Exclusion from participation
In determining the taxable income of a resident entity, dividends received are excluded from taxable income if:
a) the recipient entity holds at least 10%of the share capital or voting rights of the distributing entity, by value or number; and
b) Shares or minimum participation have been held for an uninterrupted period of at least 24 months.
Article 1 of this law also applies to a non-resident corporate income tax entity if the participation relates to business activities carried out by a non-resident in the Republic of Albania through an entity established in the Republic of Albania.
If dividends are distributed by a paying entity to a recipient entity that has not held the shares or participation for a period of 24 months, but meets the conditions of points 1, letter “a”, or 2 of this Article, the recipient entity may temporarily claim the exemption provided for in these points, provided that it lodges with the tax administration security for the amount of tax that would be payable in the absence of such exemption. The tax administration may call upon the security if the recipient entity does not hold the shares or participation for at least 24 months. The exemption becomes final and the security is returned to the recipient on the date the shares or participation have been held for a minimum of 24 months.
Interest limitation rules
To the extent permitted by this law, interest is deductible from business income in the tax year in which it is incurred up to thirty percent (30%) of the entity's earnings before interest, taxes, depreciation, and amortization (EBITDA).
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is calculated by adding the tax-adjusted amounts for excess interest, as well as the tax-adjusted amounts for depreciation and amortization to the income subject to tax. Income excluded from tax is also excluded from the entity's EBITDA.
For the purposes of this article, “excess interest” means the amount by which an entity's deductible interest exceeds the interest income and other economically equivalent taxable income received by the entity.
The interest for which the deduction is refused under point 1 of this article shall be carried forward for the next 5 years.
This regulation does not apply to:
- banks, non-bank financial institutions, insurance companies, and leasing companies;
- interest related to credits used for financing a long-term public infrastructure project where the project operator, borrowing costs, assets, and revenues are all in the Republic of Albania.
The rules for the implementation of this article are determined in the relevant instruction approved by the minister responsible for finance.
Provisions and write-offs of bad debt for financial institutions
In determining the taxable income of financial institutions, regulated by regulatory authorities, a deduction is allowed for amounts that will be set aside and/or increased:
- the mandatory technical provisions established in implementation of the applicable law for insurance and reinsurance activities; and
- mandatory provisions for commercial banks and other non-bank financial institutions and credit unions established in accordance with standards drafted by the International Accounting Standards Board and audited without reservation by external auditors.
- Bank expenditures for annual and extraordinary contributions, in accordance with current legislation on banking recovery and extraordinary intervention in the Republic of Albania, are recognized expenses in determining taxable profit.
The full write-off of bad debt is permitted if the following conditions are met simultaneously:
- Bad debt, previously included in revenue, is removed from the entity's accounting.;
- all possible legal actions have been taken to collect the debt; and
- The provisions created according to point 1 of this article shall be added to the taxable profit.
In the case of banks, branches of foreign banks, and non-banking financial entities, licensed by the Bank of Albania to conduct lending activities, the write-off of bad debt related to the lending process is recognized as a deductible expense for the determination of taxable profit, provided the following conditions are met:
- in case the loan is secured by movable or immovable property:
- 365 days after filing the request for initiation of compulsory enforcement with the bailiff, or;
- at the time of execution of movable or immovable property, whichever is the earlier date.
- in case the loan is not secured by movable or immovable property, 365 days after the issuance of the writ of execution by the court.
When a provision for bad debt has previously been applied to a claim that has been settled or otherwise resolved, the amount recovered must be added to taxable income in the year of recovery, unless it is transferred in relation to a business reorganization under Section 46 of this law.
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Source: General Directorate of Taxes.