Legislation in LITHUANIA

1. General Information on Electrical Supply

Lithuania has three factors that greatly affect its energy sector. First of all, the country

currently depends greatly on Russia's primary energy sources. Secondly, Lithuania does not

have any electric interconnection with Western Europe and thirdly, the country is now

studying the complete dismantling of its nuclear power plant at Ignalina. These three facts may

play a major role in the configuration of the future of Lithuania's energy sector (EREC, 2008).

Electricity generation in Lithuania is predominantly nuclear, and the balance is covered by

thermal energy, natural gas and diesel and co-generation (electricity and heat) plants for urban

heating. Lithuania is predominantly flat, which means it has few hydroelectric resources,

however, this resource is currently being taken advantage of up to 50% of its potential, which

reaches 1,600 MW.

In 2007 around 70 per cent of the total national production of electricity was generated by the

nuclear power plant at Ignalina. Dismantling Lithuania's nuclear power plant will represent a

unique opportunity for the development of renewable energies. One of the European Union's

strategic objectives is its 2002 Energy Strategy, which aims to achieve that coverage of 12% of

the total balance of primary energy be from renewable energies by 2010.

The transportation network in Lithuania has deteriorated considerably since the fall of the

former Soviet Union and currently the country is modernising and expanding the existing

network.

2. The Regulatory Framework

Lithuania passed its current National Energy Strategy in 2002. One of the objectives of the

National Energy Strategy is to increase the use of national energy resources and renewable

energy sources following the European Union's guidelines and to reduce the import of fuels,

whilst creating new jobs and improving environmental regulations.

The European Union's Directive on the promotion of renewable energies has set objectives for

Lithuania to reach close to 23 per cent by 2020.

Since the application of the National Energy Policy of 2002, Lithuania has created many

support programmes for the different renewable energy producers. In 2008, the Lithuanian

National Commission for Price Control and Energy approved purchase rates for electricity

produced by clean energies. These rates are guaranteed until December 31, 2020. Small

hydroelectric plants have a connection rate of 7.8 cents of a Euro per/kWh for eleven years of

production. Conventional and off-shore wind power as well as from biomass sources, can

receive 8.6 cents of a Euro/kWh for 11 years (EREC, 2009).

Renewable Energy producers are exempt from special consumer taxes and the provisions of

this special consumer tax will come into effect on January 1, 2010.

Lithuania also supports renewable energy producers, guaranteeing priority in the grid for both

transmission and distribution. The country also offers a discounted grid-connection rate to

producers of renewable energies (up to 40% of the rate).

3. Taxation

Corporate Tax

All corporations are considered possible taxpayers, including single-proprietor enterprises, if

incorporated under Lithuanian Law, and the most common corporate types are joint-stock

company (AB) and closed joint-stock company (UAB).

Tax legislation distinguishes between resident and non-resident corporations, thus all

companies incorporated by Lithuanian Law may be considered to be resident enterprise. In

essence, the concept of resident or non-resident is comparable to that of a Lithuanian or non-

Lithuanian corporation, depending on its incorporation. Those enterprises considered to be

Lithuanian will pay taxes on their world-wide income, whereas those companies that are not

classified as Lithuanian shall only be taxed for income from Lithuanian sources.

The taxable base is determined by accounting results, in other words, income minus expenses,

modified by legally established provisions.

The expenses incurred during the development of the economic activity of the enterprise shall

be deductible.

Straight-line depreciation is the normal method of calculation for the depreciation of assets

and the declining balance sum-of-years' digits for new Real-estate properties, machinery and

equipment, lorries, software and acquired rights is also permitted.

Reserve funds and provisions shall not be fiscally deductible except for banks and insurance

companies.

Capital gains will be included in the tax base and reinvestment is not permitted to be used as

an exemption.

The general tax rate is 15% (formerly 24%), and a reduced rate of 13% for small companies, as

long as they comply with the legally established requirements.

As a general rule, all dividends received by a Lithuanian corporation will be taxed at 15%.

However, an exemption has been established for the withholding applied to distributed

dividends, as long as the profits that are distributed as dividends have been taxed normally in

the headquarters of the corporation that is distributing them, (whether at the 13% or 15 %

rate), if the company receiving the dividend has held more than 10% of voting stock for at least

12 months.

