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Are VAT restrictions in Lithuania legal?

Lithuania: The Supreme Administrative Court of Lithuania (Supreme Court) has considered a case between the Tax Authority and a Swiss company (Company) in which it analyzed the Company's right to recover input value added tax (VAT) from representative expenses (e.g. seminars and marketing events).

The Tax Authority rejected the Company's claim, referring to particular restrictions from an EU Directive that are implemented in Lithuanian law. These restrictions (under certain conditions) do not allow recovery of VAT to non-EU country entities (e.g. Switzerland).

The Company did not agree with this assessment and initiated a tax dispute, asking whether Lithuania accepted that the restrictions in the directive were appropriate and whether Lithuania had implemented restrictions in national law accordingly.

The Supreme Court evaluated the Company's arguments comprehensively and stated that there were no grounds to doubt the legitimacy of national regulation,* accordingly noting that declarations between two states, signed by Lithuania, cannot be evaluated as argument denying the application of a regulation established under national law. The Supreme Court decided that Lithuania had not exceeded its authority and had properly transposed VAT restrictions for non EU entities into national law.

It should be noted that recently the Tax Authority actively controls input VAT recovery as well as performing "zero" VAT monitoring, where the supply of goods, purchase of goods and the supply of services are taxed at the 0% VAT rate. For this reason, entities executing these transactions have to perform their VAT duties with maximum care, skill and responsibility.

* According to current regulation, restrictions on recovery of VAT might apply to a claim by an entity in a non EU country entity that is not registered as a VAT payer in Lithuania for recovery of input VAT from limited expenses (e .g. representation expenses).