequently, the restrictions will only apply to cars purchased or leased from 2025. In other words, if a car is purchased or leased before 2025, it will be unaffected after 1 January 2025.

·         Transport costs.

For example, a company purchases a passenger car in 2025 for use in its operations. A VAT invoice has been received stating the cost of the car as €50,000 plus VAT of €6,300 and CO2 emissions of 205 g/km. In addition, the company incurred transport costs of EUR 5 000 before putting the vehicle into service. The question may then arise whether the purchase price limitations set out in Article 30-2 of the VAT Act apply only to the purchase price of the car as stated in the VAT invoice or to the total calculated price including transport costs? The answer is that if, in the case of the acquisition of a passenger car in 2025, costs relating to the acquisition of the asset, such as transport, preparation for use or repair costs, which are attributable to the purchase price of the acquired car, are incurred before the car is put into service, then the limitation on the purchase price of the car set out in Article 30-2(1) of the VAT Act is applied to the total estimated purchase price of the car for the purpose of calculating the corporation tax for the 2025 tax period and for the tax periods thereafter. This is because the acquisition cost of an asset, in this case a car, when purchased from other persons, must be determined by adding to the purchase price all taxes (customs duties, registration, etc.), transport, assembly, inspection, installation and other direct costs related to the acquisition of the asset. According to Article 14(1) of the ITA, the cost of acquisition of an asset is the cost incurred in acquiring the asset, including commissions paid (as well as payable) and taxes/fees incurred in connection with the acquisition of the asset.

·         Restrictions on rentals.

The monthly rental cost of a passenger car which is not considered to be an asset of the enterprise shall be deducted from income up to the above limit and the ratio of the depreciation rate (in years) set out in Appendix 1 to the ITA for the group of fixed assets to which the rental car would have to be assigned if it were considered to be an asset of the enterprise, divided by 12. In simple terms, the monthly rental cost of a car is deducted from the company's income within the above-mentioned limit of the relevant thresholds for the four categories of cars discussed, depending on the CO2 emissions. In this case, it is important to calculate what the rental costs are, how many months per year are rented, what limit on deductions based on the car's emissions is applicable and to assess the proportionality of the deductions allowed under the AIA.  However, these rules do not apply in the case of leases with a total duration of 30 days or less per tax period, nor in the case of leases using an electronic interface such as a platform, portal or other similar means. If long-term lease contracts concluded before 1 January 2025 continue without renewal, the restrictions on the deduction of rental expenses will not apply to car lessees.

·         When does the restriction not apply?

The limitation on the purchase and rental of cars set out in the ITA does not apply where the cars are used solely for rental activities, driving instruction services or transport services such as lifts, taxis, etc.

·         Who will determine CO2?

The new amendment to the VAT Law establishes that the carbon dioxide (CO2) emissions of a passenger car shall be determined in accordance with the procedure set out in the Law on Registration Tax on Motor Vehicles of the Republic of Lithuania, which is used to determine the carbon dioxide (CO2) emissions of motor vehicles registered in the Register of Road Vehicles.