When a shareholder grants a loan to a company, the tax consequences arise in the following cases:
1. The company may include interest paid in allowable deductions if the interest rate corresponds to market interest. If the amount of interest paid exceeds the interest available on the market, the excess will not be considered as a allowable deduction.
In order to prove the market interest rate, it is necessary to prove the interest that a particular company can borrow on the market from an unrelated person. Therefore, we recommend that you have documentation of the loan transaction with the shareholder that would justify the compliance of the applied interest rate with the interest in the market (for example, offers of commercial banks to the company to conclude a loan agreement).
2. If the amount borrowed exceeds the company’s equity * more than 4 times, the tax administrator may recognize the interest paid on the excess as a not allowable deduction and tax it as dividends if both of the following conditions are met:
a) The interest rate is higher than the market interest rate;
b) The shareholder (lender) controls ** the company on the last day of the tax period.
3. Interest paid to a natural person shareholder (both a resident of Lithuania and a foreigner) shall be taxed in Lithuania at the rate of 15% of personal income tax.
4. Interest paid to a Lithuanian legal entity is taxed at the applicable corporate income tax rate (15% or 5%).
5. Interest paid to a legal person registered in a state of the European Economic Area or in a state with which Lithuania has concluded a double taxation agreement is not taxable.
6. Interest paid to a legal person that is not registered in a state of the European Economic Area or in a state with which a double taxation agreement has been concluded shall be taxed at the rate of 10%.
7. A natural person shareholder may lend to the company without interest. In this case, there are no tax consequences for either the shareholder or the company.
* The ratio of borrowed amount to equity is calculated on the last day of the tax period (excluding the result of that tax period).
** A shareholder is considered to control a company if he directly or indirectly owns more than 50% of the shares or together with related parties holds more than 50% of the shares and the shareholder himself owns at least 10% of the shares.
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