1. The recent changes in tax legislation: risks and opportunities 9 February 2012 Alina Ulinauskienė, Tax Manager

2. 2 © 2012 Deloitte Lithuania Presentation will focus on: Binding rulings for the future transactions; Recovery of VAT from bad debts; Other amendments to the Law on VAT; Amendments to the Law on CIT with respect to : ‒ application of 5 % CIT rate; ‒ tax incentive for free economic zone’s entities; ‒ tax incentive for investment projects. Amendments to the Law on Real Estate Tax; Changes in rules on distribution of profit. The recent changes in tax legislation: risks and opportunities, 9 February 2012

3. 3 © 2012 Deloitte Lithuania Binding rulings for future transactions (1) (Article 37 1 of the Law on Tax Administration) Safety to the business with respect to correct application of tax legislation as well as more accuracy while planning the cash flows; Application could be submitted only by a tax payer or his attorney and the ruling is binding for the Tax Authorities only in respect of the tax payer who submitted the application; Tax payers may face difficulties with respect to the preparation of application due to quite strict requirements applicable. For example, the application should include: ‒ detailed description of a transaction (each fact shall be supported with the relevant documentation that shall be provided together with the application); ‒ detailed description of all circumstances important for application of tax legislation; ‒ provisions of tax legislation that in tax payer’s opinion are applicable for the future transaction; ‒ transactions related with the future transaction, other information that might be important for taxation, etc. The recent changes in tax legislation: risks and opportunities, 9 February 2012

4. 4 © 2012 Deloitte Lithuania Binding rulings for future transactions (2) (Article 37 1 of the Law on Tax Administration) Indeterminations and possible subjectivity of the tax administrator, for example: a restriction to apply with „simple“ questions; a tax administrator has a right to ask to provide additional documents / information during the indicated term „correspondent with the criteria of prudence”. However, in case the mentioned requirements are not met, the application might be rejected. Besides: to receive a binding ruling might take from 3 to 5 months or even longer if the process would be stopped due to additional documents / information requested; after the binding ruling is issued, it will be valid during the period of implementation of this transaction but not longer than the current and 5 consecutive calendar years after the date the binding ruling is issued; the ruling is binding only to the Tax Authorities, i.e. the tax payer is not obliged to implement this ruling. The recent changes in tax legislation: risks and opportunities, 9 February 2012

5. 5 © 2012 Deloitte Lithuania Recovery of VAT from bad debts (1) (Article 89 1 of the Law on VAT) In order to take this opportunity, it is required: to prove that debts (including output VAT) are bad and that the efforts were undertaken to recover these debts. However, the Government has not yet issued the rules how this requirement should be implemented. Therefore, it is not clear: ‒ whether these rules will require the same proofs as it is indicated in the Order of Minister of Finance No. 40 applicable in order to prove the badness of debts for CIT purposes; ‒ how difficult it will be to receive the required proofs in practice. to issue an accounting document by a supplier / service provider showing the amount of a bad debt and related output VAT. According to this document the purchaser is required to increase his VAT payable respectively. However, the Government has also not yet issued the rules regulating the issue of such document. The recent changes in tax legislation: risks and opportunities, 9 February 2012

6. 6 © 2012 Deloitte Lithuania Recovery of VAT from bad debts (2) (Article 89 1 of the Law on VAT) Not clear of which period VAT returns shall be adjusted when the bad debt or its part is afterwards repaid and the supplier / service provider or the purchaser is already deregistered from the VAT payers, i.e. whether VAT returns shall be adjusted: where the supplies were declared, or where the adjustment of VAT payable was declared due to recognition of the bad debts. 5 years period of statute of limitation. This possibility to decrease VAT payable is applicable to the amounts of output VAT calculated and declared starting from 1 January 2012 and only if not less than 12 months have elapsed after taxable moment of the goods supplied / services provided. The recent changes in tax legislation: risks and opportunities, 9 February 2012

7. 7 © 2012 Deloitte Lithuania Other amendments to the Law on VAT (1) (Article 19 Paragraphs 3 and 4 of the Law on VAT) application of reduced 9 % VAT rate was extended up to 31 December 2012 to thermal energy, supplied to heat the residential premises, hot water supplied to residential premises or cold water and thermal energy, consumed to prepare hot water, supplied to residential premises; application of 5 % VAT rate was extended up to 31 December 2012 to medicines and medical aid devices, when their acquisition costs are partially or fully reimbursed according to the procedures established in the Law on Health Insurance; application of reduced 9 % VAT rate was cancelled to accommodation at hotels and other special accommodation services provided according to the procedures established in the legal acts regulating tourist activities. The recent changes in tax legislation: risks and opportunities, 9 February 2012

