Key tax aspects of IP rights transfers - International Law Office

Introduction
Tax-resident individuals
Non-resident individuals
Taxation of entities
Value added tax
Avoiding double taxation

Introduction

In Lithuania, intellectual property can be transferred by assignment or licence agreement, by inheritance (eg, in the case of copyright) and by other procedures prescribed by law. For example, copyright in a work (other than a computer programme) that is created by an employee in the execution of his or her duties or the fulfilment of his or her employment functions is automatically transferred to the employer for five years, unless otherwise agreed. This update reviews the tax consequences of assigning or licensing intellectual property and highlights key considerations for transferors and transferees of IP assets in Lithuania.

The tax consequences of an IP asset transfer depend primarily on:

• the nature and tax residence of the transferor;
• the form of IP right;
• the form of transfer - that is, whether the rights are sold (ie, assigned) or licensed;
• the amount of annual royalties; and
• any double tax treaty provisions that may apply between the relevant countries.

Tax-resident individuals

When individuals who are Lithuanian residents for tax purposes derive royalties from the assignment of copyright and related rights, such royalties are assessed for personal income tax and social and health insurance contributions. However, royalties derived from licensing copyright and related rights or the transfer of industrial property rights are taxed only on a personal income tax basis. The relevant rates of personal income tax and social and health insurance contribution depend mainly on whether the individual is registered as self-employed or falls within the legal category of the liberal professions.

Non-self-employed taxpayers
Copyright and related rights
Income derived from the assignment of copyright and related rights is subject to personal income tax at a rate of 15% and a social and health insurance contribution at a rate of 39.98%, 40.22%, 40.7% or 41.6%, according to the insurer's occupational health grouping.

In both cases the taxable base is equal to 100% of the royalties received under the copyright assignment agreement. However, if the taxpayer is a professional artist, a 50% base applies for the purpose of the social and health insurance contribution. For social and health insurance purposes, these rates apply where the individual is in an employment relationship, regardless of whether the employer pays the royalties.

Social and health insurance contributions are payable at a rate of 38.7% or 37.5%, depending on the insurer's occupational health grouping, if the individual who receives the royalties is not in an employment relationship with the party that pays the royalties (or any other person). The taxable base for such an individual is 50% of the royalties received under the copyright contract. However, the taxable base may not exceed €20,700 a year or €1,725 a month.

Social and health insurance contributions are not payable on an individual's income from copyright or related rights licensing agreements; therefore, it is more advantageous for tax purposes to conclude licencing agreements with authors or performers.

Personal income tax and social and health insurance contributions on the income of individuals who are not registered as self-employed must be calculated and paid by the legal person responsible for paying such income.

Industrial property rights, franchise rights and know-how
The term 'industrial property rights' generally includes patents and trademark rights, as well as design rights, topographical rights and similar rights. A 'franchise' in Lithuanian law is considered to be a business concept that is owned by the franchisor, consisting of a business system, associated know-how and a package of rights to distinctive signs related to the business. These elements are transferred to the recipient of the franchise. 'Know-how' is understood as a piece of practical information which is gained through specialised knowledge and experience (whether patented or not), and which is necessary to reproduce franchised products, perform manufacturing or commercial processes or provide services.

Individuals who are tax resident in Lithuania but are not registered as self-employed are subject to personal income tax at a rate of 15%. The personal income tax must be calculated and paid by the legal person responsible for the payment of such income.

Income derived from the transfer of industrial property rights, franchise or know-how is not subject to social and health insurance contributions.

Self-employed taxpayers
For assignments of copyright and related rights and transfers of industrial property rights, franchise and know-how, income accruing to self-employed individuals who are tax resident in Lithuania and are registered as self-employed is subject to personal income tax at a rate of 5%, provided that such individuals are not defined by law as members of the liberal professions.

In calculating his or her tax base for personal income tax purposes, a self-employed taxpayer may:

• reduce the amount of income received by 30% (with no obligation to prove the deductible expenses); or
• deduct all allowable expenses from income received, provided that the taxpayer can produce documents proving the deducted expenses (although certain limits apply for some types of expense).

Such income is also subject to social and health insurance contributions at a rate of 37.5%. The taxable base is equal to 50% of the total taxable income (before such deductions) generated from the individual's self-employment. However, the taxable base may not exceed €20,700 a year or €1,725 a month.

The personal income tax and social and health insurance contributions must be paid and the personal income tax declaration filed by May 1 the following year.

Non-resident individuals

For individuals who are not tax resident in Lithuania, income derived from the transfer of copyright and related rights, industrial property rights, franchise rights and know-how is subject to personal income tax at a rate of 15%, but is not subject to social and health insurance contributions. Double tax treaties may set lower effective rates for such income.

The personal income tax must be calculated by the legal person responsible for the payment of the income.

Taxation of entities

For Lithuanian entities or foreign entities that act through a permanent establishment in Lithuania, income derived from the assignment of copyright and related rights or the transfer of industrial property rights, franchise rights or know-how is included in the entity's taxable income and is subject to corporate income tax at 15%.

However, a 5% rate applies to the taxable profit of:

• small entities (ie, legal entities with an average workforce of 10 employees or fewer and an income in the relevant tax period of no more than €289,620); and
• entities that derive more than 50% of their total income from agricultural activities.

Income which is derived from the assignment or licensing of copyright and related rights, but is received other than through a permanent establishment in Lithuania, is subject to withholding tax at a rate of 10%. Double tax treaties may set lower effective rates for such income.

Value added tax

The transfer of copyright and related rights, industrial property rights, franchise rights or know-how is considered a provision of services and is subject to value added tax (VAT) at the standard rate of 21%.

If individuals or legal entities have derived income from their economic activities in excess of €44,927 in the preceding 12 months, they must register as VAT payers and pay accordingly.

Avoiding double taxation

Lithuania has entered into 47 double tax treaties. Although the individual provisions vary, the main principles are as follows.

IP-related royalties which a Lithuanian entity pays to a foreign natural or legal entity that is a tax resident of a foreign state and is the beneficial owner of the royalties are subject to Lithuanian tax; however, the tax charged may not exceed 10% of the royalty payment.

If a Lithuanian tax resident (whether a legal or natural person) receives royalties from a foreign entity, such royalties may be taxed in the foreign entity's home state if the foreign domestic tax laws so provide. However, if the Lithuanian tax resident in receipt of the royalties is their beneficial owner, the income tax imposed by the foreign state shall not exceed 10% of the total royalties.

Royalties derived by a Lithuanian tax resident individual who is registered as self-employed and has no permanent base in the foreign state in question may not be taxed there. However, if such an individual carries out his or her activities in a foreign state and has a permanent base there, the royalty income that is related to his or her permanent base in the foreign state is subject to the foreign state's tax laws.

If a self-employed individual is a foreign resident and is engaged in activities only in a foreign state, but receives royalties from Lithuania, the royalty income is subject to the tax laws of the foreign state. However, if a self-employed person carries out his or her activities in Lithuania and has a permanent base there, the proportion of the royalty income that relates to the permanent establishment in Lithuania is subject to Lithuanian tax.

For further information on this topic please contact Edita Ivanauskienė, Antanas Butrimas or Jurgita Randakevičiūtė at LAWIN Vilnius by telephone (+370 5 268 1888), fax (+370 5 212 5591) or email (edita.ivanauskiene@lawin.lt, antanas.butrimas@lawin.lt or jurgita.randakeviciute@lawin.lt).