GENERAL INSTRUCTIONS

Number.    , date _/_/_

FOR TAXATION INCOME

In support of Article 102, point 4 of the Constitution of the Republic of Albania, as well as in implementation of Article of Law No. , dated _/_/_ , “On Income Tax,’ the Minister of Finance,

GUIDE

General Provisions

This General Instruction establishes the criteria and procedures for the implementation of the provisions of Law no. [Blank] Dated [Blank] [Blank] “On Income Tax.’

1. Object of Law

1. The Law “On Income Tax” defines the direct income tax scheme and the rules that apply in relation to this scheme by persons, including legal entities, also called “legal persons,” as well as natural persons including individuals, sole proprietors, and self-employed persons.
2. For all categories mentioned in the preceding paragraph, the Law defines the tax base, tax rates, exemptions, declaration and payment procedures and deadlines, as well as any other procedures or obligations necessary for the administration of income tax liabilities.
3. This Law, in addition to income from employment, business, and investment, also covers income of another nature, such as income from inheritances, gifts, and lottery winnings.

Definitions

• Terms used in the Law “On Income Tax” shall have the meaning given to them in this Law.
• If for any term used in this law, legislation in other fields has a different meaning, for the purposes of interpreting the Law “On Income Tax," the definitions made in this Law shall be used.
• For terms used in the Law “On Income Tax” for which no definition is provided, the definitions given for these terms in the legislation of other fields will be used for interpretation purposes.
• Terms used in Law and related to international taxation terminology shall have the meaning given in universally accepted international documents of the field published by the IMF, OECD, EU.

3. Source of income

• In application of the “source of income” principle, Albanian resident individuals, whether entities (legal persons) or natural persons (individuals, self-employed, traders), pay tax in Albania on income earned within and outside of Albania. Meanwhile, Albanian non-resident individuals, whether entities (legal persons) or natural persons (individuals, self-employed, traders), pay tax in Albania only on income earned within Albania.
• In this regard, based on the principle of the source of income, determining the types of income that can be generated in Albania and are subject to taxation in Albania is important for tax planning by residents and non-residents.
• Article 3 of the Law “On Income Tax” has defined the groups of income that originate/are generated from a source in the Republic of Albania. However, income with a source in the Republic of Albania, which may be subject to income tax, is not limited only to the group of incomes listed in paragraphs “a” through “o” of this article, meaning it is not exhaustive, but can be expanded with other categories of income with a source in Albania.
• Income from sources in Albania can be identified based on payments made by Albanian tax residents to Albanian tax residents or non-residents, regardless of the obligation of the income payer to withhold tax at source or the obligation of the income beneficiary to declare the income received and pay the tax liability related to this income.
• The income listed in Article 3, paragraphs “a” through ‘o” are potentially a source for the calculation of the tax liability, while the specific types of taxable income by categories (income from employment, business, investment, inheritances, gifts, gambling) are explicitly defined in other articles, chapters, and parts of the Law.
• Paragraph “f” of this article clarifies that income derived from rights to exploit Albanian natural resources and assets is considered to originate in Albania, is taxable in Albania, and will be treated in the same way as other income from immovable property. These rights specifically include licenses and agreements that permit the extraction of minerals, or oil and gas. Furthermore, income generated from information and data related to these rights is subject to the provisions of paragraph “f”. Example: seismic information, other technical information, and analyses that may be available regarding the existence of natural resources, e.g., oil, gas, chromium, etc., information which is transferred to third parties.

• Paragraph “g’ treats income derived from the alienation of rights, which are the subject of paragraph “f” of this article, as having their source in Albania. Subparagraph “i” of paragraph “g” specifically covers gains from the direct sale of rights to exploit natural resources, or information pertaining to such rights. Subparagraph “ii” of paragraph “g” covers indirect sales of shares, rights, and information covered by paragraph “f.” It is based on the principles of Article 13(4) of the OECD and UN Model Tax Conventions. Gains from the sale of shares (or similar interests) derived from the property, rights, or information mentioned in paragraph “f” are treated as sourced in Albania. However, these shares must derive at least 50 percent of their value from the property, rights, or information in question. These provisions are primarily important for share sales/acquisitions between non-resident Albanian individuals, in relation to property and rights located in Albania, while Albanian residents are taxed on all income on a worldwide basis.

4. Eternal Selia

• Predictions regarding the “permanent establishment” follow the pattern of prediction and are similar to the determination of this concept according to the “Model Tax Convention on Income and Capital,” published by the UN and OECD. This is because our country applies the principles of these Model Conventions in negotiations with other countries regarding bilateral agreements for the elimination of double taxation.

• The accuracy in defining the concept of “permanent establishment” is important, as it determines Albania's right to tax the profits sourced in Albania of an enterprise from another country.

5. Field of application

• In determining the tax liability of Albanian resident persons, whether individuals or entities, the principle of worldwide income taxation is applied, meaning income earned within the territory of the Republic of Albania and income earned outside the territory of the Republic of Albania, but by crediting the foreign tax paid, up to the amount of the liability payable in Albania.

• As a general rule, when determining the tax liability of non-resident Albanian persons, whether individuals or entities, the principle of taxing income with a source in Albania is applied, as well as their worldwide taxable income attributable to a permanent establishment in Albania, or their taxable income from all sources that have a source in Albania, according to Article 3 “Source of Income” in a given tax year.
• Meanwhile, in implementation of the agreements for the elimination of double taxation that Albania has signed with other countries and which are in force, the incomes and tax rates are determined in relation to the part of the tax that must be paid in Albania, as well as the methods for the elimination of double taxation through the mechanism of exemption from tax at source or crediting of tax paid in Albania.

Tax Year

• For the purposes of declaring and paying tax obligations, the tax year is the same as the calendar year, beginning on January 1 and ending on December 31.

KREU 2

     Personal Income Tax

7. Payment of Personal Income Tax

1. Natural persons, including individuals and sole proprietors, or self-employed individuals, declare and pay “Personal Income Tax”.
2. Personal income tax includes:

3. Individuals are also subject to income tax on gifts, inheritances, and gambling winnings, but they are not categorized as personal income under paragraph 7.2 above.

8. Residence of natural persons

• Determining whether a natural person (individual, trader, or self-employed) meets the conditions of a tax resident in the Republic of Albania is important for calculating their tax obligations on a worldwide basis, meaning for income earned within and outside of Albania.

• An individual is considered an Albanian tax resident if they meet even one of the conditions listed in letters “a’ through “e” of Article 8 of the Law.

• Having a stable residence means owning, being gifted, inheriting, renting, etc., a dwelling in which one lives.

• In letter b, the minimum time period of 183 days in total is determined as a criterion, which a taxpayer of personal income must meet within a tax period, in the Republic of Albania. For example, if an individual comes to Albania on November 30, 2022, and stays until June 10, 2023, they will be considered a resident in Albania because within a 12-month period they have spent more than 183 days in Albania.

• Has their center of vital interests in the Republic of Albania, meaning significant personal ties in Albania (has family, minor children, spouse, cohabiting partner) or economic ties in Albania (has businesses, manages assets, has investments, etc. of this nature).

9. Documentation

• Taxpayers of personal income tax shall maintain documentation and records as required by this Law. They shall also maintain documentation and records in accordance with accounting legislation (Law “On Accounting and Financial Statements") to the extent, documentation and records required by that legislation.

• Taxpayers who submit an income statement must justify any declared income with corresponding documentation. .
• Self-employed individuals and merchants, for whom the Law “On Accounting and Financial Statements” does not define accounting obligations, are required to record the data of their activity in:
  • income register, for the daily income they generate;
  • the expense register, for every electronic expense invoice they receive;
  • Receivable requirements for the sale of goods and services with deferred payment and payable obligations or debts on account of purchased goods or services.

The structure of the mandatory documentation is as per the attached Annex 1.

• Individuals who report income from employment must have:
  • employment contract or service contract
  • employment contract or service contract
  • employment contract or service contract

• In cases where the taxpayer claims foreign tax credit, they must possess documents related to any foreign tax paid that is allowed to be deducted from the tax payable in Albania, including: clear evidence of the income tax return in the other country, proof of payment of the foreign tax, or other authentic documents from the competent foreign authorities that verify the payment of taxes in that country and which can be credited against the tax payable in Albania.

10. Taxable personal income

• Taxable personal income according to the Law is considered to be income from employment according to Article 12, income from business according to Article 13, and income from investments (capital income), listed in Article 15 of the Law.

• Personal income is taxable regardless of whether it is paid in monetary form (leks or foreign currency) or in kind. In cases where personal income is realized in kind, it is valued at market value, converted into leks, thus calculating the taxable base upon which the tax is applied according to the law and the corresponding tax liability.

