lithuanian Tax Authorities Scrutinize Holding Structures, Emphasizing “Economic Logic” Over Pure Tax Benefit
VILNIUS, LITHUANIA – Lithuanian businesses considering or utilizing holding company structures are facing increased scrutiny from tax authorities, who are prioritizing demonstrable economic substance over perceived tax advantages. Recent legal changes and interpretations, mirroring European Union directives, are forcing companies to justify the commercial rationale behind their holding structures or risk losing access to valuable tax benefits, especially dividend relief.
Since 2016, Lithuanian Income Tax Law has incorporated provisions from an EU Directive specifically prohibiting dividend relief when the primary purpose of a structure is tax optimization. This was further reinforced in 2018 with the introduction of a general anti-tax abuse rule, allowing authorities to disregard elements of a business structure in tax calculations.
“The main criterion in assessing whether a holding or holding structure is legitimate is economic logic and commercial content,” according to analysis of recent legal interpretations. Tax officials are increasingly focused on proving a genuine business purpose beyond simply minimizing tax liabilities.
In practice, structures are flagged as potentially “fictitious” if the holding company lacks key indicators of operational activity. These include a lack of employees, relevant qualifications, dedicated premises, active property, and a short operational lifespan – particularly if established immediately before dividend payouts with no reinvestment of those dividends.
However, authorities acknowledge that passive activity alone doesn’t automatically invalidate a holding structure.A holding company actively managing multiple companies, providing intra-group loans, or coordinating investments is considered to possess legitimate economic substance. Simply holding shares in other companies is not automatically considered fraudulent.
The Court of Justice of the European Union (CJEU) has weighed in, emphasizing a holistic assessment. Authorities must consider all circumstances, “from the aims of the Holding establishment (what circumstances have led to the creation of a group of companies) to actual activities of Holding and whether, for example, Holding to transfer to the true owner of the dividend (when the dividend is directly paid, the relief would not be applied).” Crucially, the CJEU has also clarified that it’s not just the entire holding structure that can be deemed artificial; individual transactions within the structure can also be challenged.
When Does a Holding structure Make Sense?
Experts caution that holding companies aren’t universally beneficial. For small businesses with a single activity and no plans for diversification or investment, the added complexity and cost may outweigh any potential advantages.
However, for companies engaged in multiple activities, implementing new businesses, making significant investments, or planning for future business transitions (like mergers or sales), a holding structure can be a strategic asset. It can contribute to business sustainability, facilitate growth, and unlock tax incentives related to intra-group loans and other strategic initiatives – both within Lithuania and internationally.
This increased scrutiny signals a shift towards a more substance-over-form approach to taxation in Lithuania, demanding that businesses demonstrate genuine commercial rationale for their holding structures to avoid potential challenges from the tax authorities.
