Statutory limitation in Lithuania concerning historical tax losses
Dr Aiste Medeliene
Walless, Vilnius
Introduction
The utilisation of historical tax losses by Lithuanian companies might appear very attractive, as the Lithuanian Law on Corporate Income Tax provides that it is generally unlimited in time (for tax losses from general economic activities). The general statutory limitation term for the recalculation of taxes is also quite short, at three years. Recent case law from the Supreme Administrative Court has provided the explanation that the statutory limitation term, however, does not apply to situations when the taxpayer wishes to utilise tax losses from earlier periods. Thus, the taxpayer should substantiate and the tax administration could challenge the historical tax losses incurred in the out-of-statutory limitation term periods, if the taxpayer wishes to use them within the open period.
Background
Lithuania has a traditional corporate income tax (CIT) system, meaning that the profits of a company are taxed each year (at the standard 15 per cent rate). Tax losses cannot be carried back, however; accumulated tax losses can be either: (1) carried forward for an unlimited period of time by the same company (except losses from the transfer of securities and derivative financial instruments, which may be carried forward for five consecutive tax years only and may be covered only by profits from the transfer of securities), or (2) transferred to a group company (only set-off with the tax losses of the same tax period). Tax losses cannot be used in the case of discontinuation of the economic activity from which they incurred.
Losses that are carried forward cannot exceed 70 per cent of the taxable profits, except for small companies subject to the five per cent reduced CIT rate. The general rule implies that the first-in first-out (FIFO) method applies to loss transfers arising from different tax periods.
The statutory limitation term in Lithuania is generally ongoing and set at three previous years; however, an extended five- or ten-year statutory limitation term can apply in certain cases. The limitation period for a maximum of the current year and the previous five calendar years applies to:
personal income tax (except for income from self-employment);
unreliable taxpayers;
recalculation, based on information received from the automatic exchange of information;
recalculation related to transfer pricing regulations;
profits, calculated with regard to the validity of the patent box or investment project relief;
profits, related to the write-off of bad debts and efforts made to recover them; and
after the court identifies intentional bankruptcy by the taxpayer.
A limitation period consisting of the current and the previous ten calendar years applies in the case of input VAT deduction for real estate and in the case of a mutual agreement procedure.
There is a provision in the Lithuanian Law of Tax Administration that the tax declaration is deemed to be correct unless it is proved otherwise. This essentially should mean that if a taxpayer calculates their tax losses and declares them and does not utilise the whole amount during the statutory limitation period, such tax losses should be undisputable when they are finally utilised and set-off with the taxable profits of the company in the future.
Recent case law
However, in the recent jurisprudence of the Lithuanian Supreme Administrative Court (‘the Court’) it was explained differently. The Court in its ruling on 6 April 2022 (Administrative Case No. eA-158-575/2022) held that the taxpayer must be ready to substantiate any historical tax losses (including the provision of relevant documentation) during any tax period in which they are utilised, which basically means that if the taxpayer wishes to use historical tax losses, incurred in, for eg, 2009, to reduce the profits for 2022, it should be able to substantiate the whole amount of the losses (having kept all the documents relevant for calculating the tax base for 2009). Subsequently, the tax authorities during the tax investigations and subsequent tax disputes (which may be initiated until 2025) might challenge the historical tax losses, notwithstanding the fact that the tax period when the losses were incurred is already outside the scope of the statutory limitation term. If the taxpayer fails to provide the evidence on the calculations of the tax base, or in case the tax authorities deny tax deductibility of certain costs incurred in the year when the tax losses to be used were calculated, the taxpayer could be denied the ability to deduct historical tax losses (and an additional tax liability may occur). Since the adoption of this ruling, the Lithuanian tax authorities have tended to investigate an increasing number of tax losses, generated during the out-of-statutory limitation years, which were used or intended to be used in tax periods within the statutory limitation term.
However, this jurisprudence raises questions of a more general nature, such as regards the principle of legal stability or legal expectations, which statutory limitation terms are generally used to secure. Such practice leaves taxpayers with open-ended obligations, which generally they did not expect to have.
Taxpayers, especially those acquiring operating companies with recorded historical tax losses, should be aware of the obligation to keep documents for longer periods (possibly exceeding even the general ten-year bookkeeping term) and the need to be able to provide the calculations for the tax base of such tax periods when tax losses were recorded, even though the statutory limitation term has expired.
Lithuania, with its traditional CIT system and very attractive tax loss utilisation rules due to such jurisprudence, has obviously lost a part of its attractiveness compared with neighbouring countries, for eg, Poland, where to the best of the author’s knowledge, the practice has turned in the opposite direction and the position is that such tax losses cannot be investigated, following controversies on the same question.