• The types and categories of in-kind income, but not limited to them, may include:
  • Payments related to services rendered or goods supplied to an employee, self-employed person, or trader, not in cash but in assets other than money.
  • assets (equipment, inventory, etc.) donated to employees by the employer
  • paid holidays for employees by the employer
  • payment for aesthetic treatments, plastic surgery, etc. of this nature
  • payment for medical treatment when not otherwise provided for in this law
  • Payments for private travel, private holiday accommodation, etc., of this nature, paid to the employee by the employer, but not related to the employment relationship or the performance of duties (services outside the place of work, transport, diets, accommodation).
  • other movable or immovable assets acquired by the employee

• Income paid in kind must be accompanied by supporting documentation proving the expense incurred in relation to the asset/service paid for, such as:
  • Electronic invoices paid for aesthetic treatments, medical care, travel, accommodation, and assets purchased and given as in-kind compensation.
  • Lease agreement and payment documentation for rent paid by someone other than the tenant, at levels no lower than those set forth in the applicable regulations for minimum rent.
  • Accounting for donated goods or inventory to employees
  • Market value of goods/services given in exchange for other goods/services received

11. Categories of personal income not subject to Personal Income Tax

In paragraphs “a” through “h” of Article 11, the categories of personal income are listed, which are excluded from personal income tax, as follows:

1. Income earned as a result of insurance in the compulsory social security and health insurance scheme means any individual income originating from payments made by the Social Insurance Fund and the Health Care Fund. Payments made by the social insurance fund include any type of payment for old-age pension, disability, compensation, etc. Payments made by the Health Care Fund, regardless of their nature, are also tax-exempt income for their beneficiary individuals.;
2. Economic assistance from public budgets for individuals with no income or low income, as defined in the relevant legislation in force, includes payments from central and local government.;
3. Income excluded on the basis of international agreements ratified by the Assembly of the Republic of Albania. Such agreements must clearly define the subjects excluded from taxation. Typically, such agreements provide for exclusions for foreign staff (non-resident Albanian individuals), while resident Albanian individuals are subject to domestic tax legislation and do not benefit from such ratified agreements; Exclusions that may be provided for in documents not ratified by the Assembly of Albania, and therefore do not prevail over domestic legislation, are not applied;
4. Financial compensation paid to property owners as compensation for expropriations carried out by the state in the public interest, paid from the central or local budgets, as well as financial compensation provided by the state to former owners for property expropriations prior to 1991.;
5. Financial compensations paid to former political prisoners and their descendants, and acquired according to the relevant legislation in force;
6. Awards and prizes given to athletes, artists, researchers, scientists, etc., whether from state institutions or local government bodies, for results and achievements in science, sports, and culture. The exemption from tax calculation and payment for these incomes does not exempt the beneficiaries from the obligation to submit the annual income declaration according to the conditions of the Law.;
7. Scholarships for pupils and students awarded by the central or local government to high-achieving pupils and students, in accordance with the relevant sectoral acts;
8. Benefits for damages, received through final court decisions, as well as compensation for court costs. The term “damages” does not include benefits in the form of wages for individuals dismissed from employment, for whom the court decision requires the payment of unpaid wages. These benefits will be taxed as if the wages had been received monthly for the period covered by the court decision.

12. Income from Employment

1. Any benefit an individual receives that is related to an employment relationship is considered income from employment and is taxed as such, regardless of whether it is called or labeled a salary, wage, reward, bonus, allowance, compensation, etc. The main principle for income to be considered employment income is that the taxpayer must follow the instructions of the payer of the income, i.e., the employer, or the person who has assigned a duty or function, in order to receive the salary/wage/the reward/bonus/compensation or allowance, or other similar elements. Within the concept of employment income are basic wages, whether for time worked or quantity produced, any permanent additions to the basic wage such as allowances for position, seniority, difficulty, distance from home, the special nature of work or service, as well as other wage supplements and bonuses. Also, income that an individual receives in the form of bonuses from a special fund, or from other funds established by various legal or statutory acts of companies, such as the 13th salary, or various payments of this nature, are considered employment income and are consolidated on a monthly basis for the purpose of calculating the tax liability.
2. Even if payments are made for employment relationships or duties that will be realized in the future, or for employment relationships or duties that have occurred in the past, the beneficiary is considered to have received employment income and will be taxed according to the rules of employment income taxation.
3. The nature of employment income also includes directors' fees, fees for serving on a board of directors or a company's legal body, as well as fees for management and participation in steering committees.
4. In cases where such payments, which may be periodic, monthly/quarterly/annual as appropriate, are received at the individual's place of continuous employment, their payer, i.e., the payroll agent, consolidates all income on a monthly basis and withholds tax according to the effective legal rates.
5. In cases where such payments, which may be periodic, monthly/quarterly/annually, as the case may be, are paid not at the place of employment but by an entity other than the one with which the beneficiary has an employment relationship, the paying entity withholds 15% tax as specified in Article 65(1)(b) of the Law. Since such income is considered employment income, the beneficiary is required to recalculate the tax liability in the annual personal income tax return by combining the income under paragraph 1, letters "a," "b," and "c." of Article 12 received each month, with the monthly salary that may have been received at the place(s) of employment, and to pay or claim a refund of any differences in the annual tax liability.
6. Even in cases of employee transfers or secondments, the individual income received by employees will be treated as employment income and taxed as such.
7. The letter “e” of paragraph 1 of Article 12 is “anti-avoidance clause” and aims to protect the employment income tax base from erosion, by transferring the taxpayer from “employed” status to “self-employed” status with the sole purpose of gaining fiscal advantages by applying more favorable tax rates.
8. If a self-employed individual derives 80% of his income from a single client, or 90% of his income from fewer than three clients, then for the purposes of calculating his tax liability on his annual/monthly income, payroll tax rates will apply. For the purposes of applying this provision, the calculation of the tax liability under this paragraph shall be carried out by the self-employed individual who meets these criteria in his annual tax return.
9. In cases where the self-employed person, a tax resident with a permanent establishment in Albania, provides services exclusively to non-resident persons in Albania, who do not have a permanent establishment in Albania in the form of a branch, agency, or representative office, the letter "e" of paragraph 1 of Article 12 does not apply.
10. Income from employment also includes payments made in cases of redundancy, loss, or termination of employment relationships. If an employee receives, in a single sum or in several payments, income from their former employer in the form of a bonus for job reduction, job closure, or termination for various reasons, the income paid will be considered income for the month in which it was paid and will be taxed according to the tax rates for payroll tax.
11. Based on the principle that employment income is taxed in the place of employment, even in cases where the workforce is provided by an employment agency that is not a resident of Albania for tax purposes, such as when foreign agencies provide Albanian legal entities with foreign labor, but the payment for the labor is made to the foreign agency under the contract, the tax calculated and withheld as payroll tax will be no less than 80 % of the total fee paid by the Albanian entity to the foreign employment agency.

Example: An Albanian construction company has asked a Chinese employment agency to supply it with 50 carpenter employees, who will work for a six-month period. The total payment, which includes the cost of labor and the agency's commission, is 380,000 euros. For the purposes of applying paragraph 3 of Article 12 of the law, the gross wage fund is assumed to be 380,000 × 80% = €304,000. Each employee is assumed to have received: 304,000 : 6 months : 50 employees = €1,013 per month. This will be the basis on which the tax liability for each employee will be calculated.

12. The following employee benefits are not considered employment income and are not part of the tax base on which payroll tax is calculated:

• the cost of food, non-alcoholic beverages, work equipment, medical treatment, and other anticipated benefits, at the premises where the employer operates or on behalf of the employer, and which are available to all employees under similar conditions and create better working conditions for employees. Employee benefits under this paragraph are considered outside the tax base only when they are provided in kind by the employer, whether for goods or services, i.e.: (i) either when they are organized and provided by the employer itself, e.g., food and non-alcoholic beverages in the entity's canteen, the doctor's or dentist's office in the entity, (ii) or when the employer procures these services from third parties and its employees receive food at a contracted restaurant, or undergo examinations or medical visits at a clinic. In cases where the employer makes monetary payments considered as payments for food, medical treatment, or the purchase of equipment such as uniforms, etc., such monetary payments received by the employee will be considered part of their personal income from wages and will be taxed as such.
• reimbursements from the employer for travel expenses, accommodation, and per diems. Such benefits must be substantiated by documentation to prove that payments, as employee benefits, are part of the fulfillment of their contractual duties and were incurred as part of economic activity and for the purposes of entity management.

The supporting documentation must also include:

1. written authorization of the relevant management level for services for work needs. Management, indicating and justifying the purpose of the trip for work needs, related to the functions performed by the beneficiary;
2. paid invoices as supporting documents, transport tickets, accommodation invoices, or other supporting documents.

• Compensation in the form of assistance for employees in cases of illness, accidents, or personal hardships they face, but only within the provisions of the applicable legislation in force when such provisions exist. Such payments and benefits must be supported by documentation (e.g., assistance in the event of a family member's death, payment for medical treatment, etc.), but the total amount of benefits must not exceed 201% of the recipient employee's annual employment income.;

• In cases where employers insure employees with insurance companies for life, health, and work-related accidents, such payments in the form of contributions for life, health, and work accident insurance, made by the employer on behalf of the employee are not considered part of the wages on which payroll taxes are calculated.

• In accordance with International Conventions or Agreements accepted and signed by the Republic of Albania or the Albanian Government, individuals who, although they may meet the criterion of Albanian tax resident, enjoy diplomatic status and are part of foreign diplomatic Missions or international bodies and organizations in Albania, are exempted from tax on income arising from salaries and compensation for their employment relationships, during the performance of their official duties in the Republic of Albania.
• In cases where an individual receives income in the form of wages, compensation, severance pay, etc., but which are related to their past employment and the payment is made in a lump sum or in installments, the income earned as wages is treated as employment income for the months and years for which it was paid, and the tax is calculated according to the wage tax rates of those tax periods. Whereas severance pay is taxed at the rate provided for in paragraph 65/1/b.

