Dividend tax is a tax that small and medium-sized businesses in Albania need to understand well. This article explains in simple yet technical language what this tax is, how profit distribution works in Albania, the historical changes in the tax rate, and the options you have for profit planning.
If you're an entrepreneur or an economist, below you'll find everything you need to know about dividends, the 2025 dividend tax, and how to act optimally while complying with the law.
What is dividend tax and when is it applied?
The tax on dividends is Withholding tax that is applied to a company's distributed profit to its owners or shareholders. In simple terms, a “dividend” is the portion of net profit that the company decides to share with its owners (partners or shareholders). When these profits are distributed, Albanian law requires the company (as the payer of the income) to withhold and pay the applicable tax on behalf of the beneficiaries. This is a tax called “withholding tax,” because it is withheld at the source of the income, i.e., at the company, before the profit passes to the owner.
When is dividend tax applied? Whenever a trading company declares a distribution of profit (e.g., after a profitable financial year) to its partners, it is required to withhold the statutory tax. According to Albanian tax legislation, the standard rate of tax on dividends (including any profit distribution) is 8% of the amount of distributed. This rate applies to both natural persons and legal entities receiving dividends, regardless of their status, and the tax is withheld and paid by the company making the distribution.
Meanwhile, the dividend tax is paid only by the company (LLC or SA). If the business is registered in the form of natural person, He does not pay tax on the dividend.
Example: If your company distributes 100,000 lek in profit to the owners, the 8% tax is immediately collected on that amount. The company pays 8,000 lek to the tax authorities, while the owners receive 92,000 lek net. This mechanism ensures that the state collects the tax at the moment of distribution and the owners receive the net profit after tax.
From 15% to 8%: A History of the Dividend Tax Rate
Historically, the dividend tax in Albania has been higher. Until a few years ago, the rate of taxation on distributed profits was 15%. The change came with the 2019 fiscal package, when the government cut the dividend tax rate from 15 percent to 8 percent. The main purpose of this cut was to encourage businesses to declare and distribute their accumulated profits, as well as to stimulate investment.
The tax cut to 81% had several immediate positive effects: many companies began distributing past-year profits to take advantage of the lower rate, bringing additional revenue into the state budget while also providing fiscal relief to investors.
For example, a business owner who would previously pay 15,000 lekë in tax for every 100,000 lekë in dividends, after 2019 pays only 8,000 lekë for the same amount. This change significantly reduces the tax burden on profit distribution and makes the investment climate more attractive.
Transitional provisions (old undistributed earnings)
During the rate reduction transition, the legislation provided transitional rules for profits accumulated in the past. It was decided that retained earnings from 2018 and earlier years could also be taxed at 81%, provided that the dividend tax was paid within a specified deadline (e.g., by September 30, 2019, for earnings through 2017). The Tax Administration even issued special guidelines: if companies paid the tax by the specified dates in 2019, an 8% rate would apply to those profits.% instead of 15%. This was a golden opportunity for businesses that hadn't distributed profits in years.
Caution: Companies that did not take advantage of this transition period and still have unpaid profits from prior years may face the prior 151% tax when they distribute those profits. The law explicitly provided that for retained earnings from prior years, if tax was not paid within the deadline, the taxpayer will pay 15% tax on those dividends.
So, if today (in 2025) you withdraw accumulated 2017 profits from the drawer tax-free, you'll have to pay tax at the old rate of 15%. In all new cases, however, the 8% rate is currently applied.
Declaration of profit distribution and legal deadlines
Distribution of profit is not simply a matter of the partners' decision – it must be officially declared and the corresponding tax paid within the legal deadlines. According to tax legislation, when a company decides to distribute profits, it acts as a withholding agent and has specific obligations:
Withholding and payment of tax
At the moment the dividend is approved (e.g., upon approval of the annual financial statements and the shareholders' decision to distribute profits), the company is required to withhold 81% of the amount as tax. This amount must be transferred to the tax authorities within a period of 3 months from the date of profit distribution. Note: For other payments such as interest or rent, the standard deadline is the following month, whereas for dividends the law allows up to three months to pay the tax.
Formal declaration
The company must complete and submit the special form, “Withholding Tax Statement,” detailing the beneficiaries' information (e.g., the names of partners or shareholders receiving dividends) and the amounts distributed to each., as well as the withholding tax. This statement is submitted online to the tax administration at the time of payment. For each dividend payment, the statement must include full information for transparency and control.
Supporting documentation
Minutes of the shareholders' assembly in which the profit distribution was approved, as well as the corresponding accounting records, must be retained. These documents may be requested during tax audits to verify that every profit distribution was carried out in accordance with the law.
Failure to comply with the above procedures can lead to serious consequences. In the next section, we will address the specific risks of distributing profits without proper declaration.
Consequences of distributing profits without declaring them
Distributing profit “under the table” – i.e., taking money from the company's profit without officially declaring it as a dividend – constitutes a serious violation of tax law. Some of the main consequences and risks of such an action are:
Tax liabilities with retroactive effect
The Tax Administration may uncover an undeclared distribution (e.g., through the review of bank accounts or balance sheets). In that case, it will demand payment of tax 8% on the distributed amount, together with late‐payment interest for the period from when the tax should have been paid. So, instead of avoiding the tax, you'll face an even steeper bill.