8. 8 © 2012 Deloitte Lithuania Other amendments to the Law on VAT (2) (Article 71 Paragraph 2, Article 92 Paragraph 1, Article 66 Paragraph 2, Article 64 Paragraph 3 of the Law on VAT) threshold, from which the Lithuanian taxable person is obliged to register as a VAT payer, was increased from LTL 100,000 to LTL 155,000. Besides, it was explained that VAT shall be calculated from the total amount of transaction due to which the threshold was exceeded (instead of the part of amount which exceeds this threshold as it was calculated previously); VAT deduction is not adjusted when the goods are lost due to the reasons not depending upon the tax payer (destruction of expired goods, etc.) if that could be supported with this fact proving documentation; the requirement was cancelled to fill in the registers of purchased goods / services when goods / services are purchased from another member state or when according to the provisions of the Law on VAT a purchaser is obligated to calculate output VAT for acquired goods / services. The recent changes in tax legislation: risks and opportunities, 9 February 2012

9. 9 © 2012 Deloitte Lithuania Amendments to the Law on CIT (1) (Article 5 Paragraph 2, Article 58 Paragraph 16 Subparagraph 2 of the Law on CIT ) Income threshold has been increased from LTL 0,5 million to LTL 1 million meaning that entities which income does not exceed the above mentioned threshold shall be taxed by 5% CIT rate (except for non-profit entities or entities which average number of employees exceeds 10); list of activities carried out in free economic zone has been expanded with the following activities performed in the zone: ‒ manufacturing of aircraft, spacecraft and related equipment; ‒ maintenance and repair of aircraft and spacecraft; ‒ activities related to the maintenance and repair of aircraft (electronic and optical equipment repair, technical testing and analysis); ‒ computer programing activities, computer consulting activities; ‒ computer facilities management and other information technology and computer services activities; ‒ data processing, web servers (hosting) and related activities, call centre operations. The recent changes in tax legislation: risks and opportunities, 9 February 2012

10. 10 © 2012 Deloitte Lithuania Amendments to the Law on CIT (2) (Article 58 Paragraph 16 Subparagraph 2 of the Law on CIT ) Reminders… Free economic zone’s entity: shall not pay CIT for 6 tax periods, and shall be subject to a 50% reduction in CIT rate for 10 subsequent tax periods. This tax incentive may be applied only if: not less than 75% of income of a free economic zone’s entity for the relevant tax period comprises income from the activities in the list; capital investments amount to at least EUR 1 million; free economic zone’s entity has an auditor’s report confirming the required amount of capital investments. The recent changes in tax legislation: risks and opportunities, 9 February 2012

11. 11 © 2012 Deloitte Lithuania Amendments to the Law on CIT (3) (Article 46 1 Paragraph 5 of the Law on CIT ) Application of CIT incentive with respect to investment projects has been extended, i.e. the entities will not be obliged to restore the tax incentive applied when fixed assets are used in the course of the entities activities for less than 3 years in cases where the fixed assets: are no longer used or is transferred due to the statutory requirements, or are transferred due to reorganisation or transfer of the business to the acquiring entity, provided that the acquiring entity will use these assets till 3 years period since the first exploitation of the acquired asset elapse. Acquiring entity, which has taken over the fixed assets during the reorganisation or transfer of business, or due to the statutory requirements, may continue to reduce the taxable profit in the same way as it would have been reduced by the entity which transferred the assets and lost this opportunity. The recent changes in tax legislation: risks and opportunities, 9 February 2012

12. 12 © 2012 Deloitte Lithuania Amendments to the Law on CIT (4) (Article 2 Paragraph 12 1, Article 46 1 Paragraph 5 of the Law on CIT ) Reminders… Investment projects – investments into particular new and unused fixed asset for: production (provision) of new, additional products (services), or increase in the production (service provision) capacity, or introduction of a new process of production (provision of services), or substantial change in the existing process (part thereof), or introduction of technologies protected by international invention patents. This CIT incentive: entitles the companies to reduce the taxable profit down to 50 %; is applicable to the expenses incurred during the years 2009-2013 and could be carried forward till the year 2017. The recent changes in tax legislation: risks and opportunities, 9 February 2012

13. 13 © 2012 Deloitte Lithuania Amendments to the Law on Real Estate Tax (1) (Taxation of individuals) With the effect from 1 January 2012, material changes were introduced with respect to taxation of the Lithuanian real estate (other than land) owned or being acquired by individuals : In cases where the tax value of the pool of the Lithuanian RE owned or being acquired by a family is above non-taxable amount (LTL 1 million), the exceeding part is subject to 1% annual real estate tax; Affected real estate, which was tax exempt (unless used for economic activities or transferred for use to a legal person) - structures (buildings) owned or being acquired by individuals and intended for dwelling purposes, gardens, garages, homesteads, greenhouses, farms, subsidiary farms, science, religion, recreation, fish-farming structures and engineering structures (collectively, “RE”); Family members, whose RE is pooled: spouses, persons raising children (adopted children) alone, and their children (adopted children) under 18 residing with them. The recent changes in tax legislation: risks and opportunities, 9 February 2012