13. Business income

1. For the purposes of the Law "On Income Tax," business income of natural persons, including traders and self-employed individuals, includes, but is not limited to, the income items listed in letters "a" through "l" of Article 13 of the law. Such income shall be treated as business income if it has not previously been treated as employment income, e.g., if the conditions of paragraph 1(e) of Article 12 or of paragraph 1(b) of Article 65 are met:
   • The income of a merchant individual or self-employed person from any of their business activities, of whatever kind or nature;
   • Income that a sole proprietor or self-employed individual receives in the form of interest, dividends, profit sharing, or any fees, but only for cases where this income is part of the business conducted by the sole proprietor or self-employed individual and not part of their individual investments. Example: If a self-employed taxpayer receives interest from their business accounts, or any profit distribution from a share they may have in another business, where this share was financed by the self-employed person's business activities and not their individual accounts, these income categories will be treated as business income.;
   • Revenues from the sale of securities, which are effectively linked to and part of his business;
   • Revenues from leasing a business, regardless of whether the lease includes all or part of its tangible or intangible assets. Example: A taxpayer, a sole proprietor, converted his first-floor apartment into a shop, registered it as such with the Cadastre Agency, and included it as a contribution, part of the assets of the business he operates. If this merchant rents out a part of the shop to another merchant or self-employed person, the rental income will be considered part of his business income. But if he rents out another apartment he owns as an individual, the income he derives from this rental will be considered individual rental income, taxed as such, and has no connection to the merchant's business.;
   • Income from the sale of any type of business asset and liability, including the sale of the entire business. If assets are registered as part of the business, income from their sale will be business income. If the entire business is sold, including both tangible and intangible assets, the entire amount received from the sale is taxable business income, regardless of whether the amount received may be higher (due to the customer list, goodwill, positioning, etc.) than the value of the assets sold within the scope of the Business.;
   • Income from agricultural or livestock production, for cases where this production is traded within the framework of a business registered with the National Business Center (QKB) and equipped with a Tax Identification Number (NUIS) as a sole proprietor.;
   • The capital gain realized from the transfer of business assets and liabilities in a business reorganization, as defined in Article 46 “Applicable Rules on Business Reorganizations” of this Law;
   • Gifts, financing, or subsidies received by a sole proprietor or self-employed individual, which are given to their business and regardless of who the donor or subsidizer is. Such income in business accounts is considered business income for tax purposes.;
   • Any service fee charged by an individual to a third party in the course of his business.
   • Capital gains from the revaluation of business assets when those assets are contributed in kind to a company's capital, whether upon its formation or in a capital increase;
   • Revenue from the extraction/acquisition of virtual assets, as well as revenue from transactions with virtual assets that are effectively linked to the taxpayer's business.

2. Taxable annual business income is determined as the total amount of business income, reduced by the corresponding documented expenses incurred for the purpose of earning, maintaining, and securing income. Taxable annual business income and deductible expenses must be calculated in accordance with Chapter 4 of this law.

14. Special regime for tradespeople and self-employed individuals

1. For the purposes of declaring tax income from business, a taxpayer who has the status of a natural person, merchant, or self-employed can use:
   • The full form of the declaration, where one must report every deductible business expense and declare it according to legal requirements, by calculating gross income from the sale of goods and services, deductible expenses, taxable net business income, and the calculated income tax. In this case, the taxpayer will keep complete records regarding expenses incurred and reflected in electronic invoices issued by suppliers of goods and services, records on asset depreciation calculations by group, if any, records for paid interest and other deductible expenses. Meanwhile, gross business income must be reflected through electronic invoices for business-to-business sales and fiscal device receipts for business-to-consumer sales.
   • At his option, a taxpayer subject to income tax on business income who has realized turnover—that is, gross business receipts as defined for "income" in Article 13 of the Law—not exceeding 10,000.000 lekë for the tax year, may choose to apply the simplified form of taxable income reporting under Article 14 of the Law, by reflecting as expenses, deductible from income, the amount presumed at % of turnover (gross income) in accordance with paragraph 1 of Article 14 for each business category. Meanwhile, the gross business income must be substantiated and documented through electronic invoices for business-to-business sales and fiscal device invoices for business-to-consumer sales.

If the taxpayer's economic activity does not cover a full year, for the purpose of calculating gross income, below which the taxpayer is entitled to use the presumed expense declaration method, the income for the period is converted into annual income by dividing it by the number of months the activity was carried out and multiplying by 12. Regardless of whether the taxpayer chooses the presumed expense method, they are obligated to comply with the fiscalization legislation requirements for accepting invoices from their suppliers of goods and services, as well as to record sales of goods and services based on the requirements of this law. They are also obligated to respect the retention periods for tax documentation for both purchases and sales according to current legal provisions, as well as any other legal obligation related to providing information and data for tax verification and control purposes, according to the procedures and obligations stipulated in the Law “On Tax Procedures in the Republic of Albania” and its implementing bylaws. .

2. The declaration of taxable income, whether by the full expense recognition method or the assumed expense method, is made through the Income Declaration, which is part of these Guidelines.
3. An individual, trader, or self-employed person may choose the method according to the special regime with presumed expenses, or apply the deduction of expenses based on documentation and invoices, provided that the switch from one method to another does not occur more often than once every five years. Thus, if an individual chooses to use the special regime, they will use it for at least 5 tax periods. In case, at the end of the 5-year period, the individual trader/self-employed person chooses to keep documentation for recording expenses, they must notify the regional directorate where they are registered about the change in the regime for keeping necessary documents for the recognition of tax expenses.
4. A taxpayer who has reduced expenses to a single sum under the special regime is not allowed to claim any other deduction or compensation except for the personal allowance according to Article 22 “Deductions from the Tax Base” of this law.

15. Investment Income

1. Investment income for individuals is different from their employment income or business income in cases where the individual is a sole proprietor or self-employed.
2. In the category of investment income, or passive capital income, the following are included: income from interest on savings accounts, checking accounts, term or demand accounts, income from interest on treasury bills or bonds, income from dividends or profit distributions, income from royalties, capital gains from the sale of securities, realized capital gains from life insurance schemes, investment returns from private pension schemes, capital gains from the sale of real estate, rental income from real estate, income from the mining/earning of virtual assets, or even income from transactions with virtual assets.
3. Such income listed in point 15.2 above is considered individual income, but if any of this income, as explained in paragraph 1 of Article 13, is part of the business of a merchant or self-employed person, it is treated as part of the business income.
4. Excluded investment income shall be considered: income from the alienation of movable assets, except for the alienation of vehicles, aircraft, and ships if they are sold within less than 12 months of purchase; income from the transfer of agricultural land ownership from a registered farmer to a natural person or entity engaged in agricultural activity, as well as in cases where the legal heir inherits the land for the same purpose and activity. Also excluded from income tax are income from investments in Eurobonds issued by the Government of Albania, when the investor is a non-resident Albanian individual.

16. Taxable income from the disposal of securities and virtual assets

1. Taxable investment income from the disposal of shares, participations, and securities is determined as the difference between the selling price and the purchase price of these disposed assets.
2. If the difference between the selling price and the purchase price of such a disposed asset results in a negative amount in a tax year (resulting in a loss), such a loss can be offset against taxable investment income from the disposal of other securities in the same tax year. For virtual assets, if the taxable investment income from their disposal results in a loss in a tax year, the taxable investment income is considered to be zero, meaning the principle of offsetting with other capital gains does not apply.
3. For publicly traded securities, the purchase and sale prices are determined by the relevant trading documents on the date of sale, while for unlisted securities, the selling price is determined based on the equity value of the issuing company at the time of sale or the market value stated in the transfer agreement, if this value is higher. The purchase price is determined based on the equity value of the issuing company at the time of purchase, or the value mentioned in the transfer agreement at the time of purchase of the securities, whichever is lower. If the purchase price cannot be determined, it shall be considered zero. Also, in the case of securities acquired by inheritance or donation, the purchase price for tax purposes is the taxable value of the donated or inherited securities at the time of acquisition.
4. The transformation of securities involves the contribution in kind of securities as initial capital or a capital increase of an entity.

17. Taxable income from the alienation of immovable property

1. The procedures for calculating income, costs, and profits by case and subcase in relation to capital gains from the alienation of immovable property by individuals are clarified in the specific Instruction of the Minister Responsible for Finance and the Head of the State Cadastre Agency.

18. Taxable annual income from Investment

1. Annual taxable income from investment must include any such income as defined in Article 15 of the law and is considered the total amount of taxable income from investment.

19. Rules for controlled foreign entities

1. Article 19 of the Law sets out the rules for taxing an individual who has an interest in a controlled foreign corporation (CFC). When an individual has an interest in a controlled foreign corporation whose profits are not subject to tax or are exempt from tax in Albania, any undistributed profit derived from the individual's passive income must be included in the individual's taxable investment income.
2. To determine if the EHK rules apply, two issues must be considered:
   • if a foreign economic entity is of the kind that would be considered an institutional unit, and,
   • if the natural person has sufficient influence or control over the foreign entity such that the foreign entity is considered a UPE.

3. Any foreign entity is considered a controlled foreign entity when the following conditions are met:
   • natural person, or together with related persons, has a direct or indirect participation of more than 50 percent of the voting rights, or directly or indirectly owns more than 50 percent of the capital, or enjoys the right to receive more than 50 percent of the profit of that entity; and
   • The actual tax paid on its profit by the entity is less than 50 percent of the tax that would have been imposed on the entity had it been a resident entity in Albania.

