Lithuanian transfer pricing regulations align with the Guidelines provided by the Organization for Economic Co-operation and Development (OECD). Currently, they are incorporated within the Law on Corporate Income Tax.
Arm’s Length Principle
The arm’s length principle provides that pricing for all transactions or economic operations performed between related parties must be equal to pricing for the same transacting or economic operations performed by two independent parties acting in a normal business environment. The arm’s length principle is based on comparability. In other words, comparability to the arm’s length principle is to compare the controlled transaction with a comparable transaction or transactions.
Related Party Definition
In Lithuania, parties are considered related if there is control or influence between them that may lead to transactions not being carried out under normal market conditions. This includes companies and their shareholders, management, or close relatives; entities within the same group; companies with cross-shareholdings of at least 25%; and situations where one entity has decision-making power over another. Even personal relationships—such as spouses, cohabitants, and close family members—can create a related-party connection if they are linked to key persons in the entities involved.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Lithuania are provisioned in Article 9 of the Regulation, as follows:
- Comparable Uncontrolled Price Method (CUP)
- Resale Price Method (RPM)
- Cost Plus Method (CPM)
- Transactional Net Margin Method (TNMM)
- Profit Split Method (PSM)
The selection of the method is based on the most appropriate principle. However, priority is given to traditional methods—such as the CUP, RMP, and CPM methods. If the CUP method can be applied equally alongside another method, CUP must be used. Other methods are allowed if they lead to arm’s length results and are supported with proper documentation.
Comparability Analysis
In Lithuania, the comparability analysis in transfer pricing is in line with the guidelines in Chapter III of the OECD Transfer Pricing Guidelines. To determine comparable transactions, the law provides neither states a preference for the local comparables, nor does allow the tax authority to use secret comparables.
Lithuania’s transfer pricing guidelines specify a four-step process for conducting comparability analysis: (1) define the controlled transaction, (2) identify the most appropriate uncontrolled comparable(s), (3) evaluate comparables, and (4) apply the appropriate transfer pricing method. The analysis will involve five components: the type of transaction, the functions and risks of the transacting parties, contractual terms, economic conditions, and business strategies. If using multiple comparables, an arm’s length range can be developed. In general, an adjustment is made to the median of the range unless the taxpayer has a reasonable basis for choosing another point. If the transaction is within range, there is no adjustment; however, if the taxpayer fails to cooperate with the assessment, the tax authority can adjust any point within the arm’s length range.
Documentation Requirements
Transfer pricing documentation requirements in Lithuania are based on the three-tiered approach set forth by the OECD. This requires multinational groups to:
- Master File;
- Local File, and
- Country-by-Country (CbC) report.
Both resident companies and foreign entities operating through a permanent establishment (PE) must electronically file two key transfer pricing forms annually with their corporate income tax return: Form FR0438 (on related parties) and Form FR0528 (on transactions exceeding €90,000).
The Master and Local File requirements apply when the value of a controlled transaction (or a group of linked transactions) is at least €90,000. Nevertheless, these requirements do not apply to transactions between Lithuanian residents or transactions by resident individuals with nonresidents provided that the nonresidents are located within a permanent base in Lithuania. If documentation is not provided there could be penalties of up to €6,000 for company managers.
Master and Local File:
The Master File must be prepared by Lithuanian entities or PEs that are part of a multinational group and had revenue above €15 million in the relevant tax year. It must be ready by the 15th day of the sixth month after the tax year and submitted to the tax authority (VMI) upon request. It includes information on the MNE group’s structure, global operations, intangible assets, financial arrangements, transfer pricing policy, and intra-group transactions. The Local File, required from entities with over €3 million in controlled transactions, contains detailed information about specific related-party transactions, including functional analysis, the pricing method used, and any advance agreements or reorganization impacts. It follows the same preparation and submission timeline as the Master File.
Country-by-Country (CbC) Reporting:
CbC reporting applies to multinational enterprise (MNE) groups with annual consolidated revenue of at least €750 million. The main responsibility to file lies with the Lithuanian ultimate parent entity (UPE). However, a Lithuanian subsidiary may also be required to file if the UPE is not obliged to report in its jurisdiction if no exchange agreement exists with Lithuania, or if the UPE’s country has a systemic failure in report sharing. Lithuanian entities must notify the tax authority of the reporting entity’s identity and residence by the end of the reporting year. The CbC report itself must be filed electronically within 12 months of the end of the reporting year.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
An Advance Pricing Arrangement (APA) is an agreement between a taxpayer and the tax authority that sets out how transfer pricing will be done for future cross-border transactions. APAs help avoid disputes and double taxation. Lithuanian law allows for two types of APAs, unilateral and multilateral.
Mutual Agreement Program (MAP)
Lithuania is providing a Mutual Agreement Procedure (MAP) to resolve tax disputes, including transfer pricing, under its tax treaties. Although taxpayers can request MAP at any time, and the applications for MAP may be made even when there may be court or administrative proceedings pending or already completed, MAP requests should normally be made within three years from the date of the matter arising. In addition, during the processing of the case by Lithuania’s tax authority, tax collection is stayed. Lithuania’s goal is to settle MAP cases in 12-24 months and to provide arbitration under select treaties such as with EU countries.
Penalties
Penalties applicable to the transfer pricing cases, by general rule, are levied between 10%-50% of the tax underpayment.
Taxation at a Glance
In Lithuania, the tax law is not codified, but instead, it consists of several separate laws, including the Law on Corporate Income Tax, the Law on Personal Income Tax, and the Law on Value Added Tax, among others.
The currency of Lithuania is the Euro. The official name of the Lithuanian tax authority is the State Tax Inspectorate (VMI).
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 16% |
VAT | 21% |
Withholding tax on dividends to non-residents | 16% |
Withholding tax on interest to non-residents | 0/10% |
Withholding tax on royalties to non-residents | 10% |
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