Can a farmer use the farm's money as he or she sees fit? Is he subject to the same requirements as a company manager - first pay taxes, pay debts, then "you"? Karolina Laura Briliūtė, Senior Associate at AVOCAD, answers these questions by commenting on the recent case law of the Supreme Court of Lithuania. According to her, the Court's decision is particularly important for those who own, transfer or intend to acquire a farm.
Farmer - not a legal person
Although a farmer’s farm is often regarded as a “business entity,” it is not a legal entity and cannot be considered an independent entity. In its ruling, the court emphasized that a farm is not a limited liability company (UAB), even if it has a structure, assets, and even employees. Legally, everything is managed by the farmer as a natural person. “This is a fundamental point: when there is no separate legal personality, there is no obligation for the farmer to act as the governing body of a legal entity,” notes Karolina Laura Briliūtė.
The Supreme Court noted that neither the Civil Code nor the Farmer's Farm Law creates a separate category of ownership of "farm property". Accounting is designed to record financial flows, but it does not create or limit ownership. Even if the funds are referred to in the accounts as 'farm money', they remain the personal property of the farmer.
According to AVOCAD's lawyer, the Court of Justice took a hard look at the Court of Appeal's attempt to apply business law analogies. The attempt to treat the farmer as the manager of the company, who only disposes of the funds after the "profit balance" is left, was found to be inappropriate and dangerous to the precedent. A farmer's activity is not a collective activity, but an individual activity under the Personal Income Tax Act (PITA), where all the assets generated belong to the person running the activity. The purpose of the funds - payment of taxes, fulfilment of obligations - is important, but it does not restrict the owner's right to use the property, unless otherwise stipulated in the contract.
Taxes: an obligation on the state, not on the other party to the contract
The Supreme Court has also given a detailed assessment on taxes. Although a farmer is subject to VAT and GPT on the income he receives, this does not mean that he is not entitled to use the money until he has paid these taxes. These are two separate lines of liability: one against the State (tax liability) and the other against the contractor (contractual liability). The applicant could not rely on tax arguments to recover the funds as 'misappropriated'.
The Court's position is clear: the farmer may dispose of all the funds in the farm account as his own property, unless the contract expressly provides otherwise. Unless the parties have agreed that the funds are to be used for certain payments prior to the transfer, there is no reason to believe that the farmer was obliged not to use them.
According to the lawyer, this Supreme Court ruling makes it clear that a farmer's activity, although governed by accounting rules, loses any legal personality when it comes to property rights:
- If you want to use certain farm funds specifically (e.g. to pay debts or taxes), agree this clearly and in writing - only a written agreement creates obligations on the part of the farmer in favour of the partner.
- Don't overestimate accounting terms such as "farm money" or "farm account" - these are used in accounting but do not give money a separate legal status.
- Tax law (VAT, GPT) cannot be invoked to restrict the farmer's right to dispose of his money - taxes must be paid, but the obligation to do so lies with the farmer in his relationship with the State and not with the other party to the contract.
- A farmer is not a director of a company, so the business law analogy of holding funds "outside" his control until taxes have been paid and debts settled does not apply. When a farm is transferred, the exact use of the assets, debts and money must be defined in advance - otherwise the court will consider that the farmer was free to use the money as he saw fit.