4. The first step to determine the UBO according to paragraph a) above is to identify whether the natural person has direct or indirect control of the voting rights, capital, or profits of the UBO and then to identify the level of control determined.
5. The second step is to compare the tax paid by EHK and the tax that would have been paid if the company were a resident of Albania. For this purpose, the resident person presents the justifying documents for the tax paid by EHK, specifying the tax rate.

The following example shows the tax paid by

Calculation on the tax paid by EHK
Welcome	80 000
Tax spending	20 000
Taxable Income	60 000
Paid profit tax (6%)	3 600
Tax payable in Albania	9 000

From the above example, it follows that the tax paid by EHK is less than 50% of the tax that would have been charged to the company if it had been resident in Albania.

The test conducted for the example shows that the condition defined in paragraph b) of Article 19 of the law is met.

6. Upon completion of the analysis to determine whether the EHK rules will apply, passive income analysis is performed. Passive income will be considered:

• interest or any income realized from financial assets;
• honoraria or any other income derived from intellectual property;
• dividends and income from the sale of securities;
• income from finance lease.

7. Any undistributed profit derived from these passive incomes shall be included in the taxable investment income of the individual who has an interest in a CFC. Such income shall be declared by the individual through the annual tax return of the year to which the 60th day from the end of the CFC's fiscal year belongs.
8. These income will be taxed according to the tax rate set out in paragraph 3 of Article 24. This rule does not apply if passive income does not exceed 30% of an EHK's total profit.
9. When an entity distributes profits to a natural person and those distributed profits are included in the taxable income of the natural person, the amounts of income previously included in the taxable base according to this article are deducted from the taxable base for the calculation of the amount of tax due on distributed profits.
10. Where the EHK has paid tax in the state of residence or domicile on income included in the tax base of the physical person under this article, this tax may be credited against the general tax liability. The tax credit shall be calculated according to Article 25 “Foreign Tax Credit”.

20. Private pension tax

1. Contributions made by each member of a pension fund, and contributions made by the employer and any other contributor, on behalf and for the account of a member of a pension fund, are not considered taxable income for the purpose of calculating personal income tax.
2. Contributions made by the member themselves to a voluntary pension fund up to the level of the nationally approved minimum wage, as stipulated in the contract between the fund member and the fund management company, are exempt from personal income tax. This payment is deducted from taxable personal income before the calculation of personal income tax by the tax withholding agent. The supporting document is the contract between the fund member and the voluntary pension fund management company.
3. In cases where the employer has established a pension fund for the employee, contributions paid by the employer to the pension fund on behalf of the employee are not considered taxable income for the calculation of personal income tax and are considered an operating expense, up to an annual amount for each employee, equal to the minimum annual wage approved at the national level. This amount is considered a deductible expense for profit tax purposes.
4. The justifying document is the contract that the fund member has with the voluntary pension fund management company. In cases where a contributor other than the member themselves or the employer makes a contribution on behalf of the fund member, this contribution is exempt from personal income tax from salary. The justifying document is the contract that the fund member has with the voluntary pension fund management company.
5. In case a fund member withdraws the pension fund prematurely, they are taxed at the effective personal income tax rate on the full value of prematurely withdrawn assets, including contributions.
6. For pension fund members who have invested their previously taxed individual savings in the fund, a 15 percent deduction is applied to the tax on investment returns at the prevailing rate, reducing the tax liability payable. The member must provide documentation proving that the funds used for this investment were taxed as personal income.
7. Payments received by a pension fund member immediately, before the deadline for their periodic monthly receipt as stipulated by the law on private pension funds, are taxed at the applicable personal income tax rate on the full value of withdrawn assets, including contributions.

21. Annual Tax Base

1. For the purpose of determining an individual's annual tax base for income, all three income categories are considered: taxable annual employment income, taxable annual business income, and taxable annual investment income. This annual tax base is reduced by compensations and deductions as defined by law.
2. For the three categories of personal income that constitute the taxable base, tax rates are applied individually to each category, as defined by law:
   • Employment income is taxed at progressive rates of 13% and 23%.;
   • Net business income is taxed at progressive rates of 15% and 23%.;
   • Investment income is taxed at the respective rates of 8% for dividends and profit distributions and 15% for other investment income.

22. Deductions from the tax base

1. A personal income taxpayer with income from employment and from business may deduct from the respective tax base for the tax period:
   • a sum of 600,000 lekë if the annual income is up to 600,000 lekë;
   • an amount of 420,000 leks if the annual income is over 600,000 leks up to 720,000 leks;
   • a sum of 360,000 lek if the annual income is over 720,000 lek;
   • a compensation amount for each child under his charge who is under 18 years of age and who lives together with the taxpayer in a common household of 48,000 lek.

2. An income taxpayer with employment income can request deductions for personal allowances through the Declaration, from their payroll agent on a monthly basis, in the amount of 1/12 of the sum mentioned in Article 22, Paragraph 1. Personal allowances can only be claimed once per tax year.
3. An employee requesting personal allowances or portions thereof may not request them more than once per month. The payroll tax agent is obligated to consider 1/12 of the allowances on a monthly basis and calculate the income tax on the payroll for the employee who has signed the personal status declaration with this payroll tax agent. An employee may not sign the personal status declaration with more than one payroll tax agent for the same calendar month.
4. Whereas, the request for a deduction from the tax base regarding compensation for a dependent child is made by the family member with the highest annual taxable income, through the annual income statement.

Example 1:

Iliri works full-time as a financier at company “XX” and has a gross salary of 70,000 lekë/month or 840,000 lekë/year. Meanwhile, he also works part-time at an accounting office with a salary of 40,000 lekë/month or 480,000 lekë/year.

Calculation of deductions from the tax base:

Iliri chooses to sign the Personal Status Declaration with the accounting office. The accounting office withholds income tax from employment and is also obligated to consider 1/12 of the tax base deductions on a monthly basis. Specifically, Iliri's taxable income from the accounting office is 480,000 ALL/year. The law states that for salaries up to 600,000 ALL/year, a deduction of up to 600,000 ALL/year is applied. In this specific case, the tax agent must apply a monthly deduction of 600,000 ALL / 12, which is 50,000 ALL per month. The employee has a salary of 40,000 ALL/month from the accounting office, where after applying the tax deduction, the taxable base remains zero, and in this case, the employee does not pay income tax from employment for the income from the accounting office.

Company "XX," referred to in paragraph 1 of Article 65, applies a progressive tax of 131 TP3T and 231 TP3T under paragraph 1 of Article 24 of the Law on Wages and does not apply any deductions from the tax base.

An individual income taxpayer with taxable annual income from employment, taxable annual income from business, and taxable annual income from investment less than 1,200,000 lekë may deduct, in addition to the individual amounts according to the above paragraph, current expenses for:

1. expenses for the education of children in his charge, to the maximum value 100,000 leka;
2. medications for his children or those in his charge and persons under his care, up to a maximum value of 30,000 ALL.

The request for a deduction from the tax base regarding expenses for education and medication is made by the family member with the highest taxable annual income, through the annual income statement.

23. Request for discount

1. Compensation for a dependent child, as well as expenses for education and medicine, are claimed by the family member with the highest annual taxable income. He/she must submit supporting documents such as a family status certificate, contracts with educational institutions and payment documents, a doctor's certificate, and receipts for medicines purchased for the children, etc.
2. An individual income taxpayer with employment income, through the Declaration, may request personal deductions from their payroll tax agent on a monthly basis, in the amount of 1/12 of the amount mentioned in Article 22, Paragraphs 1/a, b, c. Personal deductions can only be claimed once in a tax year. A taxpayer who claims personal deductions or a portion thereof cannot claim them more than once per month. Other deductions besides personal deductions in accordance with Article 22, paragraphs 1/a,b,c, can only be claimed through the annual income statement.

24. Tax regulations

1. For employment income, the applicable tax rates are 13% and 23%. The reduction of the tax burden for low-income employees is not carried out by applying a 0% rate to a specific pay bracket, but by reducing the tax base (gross salary) by a fixed amount provided for in Article 22 of the law.
2. For business income, for which the tax base is net income, meaning the difference between revenue and deductible expenses, the following rates apply:
   • 15% on net profits up to 14,000,000 lek in a tax year.
   • 23% tax on each net profit exceeding 14,000,000 lek per year.

3. If a natural person who is a trader or self-employed, after deducting from gross income all deductible expenses and any allowances permitted under Article 22 of the law, declares a net profit of 12,000,000 lekë, the tax they will pay will be 12,000.000 × 15% = 1,800,000 lek.

4. If a natural person who is a trader or self-employed, after deducting from gross income all deductible expenses and any allowable deductions under Article 22 of the law, declares a net profit of 20,000,000 lek, the tax they will pay will be: 14,000,000 × 15% + 6,000,000 × 23% = 2,100,000 + 1,380,000 = 3,480,000 lek.

5. Investment income is taxed at 81% for dividend/profit-sharing income and 15% for any other item of investment income. Except as otherwise provided by law, no expenses are deductible against investment income.

24.6 Tax Calculation Examples:

Ana works in a programming office and her gross salary is 230,000 ALL/month or 2,760,000 ALL/year. Ana's husband has a business for trading hydro-sanitary equipment and has a net income of 3,250,000 ALL/year. Meanwhile, Ana has a term deposit from which she receives an interest rate of 20,000 ALL/year, while Beni has some shares in the company “XX” which paid dividends worth 25,000 ALL/year this year. Ana and Beni also have three children aged 13, 15, and 18, respectively.

