Companies established in North Macedonia and tax residents are required to pay corporate tax. Non-residents should pay corporate income tax only for the part of the income which is attributable to the activity of their permanent business establishment in North Macedonia and on certain types of income deemed generated in North Macedonia (i.e. withholding taxes and taxation of permanent business establishment).
Tax rate and tax base
Under the currently applicable CIT Law, Macedonia has a flat corporate income tax rate of 10%, which is one of the lowest in Europe. The tax base is the profit declared in the annual tax balance sheet. The profit is calculated as the difference between the expressed total revenues and the total expenditures of the taxpayer in the amounts determined in accordance with the accounting regulations and accounting standards. The accounting standards in Macedonia are compliant with the International Accounting Standards (IAS).
The tax base for corporate income tax was amended with the introduction of the new CIT Law in 2015. This new law came into force on 1 January 2015, but it applied to the profits generated during 2014 as well. The most important novelties focus on:
Under the old Law on Corporate Income Tax, there were two separate tax bases for corporate income tax, which were subject to filing of two separate tax returns. In the period between 2009 and 2013, corporate income tax was payable separately on non-deductible expenses (on an annual basis) and on financial profit (only if distributed). By means of the applicable CIT Law, the accumulated profit realised for the period between 2009 and 2013 is subject to taxation at the moment of distribution. Taxpayers are obligated to cover the losses from previous years prior profit distribution.
In general, expenses are recognized for tax purposes if they are documented and incurred for business purposes. Particular expenses are listed as non-deductible, while the deductibility of other expenses is limited up to a specific threshold, usually expressed in percentages of the taxpayer’s annual revenues (e.g. expenses for sponsorships and donations) or of the specific expense (e.g. entertainment and leisure costs). Deductibility of other expenses is also affected by specific rules on transfer pricing, thin capitalization etc.
Amendments to the CIT Law were introduced during 2018, and are applicable since 01 January 2019. The amendments clarify the provisions regulating non-profit organizations and the obligation for the taxation of their income from commercial activities. The CIT Law also regulates tax exemptions for donations to sport and other relevant questions regarding these types of donations. It is expected that the amendments will result with incentives for donations to sport clubs, athletes and sports in general.
The amendments of the CIT Law further specify the definition of the affiliated entities and extend the list of non-deductible expenses. The transfer pricing provisions are additionally regulated, defining the arm's length principle and extending the list of methods used for determining the price in transactions, in accordance with the arm's length principle.
From its adoption, the CIT Law will allow the reduction of the tax base by investing into tangible assets acquired through financial leasing. If the taxpayer (i) alienates the assets acquired through reinvestment of the income in a period of five years after the investment, and (ii) if the financial leasing agreement is terminated, the taxpayer is obliged to pay tax which would have been paid if the tax exemption was not used in the first place.
An asset may be depreciated for tax purposes if it is recognized as a fixed asset under relevant accounting regulations and subject to the condition that (i) its purchase price exceeded EUR 300, and (ii) its useful life is longer than one year. All assets are categorized in six depreciation groups with different rates and methods of depreciation for tax purposes. Tax depreciation rates range from 2.5% (for immovable assets) to 25%. In general assets in Macedonia are depreciated by using the proportional method.
Transfer pricing rules apply to transaction between related entities. Transfer pricing rules are based on applicability of the arm’s length principle, i.e. that the parties of the transaction are independent and the applied prices on the transaction are established in accordance with one of the transfer pricing methods allowed under the CIT Law, which are methods prescribed by the OECD Guidelines for Transfer Pricing.
The new CIT Law significantly broadens the definition of related entities by adding all non-resident legal entities registered in low-tax jurisdictions in the definition together with shareholders holding at least 20% of the company’s capital. The companies from low-tax jurisdictions would be considered as related entities irrespectively whether these entities are having control or significant influence to the taxpayer. Considering that there is no published list of such low-tax jurisdictions yet, the applicability of this provision and its interpretation by the TA in practice still remains unclear.
When submitting annual tax returns, taxpayers are now obliged to attach a report for transactions with affiliated entities. Upon request by the tax authorities, companies should provide enough additional documentation as evidence that the transactions with related parties were in line with the 'arm's-length principle'. Note that the practice of the Public Revenue Office regarding transfer pricing cases is still underdeveloped in North Macedonia.