Fines and administrative sanctions
In addition to paying the tax and interest, the company (and its legal officers) may be fined for failing to declare income. Administrative fines for tax evasion in Albania can be high and severely impact your business's finances.
Criminal liability in extreme cases
If the amount of hidden profits is very large or if intentional repetition is detected, the matter may be treated as a criminal case. Avoiding tax obligations in substantial amounts is classified as tax evasion, which under the Penal Code can lead to criminal prosecution of the responsible administrator or owner.
Classification as taxable dividend
Even if you think that by not officially declaring the profit as a dividend you can avoid taxes, the law has provided preventive measures. Tax technical guidelines emphasize that if the annual profit is not assigned any destination (e.g., neither to reserves nor to declared dividends) within the legally prescribed deadlines, then the entire profit (minus mandatory legal reserves) is considered to have been distributed as a dividend. and is taxed in accordance with the applicable rate.. In other words, failing to file doesn't exempt you from taxes – in the eyes of the law, your profit will still be treated as distributed and taxed.
In summary, it's not worth the risk to secretly distribute profits. It's much safer and less costly to declare every distribution and pay the tax on time. Serious businesses must operate within the legal framework to avoid damaging their reputation and the financial burden of penalties.
Practical example: Calculating dividend tax with concrete figures
To illustrate more clearly how the dividend tax works, let's look at some examples. Practical examples with rounded figures:
Example 1 – Small business (exempt from income tax)
Suppose a small business with annual revenue under 14 million lek. For year X, the business recorded a net profit of 100,000 lek (since the corporate tax rate is 0.3% for this category, profit before and after tax is the same in this case). If the owners decide to distribute the entire profit as a dividend, the company must withhold 81% tax. Calculation: 100,000 lekë × 81% = 8,000 lekë tax. Thus, 8,000 lekë are paid to the state and the owners receive 92,000 lekë net. Had they decided not to distribute profit, there would have been no obligation for this 8% at that time.
Example 2 – Large business (15% income tax payer)
Now suppose a larger company with revenues over 14 million lek, where the profit tax (corporate tax) is 15%. Let's say the company has a pre-tax profit of 117,650 lek. First, it pays the 15% tax on this profit (17,650 lekë corporate tax), leaving 100,000 lekë net profit. If the company decides to distribute this 100,000 lek to shareholders, 8% will be withheld as dividend tax (i.e., 8,000 lek). In the end, the shareholders receive 92,000 lek in hand, while the total taxes paid were 17,650 + 8,000 = 25,650 lek. Note that, in this case, the distributed profit is taxed twice: first at 15% corporate income tax and then at 81% dividend tax. This corresponds to about 21.8% of the total pre-tax profit.
Example 3 – Partial distribution of profit
Companies don't always distribute all of their profit. For example, imagine a business with 1,000,000 lek profit after taxes. The shareholders decide to distribute only half as a dividend (500,000 lek) and keep the rest as reinvested profit. In this case, the 8% tax applies only to the distributed amount: 500,000 × 8% = 40,000 lek tax. This amount is paid to the budget, the shareholders receive 460,000 lek net, while 500,000 lek remain in the company to be used for investments or as a reserve. This scenario shows that dividend tax is paid only on the portion of profit taken by the owners, while the profit retained in the company is not taxed at 8% (but note that this retained profit has already paid corporate income tax and will be taxed as a dividend only if it is distributed at a later date).
As shown by the examples, calculating the dividend tax is straightforward – simply divide the amount to be distributed by 8%. For small businesses with zero income tax, this 8% is the only tax on their profit (when distributed). For large businesses, the 8% is added on top of corporate tax, which must be taken into account in financial planning.
Reinvestment of profit in the company – as an alternative to dividends
Many entrepreneurs ask: “Is there any way to avoid dividend tax?” Of course, legal avoidance of dividend tax is only possible by not distributing the profit to yourself, but by leaving it in the company. This is known as profit reinvestment. Instead of taking the profits as a dividend (and immediately subjecting them to 8% tax), you can use that money within the business for expansion, new investments, or development projects.
The main benefits of reinvesting profits in the company are:
Immediate avoidance of the 8% tax
If the profit is not distributed to the partners, the dividend tax Does not apply at that moment. Thus, the entire net profit can be used for business purposes, without an 8% “cut.” This Reduces the fiscal cost short-term and gives your company more liquidity for investments.
Increase in the company's value
Reinvestment of earnings can be accompanied by an increase in the company's capital. For example, retained earnings can be capitalized—that is, added to equity—by increasing the company's registered share capital. This makes its balance sheet stronger. Higher equity capital can help attract new investors, secure loans more easily, and withstand financial crises.
Further increase in profit in the future
Reinvested funds can finance the opening of new business lines, the purchase of modern equipment, expansion into new markets, or other forms of expansion that potentially increase future profits. In this way, the owner can benefit more in the long term (for example, the stock value increases or future earnings are higher), even though they have given up on taking immediate profit.
