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Dear client and cooperation partner,
We would like to remind you that after shortening of the deadline for filing the annual corporate income tax return, companies whose tax year coincides with the calendar year have to file their annual tax return for the 2010 tax year before 1 June 2011. While preparing the return for the 2010 tax year, companies can for the first time use the possibility to transfer tax losses to other group companies. Since the State Tax Inspectorate under the Ministry of Finance issued an official commentary on the provision of the Law on Corporate Income Tax that regulates intra-group transfer of losses, we would like to present the requirements and possibilities for transferring losses between group companies.
Requirements for companies participating in intra-group transfer of losses
Article 56(1) of the Law on Corporate Income Tax lays down conditions for companies to be eligible for intra-group transfer of losses:
- The group parent company directly or indirectly holds at least 2/3 of shares in both companies participating in the loss transfer, and
- directly or indirectly related companies participating in the loss transfer have formed part of the same group for not less than 24 months without interruptions including the moment when the loss transfer takes place, or a company participating in the loss transfer has formed part of the group from its formation and will remain in the group for not less than 24 months without interruptions, calculated from the moment of registration of the company.
Moment when intra-group transfer of losses takes place
The moment when losses are transferred is regarded to be the date of signing the loss transfer agreement. The agreement should be signed before filing the annual corporate income tax return the losses of which are being transferred. So, if losses from the 2010 tax year are being transferred, an agreement should be concluded before 1 June 2011. If the tax years of the companies participating in the loss transfer do not coincide, the tax loss may be transferred only after the tax year of the company transferring the losses is over. As regards the entity that takes over the losses, only taxable income of the tax year that began in the tax year during which the losses accrued for the company transferring the losses may be reduced.
Since the company taking over the losses may only use those losses to offset taxable income of the tax year when the loss transfer took place, it may not carry forward those losses, while losses incurred in earlier tax years may not be transferred at all. Therefore, in practice losses may be transferred only to a profitable group company. However, the Law on Corporate Income Tax does not preclude a company from transferring part of its losses or transferring losses to several group companies.
Other requirements applicable to intra-group transfer of losses
We also draw your attention to several specific provisions related to intra-group transfer of losses:
- Losses from trade in securities or derivative financial instruments may only be used to offset taxable income from trade in securities or derivative financial instruments of the company taking over the losses.
- If losses are transferred for a consideration, such consideration is not included in the taxable income of the company transferring the losses. Consequently, consideration paid by a company taking over losses may not be deductible for tax purposes.
- A Lithuanian company may take over losses from a company resident in another EU member state only if possibilities to use or carry forward those losses were fully exhausted in that EU member state under its legislation.
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