Deductibility of interest generated from related party loans is subject to limitation on the ground of thin capitalization. Interest expense incurred on loans granted by shareholders holding at least 20% of the capital of the company is non-deductible if the total amount of the loan exceeds three times the capital of the shareholder. Thin capitalization rules apply to loans provided by related parties, as well as loans guaranteed by related parties. The thin capitalization rules do not apply to financial institutions.
Simplified tax procedure
There is a simplified tax regime for small companies providing that companies with annual turnover up to MKD 3 million (approx. EUR 50,000) may be exempted from payment of income tax.
Companies with annual turnover between MKD 3 million and MKD 6 million (approx. EUR 100,000) may opt to pay income tax under the general rules set in the CIT Law by 10% tax rate, or to pay income tax to the taxable base which is their overall turnover under the 1% tax rate.
North Macedonia is party to approx. 50 agreements on avoiding of double taxation, i.e. double tax treaties (“DTT”). The treaties include Vietnam, Egypt and United Arab Emirates, as well as a new DTT with Israel are waiting for exchange of ratifications in order to become applicable.
The DTTs are concluded based on the OSCE model contract and a significant number of the DTTs prescribes equal or lower tax rates for dividends, interest, royalties and other income.
Withholding tax – Withholding tax applies to the specific categories of income paid by a resident to a non-resident, defined in the CIT Law, including incomes generated by: dividends, interest, royalties, technical services fees, management, consulting, financial and research and development fees paid to a non-resident. The applicable withholding tax rate is 10%, unless it is otherwise agreed with a DTT. If the income recipient to which the withholding of tax is applied is a resident of a foreign country that has signed a DTT with Macedonia, the tax rate set out for such income should not exceed the tax rate applied to the income set out in the agreement.
The tax exemption or lower tax rates available under the DTTS apply if the non-resident obtains a certificate of tax residency, confirming that the recipient of income is a resident of a treaty country. The procedure for tax exemption or application of lower tax rates should be initiated and completed before the Public Revenue Office prior to the payment of the income. The withholding tax should be paid in the same moment before the income is transferred to a non-resident entity.
Under applicable foreign exchange operations, cross-border payments are liberalized in Macedonia. Only in cases when domestic legal entities receive loans from abroad, or have foreign investments in their capital, the resident would have an obligation to notify the National Bank of the Republic of Macedonia on the status of its cross-border operations.
When dealing with transactions and clients originating from countries which are considered as high risk under the local anti-money laundering regulation, local banks are required to apply special procedures and request additional information and documentation. After individual assessment the bank may even refuse to open the bank account or reject the transaction. The current list of high risk countries includes countries such as:
Aside the list of countries which is provided by the law, the banks usually have additional internal lists of countries which they consider as jurisdictions with substantial money laundering and terrorist financing risks, in which case further information and documentation may also be requested.
Capital gains derived by companies are treated as ordinary income. Capital losses may be carried forward for up to three subsequent years from the year when the loss was recorded. In addition, losses evidenced in a taxpayer’s income statement, may be carried forward to up to three future tax years after the reporting of the subject loss in the annual financial records. Before the new CIT Law, there was a possibility to carry forward losses to up to 5 future periods.
Generally, a permanent establishment is a fixed place of business through which the company carries out the complete or part of its business. The permanent establishment should be registered as a corporate taxpayer at the beginning of its activity in the country for purposes of obtaining a tax number. This obligation applies when establishing a branch office, as well as when the non-resident has no corporate presence, but carries out specific activities which classify as a permanent establishment.
According to the CIT Law, a permanent establishment may include a place of management, a branch office, an office, a factory, a workshop, mining activities, or any other place of extraction of natural resources. A building site or construction or installation project, as well as related supervision activities, may constitute a permanent establishment for tax purposes if it lasts longer than six months.
Furthermore, the provision of services, including consulting services with regard to one or several related projects, is deemed to give rise to a permanent establishment if such activities last longer than 90 continuous days within any 12-month period. If one or several persons establish a permanent establishment as per above, any other non-related projects on which they are working on become part of the permanent establishment, irrespective of its duration.