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Costs incurred due to asset replacement with analogical asset do not count as investment project

Lithuania: The Supreme Administrative Court of Lithuania (Supreme Court) has considered a case between the Tax Authority and a Lithuanian company (Company) in which it analyzed whether a Company could reduce taxable gain by costs incurred in an investment project*.

The Tax Authority in clarifying the substance of a tax incentive took the position that the terms of an incentive cannot be interpreted expansively, i. e. as the Company itself understands such terms. The Supreme Court agreed with the Tax Authority's position, additionally indicating that if costs incurred do not satisfy the terms for the tax incentive in the Corporate Income Tax Law (CIT) and if there is no obvious relation between costs incurred and the provisions of the investment project, the Company cannot implement the tax incentive. The Supreme Court also noted that costs incurred due to asset replacement with an analogical asset are not considered as an investment project. The Company's claim was rejected; the Supreme Court's decision is final and not open to appeal.

All entities that have already incurred or are planning to incur costs on an investment project should carefully evaluate whether these costs satisfy the criteria for an investment project and whether those criteria are understood in the strict sense.

* An investment project is a tax incentive for investment in new technologies and other assets listed in the CIT, allowing reduction of an entity's taxable gain up to 50% due to costs incurred.