Lithuania vs UAB Intersurgical, October 2020, Supreme Administrative Court, Case No eA-3511-968/2020

Posted on | By Courts of Lithuania
Category: MAP - APA, Royalty and License Payments, Withholding Tax (WHT) | Tag: , , , ,
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UAB Intersurgical submitted a claim for the refund of an overpayment of corporation tax amounting to EUR 377 378.

The tax overpayment arose following a mutual agreement procedure between the competent authorities of Lithuania and the UK in 2016, during which it was established that UAB Intersurgical had not paid the UK company an arm’s length royalty for the use of its intangible assets. On this basis, the UK tax authorities assessed the UK company for additional taxable income.

After reviewing the claim, the tax authorities decided not to reimburse EUR 289 688.01 of the claimed amount, but only EUR 87 689.99. According to the tax authorities, UAB Intersurgical’s claim related to the deduction of royalty payments, but it had not taken into account the liability to pay withholding tax of EUR 289 688.08 when submitting its refund claim.

UAB Intersurgical appealed to the Commission of Tax Appeals, which partially annulled the decision of the tax authorities. According to the Commission, the obligation to pay withholding tax only arises when the royalties are actually paid, whereas in this case no royalties were paid to the UK company.

The tax authorities then appealed to the Administrative Court, arguing that the outcome of the mutual agreement procedure led to an increase in UAB Intersurgical’s costs. If the increase in UAB Intersurgical’s costs is due to the recognition of the payment of royalties, the amounts of such royalties should be subject to withholding tax, even though no royalties were actually paid.

In 2019, the Administrative Court dismissed the tax authorities’ appeal as unfounded and upheld the decision of the Tax Appeals Commission.

An appeal was then lodged with the Supreme Administrative Court.

Judgment of the Court.

The Supreme Administrative Court upheld the judgment of the administrative court, and ruled in favour of UAB Intersurgical.

Excerpt in English

“29. In this respect, it should first be noted that it is apparent from the documents submitted by the defendant to the court in the mutual agreement procedure, in particular the letter of 10 March 2016 from the UK tax authority, that this UK competent authority did not consider that any royalty existed for the purposes of Article 12 of the Treaty at all. This authority used the term “royalty” only in the context of transfer pricing adjustments. This means that the mutual recognition procedure did not address the question of the applicability of Article 12 of the Treaty. Moreover, as the Commission and the Court of First Instance rightly pointed out, Article 12(2) of the Treaty would only be relevant if the taxation of a fee paid to a foreign entity is generally provided for by national tax law (in this case, the ITA).”

“34. However, taking into account the ordinary meaning of the word “actual” and the aforementioned prohibition to interpret this concept broadly, it should be considered that the moment in question is related to the fact that the Lithuanian entity has actually paid out the relevant benefits (royalties) in cash or in another form.
35. In this respect, the respondent itself indicates in its procedural documents that the applicant has not made any actual payments to the UK company. It is apparent from the documents relating to the mutual recognition procedure that the fact that no actual payments were made was maintained by the competent authorities throughout the procedure. Moreover, the fact that the UK company did not comply with the principles laid down in Article 4 of the Convention was established and the transfer pricing adjustment was made following the discovery that the applicant did not pay remuneration for the intangible assets created by the UK company for use in its activities, i.e. the UK company’s income was increased by the applicant’s actual payment of the relevant sums to the applicant. Thus, at the time of the recognition of the additional income of the UK company, the applicant had not actually made any form of payment corresponding to these amounts. It is also clear that the actual payment in the present case cannot be regarded as giving effect to Article 14(a) of the Convention, since the elimination of the double taxation of the same income merely reduced the applicant’s taxable income, but the amount corresponding to that income was not actually paid by him (the applicant) in any form.
36. In the absence of any other objective circumstances that would contradict such an assessment (Article 67(1) of the ITA), the tax administration has not indicated any other objective circumstances (Article 67(1) of the ITA), and it must be acknowledged that in the case at hand the condition of the hypothesis of Article 37 of the ITA (wording of Law No IX-675 of 20 December 2001), relating to the payment of allowances is not fulfilled. This, inter alia, also eliminates the Court’s obligation to assess separately the arguments concerning the recognition of the disputed sums and/or their classification as royalties.
37. In the light of the foregoing, the Chamber of Judges finds that the institutions which examined the tax dispute, including the court of first instance, applied the provisions of substantive law governing the disputed relations in a substantially correct manner, and that, therefore, there are no grounds for upholding the defendant’s (the central tax administration’s) appeal.”

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