Interest paid by Lithuanian corporations is generally deductible, except for interest on fines or

late payment.

Fees or royalties paid for the use of patents, brands, secret formulas, copyrights, know-how

are all deductible. However, for the aforesaid, excessive payments paid in fees to the mother

company or shareholders shall be considered dividends and not be deductible.

Services received are deductible expenses. Should these services have been rendered by the

mother company, they will be considered a deductible expense corresponding to the market

value of the services received, be considered as dividends and the excess amounts shall not be

deductible.

With regards to groups of companies, according to Lithuanian legislation, it is not possible to

neither consolidate fiscally nor compensate losses with group companies.

There is a Free Port Zone in which companies incorporated there, excepting credit institutions,

will enjoy a tax grace period for the initial six years, as well as rates reduced by 50% for the

following 10 years, as long as they fulfil the legally established requirements.

The tax year is twelve months and generally coincides with the calendar year.

Non-residents

Non-resident companies in Lithuania are subject to Corporate Tax for income generated in

Lithuania.

According to internal Lithuanian legislation, a corporation is considered to have a permanent

presence in Lithuania if it carries out activities permanently in this country, if it has an agent, a

building, construction or facilities or if it uses equipment or construction for prospecting or

extraction of natural resources in Lithuania.

Income obtained by non-resident permanent establishments or by non-resident corporations

without permanent establishment in Lithuania is subject to general tax rates, paid by means of

withholding.

The tax base will consist of profits obtained in Lithuania by the non-resident corporation as

well as profits abroad attributable to the permanent establishment.

Dividends obtained by a non-resident company shall be exempt from taxation in Lithuania if

the same requirements are fulfilled as for resident corporations. Should said requirements

not be fulfilled, or the receiving corporation be located in a territory classified as a tax haven,

dividends shall be subject to withholding at a general tax rate of 15%.

Payments made by a Lithuanian company to a non-resident one as interest or fees, shall be

subject to a final 10% withholding. Capital gains shall be exempt as long as they fulfil the

requirements established in the Parent Company/Subsidiary Directive.

The Lithuanian tax regime established special regulations for transfer prices of intra-group

operations, thus the Lithuanian Tax Administration is entitled to adjustments to operations

carried out between related parties that have not been carried out according to market rates.

Different calculation methods have been established to calculate market rates and the

Administration's preferred method is that of comparable free rates. Should it not be possible

to use said method, one can choose between increased costing methods or resale prices. The

rules governing transfer pricing must be interpreted according to the comments made by the

OECD regarding it.

Currently, Lithuania has signed a total of 45 conventions to prevent international double

taxation, amongst which is one with Spain.

Indirect Taxation

The delivery of goods and rendering of services within Lithuania shall be subject to VAT,

according to internal legislation. Currently, Lithuania has implemented the EU Directive

regarding VAT. A general rate of 21% has been set.

The Property Transfer Tax and Stamp Duty are not applied in Lithuania.

EMISSIONS TRADING

Lithuania, as a signatory of the Kyoto Protocol, may benefit from the Joint Implementation

Mechanism since it is included in Annex B (the Parties included in Annex I are listed in Annex B

of the Kyoto Protocol), regulated in Article 6 of the Kyoto Protocol, which permits that a

country listed in Annex I of the Convention (developed countries and countries transitioning to

a market economy) may invest in projects aimed at reducing emissions of man-made

greenhouse gases in another country listed on Annex I. This type of project will permit a

reduction in emissions by sources and removal by sinks of all greenhouse gases.

The investing country shall obtain Emission Reduction Unit allowances (URE) which are

discounted from the emission allowance units assigned to the receiving country and in this

manner the country financing the project will earn UREs at a lesser price that what it would

have cost in the original country and the receiving country will benefit from the investment

made in it.

As a member state of the European Union, Lithuania participates in the “EU Emissions Trading

Scheme” (EU ETS), which is the main pillar of Climate Policy in the European Union. This

Scheme began in January of 2005 with an initial phase from 2005 to 2007 and a second phase

that will reach from 2008 to 2012 (this Scheme has been defined in European Directive

2003/87/EC).