VMI expands guidance on foreign controlled entities and tax credits

Lithuania’s State Tax Inspectorate (VMI) has expanded its corporate income-tax commentary on controlled foreign entities and foreign tax credits. The guidance explains when income must enter a Lithuanian company’s tax base even though that company has not received it.

For the controlled-foreign-entity definition, VMI looks at whether the Lithuanian company, alone or with related persons, holds more than 50% of shares, voting rights or rights to distributable profit, or exclusive rights to acquire them, on the last day of the foreign entity’s tax period. This is distinct from the general group definition, which uses a holding of more than 25% by the parent, directly or indirectly.

For a controlled foreign entity outside a listed target territory, VMI describes two cumulative tests.VMI Passive income must exceed one third of the entity’s total income, and its actual foreign corporate tax must be less than 50% of the tax that would be calculated under Lithuanian rulesVMI. Where those tests are met, the relevant income is the passive income. The commentary lists categories including interest, royalties and income from financial services.

An economic-substance exception applies where the foreign entity has employees and uses assets to carry on actual economic activity in its state of establishment.VMI VMI explains that the sufficiency of those resources depends on the activity and the facts. The exception does not apply to entities established in target territoriesVMI; for those entities, the commentary takes both active and passive income into account.

The expanded foreign-tax-credit explanation separately limits the credit to the Lithuanian corporate tax attributable to the relevant foreign income.VMI Where income arises in several foreign states, the credit is calculated separately for each state. VMI says an unused excess cannot be carried into another tax period.VMI Supporting documents must establish the foreign income and tax paid.

The commentary identifies these revisions in letters R-2185 and R-2184 of 7 August 2026 and RTD-77 of 10 August 2026.VMI They explain the application of the existing statutory tests and the treatment of foreign income.

The legal basis is Articles 2, 4(2), 39 and 55 of the Pelno mokesčio įstatymas.