Calculation of income tax from employment:

Ana has annual employment income of 2,760,000 lekë, meaning her income exceeds 600,000 lekë. The deduction from her taxable income, as per paragraph 1 of Article 22 of the law, is 360,000 lekë. Additionally, Ana has two children under the age of 18 for whom a deduction from taxable income of 48,000 lekë per child is granted, totaling 96,000 lekë. However, since Beni has higher income, Beni will be the one to claim this deduction from taxable income, as well as the deductions provided in paragraph 2 of Article 22. The income tax on employment that Ana will pay will be:

Annual income from employment of 2,760,000 lekë/year is reduced by the deductions provided for by this law. 2,760,000 lekë/year – 360,000 lekë/year = 2,400,000 lekë/year

The annual income, after deductions and offsets are applied, is taxed:

2,040,000 lek/year * 13% + (2,400,000 lek/year – 2,040,000 lek/year) * 23% = 265,200 lek/year

+ 82,800 lekë/year = 358,000 lekë/year tax that Ana pays on employment income.

b. Calculation of business income tax:

Ben has annual net income as self-employed in the amount of 3,250,000 ALL. According to paragraph 1 of article 22, Ben's income is over 600,000 ALL/year, therefore the deduction from the tax base that Ben benefits from is 360,000 ALL. Ben, as the highest-earning taxpayer in the family, will receive a tax base compensation of 48,000 ALL for each child under 18 years of age, meaning 96,000 ALL in total for his two children under 18. Meanwhile, Ben does not benefit from the tax base deductions provided for in paragraph 2 of article 22, as his annual income is higher than 2,000,000 ALL.

The annual net income from the business is reduced by the tax deductions and allowances provided for in this law.

3,250,000 lekë/year – (360,000 lekë/year + 96,000 lekë/year) = 2,890,000 lekë/year

The annual income, after deductions and offsets are applied, is taxed:

2,794,000 lekë/year × 13% = 363,220 lekë/year tax that Beni pays on business income.

c. Calculation of tax on investment income:

The income from Ana's term deposit and the dividend income Ben has received from his stock investment are investment income. Taxpayers of investment income may deduct from their tax base the deductions according to paragraph 2 of Article 22, but these deductions are not available to the taxpayers in question because Ben's income exceeds the amount of 2,000,000 ALL/year.

The investment income tax that Ana will pay on the interest earned from the term deposit will be: 20,000 lekë/year * 15% = 3,000 lekë

The investment income tax that Beni will pay on dividends received from the stock investment will be: 25,000 lekë/year * 81% = 2,000 lekë

25. Foreign tax credit.

1. Article 25 concerns the tax credit for resident taxpayers of personal income tax in the Republic of Albania who have paid taxes in other countries (outside the territory of the Republic of Albania) for income earned in those countries. However, this reduction shall not exceed the level of tax that would be applied to that income as if it were earned within the territory of the Republic of Albania, based on Albanian fiscal legislation.
2. The amount of foreign tax paid in other countries shall be verified by supporting documentation including the tax return and payment in that country, or a document issued by the foreign tax authority where the income was earned. The supporting documentation must contain the identifying information of the resident taxpayer, the nature of the income earned, the gross amount of income and the tax withheld in the other country, as well as the tax year in which the income was earned.
3. If the taxpayer has generated income from foreign sources in more than one country, then the foreign tax credit is calculated separately for each country based on the document issued by the foreign tax authority.
4. The foreign tax credit is calculated separately for each of the incomes included in the tax base, as well as for annual investment income.

26. Calculation of tax payable on personal income.

Personal income tax is calculated based on taxable income, in accordance with Article 24 of the law, at the tax rates specified for each category of income.

From the calculated tax, taxes previously paid by the taxpayer are deducted, such as: tax paid in a foreign country, tax withheld at source, tax withheld at source for income from employment relationships by the payroll tax agent, and prepayments according to Article 63 of the law.

If the difference resulting from the calculation of the tax payable (according to the above paragraph) is negative, the personal income taxpayer may request the overpaid tax, and the tax administration will reimburse the overpaid amount to him within no later than 60 days from the application of the request. The request is made through the taxpayer's account in the e-cats system. Administration

After verifying the documentation proving the tax paid, tax withheld at source, tax withheld at source for income from employment relationships by the payroll tax agent and advance payments, it approves the refund request. No later than 60 days from the application, the Administration refunds the amount of tax overpaid.

If the taxpayer does not request a refund of the overpaid personal income tax, that amount is considered an advance payment of personal income tax for the next tax period.

Corporate Income Tax

• Taxpayers for tax on corporate income

1. Entities established pursuant to the law “On Traders and Commercial Companies” are subject to corporate income tax (‘corporate income taxpayer’).
2. Also, every other entity, including non-resident entities, which establish a permanent establishment in Albania, in the form of a subsidiary, branch, or any other form, and to which profits sourced in Albania are attributed and which are not provided for in letters “a” through “d” of Article 27, Paragraph 1 of the Law, is subject to corporate income tax.
3. Corporate income tax also applies to entities that are subject to a special tax regime, such as operators under the fiscal regime for hydrocarbons.
4. Entities excluded from corporate income tax according to paragraph 2 of Article 27 of the Law, which are required to submit the Tax Declaration and Financial Reporting Statements to the tax authorities within the same deadlines as other entities, are:
   • Foundations or non-bank financial institutions established or transferred by a Council of Ministers' decision, which aim to support the government's development policies by providing loans;
   • Private pension fund managed by the management company, as well as the fund management company;
   • Entities that carry out only activities of a religious, humanitarian, charitable, scientific, or educational nature, or for study, whose assets or profits are not used for the benefit of their organizers or members, and within the limits of the non-commercial activity carried out by them;
   • Entities provided for in international agreements ratified by the Assembly;
   • Cinematographic production houses, licensed and subsidized by the National Cinematography Center;
   • Workers' organizations or chambers of commerce, industry, or agriculture, whose assets or profits are not used for the benefit of an individual or their members.

5. All entities mentioned in the preceding paragraph, regardless of corporate income tax exemption, are obligated to submit tax returns and Financial Reporting Statements to the tax authorities, within the same deadlines as entities subject to corporate income tax.
6. Entities engaged in activities of an educational, research, scientific, humanitarian, charitable, religious, etc., nature must provide data regarding their income and sources of funding, as well as the directions in which they are spent, detailing the structure of these expenses.

28. Residence

1. The definition of the concept of entity residency is important for determining and allocating tax rights. Entities established under current Albanian legislation, or under any foreign legislation, and which establish a permanent establishment in Albania, are subject to taxes according to this Law.
2. Also, if an entity, whether established under Albanian legislation or not, exercises management and control of its operations in the Republic of Albania at any time during the tax year, it is considered an Albanian tax resident for tax purposes.
3. Management and control of the affairs of an entity are considered to be exercised in the Republic of Albania if:
   • board meetings of the entity are held in the Republic of Albania, including the online participation of members, or;
   • at least two of the following three conditions are met:
     • Decisions regarding the daily management of the entity are made in the Republic of Albania;
     • at least 50 percent of the entity's board members or directors are residents of the Republic of Albania;
     • at least 50 percent of the entity's capital or voting rights are owned, directly or indirectly, by persons residing in the Republic of Albania.

29. Exclusion from participation

1. For cases where entities subject to corporate income tax under the Law, have/own participations, quotas, or shares in other entities, dividends or profit distributions from these other entities received as income by the entity holding the participations/quotas shall be treated as follows:
   • Income received as a dividend or profit distribution is not added to the profit on which profit tax is calculated if two conditions are cumulatively met:
     • the receiving entity holds shares or participations of at least 10%, in value or number, in the share capital or voting rights of the distributing entity;
     • The shares or minimum participation have been held for an uninterrupted period of at least 24 months.
   • In all other cases, income received as dividends or profit distributions is added to the profit on which corporate income tax is calculated.

2. The rules according to paragraphs “a” and “b” above also apply to non-resident corporate income tax entities, if the participation relates to business activities carried out by a non-resident in Albania, or through a permanent establishment in the Republic of Albania.
3. The guarantee mentioned in paragraph “4” of the Law means a guarantee issued by a second-tier bank in Albania, which guarantees at any time that, upon request by the Tax Administration, the amount of the guarantee will be transferred to the latter's account.

30. Interest Limitation Rules

1. For purposes of applying the interest limitation rule, interest is considered a deductible expense up to thirty percent (30%) of the entity's earnings before interest, taxes, depreciation, and amortization (EBITDA) for the taxable year.
2. EBITDA will be calculated by adding to taxable income, tax-adjusted amounts for excess interest, as well as tax-adjusted amounts for depreciation and amortization. Non-taxable income will be excluded from the entity's EBITDA.
3. “Excess interest,” also known as the excess borrowing cost, arises when an entity's interest expenses exceed the interest income and other economically equivalent taxable income an entity receives.
4. Calculation of the deductible costs of loan overage and transfer.

Step 1: Calculate EBITDA = Net Income + Taxes + Interest Expense + Depreciation & Amortization

The second step is the calculation of deductible excess interest expense.

