On 2 May 2023, Law No. 29/2023 “On income tax” was published in Albania’s official gazette, introducing significant changes to corporate income tax, individual income tax, and withholding tax. The new law will come into effect on 1 January 2024, replacing the previous law from 1998. Here are some key amendments brought by the new law:
Corporate Income Tax (CIT):
Taxpayers subject to CIT include entities established under relevant laws, entities subject to special tax regimes, and nonresident entities with income attributable to a permanent establishment in Albania. The new law eliminates the simplified profit tax on small businesses. Starting from January 1, 2024, all entities will be subject to CIT regardless of their annual income. The definition of tax residence for entities is expanded to include entities established in Albania or having their place of effective management and control in Albania. Taxable profit is determined based on income earned during the tax period, reduced by deductible expenses as per financial statements prepared according to relevant accounting laws. The new law introduces specific provisions for long-term contracts, including recognition of revenues based on contract completion percentage and deduction of expenses in the corresponding tax period. Deductible expenses are those incurred to generate income in the interest of economic activity, properly documented, and not subject to any limitations specified by the law. The new law introduces limitations on interest deductibility, capping it at 30% of EBITDA. Excess interest can be carried forward for five consecutive years. Bad debts can be recognized as deductible expenses based on the duration of outstanding debt and reasonable collection efforts. The new law introduces changes to the dividend participation exemption, requiring a minimum 10% shareholding held for at least 24 months for exemption eligibility.
Individual Income Tax:
Individuals are subject to income tax based on three distinct types of income: employment, business, and investment. Tax residence for individuals is determined by a broader definition, including criteria related to the place of effective management, decision-making, and capital ownership. The scope of employment income is expanded, and controlled foreign company rules are introduced. The new law introduces taxation on inheritances and gifts and revises the tax rates system for employment income, with a seven-month transitional period starting from 1 June2023.
Withholding Tax:
A new 15% withholding tax obligation is introduced on interest and royalties paid to Albanian residents. The new law updates and introduces various terms and definitions related to taxation, such as “physical person,” “self-employed individual,” “commercial individual,” “entity,” and more. It’s important to note that this is a summary of the key amendments, and the new law is expected to have more detailed instructions and provisions outlined in bylaws that will be approved and issued by August 2023.
