Withholding at source is a simple mechanism with a single rule. When a business pays an individual who does not invoice as a business, the law does not require the individual to report the income themselves; instead, it makes the business responsible for withholding the tax and remitting it to the tax authority.
This page shows when the obligation to withhold arises and when it does not, the rates for rent, interest, fees, and payments to non-residents, how withholding tax is reported, and what happens when withholding is forgotten. The procedure for profit distribution and dividends 8% are covered on the sister page.
Read also: How is the profit distributed and how much tax is levied on the dividend?.
Withholding is not an additional tax on the business; it is the recipient's tax collected one step earlier. The business reduces the payment by the amount of the tax, pays the recipient the net amount, and reports the withheld amount as its own liability to the tax authority.
In this role, the business is called the retention agent. The responsibility lies with him and does not pass to the recipient, so when the retention is not carried out, the administration does not go to the landlord or the consultant; it goes to the business that paid.
Business expenditure is not reduced by withholding. The recognized cost remains the gross contract amount, because the tax is withheld on behalf of the recipient and is not a price reduction.
| Payment | Recipient | The |
|---|---|---|
| Rent | Individual | 15% |
| Interest | Individual | 15% |
| Honorarium and author's rights | Individual | 15% |
| Gains from gambling | Individual | 15% |
| Dividend and profit distribution | Individual or entity | 8% |
| Services, insurance, board fees, construction and assembly, artists and athletes | Non-resident | 15%, subject to the double taxation agreement. |
| Services from a registered resident business | Registered entity or natural person | no retention |
| Dividends that meet the participation exemption conditions, eurobond interest, exempt entities | Depending on the case | no retention |
Read also: What changed in withholding tax?.
The practical rule is simple. Withholding exists because the recipient of the payment is often an unregistered business and would not declare the income themselves. When the payment is made between two registered resident businesses and is accompanied by a fiscalized invoice, the recipient declares the income themselves and no withholding is applied.
The dividend is the only significant exception to this logic, because withholding is still applied even when the partner is another company, except in the case of participation exemption. For all other payments to a registered resident business, the invoice replaces withholding.
Withholding is also not applied in three other cases: for tax-exempt entities, for dividends that qualify for the participation exemption, and for eurobond interest.
✔ The recipient is an individual who does not invoice as a business, or a registered business that issues a fiscalized invoice.
✔ The payment falls into the list of payments held by the object, i.e., rent, interest, honoraria, royalties, dividends, gambling winnings.
✔ The recipient is a resident or a non-resident, because the list is broader for non-residents.
When the answer to the first question is "individual" and the payment falls on the list, withholding is applied. When the recipient issues a fiscalized invoice as a business, withholding is not applied, except for dividends.
Read also: How the self-employed and liberal professions are taxed.
When a business rents from an individual, it withholds 151 TP3T of the gross rent and pays the individual the net amount. When the landlord is a registered business, no withholding applies and the rent is invoiced normally.
Rent between two individuals is not subject to withholding. In that case, the landlord reports the income themselves on their individual tax return.
Office for rent at 60,000 lekë per month from an individual. The business retains 151 TP3T, i.e., 9,000 lekë, and pays the landlord 51,000 lekë. Annually, gross rent is 720,000 lek and tax withheld is 108,000 lek. The expense recognized by the business remains 720,000 lek, because the tax is withheld for the landlord.
It is worth explicitly stating in the contract that the rent is gross and that 15% tax is withheld. Without this clause, the individual landlord expects to receive 60,000 lek in hand, and the dispute arises at the first payment.
When the contract rent is below the minimum reference price, the tax administration may rely on the reference price set by Government Decree No. 469 of June 3, 2015, instead of the price stated in the contract.
Caution. The specific method for implementing minimum reference rent prices for business leases for individuals, including figures by city and area. UNVERIFIED; must be confirmed before publication in the text of the applicable Government Decree.
Read also: Withholding tax on rent: a practical guide.
Read also: How are rents taxed?, the interests and capital gains of the individual.
Interest paid to an individual, for example on a loan that the partner or a third party has made to the company, is taxed at 15% at source. Withholding is carried out at the time the interest is paid, not at the time the loan is received.
Loan from an individual of 3,000,000 lek, with interest at 5% per year, i.e., 150,000 lek in annual interest. The company retains 15%, i.e., 22,500 lek, and pays the individual 127,500 lek. The interest expense remains 150,000 lek, within the limits recognized by law.
The recognition of interest expense has two limitations: the amount above the Bank of Albania's 12-month average lending rate is not recognized, and excess interest is capped at 30% of EBITDA, with a five-year carryforward. The 15% holding is applied in any case, even when the expense portion is not recognized.