Example;

The financial data for companies A and B are given in the table below;

	Society                   A                   (in Lek	Society B (in lek)
Teprica net interest expense	Over 10 million	+40 million
Earnings Before Interest, Taxes, Depreciation, and Amortization	100 million	100 million
× percentage set	three times three times three	three times three times three
maximum allowable as deductible expenses	30 million	30 million
Net expenses                       unbearable interests	0	10 million

• Company A has a surplus of net interest expenses of 10 million lek and an EBITDA of 100 million lek. This surplus of net interest expenses arises from the interest on loans/borrowings/financings that Company A has with third parties.  Because Company A has a net interest-to-EBITDA ratio below 30%, it can deduct all of its net interest expenses.

• Company B has a surplus of net interest expenses of 40 million lek and an EBITDA of 100 million lek. This surplus of net interest expenses results from the interest on loans/borrowings/financings that Company B has with third parties. Because Company B has a net interest-to-EBITDA ratio above 30%, it cannot deduct all of its net interest expenses. In this case, Company B is allowed to deduct 30 million lek in net interest expenses, and 10 million lek are not allowed to be deducted but are carried forward to future tax periods..
  • Interest for which a deduction is denied is carried forward for the next 5 years. Taxpayers, for this purpose, maintain records of carried-forward interest according to the years to which they belong. The deduction of excess interest is made according to the FIFO method.

• The rule set forth in this paragraph does not apply to:

1. banks, non-bank financial institutions, insurance companies, and leasing companies;
2. 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.

31. Allowance for loan losses for financial institutions

1. For financial institutions, whose activities are regulated by regulatory authorities, in determining taxable profit, a deduction is allowed for amounts to be set aside and/or increased, but limited to:
   • For the activity of insurance and reinsurance, in the mandatory technical reserves created in accordance with the law in force for insurance and reinsurance activities; and
   • For banking activities, in the mandatory provisions for commercial banks and other financial institutions established according to supervisory rules issued by the Bank of Albania for this purpose.

2. Full write-off of bad debt is allowed if the following conditions are cumulatively met:
   • The entity has taken all possible legal actions to collect the debt. The provisions of the loan/security agreement articles must have been applied, in relation to the conditions and penalties in cases of non-repayment of the loan/interest. In any case, argumentation with administrative court proceedings where final decisions have been made is necessary.;
   • Due to its uncollectibility, even though all legal remedies as provided in paragraph “a” above have been exhausted, the bad debt shall be written off from the accounting of the claimant entity; In any case, the reserves or provisions created according to paragraph 1 above, must be added to the taxable profit.

• If a bad debt reserve was previously created for a specific case, but this case has been resolved, the amount collected/recovered should be added to taxable profit in the year it is recovered, except when it is transferred in connection with a business reorganization under Article 46 “Applicable rules on business reorganizations” of this law.

32 – 39. Procedures concerning:

1. Price transfer;
2. Comparability of transactions;
3. Transfer pricing methods;
4. Evaluation of combined controlled transactions;
5. The range of market indicators;
6. Requirements for documentation;
7. The corresponding rules and
8. Advance pricing agreements:

They are clarified in the specific guidance of the Minister of Finance regarding international taxation.

40. Revenue and calculation of corporate income tax payable

1. Corporate income tax is declared by taxpayers on an annual basis. For economic activity carried out during a full tax year, from January 1 to December 31, the declaration of taxable income must be filed by March 31 of the following year.
2. In cases where the taxpayer discontinues economic activity during the year, the declaration of taxable profit may be made at any time during the year and covers the economic activity up to the date of the declaration.
3. For the calculation of the deferred profit tax, the applicable tax rate is applied. The profit tax calculated under the provisions of the Law "On Income Tax" is payable. The profit tax liability to be paid is reduced by:
   • Foreign tax paid, but within the criteria and limitations of Section 42 "Credit for Foreign Tax on Corporate Income Tax."
   • Any tax that the corporation has paid under Chapter 5 of the Law, and which has been withheld at source by the payer of the income. For example, if entity "A" has received a payment from entity "B" in connection with a granted copyright, and entity "B" has made a payment under the contract of 1,000.000 lekë, withheld 15% tax (i.e., 150,000 lekë), this amount paid as tax is creditable against the corporate income tax liability of entity "A."
   • Prepayments of profit tax made by the entity in accordance with the provisions of the relevant article of the Law.

4. The total corporate income tax liability, calculated by subtracting the above payments from the computed income tax, constitutes the amount due.

41. Taxpayer identification number

• The standard corporate income tax rate in Albania is 15 percent.

• Any rates deviating from the standard rate that may be applied continuously or temporarily to certain sectors and industries must be specified in this law or in other fiscal laws, such as the Law "On the Fiscal System in the Hydrocarbon Sector"; Libreast “"For the Technological Development Zones" Law "” For IT incubators ………"”

42. Foreign tax credit for corporate income tax

1. Entities resident in the Republic of Albania are entitled to a credit for foreign tax paid in respect of permanent establishments they may have established in other tax jurisdictions outside Albania and to which the profits realized in those countries are attributable.
2. Example 1:

In 2023, an Albanian resident entity carries out economic activities in Albania but has also established a permanent establishment as a Branch in Italy. From the activities in these two permanent establishments, the entity has realized net profit as follows:

• from the activity in Albania: 30,000,000 lek
• from activities in Italy: 16,000,000 Albanian Lek

This entity, as an Albanian tax resident, is subject to taxation in Albania on profits earned from all sources, both within and outside the territory of the Republic of Albania.

Therefore, the tax liability in Albania will be:

• Total profit: 30,000,000 + 16,000,000 = 346,000,000 lek
• Corporate profit tax: 46,000,000 × 15% = 6,900,000 lek

With respect to the profit earned in Italy—a profit that is attributed to the permanent establishment created in Italy and that would normally be taxed in Italy—this entity is required to pay in Italy income tax as a nonresident that has established a permanent establishment. Assume that the tax rate in Italy is 36% on net profit. Therefore, the tax paid in Italy:

16,000,000 x 36% = 5,760,000 lek

The taxpayer has submitted to the Tax Administration the complete documentation proving the payment of this tax in Italy. In the meantime, the Albanian entity reduces the tax as follows:

Corporate income tax that would have had to be paid if income earned in Italy had been earned in Albania:

16,000,000 × 151 TP3T = 2,400,000 lek. Only this amount will be subject to the reduction of the tax payable in Albania.

• -2,400,000 = 4,500,000 lekë will be the final corporate income tax liability payable in Albania

3. Example 2.

Suppose an entity has a branch for conducting economic activity in North Macedonia, where the current corporate income tax rate is 10%. In this case, we would have:

• Profit realized in Albania: 10,000,000 lek
• Profit realized in North Macedonia: 6,000,000 lek

Corporate income tax liability to be declared: 10,000,000 + 16,000,000 =

16,000,000 x 15% = 2,400,000 lek

For the profit it has realized in North Macedonia, the entity has been taxed there at the rate of 10.1%, i.e., 6,000,000 × 10.1% = 600,000 lek.

In this case, since the tax paid in Macedonia (10%) does not exceed the tax payable on those income in Albania (15%), the corporate profit tax payable in Albania will be reduced by only the tax paid in North Macedonia for 600,000 lek.

2,400,000 - 600,000 = 1,800,000 Albanian lek, will be the final corporate income tax liability to be paid by the entity in Albania.

4. The credit (reduction) of corporate income tax paid outside Albania, for profits earned outside Albania, in no case shall exceed the tax payable in Albania, but may be less than or equal to the tax payable in Albania, if those profits were realized in Albania.
5. The same principle regarding foreign tax credit also applies to individuals, including sole proprietors and merchants, if they have income sourced from outside Albania.
6. In this case, after the taxpayer has submitted complete documentation proving that they have earned income and paid taxes in Macedonia on this amount, the tax credit will be granted as follows:
7. The amount of foreign tax paid is verified with the relevant documentation.

1. Permanent establishment registration document in a foreign country (corresponding TIN, etc.);
   • Copies of the tax declaration filed in the country where the permanent establishment is located;
   • Bank transfer documentation justifying payment of corporate profit tax/personal income tax in the respective country.

General Provisions on the Determination of Profit

• Profit You are a fighter.

1. Taxable profit is calculated as the difference between income and deductible business expenses. Revenue includes all business income realized, regardless of its nature. The tax treatment of expenses takes into account the limitations under this law regarding expenses incurred by the business that are considered partially or wholly nondeductible.
2. The construction of the Taxable Profit Statement begins with the data, records, and statements kept by the taxpayer, in implementation of the obligations based on the law “On Accounting and Financial Statements,” as well as on the sub-legal acts implementing this law.
3. In any case, for the purposes of the Corporate Income Tax Declaration, the provisions of tax legislation shall be taken into consideration as a priority, regardless of any different treatment that Accounting Standards or the law “On Accounting and Financial Statements” itself may provide.

Market principle.

The procedures and standards that apply to ensure that transactions between related parties are in compliance with the arm's length principle are set forth in the specific Guideline of the Minister responsible for Finance.

45. Long-term contracts

1. Long-term contracts typically involve economic activities in the execution of a project for which supply contracts for goods or services are entered into between the client and the contractor for a period exceeding 12 months and which are primarily carried out in the construction sector, assembly, production of investment components, or services related to these contracts:
2. For these types of contracts, tax periods must be harmonized when expenses incurred for generating income are allocated. Income related to a long-term contract and to be recognized and reflected in the Taxable Profit Statement corresponds to the portion of the contract completed in the respective tax year.
3. The completion percentage is determined in two ways, depending on the method the taxpayer chooses:

1. referring to that year's cost report with the estimated and preventive overall expenses
2. referring to national and international accounting standards.

