In October 2020 Lithuania has adopted amendments to the national rules on transfer pricing:
- A mark-up of 5 % is allowed for low value-adding services;
- The rules introduce the concept of “hard to value intangibles“ and exceptions for price adjustments of these assets;
- The new set of rules on profit split method application;
- Transfer pricing documentation is no longer required when transactions are performed solely with other Lithuanian taxpayers and are related to the activities carried out in Lithuania.
Low value-adding intra-group services
Low value-adding servives are defined as personnel management (HR), IT application and support, accounting, audit, legal, technical assistance and other similar administrative, supportive, ancillary services that are provided by one or more than one member of an MNE group to other associated company (-ies) and have all of the following characteristics:
- are not part of the core business of the MNE group (although the provision of such services may be a principal activity of the services provider);
- are of a supportive nature;
- do not require the use of unique and valuable intangibles and do not lead to the creation of unique and valuable intangibles;
- do not involve the assumption or control of substantial or significant risk by the service provider and do not give rise to the creation of significant risk for the service provider.
If the conditions of the concept of low value-adding services are met, no comparability analysis is required, but the requirement to prepare other parts of the documentation remains.
Exception: It should be noted that the rule on the 5 % mark-up cannot be applied when the company has internal comparable data, i. e. services are also provided to non-associated parties or are also acquired from non-associated parties.
The provisions of these rules apply for the calculation of corporate income tax for 2020 and subsequent years.
The concept of hard to value intangibles
The Transfer pricing rules establish that the concept of hard to value intangibles. The concept covers intangibles, the value of which at the time of transfer of these assets or rights to them is difficult to determine for the following reasons:
- no reliable comparable exists;
- at the time the transaction was entered into, the projections of future cash flows or income expected to be derived from the transferred intangible, or the assumptions used in valuing the intangible are highly uncertain, making it difficult to predict the level of ultimate success (profitability) of the intangibles at the time of the transfer.
The taxpayer may need to inform the State Tax Inspectorate about the transaction and related calculations performed when transferring hard to value intangibles. The rules provide the tax administrator with the possibility to adjust the price of hard to value intangibles existing at the time of the transaction (ex ante) using the information obtained after the conclusion of such transaction (ex post). The adjustments can only be avoided if the taxpayer meets the conditions set out in the Transfer pricing rules and provide the relevant evidence.
These provisions came into force on October 23, 2020.
No obligation to prepare transfer pricing documentation if transactions are performed only with other Lithuanian taxpayers
Associated persons are no longer obliged to prepare trasfer pricing documentation for the intra-group transactions if such transactions are concluded between Liithuanian taxpayers and are related to the activities carried out in Lithuania.
The requirement to prepare transfer prcing documentation also does not apply in cases where the value of the transaction exceeds the threshold of €90 k and regardless of the fact that the company’s annual revenue exceeds € 3 M or the company belongs to a multinational group which annual income exceeds € 15 M.
The above exemption does not mean that the arm’s length principle can be ignored: Lithuanian entities are still obliged to sell goods or provide services to each other under the arm’s length principle but will not be held resposible for the non-preparation of transfer pricing documentation.
This exemption takes effect for the calculation of corporate income tax for 2020 and subsequent years.
The application of profit split method
According to the Transfer pricing rules, the profit split method can be considered as the most appropriate method if other transfer pricing methods are insufficient and there is at least one of the following conditions:
- Each party makes unique and valuable contributions;
- The business operations are highly integrated such that the contributions of the parties cannot be reliably evaluated in isolation from each other;
- The parties share the assumption of economically significant risks, or separately assume closely related risks.
It is stipulated that the net profit of controlled transactions must be distributed, the gross profit may be distributed only in exceptional cases. The split criteria must be reliably assessed.
The Transfer pricing rules provide two appraches for applying the profit split method:
- Contribution analysis. An analysis used in the profit split method under which the combined profits from controlled transactions are divided between the associated enterprises based upon the relative value of the functions performed (the contribution is assesed based on external market data that indicate how independent enterprises would have divided profits in similar circumstances or, in absence of such data, based on the functional analysis). Under the latter contribution, the ratio at which the profits should be shared between the counterparties is calculated and finally the net profits are attributed to a specific taxpayer).
- Residual analysis. A residual analysis divides the combined profits from the controlled transactions under examination in two stages. In the first stage, each participant is allocated an arm’s length remuneration for its non-unique contributions in relation to the controlled transactions in which it is engaged. Ordinarily this initial remuneration would be determined by applying one of the traditional transaction methods or a transactional net margin method, by reference to the remuneration of comparable transactions between independent enterprises. In the second stage, any residual profit remaining after the first stage division would be allocated among the parties based on an analysis of the facts and circumstances, following the same guidance for contribution analysis.
The transfer pricing rules state that in applying the profit-sharing method, it is important to follow the information available to parties at the time of execution or pricing of the transaction, and to take into account parties’ projections of future transaction costs and expected profits at the time of the transaction, same as it would be done by non-related parties, except when transactions involve hard to value intangibles or the rights to hard to value intangibles.
The above provisions apply for the calculation of corporate income tax for 2021 and subsequent years.