Foreign companies intending to do business in Lithuania often decide whether to establish a subsidiary or a branch? For foreign companies intending to establish a subsidiary or a branch in Lithuania, we recommend to evaluate both legal forms (establishment procedure, its complexity and duration, liability and tax issues).
In principle, the establishment procedures are quite similar. When establishing a branch, the list of documents required from the founder is wider than when establishing a subsidiary (in addition to the founder’s extract from the register of foreign legal entities and other establishment documents, annual financial statements must be submitted). Also, when establishing a branch, no authorized capital is formed, therefore there is no requirement to deposit authorized capital into an accumulation account.
After establishing a branch, the branch manager (director) is responsible for the management of the branch, whose status is comparable to the status of the company’s management body. Thus, in terms of management, the establishment of a subsidiary is a more attractive option due to the broader competences of the management bodies.
The fundamental difference between the establishment of a subsidiary and a branch is related to liability. In terms of liability, a subsidiary is a more favorable form of activity, because it is a limited liability legal entity that is liable only with its own assets and only in very exceptional cases can the recovery be directed to the shareholder (founder) of the company. Meanwhile, in a situation where the branch has certain debts or unfulfilled obligations, the person with the right of claim (creditor) would have the right to direct the recovery not only to the assets of the branch, but also to the assets of the founder.
It is important to note that when establishing a branch, both the branch and the foreign company establishing the branch are obliged to register as a taxpayer in Lithuania. In addition, the foreign company must obtain a VAT payer code in Lithuania.
Meanwhile, when establishing a subsidiary, it is automatically included in the Lithuanian Taxpayers Register, and the obligation to register as a VAT payer arises when the total amount of remuneration received (receivable) from VAT-taxable economic activity in the territory of the Republic of Lithuania in the current or previous calendar year exceeds 45 000 Eur or when the company plans to purchase goods from other Member States for more than 14 000 Eur during the previous and current calendar years, and in other cases.
The advantage of establishing a company is also manifested in the fact that if the holding company owns at least 10% of the shares for at least 12 months, dividends paid to the holding company are not taxed. Meanwhile, branches cannot pay dividends, since the branch is not a legal entity.
In summary, it could be stated that the more attractive option is to establish a subsidiary in Lithuania.