The Lithuanian Central Bank has approved the idea of the system. According to Marius Jurgilas, board member of the bank, the regulator is now working on LBChain blockchain solutions that will support the financial technology sector.

The emergence of LBChain will be one step towards a larger goal – the creation of the LTChain system, which will enable the transfer of important social services to blockchain technology.

According to analysts at Invest Lithuania, such an opportunity would attract companies from the United States, Israel and Singapore, as well as other non-EU residents.

“Fintech companies can already obtain a Payment Institution or Electronic Money Institution license in Lithuania in 3 months – the fastest period among EU countries,” notes Mantas Katinas, Managing Director of Invest Lithuania.

The new blockchain system will also be used by small and large companies that list their shares on stock exchanges. Such companies, according to Lithuanian law, will be treated as legal entities. Filing financial statements and paying taxes will be mandatory conditions for conducting business in the jurisdiction.

If the necessary changes to the legal framework are made, organizations from all over the world will be able to register virtual companies in Lithuania in 2019.

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This regime entered into force on July 1, 2017 and generally reflects the “arm’s length principle” (en: “arm’s length principle”) established by the Organization for Economic Cooperation and Development (OECD) Recommendations on TPAs.

According to the OECD recommendations and the OECD Model Tax Convention on Income and Capital Taxes, affiliated enterprises will be considered as such if:

An enterprise of one Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State; or
the same persons participate directly or indirectly in the management, control or ownership of an enterprise of a Contracting State and an enterprise of the other Contracting State,
The OECD Recommendations and the national legislation of Cyprus do not set a threshold at which control and/or participation begins.

The Circular requires a comparability analysis on an arm’s length basis to determine (“delineating”) an intra-group financial transaction and to determine the applicable market remuneration thereunder. Note the comparability analysis requirements for (1) capital adequacy and (2) a sufficient level of presence in Cyprus in relation to intra-group financial transactions.

The Circular deals with the tax treatment of Cyprus tax residents and permanent establishments located in Cyprus which carry out intra-group financial transactions, including activities involving loans or cash advances to related companies, which involve interest payments and are financed by funds and instruments such as debentures, private loans, cash advances, etc.

The Circular clarifies that according to the Cyprus Income Tax Law (en: The Income Tax Law) Art. 33 the remuneration for intra-group financial transactions should correspond to the arm’s length principle and the price which would have been agreed upon by the independent parties in a comparable transaction executed in the market under similar conditions.

The European Union Directive (EU) 2017/828 amending the European Union Directive 2007/36/EC “on the exercise of certain shareholder rights in companies whose shares are admitted to organized trading” introduces the definition of affiliated parties (en: “related parties”). The EU Directive in this case contains a reference rule to the International Financial Reporting Standards.

According to International Financial Reporting Standard (IAS) 24 “Related Party Disclosures”, a related party is:

An individual or a company related to the entity making its financial statements:

A private person or a close family member of that private person is a related party of the reporting entity if that person:

1. Exercises control or joint control over the reporting entity;
2. Has significant influence over the reporting entity; or
3. Is a member of the key management personnel of the reporting entity or its parent.

A company is a related party of a reporting entity if any of the following conditions apply:

1. This company and the reporting company are members of the same group (this means that all parent and all subsidiaries of the same controlling party are related).
2. One company is an associate or joint venture of another company (or one company is an associate or joint venture of a member of the group to which the other company belongs).
3. Both societies are joint ventures of the same third party.
4. One company is a joint venture of a third party and the other company is an associate of that third party.
5. The company is controlled or jointly controlled by the person referred to in subparagraph (a).
6. The person referred to in subparagraph (1) has significant influence over the company or is a member of the key management personnel of the company (or its parent company).
7. The company, or any member of the group of which it is a part, provides key management personnel services of the reporting company to the other company or its parent company.

Under this standard, however, the following societies are not affiliated parties:

1. Two companies, just because they share a director or other member of the key management personnel, or because a member of the key management personnel of one company has significant influence over the other company;
2. Two participants in a joint venture only because they exercise joint control over the joint venture;
3. An individual customer, supplier, franchisor, distributor, or general agent with whom the company does significant business only because of the resulting economic dependence.

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