Lithuania’s tax exemption for reinvested profits

The investment project incentive has been a selling point for Lithuania to attract foreign direct investment (FDI) and establish new businesses in Lithuania.

Using the investment project incentive, legal entities involved in investment projects can reduce their taxable profits by up to 100% of the actually incurred acquisition costs of fixed assets meeting certain requirements. Tax depreciation of these qualifying fixed assets is also allowed, resulting in double deduction.

In addition to the investment project incentive, Lithuania has a range of investment incentives, including those for large-scale investment projects, research and development activities and free economic zones.

Who can apply for the investment project incentive?

Legal entities carrying out investment projects are entitled to reduce their taxable profits by the amount of actual costs incurred in acquiring fixed assets directly involved in operations for at least three yearsand meeting certain requirements. From a practical perspective, investment into fixed assets leased to other businesses does not qualify for the described tax incentive as they are not regarded as directly involved in operations. Therefore, the ownership structure of newly acquired fixed assets should be considered before making investment decisions.

For the purpose of this relief, investment project refers to the entity’s investment in fixed assets intended for the production of new, additional products or the provision of services, increases in the production capacity, the introduction of a new process of production, or a substantial change in the existing process. The introduction of technologies protected by international invention patents also attracts relief.

Practical aspects of the incentive

From a practical perspective, legal entities should determine the aim and purpose of their investment before applying for the incentive. A newly established business could justify application of the investment project incentive without significant effort. Introductions of new products and services by existing legal entities should clearly qualify.  On the other hand, an increase in the production capacity normally requires provision of evidence to qualify. This evidence should be supported with certain financial data, including the increased number of clients and increased volume of produced products or supplied services. In all cases, a description of the aim and results of the investment project should be prepared.

Restrictions and requirements in place

Investment intended only for the replacement of the held fixed assets with fixed assets of an equivalent group would not be considered an investment project for the purpose of the incentive. In practice, businesses may have concerns about whether the investment project incentive could be applied when existing fixed assets are replaced by new ones.

Despite this restriction, in practice, it is possible to determine technological novelty to justify to the tax authorities that the incentive should apply to investment into the new, advanced fixed assets. Technological novelty would include improved functionalities or environment and user-friendly features of newly acquired fixed assets,

The taxable profits are reduced if fixed assets are necessary for the entity to carry out an investment project. Fixed assets are attributable to machinery and equipment, installations such as structures and wells, computers and communications equipment, software, acquired rights and goods vehicles, trailers and semi-trailers up to €300,000 of investment.

Fixed asset category classification 

As the category of fixed asset constitutes another requirement for applying the investment project incentive, legal entities should carefully classify their newly acquired fixed assets. Considering that there are no clear guidelines regarding th the attribution of fixed assets to a particular category, businesses can make reasonable decisions in this respect. For example, a developed internet platform could be treated as a software asset qualifying for the tax incentive or other intangible fixed asset where the incentive is not allowed.

The burden of proving that fixed assets are new is higher in relation to tangible fixed assets. In certain cases, both the certificate of a fixed asset, where the date of manufacture is indicated and the seller confirms that a fixed asset was not used, are required. In the case of smaller investments, confirmation by the seller stating the approximate date of manufacture and the fact of non-usage is sufficient. For intangible fixed assets, the date of creation is irrelevant and, in most cases, confirmation by the supplier is not required.

As mentioned above, a legal entity’s taxable profits may be reduced by up to 100%. If investment exceeds the amount of taxable profits calculated for a tax period, costs exceeding this amount may be carried forward to reduce the amounts of taxable profits calculated for four subsequent tax periods.

The Investment project incentive applies to costs incurred from 2009 to 2023, but at the time of writing, this incentive is expected to be extended.