Opening a company by Polish citizen in Lithuania (part 2/3)

Lithuania offers great incentives to incorporate for the Polish. Double Taxation Avoidance Agreement signed between Lithuania and Poland includes possibilities of 5% tax on dividends and tax exemption for personal income. Additionally, Research and Development is highly encouraged in Lithuania as firms can deduct R&D expenditures 3 times. Moreover, 5% Corporate Income Tax is possible for the small firms with an annual income of 300,000 EUR or less. Keep reading for additional information on "Opening a company by Polish citizen in Lithuania".

Tax benefits for personal income in Lithuania

According to Lithuanian-Polish Double Taxation Avoidance Agreement Article 25, Polish resident that receives income in Lithuania is required to pay 15% tax exclusively in Lithuania as Poland exempts any tax payable in Poland.

In order to qualify for being a resident in Poland for the tax purposes the individual shall:

a)      Have a permanent home available to him in Poland; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (center of vital interests)

b)      If the State in which he has his center of ital. interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode

c)       If he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national.

Tax benefits for corporate income in Lithuania

Dividends:

Lithuania employs the participation exemption rule pursuant to the Parent-Subsidiary Directive 2011/96/EC. Therefore, dividends are not taxed when received by the parent company from the subsidiary where the parent company holds more than 10% of the subsidiary for the last 12 months. However, these dividends can be taxed when foreign subsidiary is located in the blacklisted jurisdictions, which can be found:

 http://ec.europa.eu/taxation_customs/taxation/gen_info/good_governance_matters/lists_of_countries/index_en.htm

Therefore, when Lithuanian parent company receives dividends from the Polish subsidiary, the withholding tax on dividends in Lithuania is 0% provided that Lithuanian parent company holds more than 10% of shares in the Polish subsidiary for 12 months.

Conversely, if Polish parent company receives dividends from the Lithuanian subsidiary, the withholding tax on dividends in Poland is 0% provided that Polish parent company holds more than 10% of the shares in the Lithuanian subsidiary for 2 consecutive years.

From the perspective of participation exemption Lithuania employs less strict rules according to the Parent-Subsidiary Directive than Poland.

If the 12 months criteria is not satisfied: Pursuant to the Article 10 of Lithuanian-Polish Double Taxation Avoidance Agreement, when the Polish subsidiary as a recipient is the beneficial owner of the dividends distributed by the Lithuanian company, the withholding tax rate applied in Lithuania is 5% provided that the beneficial owner is a company (other than a partnership) which directly holds at least 25% of the capital of the Lithuanian company paying dividends.

In all other cases the tax rate amounts to 15%.

Royalties and Interest rates between Poland and Lithuania

The tax rate applied for Royalties and Interest between Poland and Lithuania is 10%. 

However, corporations may also make use of the EU Interest & Royalties Directive 2003/49/EC, which stipulates that interest and royalty payments arising in a Member State shall be exempt from any taxes imposed on those payments in that State, provided that the beneficial owner of the interest or royalties is a company of another Member State or a permanent establishment situated in another Member State of a company of a Member State.

Limitations of the Directive in relation to the “beneficial owner” are stipulated in Art.1(4):” A company of a Member State shall be treated as the beneficial owner of interest or royalties only if it receives those payments for its own benefit and not as an intermediary, such as an agent, trustee or authorized signatory, for some other person.”

Directive also accepts the notion of “associated companies” when:

1. the first company has a direct minimum holding of 25 % in the capital of the second company, or
2. the second company has a direct minimum holding of 25% in the capital of the first company, or
3. a third company has a direct minimum holding of 25% both in the capotal of the first company and in the capital of the second company.