Today, the international transportation industry operates across multiple jurisdictions, which means not only broader markets but also greater tax risks. One of the most complex situations arises when different countries believe they have the right to tax the same income.
This is precisely the situation that can arise when Lithuanian transport companies post drivers to work in other European Union countries. Although the company pays taxes in Lithuania, the foreign tax authority may consider that part of the income should be taxed in the country where the work is actually performed.
In such cases, businesses may face a real risk of double taxation—when tax is levied on the same income in two countries.
Egidijus Kieras, an attorney at AVOCAD, says that such situations are not uncommon in the European transport sector. “The international transport business operates across multiple jurisdictions simultaneously, which is why there are sometimes differing interpretations of the same factual circumstances. One country may consider that employees are on a business trip, while another may consider that they are actually working within its territory and therefore their income must be taxed there,” he notes.
In which country should taxes be paid?
Such situations are governed by international double taxation treaties, which Lithuania has concluded with many countries.
Under these agreements, the general rule is that wages are taxed in the country where the employee is a resident and where the employer is established. However, there are exceptions to this rule.
If an employee is actually working in another country, that country may also have the right to tax that income. In practice, however, the so-called 183-day rule is often applied, which allows such a situation to be avoided if certain conditions are met.
Generally, income is taxed only in the employer’s country if:
- the employee works in another country for no more than 183 days per year,
- the salary is paid by an employer who is not a resident of that country,
- The salary is not paid through a permanent establishment located in that country.
In the transport sector, these conditions are often relevant because drivers regularly travel between different countries, and their working hours in a single country may be limited.
Why do disputes still arise?
In practice, problems usually arise not because of the rules themselves, but because of how they are interpreted.
Foreign tax authorities may sometimes consider that employees are actually working in their territory for an extended period of time, or that the employer is acting as a temporary staffing agency that “leases” employees to local companies.
In such a case, it can be argued that the remuneration should be taxed in that country.
According to attorney E. Kieras, it is crucial to properly assess the factual circumstances in such situations. “Tax authorities are increasingly analyzing the actual organization of work—who actually supervises the employee, where decisions are made, and where the salary is paid. If the documents and actual activities are not clearly distinguished, a dispute over tax law may arise,” says the AVOCAD attorney.
How are double taxation disputes resolved?
International treaties provide for a special mechanism for resolving such disputes—the mutual agreement procedure.
It allows tax authorities in both countries to:
- exchange information,
- to assess the facts of the case,
- to ensure that the same income is not taxed twice.
In such a case, the taxpayer contacts the tax authority of their country of residence (in Lithuania, the State Tax Inspectorate), which initiates a dialogue with the authorities of the other country. If the parties reach an agreement, the double taxation situation is resolved.
Attorney E. Kieras emphasizes that such situations can be avoided or, at the very least, the risks associated with them can be significantly reduced. The transportation sector is one of those industries where employees regularly work in several countries at the same time. Therefore, it is very important to assess tax risks in advance and maintain clear documentation that would justify in which country taxes must be paid.
According to the lawyer, in practice, many disputes with foreign tax authorities arise not because of the legal provisions themselves, but because the factual circumstances are not sufficiently well documented. “Transport companies often operate at a fast pace and prioritize efficiency, but tax authorities evaluate documents and the actual circumstances of how work is organized. If these are not clearly documented, assumptions may be made that the activity is being carried out in another country,” says the lawyer.
To reduce the risk of such disputes, the attorney advises transportation and logistics companies to pay attention to several important aspects.
Clearly document business trips and employees' hours of attendance
One of the most important issues in double taxation situations is how much time employees actually spend in a particular country.
It is particularly important to have clear data on: drivers’ work schedules, the duration of business trips, and the length of time spent in different countries.
In the transport sector, this information can often be substantiated by tachograph data, route documents, business trip orders, or other logistics documents. The clearer and more consistent this information is, the easier it is to prove that the employee did not work in a particular country for longer than permitted by double taxation agreements.
Ensure that labor relations are clearly regulated in Lithuania
Another important aspect is who is actually considered the employer. Foreign tax authorities often analyze who organizes the employee’s work, who gives instructions, and who actually receives the results of the work. If it appears that the employee is actually working for the benefit of a foreign company, it may be concluded that the employment income should be taxed in that country.
Therefore, it is important for transportation companies to ensure that the following is clearly visible:
- that the employees are employed by a Lithuanian company,
- that wages and other employment-related payments are paid specifically by Lithuanian companies,
- that work is organized and decisions are made in Lithuania.
These circumstances are often supported by employment contracts, internal documents, business trip orders, and payroll records.
Assess the risk to permanent habitats
Another important consideration is whether the company actually carries out permanent activities in another country. If activities in a particular country become permanent, if the company has representatives there or organizes work there, there is a risk of establishing a so-called permanent establishment. In such a case, part of the company’s income may be considered taxable in that country.
In the transport sector, this risk may arise, for example, when operations are consistently organized from a specific foreign country, a permanent operational center or management structure is located there, or employees effectively work exclusively in one country for an extended period of time.
Therefore, it is important for companies to regularly review their business model and ensure that it does not give rise to additional tax liabilities in other jurisdictions.
Consult with tax and legal professionals early on
Ultimately, one of the most important preventive measures is to identify risks in a timely manner. Tax regulations in the international transport sector are constantly changing, and different countries may interpret the same situations differently. Therefore, early legal and tax analysis helps avoid situations where, during an audit conducted several years later, significant additional tax payments are demanded.
According to attorney E. Kieras, experience shows that such disputes can drag on for years and pose a tax risk amounting to hundreds of thousands of euros. “It is important for transportation companies not only to comply with the rules but also to have a clear strategy for documenting their activities. This often becomes a decisive factor in disputes with foreign tax authorities,” says the attorney.
Where should you turn in the event of a dispute?
If a foreign tax authority demands payment of taxes for a period for which they have already been paid in Lithuania, the company has the right to initiate a double taxation dispute procedure.
First, one typically contacts the Lithuanian tax authority—the State Tax Inspectorate (VMI)—which, under international agreements, can initiate dialogue with the authorities of another country.
In such cases, it is important to quickly gather all the necessary documents and properly formulate a legal position. “Double taxation situations are not just a theoretical problem—they can pose a tax risk amounting to hundreds of thousands of euros. Therefore, it is important for transport companies not only to know their rights but also to actively defend them,” says attorney E. Kieras.