Long-term tax planning
By not taking a dividend today, you're in a way deferring the tax to the future. It's possible that after a few years, if you decide to sell your company's shares at an increased value, you'll be taxed on the capital gain at the prevailing rate (currently 15% for passive capital gains). But over the years you've used all the profit to grow the business without paying 8% each year. Some company owners use this strategy for tax optimization, taking salaries or bonuses that are taxed differently, and letting the net profit grow the company itself.
Of course, the decision to reinvest profits instead of distributing them should not be made solely for tax reasons. You need to consider your business needs, expansion plans, and your personal financial outlook. If the owners have a personal need for liquidity, then distributing dividends may be necessary despite the tax. But if the primary goal is business growth, then leaving the profits in the company is a smart strategy that also saves you the 8% tax for now.
Profit distribution vs. capital increase: What's the difference?
It is important to clearly distinguish between distributing earnings as dividends and increasing the company's capital through retained earnings:
Profit distribution (Dividend)
This happens when the company decides to pay its owners out of the profits it has generated. The money leaves the company's accounts and goes into the shareholders' pockets. The result? The company's wealth is reduced by the amount paid out, while the owners become individually richer. The distribution of profit immediately triggers a 8% tax liability. Furthermore, after the distribution, the company's equity remains unchanged, but its reserves and retained earnings on the balance sheet decrease (since they were used to pay the dividends). Profit distribution is how owners reap the benefits of their investment, but it comes with the immediate tax cost and reduces the company's assets.
Increasing capital with the company's profits
This happens when the company decides not to distribute the realized profit as a dividend but to capitalize it. In practice, retained earnings are converted into additional share capital (e.g., by increasing the nominal value of existing shares or by issuing new shares proportionally to current shareholders). The money doesn't leave the company; it simply moves from the retained earnings account to the stockholder equity account on the balance sheet. The result? The company's capital increases, making it financially stronger, while the owners don't receive any cash at that moment (their stake in the company's capital simply grows). No dividend tax is paid in this process, because legally we don't have a distribution of income to the owner – there is no “personal income” to be taxed, just a reallocation within the company.
Which is more favorable? It depends on the circumstances. Profit distribution gives owners immediate monetary gain, which is especially important when owners need liquidity or want to enjoy the fruits of their profits. On the other hand, increasing capital strengthens the company and boosts the paper value of your investment, even though you don't receive cash in hand immediately. Often family businesses and SMEs choose a balanced approach: they distribute part of the profits as dividends to reward the owners, and leave part in the company (as retained earnings or increased capital) to finance further growth.
Profit Planning in Companies: Tips for Businesses
At the end of the day, the main issue for business owners is Profit planning in a company in the most efficient way. Some practical tips in this regard:
Analyze your personal financial needs compared to those of the business.
If your company needs capital to grow, it may make sense to retain a substantial portion of earnings for investments. If, on the other hand, you need funds for personal expenses or investment diversification, plan to distribute a dividend, taking the 8% tax into account as a cost.
Avoid ad-hoc distributions without a strategy.
It is advisable not to “siphon off” the business's profits every time there's money in the account. Establish a clear dividend policy – for example, once a year after the balance sheet is closed, or a fixed percentage of profit to be distributed. This ensures the business doesn't run out of liquidity and that you've also accounted for the corresponding tax obligations.
Consider the compensation alternatives.
Instead of taking all the profit as a dividend, you might take a salary or bonus as a director (taxed under the payroll tax scheme) and leave the rest as retained earnings. Sometimes this can be more tax-efficient, especially for smaller amounts, since wages up to a certain level are taxed at a relatively low rate. However, be careful about abuses – every payment must reflect an actual job role within the company.
Document every decision.
Any decision regarding profit distribution or retention must be officially documented (meeting minutes, partners' decisions, etc.). This legally protects you and prepares you in case of an audit. Also, keep records of every tax paid so that when you do your annual planning, you can accurately calculate your obligations and avoid surprises.
Seek professional advice.
Fiscal planning is a complex field that involves many aspects (income tax, dividend tax, VAT, social contributions on wages, etc.). A good economist or tax consultant can help you develop a strategy that minimizes the tax burden within the legal framework. For example, they advise you on whether it's more advantageous to reinvest for the time being or to distribute profits, and they keep you informed of any recent legal changes that might affect you.
In short, every business should carefully plan the destination of its profits. The 8% dividend tax is low compared to many other countries, but it still represents a cost that must be optimized through planning. By being aware of the rules of the game and taking proactive measures, you can ensure that your company grows sustainably, while also allowing owners to receive the well-deserved reward for their work.
Conclusion
Taxation on dividends and profit distribution are topics that every serious entrepreneur in Albania must have a clear understanding of. By understanding tax rates, filing procedures, and strategic options such as reinvestment, you can make better decisions for your business. Don't forget that staying within the legal framework is the best way to avoid problems – taxes can be optimized, but they should not be evaded illegally.
If you need further assistance with corporate profit planning or have specific questions about how to handle dividend distributions, we're here to help.
Contact us For a professional consultation with our experts – together we will structure your profit distribution in the most favorable and legally compliant way.