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Taxation update

12 Jan 2015

On 1 January 2015 three new Double Taxation Treaties with Cyprus, United Arab Emirates and Turkmenistan came into force in Lithuania.

Just like other similar Double Taxation Treaties concluded with foreign countries (there are 53 similar treaties currently applicable in Lithuania), new treaties eliminate the double taxation of income received by permanent residents of Lithuania and Lithuanian entities from foreign countries, as well as the double taxation of income received by permanent residents and entities of such foreign countries from Lithuania.

All three new Double Taxation Treaties were prepared on the basis of Model Tax Convention on Income and on Capital prepared by the OECD. Perhaps only the Double Taxation Treaty between the Republic of Lithuania and the Republic of Cyprus can be discussed separately. Considering that both, Lithuania and Cyprus are EU members, particular EU and national regulation on the avoidance of double taxation were already applicable before the enforcement of the Double Taxation Treaties. For example, when a Cyprus entity is the ultimate beneficial of payable dividends and such entity owns at least 10 percent of shares granting votes in a Lithuanian entity for at least 12 months, the deep-rooted rule of respective EU and national regulation (Article 34 of the Law on Income Tax of Lithuania) is that Lithuania does not tax the payment of dividends to such Cyprus entity. A similar rule is prescribed in the Double Taxation Treaty, but the provisions of the treaty also establish that in other cases Lithuania shall have the right to apply the tax not exceeding 5 per cent of the gross amount of the dividends. 
 
It should be also noted that whereas the Republic of Lithuania and the Republic of Cyprus are EU member-states, in case of any discrepancy between the Double Taxation Treaty and respective EU regulation, the EU law shall apply. For example, the Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States provides for cases when cross-border interest and royalty payments may not be taxed. Thus in such case respective provisions of the Double Taxation Treaty between Lithuania and Cyprus, stipulating that royalties may be taxed n Lithuania and the tax so charged shall not exceed 5 per cent of the gross amount of the royalties, shall not apply.
 
In each case it is strongly advisable to seek legal or tax advice from your local experts when structuring cross-border transactions or expanding your business activities to another countries.
 

Links: 

The Convention between the Government of the Republic of Lithuania and the Government of the Republic of Cyprus for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income in English can be found here.
 
The Agreement between the Government of the Republic of Lithuania and the Government of the United Arab Emirates for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income can be found here.
 
The Agreement between the Government of the Republic of Lithuania and the Government of Turkmenistan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital can be found here.
 

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