Permanent establishment in Lithuania
While it is possible for foreign company to conduct business operations in Lithuania without establishing a legal person, it should be noted that such activities may create a permanent establishment (PE). Permanent establishment is a legal fiction: there is no actual legal person established in Lithuania, however a foreign company is registered in Tax Inspectorate and taxed as a Lithuanian company. Conditions under which a foreign company is treated as a permanent establishment are provided below.
Conditions which influence PE
Following the Law on Commercial income tax, a foreign company is considered a permanent establishment in Lithuania, if:
- The activities of the company are not temporary, AND
- The full cycle of commercial operations is completed.
The activities of the company are considered to be temporary if they do not exceed 6 months. The period of 6 months is counted from the day the first transaction is completed.
If a foreign company engages subcontractors to perform its’ activities, the time when subcontractors are performing the works are not included in the time of business activities of the foreign company in Lithuania, provided that the foreign company does not perform any activities by itself.
Full cycle of commercial operations are concluded of the following stages:
- First stage consists of any of the following operations: marketing, including market research, distribution, advertising, project and research work, and other similar operations. One of operations is enough to ensure completion of the first stage.
- Second stage consists of any of the following operations: warehousing, consultations, reception of orders, science research, testing, construction, and technological works, production, provision of services, and other similar operations. One of operations is enough to ensure completion of the second stage.
- Third stage consists of any of the following operations: sales, supply, delivery of goods, payment (for the goods), and other similar operations. One of operations is enough to ensure completion of the third stage.
If the activities of the foreign company are of permanent nature but the full cycle of operations is not completed, although any of the stages of the cycle of operations is an independent activity of the company, such company is still considered are permanent establishment in Lithuania. For example, is a company sells marketing materials (flyers, banners, posters, etc.) but marketing it-self is one of the independent activities of the company, such company will be considered a permanent establishment in Lithuania (even though it did not sell any of the actual marketing materials in the territory of Lithuania).
If the activities of a foreign company do not exceed 6 moths in Lithuania, such company can still be considered a permanent establishment, if:
- Such activities are by their nature temporary (or short-termed), AND
- Full cycle of business operations is completed, AND
- The place of activities is in Lithuania, AND
- Income which the foreign company made from these activities in Lithuania are all of the income of such foreign person from such activities.
- Such activities are by their nature temporary (or short-termed) and recurrent (each year), AND
- Each year full cycle of business operations is completed. In such case, foreign company will be considered as operating through a permanent establishment in Lithuania on the third year of activity in Lithuania; taxes will be counted also on the third year of activity;
- The foreign company gained more than 15 000 EUR of income from the activities in Lithuania during taxable period, except when the foreign company submits proof that the above mentioned income is less than 15% of total income of the foreign company.
A good example of economic activities which fit the above mentioned exceptions are seasonal rental services, especially if they are recurring.