14. 14 © 2012 Deloitte Lithuania Amendments to the Law on Real Estate Tax (2) (Taxation of individuals) Subject to certain exceptions, RE pool includes RE, which is: held by an individual by the right of ownership; managed by an individual under a financial lease (leasing) agreement providing for transfer of right of ownership, under a hire-purchase contract or a lease contract (provided data on respective transaction has been entered in a public register). Tax value of RE: Set by State Enterprise “Registrų centras“ and based on the latest documents of mass valuation of RE (except for engineering structures, where recoverable value method is used); Above tax value can be challenged (once per year) and value determined by individual valuation can be accepted if it differs by more than 20% from the above tax value. Individual valuation has to be presented to State Enterprise „Registrų centras“ within 3 months as of the start of the calendar year. RE tax return has to be filed and tax to be paid by 15 December of the current year. The recent changes in tax legislation: risks and opportunities, 9 February 2012

15. 15 © 2012 Deloitte Lithuania Changes in rules on distribution of profit (1) (Amendments to the Company Law) INTERIM DIVIDENDS – a new opportunity In addition to the existing regular way of distribution of dividends after the end of financial year, possibility to distribute dividends to shareholders for a period shorter than the financial year (i.e. distribute interim dividends) is introduced as of 1 March 2012. Not applicable to distribution of dividends by banks, other credit and financial institutions, insurance and re-insurance companies, operator of regulated market, Central Securities Depository of Lithuania. Material pre-conditions for declaring of interim dividends: Financial result for the period, with respect to which interim dividends are to be declared, must be positive (there can be no losses); Company must have no outstanding obligations, with the terms of performance expiring before decision on interim dividends is made; Solvency: having paid out interim dividends, company must be able to meet its obligations for the current financial year. The recent changes in tax legislation: risks and opportunities, 9 February 2012

16. 16 © 2012 Deloitte Lithuania Changes in rules on distribution of profit (2) (Amendments to the Company Law) INTERIM DIVIDENDS – a new opportunity (contd.) Distribution of interim dividends is subject to a number of procedural requirements: Proposal by shareholders holding shares, which carry at least 1/3 of all votes (this threshold can be increased in the Articles of Association); Preparing and audit (if mandatory for annual financial statements) of interim financial statements; Obtaining opinion from other bodies of the company; Approval of interim financial statements by Shareholders’ Meeting and making (by a qualified majority of at least 2/3 of votes of attending Shareholders) of the decision on distribution of interim dividends; Filing of interim financial statements and auditor’s report with the Register of Legal Persons (within 30 days as of the decision to distribute interim dividends). The recent changes in tax legislation: risks and opportunities, 9 February 2012

17. 17 © 2012 Deloitte Lithuania Changes in rules on distribution of profit (3) (Amendments to the Company Law) INTERIM DIVIDENDS – a new opportunity (contd.) Time constraints – Shareholders’ Meeting, which is to decide on interim dividends, has to take place: Not earlier than annual financial statements are approved and decision on distribution of profit for previous financial year is made; Not later than within 3 months as of the end of the period, with respect to which interim dividends are to be declared; Not later than by the end of a current financial year; After interim dividends are declared, it is allowed to allocate interim dividends once again only after at least 3 months. Amount for distribution of interim dividends is not limited by profit made during relevant part of current financial year – distribution of profit for previous financial year is also possible (subject to certain restrictions). The recent changes in tax legislation: risks and opportunities, 9 February 2012

18. 18 © 2012 Deloitte Lithuania Changes in rules on distribution of profit (4) (Amendments to the Company Law) ANNUAL BONUSES – a new restriction As of 6 January 2012 another restriction on the amount of annual bonuses to members of Board of Directors or Supervisory Board (“Bonuses”) was introduced, whereby: Share of financial year’s profit, allocated for payment of Bonuses, must not exceed 1/3 of profit, allocated for payment of dividends; Above restriction is in addition to the existing restriction, under which the aggregate amount of Bonuses, annual bonuses to employees and similar compensations cannot exceed 1/5 of net profit for the financial year. Issue: -Favorable tax treatment of Bonuses (15% PIT / WHT; no social insurance contributions; potential tax deductibility for the company) and increased attention of the Tax Authorities – substance over form principle (employment related income or dividends). The recent changes in tax legislation: risks and opportunities, 9 February 2012

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20. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/lt/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. © 2012 Deloitte Lithuania Contacts: Alina Ulinauskienė Manager, Tax & Legal Department Deloitte Tel. +370 5 255 3008 aulinauskiene@deloittece.com