VMI clarifies when loan repayments reduce thin-capitalisation debt

Lithuania’s State Tax Inspectorate (VMI) has clarified how loan repayments affect the debt used in the thin-capitalisation test. Genuine repayments can reduce the relevant borrowingVMI, while a repayment followed by renewed borrowing can be disregarded where the arrangement lacks economic substance and is designed to reduce debt at the end of the tax period.

The commentary applies the 4:1 ratio between borrowing from a controlling lender and fixed capitalVMI. Fixed capital is calculated on the last day of the tax periodE TAR and excludes that period’s financial result. The part of the relevant borrowing above the ratio is controlled borrowed capital, and interest attributable to that excess is generally not deductible in calculating taxable profitVMI. The rule has exceptions where the borrower proves that an unrelated lender would have made the same loan on the same terms, and for financial institutions providing finance leasesE TAR.

VMI’s revised examples distinguish repayment without tax-avoidance features from a short-lived reduction followed by renewed borrowing from the same lender. In the latter case, if the purpose is to reduce the amount measured at the end of the tax period, the debt can be treated as having remained outstandingVMI. The commentary also warns that financing driven by abuse or a tax advantage rather than economic or commercial purposes can lead to interest being disallowed even where the 4:1 ratio is not exceededVMI.

Group cash pools receive an explicit example. Where a group finance centre administers the pool but the actual funding comes from a shareholder that controls the Lithuanian borrower, VMI treats the financing as a loan from a controlling lenderVMI. Routing funds through the pool therefore does not, by itself, change that classification when the underlying source of the money is establishedVMI.

VMI says its more favourable interpretation of the thin-capitalisation rule can also be applied to earlier tax periods for which the time limits for calculating, declaring and checking tax obligations have not expiredVMI. Its announcement identifies the revision in letter R-2183 of 7 August 2026VMI.

The legal basis is Article 40(3) of the Pelno mokesčio įstatymasVMI and the income or payment recharacterisation rules approved by Government Resolution No. 1575VMI.