Read also: Which expenses are recognized and which are not..
Honoraria, copyright royalties, and similar payments to an individual who does not invoice as a business are subject to 15% withholding at source. This applies to a translator, a photographer, the author of a study, or a trainer who works only once and does not have an NIPT.
Honorarium of 200,000 lek for a study by an individual author. The business withholds 151 TP3T, i.e., 30,000 lek, and pays the author 170,000 lek. The amount withheld is reported by the business, and the author has no further obligation on this income.
When the service is provided by a registered self-employed individual, he issues a fiscalized invoice and no withholding is applied. When the same person works solely for one client, be aware that the relationship may be reclassified as employment.
For non-residents, the list of withholding payments is broader. In addition to dividends, interest, honoraria, and rent, it also includes services, insurance, board members' fees, construction and assembly work, as well as payments to artists and athletes.
The basic rate is 15%, but the double taxation avoidance agreement with the recipient's country may reduce or eliminate it. The condition is the recipient's certificate of residence, submitted before payment, because after payment the right under the agreement becomes difficult to enforce.
Consultancy invoice of 1,000,000 lekë from a non-resident company, with no certificate of residence on file. The business withholds 15% (i.e., 150,000 lek) and transfers 850,000 lek. With a residence certificate and an agreement waiving withholding for this type of payment, the full amount of 1,000,000 lek is transferred.
Read also: How the double taxation agreement and the certificate of residence are applied.
The withholding tax is declared and paid only electronically, via e-Filing, in the month following payment. The declaration does not wait until the end of the year and is not replaced by the annual income tax return.
In practice, we follow it together with the payroll list, which for entities is submitted by the 20th of the following month, because this way the same calendar covers wages, contributions, and withholding tax. The calendar deadline for withholding tax is always confirmed in e-Filing before submission.
Attention. The provision that sets the deadline for filing and paying withholding tax, as well as the corresponding form. UNVERIFIED, must be confirmed before publication. The 20th of the following month is the verified deadline for entity payroll submissions, not the confirmed deadline for withholding tax.
The documents in the file include the contract or decision justifying the payment, the calculation of the withheld amount, the declaration confirmation, and the bank payment order for the net amount. Paying these amounts in cash is not recommended, as it eliminates the simplest form of proof.
Read also: The complete tax calendar of the year.
When you withhold tax at source, the law treats you as the withholding agent, meaning you're responsible for the amount even if you didn't actually withhold it. This is the part that costs businesses the most, because the amount not withheld isn't collected from the payee.
The responsibility of the retention agent
| Violation | Consequence |
|---|---|
| Failure to remit withholding tax on time | 0.06% of the amount per day |
| Tax was not withheld when it should have been. | 50% of the amount that had to be withheld |
| Tax is withheld and not declared. | 100% of the amount held |
Rent of 60,000 lekë per month for one year, without withholding. The unwithheld tax is 108,000 lekë. A 50% penalty yields 54,000 lekë. Late interest at 0.061 TP3T per day, calculated for a 90-day delay on 108,000 lek, amounts to 5,832 lek. The cost of a mistake that lasted a year exceeds 167,000 lek, whereas proper withholding would have cost zero.
The penalty for an obligation does not exceed 100% of the obligation's value. This is a protection under Article 111, paragraph 5, of the Procedural Law, which is often not requested by the taxpayer when preparing objection documents.
Read also: Tax audit, fines, and your rights.
It is the payee's tax, collected by the paying business. The business deducts the amount from the payment, pays the payee the net amount, and reports the tax as its own liability.
For rent, interest, fees, royalties and gambling winnings paid to an individual, the rate is 15%. For dividends and profit sharing, the rate is 8%.
Withhold 151 TP3T on the gross rental, pay the individual the net amount, and report the withheld tax in the following month. The contract, calculation, and bank payment are kept on file.
For services, no withholding is required because the recipient issues an invoice and reports the income themselves. For dividends, withholding is required even when the recipient is a company, except in the case of the participation exemption.
The basic rate is 151 TP 3 T, but the double taxation avoidance treaty with his country may reduce or eliminate it. The condition is a certificate of residence prior to payment.
Yes. The recognized expense is the gross contract amount, because the tax is withheld for the landlord's account and is not a price reduction.
The penalty is 50% of the amount that should have been withheld, plus a late‐payment interest of 0.06% per day on the amount. When tax is withheld but not reported, the penalty rises to 100% of the withheld amount.
It is not collected. In that case, the landlord reports the rental income themselves on their individual tax return.
In the month following payment, electronically via e-Filing. In practice, we handle it together with the payroll list, which for entities is submitted by the 20th of the following month.
Read also: How much tax does the business pay on its profit?.