Successfully defended a client in a tax dispute

Motieka & Audzevičius tax lawyers have achieved a full annulment of the decision of tax authorities, which assessed additional corporate income tax to a Lithuanian company engaged in the international trade of rapeseed oil. Tax authorities suspected that the client has been trading in goods through an associated entity artificially inserted into the trading chain.

We succeeded in proving that the foreign associated entity is far from being artificial. We proved that it has sufficient capital, personnel and capacity to engage in the trade in question and actually did engage in it. This decision is significant since it proves that there is no prohibition to choose most desirable structure of business transactions and receiving a tax benefit is allowed as long as the structure is real and has substance.

A second claim of the tax authorities was related to the transfer pricing of interest rates charged between associated entities. We successfully proved that interest on the loans received cannot be evaluated separately from the other transactions of the client. We showed that the loans received from the foreign associated entity, with what looks like a high-interest rate, were further lent to non-associated companies in a risky jurisdiction at an even higher interest rate. Thus, both sides of the lending transactions must be examined and since the company earned a profit from the difference in rates, interest deductions should be allowed in full. This decision is significant since it indicates that even when interest rates are several times bigger than the average statistical rates they can be approved by the authorities as long as sound economic arguments are provided.

Another benefit for the client was that the tax investigation has lasted for 4 years but after our involvement 1 year ago was now terminated at the level of State tax inspectorate without a need for the client to suffer through additional 2 more years of litigation in the administrative courts.