VMI has updated guidance on foreign tax credits, clarifying eligibility conditions, deduction limits and documentation requirements under Article 55 of the Law on corporate income tax.
Lithuania’s State Tax Inspectorate (VMI) has updated its official commentary on the Law on Corporate Income Tax, clarifying how corporate income tax or an equivalent tax paid abroad can be deducted from Lithuanian corporate income tax.
The guidance, published on 21 August 2026, sets out eligibility conditions and limits for the foreign tax credit.
The update explains that the mechanism applies where the same foreign-source income is taxed in Lithuania and abroad, subject to the applicable requirements. It also clarifies calculation rules, country-specific limits and documentation requirements for taxpayers claiming the deduction.
Foreign tax credit mechanism
The updated commentary explains that the mechanism is designed to prevent international double taxation where the income of a Lithuanian entity is taxed both in Lithuania and in a foreign state.
Under the rules, corporate income tax or an equivalent tax paid abroad may be deducted from the Lithuanian corporate income tax payable, provided the relevant requirements are met.
The deduction does not apply where double taxation is eliminated through the exemption method. This includes income earned through permanent establishments (PEs) in European Economic Area (EEA) states or countries with which Lithuania has an active Double Taxation Avoidance Agreement (DTA/DAIS), where the exemption method applies.
The deduction also does not apply to dividends that are already excluded from the Lithuanian unit’s taxable income.
Conditions for claiming the deduction
The foreign income must originate in the relevant foreign country. This may include income paid by a foreign entity or resident, income earned through a PE in a non-EEA or non-DTA country, and income from renting or selling real estate located abroad.
The income must also be included in the Lithuanian entity’s tax base for the same tax period in which it is received or earned.
In addition, the foreign tax must be a corporate income tax or a tax equivalent to it. The guidance includes withholding tax on interest or royalties among taxes that may qualify. Other foreign levies calculated on income, such as road taxes, turnover taxes or contributions to disaster reserves, do not qualify.
Payment of the foreign tax must be confirmed by the tax administrator of the foreign country.
Calculation and deduction limits
The maximum deductible amount is restricted to the portion of Lithuanian corporate income tax that is attributable to the foreign-source income.
The calculation is based on the adjusted Lithuanian tax base and the proportion of foreign-sourced income to total income. The relevant calculations exclude positive income (CFC income), unauthorised support/donations and exempt PE income from EEA/DTA countries.
Where a Lithuanian company receives income from several foreign states, the foreign tax deduction must be calculated separately for each country. The total deductible amount is the sum of the applicable country-specific limits.
For countries with which Lithuania has an active DTA, the deduction limit must be determined separately for each specific type of income received from that country.
Any foreign tax paid above the applicable Lithuanian tax limit cannot be carried forward to another tax period.
Withholding taxes on dividends under a DTA are not deducted under Article 55. They are dealt with separately under Article 35 of the PMĮ.
Rules for CFC positive income
The updated commentary also addresses foreign taxes paid on CFC positive income. Lithuanian parent companies may deduct foreign taxes paid on CFC positive income under PMĮ Article 39(11) and (12). The calculation is carried out separately and is not combined with the standard corporate income tax calculation under Article 55.
Taxpayers seeking this deduction must provide documentation for each CFC, including financial statements such as the balance sheet and P&L, a list of managers and relevant tax certificates.
Documentation requirements
To claim the foreign tax deduction, taxpayers must obtain documents certified by the foreign tax administrator confirming the income earned and tax paid.
For PEs, the certificate must include the taxpayer ID in the foreign country, the PE name, income amount, tax amount, tax name and tax period.
For non-PE income or withholding tax, the documentation must state the recipient’s name, income amount, tax amount, tax name and date or period.
The certified documents must be submitted with the annual corporate income tax return. If the required documents are not available when the return is filed, the deduction cannot initially be claimed. Once the documentation is obtained, the taxpayer may submit an amended tax return and request a recalculation and refund.
Taxpayers must also submit a free-form application identifying the original name of the foreign tax, the legal act establishing the tax, its date and reference number. The State Tax Inspectorate may additionally request a complete copy of the relevant foreign law together with its Lithuanian translation.
The updated commentary therefore sets out the eligibility requirements, calculation methodology and supporting documentation for Lithuanian entities seeking relief for qualifying foreign taxes under Article 55 of the PMĮ.
