Tax on business operations
The tax system includes corporate income tax, value added tax (VAT), excise tax, personal income tax, simplified profit tax on small businesses and local taxes. The tax period for corporate income tax is the calendar year, while for VAT, excise tax, and personal income tax, the tax period is the calendar month.
Tax liabilities (related to Income Tax, VAT, etc.), applicable to a foreign business in Albania depends on the legal form of the PE in Albania, the main tax liabilities applicable in Albania are as follows:
Corporate Income tax: The corporation tax (the tax on income) is at the rate of 15 %, and is applied to taxpayers with an annual turnover exceeding 8.000.000 ALL. This is applicable to the taxable profit of the subsidiary and of the branch of the foreign parent company (note that according to Albanian tax legislation the branch of a foreign company is considered as a taxpayer in Albania for the taxable profit of such branch).
As an exception, hotel there is no corporate tax (i.e. the tax is 0%) for a 10- year period for 4-star and 5-star accommodation facilities being granted with ‘special Status”, and that benefit such status until December 2024. The effects of the exemption shall begin at the commencement of the economic activity, but not later than 3 years after obtaining the special status, in accordance with the applicable law.
Also for entities operating as software developers, the profit tax shall be reduced from 15% to 5%. The Council of Ministers will define the activities involved in software production/development and the procedures for the implementation of this provision.
The 5% profit tax rate will apply for a 10- year period also to subjects which are certified as “subjects offering agritourism services” by the Government, up until December 2021.
VAT Regime: The new Law on VAT is aligned with the Directive of the European Parliament and Council 2006/112/CE dated 28 November2006 on the “Common system on the value added tax” and it aims to provide more clarity to the VAT regime in Albania. VAT applies to:
All legal and natural persons carrying out taxable supplies having an annual turnover exceeding ALL 5,000,000 (equal to approximately EUR 36.765) are subject to VAT too. However, as of 1 January 2018, the turnover threshold for determining VAT subjects will be defined by Council of Ministers, from time to time. In addition, the Council of Ministers has the right to establish a different VAT threshold for specific categories of taxpayers.
Natural persons and legal entities operating in the import/export industry are required to register regardless of the amount of their annual turnover.
The VAT rate in Albania is 20%. Exceptionally the VAT in tourism industry, for accommodation services only is 6%. As of 1 January 2018, a reduced rate of VAT in the amount of 6% will be applied for all services offered within 4-star and 5-star accommodation facilities defined under the tourism law provisions.
Further, VAT is 0% in certain specific cases whereas an exempted VAT regime applies in the following specific cases:
Taxation on dividend (Branch and Subsidiary): Any dividend/distribution of profit distributed by the Albanian subsidiary is subject to tax on dividend at the rate of 15%. In the case that the dividend or distribution of profit will be transferred to a foreign parent company and an effective Double Taxation Treaty (DTT) is applicable, the provisions of the relevant DTT must apply. The repatriation profits generated by a branch, after profit tax, is not subject to withholding tax as opposed to a subsidiary.
Excise duty. Excise duties are considered indirect taxes which applies on the sale or use of specific products. They are usually applied as an amount per quantity of the product. Excise duties apply to a limited number of products for mass consumption, i.e. tobacco and its derivatives, petroleum and its derivatives, alcoholic beverages, soft drinks and coffee, as well as perfumes and deodorants.
Personal income tax: Under Albanian law, all individuals are liable to income tax. Albanian tax residents are: (i) Individuals who have a permanent residence in Albania, or (ii) Albanian citizens and citizens who act as a consul, diplomat, or other officer outside Albania (iii) Individuals who are present in Albania for more than 183 days within a 365-day period.
Albanian resident individuals are subject to personal income tax on their worldwide income, whereas non-resident individuals are subject to tax only on income derived from an Albanian source, unless a Double Tax Treaty (DTT) provides otherwise.
Personal income tax is levied on the following categories of income:
Gross salaries and compensation for employees are taxed on a monthly basis according to a progressive taxation scheme that ranges from 0 – 23%. Personal income such as income from dividends, income from rent, capital gains, income from bank interest, gains from lottery or games of chance and any other income specified as personal income of individuals are subject to personal income tax at a 15% rate.
Withholding tax: This tax is applicable on gross payments related to some types of service agreements and on the lease agreements (if the service provider or the lessor is not a tax resident in Albania); withholding tax is a tax liability for the service provider and the lessor, but the service receiver and/or tenant have the obligation to withhold, declare and transfer the withholding tax to the corresponding Tax Office in Albania. The withholding tax rate is 15%.
Local taxes: Local tax authorities determine and collect local taxes from entities carrying on business in their municipalities. According to the Law on the Local Tax System, a wide range of local taxes is levied on every business activity. Most of them are levied at specific amounts and differ by location of business activity in the territory of Albania.
Double Tax Treaties (DTT)
Since 1992, Albania has entered agreements to avoid double taxation with respect to taxes on income and on capital with various countries. The agreements cover the taxation of income from business profits, international transport, dividends, interest, royalties, dependent and independent personal services, as well as income from real estate and apply to individuals and legal entities that are resident in one or both contracting states. The agreements specify the rules that apply to taxation of the above-mentioned types of income in the attempt to avoid double taxation. In addition, for certain types of income like dividends and interest the Agreements specify the maximum rate applicable in both contracting states.
For a list of the DTTs in force and those ratified by the Albanian Parliament but not currently in force the website of the tax authorities www.tatime.gov.al may be consulted.
The regime of the capital gain tax is applied in the following transactions:
Tax structures and risks for contracts with public customers and private sector (including tax exemption for “important projects”
There is no specific tax structure when it comes to the public contracts. However, based on the State Aid Law certain tax or other investment incentives may be granted to both domestic and foreign investors.
Stability clauses in PPP or other important contract with the government are common and important to protect the investor from changes to tax legislation that may adversely affect its business.
The 2005 ‘Law on State Aid’ regulates Albanian investment incentives for both foreign and domestic investors. The law governs all sectors of manufacturing and services, excluding agriculture and fisheries, and applies to both the central and local governments as well as other entities acting on behalf of the state that confer benefits to enterprises. Some of the major incentives are listed below:
A 2018 amendment of the Law on State Aid added as grounds for excluding an economic operator from gaining state their previous conviction for crimes, such as partaking in organized crime, corruption, money laundering, terrorism, narcotics trafficking, falsification of documents, exploitation of work by minors and other forms of human trafficking.