What businesses need to know about tax losses: 10 key rules
What businesses need to know about tax losses: 10 key rules
Based on its experience in resolving disputes, the Tax Disputes Commission presents the mistakes businesses make when recognizing losses and offers advice on how to avoid them. In Lithuania, approximately 43,000 businesses, or 28% of all registered companies, declared tax losses for 2021, which occur when allowable deductions exceed income. When businesses calculate losses by applying the provisions of the Income Tax Act (hereinafter referred to as the ITA)[1], questions arise regarding the recognition and carry-forward of tax losses. In recent years, there have been several tax disputes that have essentially dealt with this issue.
Commission member Jurgita Narkevičiūtė presents the most important rules for recognizing tax losses and advice related to the recognition of operating losses.
Rule number one: different rules apply to different types of losses. Accordingly, losses are divided into three groups:
1) operating losses from the transfer of securities and derivative financial instruments; 2) operating losses of an entity; 3) losses incurred from the use of assets (calculated according to the formula set out in Article 5(9) of the Income Tax Act).
Second rule. If a taxpayer calculates taxable income, tax losses from previous years may be classified as deductible expenses, provided that the same activity that gave rise to these losses is continued. However, if the taxpayer no longer continues the activity that gave rise to these losses, the transfer of losses is discontinued (except in cases where the activity is discontinued for reasons beyond the taxpayer's control). Operating profit is offset only by operating losses.
Third rule. The obligation to prove the amount of the loss lies with the taxpayer who uses it.
Fourth rule to keep in mind: the operating losses of an entity are not just a derivative figure indicated in the income tax return. Since operating losses can be carried forward indefinitely, the taxpayer must also keep the primary accounting documents (which gave rise to the losses) until all losses have been carried forward. In this case, the statute of limitations for tax calculation established in Article 68 of the Tax Administration Law does not apply to the storage of documents
(for more details, see the ruling of the Extended Panel of Judges of the Supreme Administrative Court of Lithuania (hereinafter – LVAT) of 6 April 2022 in administrative case No. eA-158-575/2022).
Rule 5. When taking over the operating losses of another entity, the taxpayer must verify that the amount of the losses is realistic. Particular attention should be paid to this when losses are transferred in cases of reorganization, transfer, or restructuring of entities (Articles 41, 43, and 45 of the Income Tax Act) or when the taxpayer decides to exercise the right to transfer tax losses between entities within a group of entities (Article 56-1 of the Income Tax Act). For example, in its ruling of 31 July 2019 in administrative case No. eA-1607-575/2019, the Supreme Administrative Court of Lithuania stated that a systematic interpretation of Articles 43(1), Article 11(1) and Article 17 of the Income Tax Act, it is clear that before deciding on the ability or inability of an economic entity to take over tax losses, the reality of the losses incurred must be assessed.
Sixth rule. If tax losses from operations are incurred for more than one tax year, the losses from the previous tax period are carried forward first, applying the principle that the earliest losses are carried forward first.
Rule 7. A taxpayer may transfer tax losses calculated in accordance with the provisions of Article 56-1 of the Income Tax Act to another entity in the group (for example, a parent company may transfer them to a subsidiary) if two conditions are met on the date of the transfer of losses: the first condition: on the date of transfer of losses, the parent entity in the group of entities directly or indirectly controls at least 2/3 (or at least 66.67%) of the shares (shares, units) or other rights to a share of distributable profits (first condition) and second condition: the entities in that group have been in existence for at least two years without interruption prior to the date of transfer of losses, or the losses are transferred or assumed by an entity (units) that has been in that group since the date of its (their) registration and will remain in the group of units without interruption for at least two years from the date of its (their) registration. In cases of this nature, the reference point is considered to be the situation of taxpayers on the date of transfer of losses (for example, see the decision of the Supreme Administrative Court of Lithuania of 5 October 2017 in administrative case No. A-204-602/2017).
Rule 8. Lithuanian companies may transfer or take over not only "Lithuanian" losses, but also losses of a group entity located in another EU country. If you decide to take over such operating losses, you may have to provide the tax administrator with additional evidence of the reality and validity of the losses and have the aforementioned documents translated into Lithuanian. Until the tax disputes on this issue are resolved, we recommend obtaining a written opinion or a binding decision from the tax administrator in advance in such cases, in accordance with the procedure laid down in Article 37-1 of the Tax Administration Act. However, it should be recognised that the tax administrator's requirement, as far as can be assessed in an individual case, must not exceed an impossible administrative burden or time costs, i.e., it must be realistically implementable. According to information published in 2021 by the Organisation for Economic Co-operation and Development (OECD), 15 of the 27 European Union Member States allow companies to carry forward their operating losses for an unlimited number of years (e.g., Germany, Spain, France, Lithuania). Luxembourg has a 17-year limit, Portugal has a 12-year limit, while the Czech Republic, Greece, Hungary, and others have limited the period to five years.
Rule 9. In practice, there have been cases where disputes over the approval of losses have not been classified as tax disputes (for example, see the Supreme Administrative Court of Lithuania ruling of 24 March 2021 in administrative case No. eA-2385-442/2020). We recommend consulting with the Commission before filing a complaint.
Rule 10. Sometimes the taxpayer's actions related to their efforts to clarify the issue of tax loss recognition also have an impact on the outcome of the tax dispute (for example, see the ruling of the Extended Panel of Judges of the Supreme Administrative Court of Lithuania of 22 June 2022 in administrative case No. eA-10-442/2022).
[1] If, in a tax year, the taxable income minus the allowable deductions results in a loss for the tax period, the amount of this loss may be carried forward to other tax years (the rules and restrictions set out in Article 30 of the Income Tax Act apply). Article 11 of the Income Tax Act establishes the rules for calculating taxable income: when calculating taxable income, non-taxable income, allowable deductions, and limited allowable deductions are deducted from income. One of the types of limited allowable deductions is losses for the tax period (Article 17(2)(12) of the Income Tax Act).
Last updated: 21-11-2025
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