Lithuania's tax authority has clarified how the 4:1 thin capitalisation ratio applies to controlled debt from controlling lenders, setting out anti-abuse measures, exemptions and the treatment of profit-linked interest and lease payments.
Lithuania’s State Tax Inspectorate under the Ministry of Finance (VMI) has updated its commentary on the Law on Corporate Income Tax, providing further clarification on Thin Capitalisation rules, controlled debt and the treatment of financing involving controlling lenders and related parties.
The updated commentary published on 10 August 2026, also addresses anti-abuse provisions, cash pool arrangements, exemptions and the treatment of performance-linked interest and lease payments.
The core thin capitalization rule
- The 4:1 ratio: A Lithuanian entity must assess the ratio between its controlled debt capital and fixed capital (equity) on the last day of each tax period.
- Tax consequences of excess: Any portion of interest-bearing debt from controlling lenders that causes this ratio to exceed 4:1 is classified as controlled debt capital.
- Non-deductibility: Interest expenses and realised foreign currency exchange losses computed on this exceeding portion are treated as non-deductible expenses (not related to earning income) for corporate income tax purposes.
- Withholding tax: These interest payments remain subject to withholding tax at source (WHT) under the PMĮ and the Law on Personal Income Tax (GPMĮ), regardless of whether they are recharacterized under the thin capitalisation rules.
Key definitions under the guidelines
- Controlled lender
A domestic or foreign entity or resident is considered a controlling lender if, on the last day of the Lithuanian entity’s tax period, they:
- Directly or indirectly hold more than 50% of the shares, parts, or voting rights of the Lithuanian entity.
- Hold, together with related parties, more than 50% of the shares/voting rights, provided their individual holding is at least 10%.
- Belong to the same corporate group as the Lithuanian entity.
- Are close relatives (spouse, fiancé, cohabitant, or relatives up to the first degree) of a controlling resident and have provided interest-bearing debt.
- Fixed capital
This is the equity capital of the Lithuanian entity calculated on the last day of the tax period, but it excludes:
- The financial result (profit or loss before tax) of that specific tax tax period.
- The revaluation surplus of assets transferred to the entity by the controlling lender, if those assets have been used by the Lithuanian entity for less than two years.
- Note: Specific equity valuation rules apply to individual enterprises and partnerships that do not keep accounts as limited liability entities.
- Controlled debt capital for consideration
The guidelines define controlled debt to include:
- All interest-bearing debt capital received directly from controlling lenders.
- Convertible bonds issued by the Lithuanian entity and acquired by controlling lenders.
- Loans received from third parties that are guaranteed by controlling lenders.
- Loans from third parties where the controlling lender has simultaneously guaranteed a loan of equivalent value back to that third party (back-to-back structures).
- Securities Exception: Third-party loans secured by other means—such as a mortgage or asset pledge—that do not involve a controlling lender’s guarantee/suretyship are excluded from controlled debt capital.
Anti-abuse and substance-over-form provisions
- Abusive repayments: Generally, debt principal repaid during the tax period is excluded from year-end calculations. However, if an entity repays a loan right before the end of the tax period (e.g., December 31) to artificially meet the 4:1 ratio, and then re-borrows the same or similar amount shortly into the next tax period (e.g., January 2) without economic substance, the repayment is ignored for tax calculation purposes.
- Cash pool arrangements: When an entity receives funding through a group cash pool administered by a group financial center, the loan is treated as controlled debt capital if the ultimate source of the funding is identified as a controlling group member.
- Pro-rata apportionment across multiple loans: If an entity has multiple loans with different interest rates from one or more controlling lenders and exceeds the 4:1 threshold, the non-deductible interest must be calculated proportionally across all loans, irrespective of their chronological issue sequence.
Safe harbors and exemptions
The thin capitalisation rules do not apply if:
- Arm’s length proof: The Lithuanian entity can prove that an identical loan would have been granted under the exact same conditions (amount, duration, collateral, interest rate, repayment terms, etc.) between independent, unrelated parties.
- Evidence: Written lending term letters from banks specifically addressing the company can serve as viable proof.
- Financial leasing: The rules do not apply to financial institutions providing financial leasing (lizingas) services.
Recharacterization of performance-linked payments
Separately from the standard 4:1 ratio, any interest or lease payments paid to a controlling person that are tied to the Lithuanian entity’s profits, revenues, or other performance criteria (such as turnover) are automatically treated as non-deductible expenses for corporate tax purposes.
Earlier, the Lithuanian State Tax Inspectorate (STI) opened a public consultation on 13 July 2026 on draft guides for transfer pricing documentation and establishing the arm’s length range.