• Tax-deductible expenses related to long-term contracts are taken into account in the tax year in which they are incurred, in accordance with accounting standards.

46. Applicable Rules on Business Reorganizations

• Changes in the structure of an entity, such as mergers, demergers, partial demergers, share exchanges, and transfers of business branches, are within the concept of business reorganization.
  • Regarding transferred assets, in cases of business reorganization, assumed capital gains that are subject to tax should not be calculated. Cash payments that exceed the payment classified as cash are an exception.

47. Tax calculated for the transfer of business assets

1. The transfer of business assets is considered taxable in the following cases:
   • A resident taxpayer transfers business assets from its domestic head office to a permanent establishment abroad and the Republic of Albania no longer has the right to tax the transferred business assets due to the transfer
   • a taxpayer resident transfers their tax residence to another country, excluding those business assets that remain effectively connected with a permanent establishment in the Republic of Albania.

2. The taxable base to which tax will be applied is the amount equal to the market value of the transferred business assets minus their tax value, at the time of the withdrawal of the business assets.

48. Deductible Expenses

• For the purposes of calculating corporate profit tax, business expenses are considered deductible from revenue if they meet the following conditions:

1. They are not subject to the restrictions provided in Article 50 of this law.;
2. They are actual expenses incurred in the direct interest of economic activity.;
3. These are expenses related to the necessary and normal conduct of the taxpayer's activities;
4. These are expenditures made with the purpose of realizing and securing profit, preserving assets and capital as a source for generating income, or expenditures to ensure, at the appropriate time, the renewal or replacement of capital, such as depreciation expenses.;
5. To be faced or to be faced by the taxpayer's assets;
6. To be reflected in the taxpayer's accounting;
7. To be proven by taxpayers with the necessary legal documentation:
   • Electronic invoice, according to the definitions in the tax legislation for fiscalization, for VAT and tax procedures, in relation to business-to-business transactions.
   • A legal document for cases where payments are made in the form of service fees in the interest of business, for public entities or other legal entities recognized by the Republic of Albania.

8. An expense considered deductible by a taxpayer, claimed as such based on the fact that it is reflected in a formally regular electronic invoice, does not automatically lead to its consideration as deductible, because the expense must be a real transaction carried out and representing a real supply of goods or services, meaning it is not a fictitious transaction for which an electronic invoice has been issued.

49. Deductible Expenses for Land Exchanged for Construction

1. For the construction sector, the methodology for recognizing revenue from sales and activity expenses, as well as the consideration of the profit share of landowners and the land costs themselves, are determined by a Decision of the Council of Ministers.
2. Enterprises operating in the construction and/or sale of buildings for housing, manufacturing, commercial, or service purposes, reflect as revenue: revenue from entrepreneurial activity, if they are solely construction entrepreneurs; revenue from the sale or rental of properties, if they are simultaneously builders and owners of the constructed properties. For the determination of revenue from the construction process and from sales, the following are considered:
   • costs and declared profit in contracting situations for contractors;
   • real estate sales contracts and the prices reflected therein;
   • data declared by real estate agencies, construction or investment companies, concerning the sale prices of construction products;
   • Reference prices in force for m2 of construction product according to its intended use and according to current subordinate acts; reference rental prices according to current subordinate acts.

2. Expenditures in the construction sector include the expenditures incurred during the construction process, as well as other deductible expenses incurred during the design, implementation, and sales phases of the construction product.

50. Non-Deductible Expenses and Deduction Limit

1. Business expenses listed in Article 50 of the law are not deductible from taxable profit:
   • The cost of purchase, improvement costs, and other expenses incurred in connection with the improvement of land, real estate, or building plots are not deductible business expenses. These costs are not deductible from income, either as expenses of the year in which they occur or as depreciable costs over several periods.;
   • Costs of acquisition, improvement, renovation, and reconstruction of depreciable assets. Such costs include expenses incurred within one year that are intended to improve the future beneficial capacity of the assets, and when such costs exceed 15% of the asset's remaining value (original cost minus accumulated depreciation). If these costs incurred within a year do not exceed 15% of the asset's remaining value (original cost minus accumulated depreciation), they are considered current period expenses;
   • The depreciation of long-term assets is allocated as an annual expense, based on depreciation rates, years, and other rules of Article 51 of the Law. No long-term asset is considered an immediate deductible expense in the year of purchase or creation, unless otherwise stipulated in the Law.;
   • The increase in a company's share capital or a partnership's contributed capital affects balance sheet accounts by reflecting an increase in assets on the asset side and an increase in capital/contribution on the liability side, and does not affect expense accounts.;
   • Dividends calculated/distributed to shareholders or partners, as well as dividends of other entities according to the Law, because they are elements that are calculated after income, expenses, profit, and corporate income tax have been declared;
   • Interest paid by taxpayers, which exceeds the average annual interest rate for credit on the market set by commercial banks, as officially published by the Bank of Albania. Interest paid on loans issued by microcredit institutions are excluded from this rule, and are considered fully deductible. Microcredit institutions include …………………….
   • Administrative penalties include fines, late fees, or other penalties paid by a taxpayer to an authority for violating legislation in the field, as well as criminal penalties or penalties that a taxpayer pays or must pay for non-fulfillment of contractual obligations with other taxpayers.;
   • Creation of reserves and other special funds, as well as creation or increase of provisions. Legal and other reserves are created from after-tax profit. Provisions for risks that the taxpayer may incur are not allocated to deductible expenses, and in cases where the taxpayer has reflected them as non-deductible expenses, they are reclaimed, and income from reclamation is not reflected as taxable income. Cases provided for by law related to insurance and reinsurance activities, as well as banking institutions or other financial institutions, are excluded from the above rule.;
   • Corporate profit tax, creditable VAT, and excise duty calculated by entities that calculate excise duty;
     • In cases where taxpayers are subject to VAT and have the right to credit the VAT paid on the purchase of goods and services, the VAT paid is not part of the cost of the purchased goods and services and is not reflected as an expense. If the taxpayer does not have the right to credit the VAT paid on the purchase of goods and services, the value of the purchased goods or services, including VAT, is considered a deductible expense.
     • Taxpayers producing taxable goods subject to excise duty, such as fuel producers, alcoholic beverage producers, beer producers, etc., do not include the calculated excise duty as part of their cost of goods sold, nor do they reflect it as an expense. Taxpayers importing taxable goods subject to excise duty include the excise duty paid upon import of the imported goods as part of the cost of goods purchased, a cost which they transfer to the selling price of goods. Any other taxpayer who, for business needs, purchases goods subject to excise duty, calculated by the domestic producer or paid upon import, the cost of the purchased goods, including excise duty as part thereof, is a deductible expense.
     • In cases where a taxpayer, acting as a tax agent, withholds withholding tax for the beneficial recipient of the income who has provided the service, the gross amount of the paid invoice is considered a deductible expense, while the tax withheld for the service provider is not a deductible expense.
   • Expenditures for hospitality and entertainment that exceed the limit of 0.3 percent of annual revenue for all taxpayers;

Expenses that exceed the 3,100-euro limit of total documented expenditures incurred for participation in, or presentation at, fairs or exhibitions abroad by exporting taxpayers.,

excluding contract manufacturers, who in the last 3 years have generated over 70 percent of their revenue from exports.

Representation expenses include documented general expenses that a company incurs for presenting its products or services in business relationships with partners or clients, domestically or internationally, such as expenses for organizing business meetings, participating in trade fairs, presenting new projects or products, inaugurating investments made, etc., of this nature.

• Expenses incurred as personal consumption by shareholders, partners, managers, and their families. Such personal expenses are not covered by the taxpayer's other means and assets. Examples: food, accommodation, fuel, private travel, rent payments, home purchase payments, entertainment payments, healthcare or aesthetic care payments, private telephone subscription payments, and others of this nature, payments for recreation, payments for accommodation, rent, or other employee expenses not part of the taxpayer's payroll, regardless of the terms of the contract with the supplier of goods or services where these employees are employed, as well as any other payment or expense that is of a personal consumption nature and is not an expense related to and affecting the increase or preservation of the taxpayer's income and profit.;

• Expenditures that exceed the limits established by law or by-laws;

1. Dietary restrictions. The benefits for employees who are sent on business trips abroad due to the taxpayer's work needs are limited to:
   1. Accommodation within the country, up to 6,000 lekë per day
   1. Accommodation abroad, up to 150 euros per day
   1. Per diem payment for in-country food services, up to 4,000 ALL per day and 2,000 ALL for partial days
   1. Per diem for food services abroad, up to 80 euros per day and 40 euros for partial days.
   1. Domestic travel expenses, not exceeding the price of approved public transport tickets.
   1. Payment for travel abroad, submission of an invoice and payment of an air, sea, rail, or road transport ticket

• Gifts and donations that a taxpayer can make, excluding gifts of a symbolic nature, but within the limits allowed in paragraph “j” of Article 50 of the Law.;

• Expense invoices for technical, consulting, and management services invoiced by non-residents, if these invoices are not paid by the taxpayer and the tax withheld at source is not transferred to the state budget revenue account within the deadline for submitting the annual tax return. If such expenses are paid later, they are deductible in the tax year in which they are paid, but not when paid later than December of the year following the invoice year;

