Lithuania's State Tax Inspectorate (VMI) has published updated commentary on the application of Article 40(3) of the Law on Corporate Income Tax, which governs thin capitalisation. The revised guidelines, issued on 7 August 2026 under letter No. R-2183, replace the previous commentary and take effect immediately. Taxpayers and their advisers should read them carefully, because the changes clarify how loan repayments affect the debt-to-equity test and introduce explicit guidance on potential abuse.
The 4:1 ratio and why repayment timing matters
The standard thin capitalisation rule in Lithuania compares controlled borrowed capital (debt owed to a controlling party) against fixed capital (equity). Where a company's qualifying debt exceeds four times its equity on the last day of the tax period, interest on the excess is disallowed as a deduction for corporate income tax purposes.
A recurring planning question has been whether a borrower can reduce its measured debt by repaying part of a related-party loan just before the year-end measurement date and then re-borrowing shortly afterwards. The updated commentary addresses this directly. It clarifies how a loan repayment affects the ratio, and specifies the circumstances in which a repayment can properly be taken into account when measuring the debt-to-equity position.
Anti-abuse provision
The commentary goes further than mere clarification. Where a sequence of repayment and re-borrowing lacks genuine economic substance and has been structured with the purpose of artificially reducing the measured debt at the period-end, the VMI may look through the form of the transactions and assess their true economic substance. The updated text sets out when a repayment may be disregarded: in particular, where the transaction structure is inconsistent with economic logic, shows characteristics of tax avoidance, or is designed to circumvent Article 40(3). This is a meaningful development for groups that use cash-management techniques, discussed further below.
Cash pooling and controlling-person loans
The revised commentary expands its practical scope through new worked examples. These cover:
- Loan repayment and re-borrowing — illustrating how a sequence of transactions is evaluated against the anti-abuse framework.
- Cash pool financing — the commentary now explicitly addresses group treasury cash-pooling arrangements ("cash pool" systems). These arrangements can give rise to fluctuating intra-group balances that have to be assessed under the thin capitalisation rules, and the guidance sets out how to treat them.
- Loans from controlling persons — additional explanation is provided on assessing loans made by parties that qualify as controlling persons under the Act.
In each area, the commentary is supplemented with concrete examples, which provide a degree of certainty for groups structuring their financing through Lithuania.
Editorial and technical updates
Beyond the substantive changes, the VMI has updated currency references, dates, legislative cross-references, and other technical formulations to reflect current law and practice.
Retroactive application
The VMI has indicated that, because the revised commentary represents a more taxpayer-favourable interpretation of the thin capitalisation rules, it may be applied to earlier tax periods for which the time limits for assessment, filing, or audit have not yet expired. Taxpayers who have taken a more conservative position in prior returns may wish to consider whether the new guidance opens the door to an amended filing.
The full updated commentary is available on the VMI corporate income tax portal at https://www.vmi.lt/evmi/pelno-mokestis.