The State Tax Inspectorate's update sets out how Lithuanian companies must include foreign subsidiaries' income in their tax base—automatically for entities in blacklisted territories, and via a two-part passive-income and low-tax test elsewhere—while confirming an economic substance exemption for genuine business operations abroad.
Lithuania’s State Tax Inspectorate (VMI) updated its guidance on the Law on Corporate Income Tax on 11 August 2026. The guidance details the official commentary and legal amendments regarding the taxation of positive income from controlled foreign corporations (CFCs) under Lithuanian law.
It explains that Lithuanian entities must include the income of foreign subsidiaries in their tax base, even if that income is not directly received, to prevent tax avoidance. The rules apply automatically if a subsidiary is based in a target territory or meets specific thresholds concerning passive income levels and low corporate tax rates abroad.
Inclusion of CFC income
The positive income of a CFC is included in the taxable income of the controlling Lithuanian entity on the last day of the CFC’s tax period. This inclusion is calculated in proportion to the Lithuanian entity’s share of stock, voting rights, or rights to distributable profits.
Under Lithuania’s CFC rules, income from a CFC located in a listed “target territory”- essentially a blacklisted low-tax or non-cooperative jurisdiction—is fully included in the Lithuanian parent’s tax base, covering both active and passive income with no exceptions, since these jurisdictions are presumed to pose a high tax-avoidance risk.
For CFCs established outside such territories, the rules are less automatic and instead target situations that look like artificial profit-shifting: income is taxable in Lithuania only if two conditions are both met—the CFC’s passive income (like dividends, interest, or royalties, as opposed to genuine trading income) exceeds 1/3 (33.33%) of its total income, and the actual foreign corporate tax paid is less than 50% of what would have been owed under Lithuanian rules (illustrated using the 16% Lithuanian tax rate).
Under PMĮ Article 39(3), passive income includes interest and other income from financial assets, royalties and other intellectual property income, dividends and distributed profits, capital gains from share transfers, and income from insurance and financial services. It also covers income earned by entities that purchase goods or services from related parties and resell them with little or no added economic value.
Specific threshold examples
The one-third passive income threshold: If Lithuanian company A owns 75% of Estonian subsidiary B, and B earns EUR 1,000,000 in total income for the year, but only EUR 10,000 of that is passive (interest) income, the passive income ratio falls far short of the 1/3 threshold (EUR 10,000 is well below EUR 333,333). This means the de minimis exception applies, and Lithuanian company A does not need to include B’s positive income in its tax base.
The low-tax test: If B’s passive income instead exceeds the 1/3 threshold, the next step is checking whether B is lightly taxed. This matters especially for profit-distribution tax systems like Estonia’s, where companies are taxed only when profits are distributed—so if B doesn’t distribute profits in a given period, its actual corporate tax is zero. For purposes of the low-tax test, this zero tax is compared to the Lithuanian benchmark: since zero is always less than 50% of the calculated Lithuanian tax, the test is satisfied, and B’s passive income would normally become taxable in Lithuania.
The economic substance exemption
Even if a foreign entity meets both the 1/3 passive income threshold and the low-tax test, CFC rules do not apply if the foreign entity has sufficient employees and assets to carry on genuine economic activity in its jurisdiction of establishment.
- Exclusion: This substance exemption does not apply if the CFC is registered in a listed target territory.
- Determining “sufficient” substance: There are no rigid statutory minimums for employees or assets. Instead, the tax administrator evaluates sufficiency on a case-by-case basis by looking at the nature of the business and what is objectively necessary to carry out that specific activity.
Therefore, in the Estonia example above, if the undistributed Estonian company can prove it has adequate staff and physical assets to carry out its financial operations locally, the Lithuanian controlling entity is exempt from including the Estonian entity’s positive income in its Lithuanian tax base.
