Definition of a permanent establishment

For the purposes of Republic of Lithuania Law on Corporate Income Tax, a permanent establishment is a manifestation of activities of a foreign entity in the Republic of Lithuania, either in whole or in a certain territory of the country concerned. A foreign unit is considered to be carrying out economic activities in the Republic of Lithuania through a permanent establishment if:

  • it permanently carries out economic activities; or
  • it carries out economic activities through a dependent representative (agent); or
  • it uses a building site, a construction, assembly or installation object; or
  • it makes use of installations or structures for prospering or extracting natural resources, including wells or vessels used for that purpose.

Foreign units are considered to be continuously operating through a permanent establishment in the Republic of Lithuania if their economic activities meet the following two criteria:

  • the activities are not temporary; and
  • the commercial  operating cycle has been completed.

Economic activities of foreign units in the Republic of Lithuania are generally considered temporary if they last for less than six months. Foreign units are deemed to commence their activities in the Republic of Lithuania from the date of the first transaction, which is the date from which the six-month period starts to run.

A complete commercial cycle consists of three stages for foreign units:

  • Stage I consists of one or more of the following operations: marketing, including market research, distribution, advertising and other substantially similar operations;
  • Stage II consists of warehousing, providing consultancy, accepting orders, providing service and other operations;
  • Stage III consists of sale, supply, delivery, payment (remuneration), etc.

When foreign units operate in Lithuania through dependent representatives (agents), they are considered to be operating through a permanent establishment in Lithuania. A representative (natural or legal person) is considered to be dependent to a foreign unit when meeting  the following criteria:

  • acts for the benefit of the foreign unit; and
  • constantly leads to or concludes contracts; and
  • the contracts are concluded either on behalf of the foreign unit or for the sale of goods or provision of services at the disposal of the foreign unit.

Foreign units are also considered to be operating through a dependent representative (agent) if the person leads to concluding contracts and the details and circumstances provided for therein on behalf of the foreign unit. In this case, such person is deemed to have the authority to conclude contracts on behalf of the foreign unit, even though the contract itself is subsequently signed by another person, or in the country in which that foreign unit is registered. If the person acting for the benefit of the foreign unit carries out economic activity in Lithuania as an independent representative (through a person who acts within the scope of his/her usual economic and commercial activities), then the foreign unit is not deemed to have a permanent establishment in Lithuania.

The criteria for determining foreign unit activity as permanent, and criteria for determining representative agent status as dependent or independent was approved by Order No. 54 of the Minister of Finance of the Republic of Lithuania on 27 February 2002.

In determining whether the activities of foreign units create a permanent establishment in Lithuania, provisions of Article 5(1) of the international treaties for the avoidance of double taxation (only in Lithuanian) (hereinafter referred to as “TADTs”) are also used to determine whether the foreign unit activities create a permanent establishment, which consists of three essential elements:

  • the foreign unit has a place of business in Lithuania;
  • the place of business is fixed, i.e. it is established in a specific place and is of sufficient permanence; 
  • the foreign unit carries out its economic-commercial activity (or part thereof) through the fixed place of business.

The place of business of foreign unit economic-commercial activity is defined as any premises or facilities, portions of floor space of certain premises, specific geographical area, etc. The place of business does not necessarily have to be owned by the unit itself, but the unit must carry out its activities therein. The place of business may also exist when there are no premises, or when premises are not necessary for the foreign unit to carry out its activities and the foreign unit simply has certain space available to it.

When foreign units carry out construction activities in Lithuania and related supervisory or consultancy activities, a permanent establishment will only be created if the duration of such activities exceeds a period of 6 months (some TADTs provide for a period of 9 or 12 months).

The period for setting up a permanent establishment on a construction site, as defined in TADTs, starts from the date on which the contractor commences work on the site, including any preparatory work, in the State where the construction or project is to be carried out, and actually exists until the work is completed or terminated. When work is temporarily interrupted (due to the lack of material resources, staff, etc.), the duration of the interruption is counted towards the period for setting up the permanent establishment.

When foreign units use equipment or structures for purposes of research and extraction of natural resources in the territory of the Republic of Lithuania, the foreign units are deemed to carrying out their activities through a permanent establishment if such activities comply with the criteria set out in the respective TADT (i.e. they are carried out in Lithuania for the period specified in the respective TADT).