On 20 September 2023, Albania released Income Tax Instruction No. 26 in the Official Gazette, laying the groundwork for the enforcement of Income Tax Law No. 29/2023. The Income Tax Law No. 8438/1998 was repealed and replaced by Law No. 29/2023, which was issued on 1 May 2023, and is generally effective as of 1 January 2024. Under the new law, some significant modifications consist of:
1. Permanent establishment (PE): The updated rules on permanent establishment (PE) now set specific time limits for establishing different types of PEs:
- A construction or project PE is considered to exist when the relevant activities persist for a total of more than 6 months within any 12-month period.
- A natural resources activity PE is considered to exist when the relevant activities persist for a total of more than 3 months within any 12-month period.
- A service PE is considered to exist when the relevant activities persist for a total of more than 6 months within any 12-month period.
2. Withholding tax rates: Revised withholding tax regulations apply consistent rates to payments made to residents and non-resident Permanent Establishments (PEs), mirroring the existing rates for non-residents:
- Dividends are taxed at 8%, except when a domestic participation exemption is eligible.
- Interest payments incur a 15% withholding tax.
- Royalty payments are subject to a 15% withholding tax rate.
3. Transfer price guidelines: Modifications to specific transfer price guidelines, such as:
- a change in the adjustment of financial indicators outside the arm’s length range so that adjustments are made to the median of the range instead of the mean average of the arm’s length range results.
- The deadline for submitting transfer pricing documentation following a request from the tax authority has been prolonged from 30 days after the request to 45 days.
4. Corporate income tax rate: Modifications in the corporate income tax rate, such as:
- A 5% rate is in effect for agricultural cooperative companies until 31 December 2029.
- A 5% rate is applicable to accommodation activities that have been certified as agritourism until 31 December 2029.
- A 5% rate applies to software production or development until 31 December 2025.
- The automotive sector is subject to a 5% rate until December 31, 2029.
- There is a 0% rate for legal entities, self-employed individuals, and commercial individuals with annual income that does not exceed ALL 14 million until 31 December 2029.
5. Limitation on interest deductions: The expansion of the limitation on interest deductions from 30% of EBITDA has been broadened to encompass all interest expenses, rather than solely those pertaining to related party loans. Furthermore, any surplus interest expenses can be carried forward for a maximum of five consecutive years. Additionally, exemptions from this restriction are granted to banks, non-bank financial institutions, insurance companies, leasing companies, and long-term loans for infrastructure projects operating in Albania.