• expenditures for wages, bonuses, and other forms of personal income related to employment relationships, paid to employees, including administrators, and not made through the banking system;

• Expenses related to amounts paid in CASH exceeding the limits set by the provisions of the law “On Tax Procedures in the Republic of Albania”;

• Life and health insurance expenses for the taxpayer's employees that exceed 51% of their gross wages for the tax year. Such expenses within the allowable limit are documented by the contract between the taxpayer and the insurance company, as well as by the insurance policies for each employee.;

• Expenses for financing through scholarships, both domestic and foreign, awarded to pupils and students on the condition that the recipients of these scholarships are not family members or persons related to shareholders, partners, administrators, or other company executives;

• Expenses for contributions made by the employer on behalf of its employees to a private pension plan, exceeding the limits of paragraph 5 of Article 20 of the Law. Such expenses within the allowed limit are documented by the contract between the taxpayer and the Private Pension Fund, as well as by the payments made for each employee based on the scheme.;

• Expenses that are related to revenue generation but are not included in this year's taxable income. Such expenses should be considered prepaid expenses and will be allocated to the income and expense statement in the period when the revenue generated as a result of these expenses is declared.;

• Bribery and corruption, which may be reflected in the taxpayer's documentation, regardless of their addressing according to the Criminal Code;

• Expenditures incurred for sponsored activities that exceed the following limits:

1. up to 5 percent of profit before tax for press publishers and publications of literary, scientific, encyclopedic works, as well as for cultural or artistic activities.
   1. up to 5 percent of profit before tax for sports activities. Sponsored amounts, within the above limit for sports team activities, part of sports federations recognized by the current legislation of the field, for the purpose of calculating profit tax for the tax period, are deductible as three times the value of the sponsored amount. Their carryover to future tax periods is not allowed. This deduction is permitted after the issuance of a “Sponsorship Authorization” by the Director General of Taxes. Paragraph “ii” applies only to sponsoring entities that realize an annual taxable profit exceeding 100 million lek.
   1. up to 3 percent of profit before tax for sponsorships of other activities not included in points “i” and “ii” above.

For taxpayers who realize an annual taxable profit exceeding 100 million lekë, the amounts sponsored for the activities of sports teams, to federations recognized by the applicable sports legislation, which are within the 5% limit of pre-tax profit for the purposes of calculating income tax for the tax period; these sponsorships are deductible up to three times the amount of the sponsored sum. Carrying them forward to future tax periods is not allowed.

Example

A taxpayer resulted in taxable profit before tax of 1,000,000,000 lek. Expenditures The sponsorship amount for that fiscal year is 40,000,000 lekë, or 4% of pre-tax profit, which is less than the permitted sponsorship rate of 5% of pre-tax profit. For the calculation of corporate income tax, the sponsored amount of 40,000,000 lek will be recognized as a deductible expense equal to three times its amount, i.e., 120,000,000 lek. The corporate income tax calculated for payment is 132,000,000 lek (1,000,000,000 – 120,000,000 lek) × 15%.

In order to qualify for recognition as deductible expenses up to three times the sponsored amount, the taxpayer must possess an “Authorization for Sponsorship” issued by the Director General of Taxes. The following procedure applies for the issuance of the authorization by the Director General of Taxes:

Sponsorship Authorization is granted for sponsorships undertaken for the activities of sports teams, part of sports federations recognized by the current legislation in the field, and each sports team must verify that it is part of recognized sports federations according to the current legislation “On Sports," in order to be eligible for such sponsorship by taxpayers.

The documentation submitted by a sponsoring taxpayer to the General Directorate of Taxation to obtain sponsorship authorization includes:

For the sponsorship beneficiary, documentation must be provided to prove that:

• participates or has the right to compete at an amateur or professional level as defined in Law no. 79/2017 dated 27.04.2017 “On Sports” and is part of a sports federation;
• has been operating in accordance with the applicable sports legislation for at least one year;
• No unpaid tax obligations;
• has not been convicted by a final court judgment for criminal offenses in the field of tax evasion, non-payment of tax obligations, or document falsification;
• has fulfilled all obligations arising from the legislation on social and health insurance;
• is not subject to bankruptcy and/or liquidation proceedings or any other similar procedure;
• It has not been suspended by court order. For the sponsoring taxpayer, it is presented as follows:
• a statement in which they commit to providing sponsorship for the sports team part of

sports federation seeking financial support;

• the sponsorship agreement between the sponsor and the beneficiary;

• Bank documentation verifying the sponsorship amount transferred to the sponsored party's bank account;

Additional documentation accompanying the request of the sponsoring taxpayer and the entity

Sponsored

• The sponsor and the sponsored entity present a program on sports development which foresees: sponsorship needs, the use of sponsorship funds during the year (highlighting funds to be used for the development, improvement, and renovation of sports infrastructure, identification of talents and training needs, coverage of expenses arising from the organization of sports competitions), as well as the anticipated benefits from this sponsorship.;

• The declaration of the sponsored person and the sponsor, by which they guarantee the truthfulness of the data in the documents and statements submitted in the application;

• Written authorization from the sponsor and the sponsored party, acknowledging the authority of the tax authority to conduct all necessary verifications and inspections at any time in order to ensure compliance with the law and the rules set forth in the tax legislation and the sponsorship legislation.;

• Self-declarations that the sponsor and the sponsored are not in a situation or circumstance of conflict of interest.

The documentation and/or verifications requested above are submitted in original format or as notarized copies of the required documentation.

Sponsorship Authorization“

The General Director of Taxes reviews the submitted documentation within 30 days of the submission of complete requested data. After reviewing the documentation, he decides on the approval or rejection of the Sponsorship Authorization.

The application for a “Sponsorship Authorization” is rejected if:

• It is proven that applicants do not meet all requirements according to the procedure specified in this Guideline; or
• From verifications and checks that can be carried out at any time with the sponsor and the sponsored party, it is verified that the parties have submitted untrue or distorted information, data, or documentation in relation to the procedure's requirements.

Recognition as a deductible expense is applied after the issuance of the “Sponsorship Authorization” by the Director General of Taxes, a procedure that should not exceed 30 calendar days from the moment of application.

• losses, damages, spoilage, and shortages during production, transit, storage, and trade, beyond the limits set forth in applicable special statutory and regulatory acts in force.

• For goods to which excise duty applies, waste, losses, damages, and spoilage during the production, storage, transport, and trade process shall be calculated according to the legal and sub-legal provisions of the current Excise Law;

• For manufacturing industries that use fuel in their technological process, fuel raw material standards are determined according to CM No. 612, dated 09.05.2012 “On the implementing provisions of the law “On Excise Duties”, as amended”;

• For tobacco, waste and losses in the processing-handling process are calculated according to the provisions of Decision of the Council of Ministers No. 687, dated June 18, 2009 “On determining the level of allowable waste during the processing-handling process of tobacco”;

• For losses and spoilage in the production process, for which there are no specific legal and sub-legal acts, their permissible quantity and value will be calculated based on the data of the technological card or scheme of the production process regarding these spoilage or damages.;

• With the exception of excise goods, which are covered by Decision of the Council of Ministers No. 612, dated 5.9.2012 “For the implementing provisions of the law “On Excise Duties”, as amended”, for other goods no losses during transport or storage will be recognized;

• For electrical energy, distribution losses will be considered the percentage of losses defined in DCM No. 171, dated 25.2.2015 of the Council of Ministers “On the approval of the financial recovery plan of the electricity sector.”.

Taxpayers who claim to have losses or legal losses in their technological process must have submitted to the Regional Tax Directorate, data and supporting documentation for:

• technology map of the line, plant, etc.;
• description of the production process;
• the object's floor plan;
• Consumption standards for raw materials and labor hours per unit of finished product (production technological card);
• Materials used in the production process and the stages where they are used.

If required by current Albanian legislation, technological cards must be confirmed/certified by a recognized institution that has the technical capacity to confirm technological cards, such as: the National Agency of Natural Resources (AKBN), the National Food Authority (AKU), the Institute of Construction Materials, the General Directorate of Standards, the Directorate of Patents and Trademarks, the National Agency of Medicines and Medical Devices, the responsible State Inspectorate, as well as any other institution that supervises specific fields of activity and approves/supervises various technological cards.

The tax administration, in its thorough audits, analyzes the technical cards or diagrams of the production process that accompany the respective machinery or lines from their manufacturer, and also carries out verifications related to the level of losses incurred during the production/processing process.

• any claimed expense, the amount of which is not substantiated by documents from the taxpayer, or for which the document does not represent a real transaction carried out by them, according to the principle that substance prevails over form.

• The documentation that justifies an expense claimed as deductible from income is that provided for in the legislation “On Fiscalization”.

• However, in cases where an expense claimed as deductible is justified by an invoice issued by a seller of goods or services, it will be considered a non-deductible fictitious expense if the following conditions are met:
  • The taxpayer seller does not conduct economic activity with goods and services that have been invoiced to the buyer;

• We are facing a VAT carousel fraud scheme through invoices

51. Amortization

1. For the depreciation of the Business's long-term assets, the straight-line method is used for all groups. Long-term assets in each group are depreciated individually.
2. The basis on which depreciation is calculated for each group is the cost of acquiring or creating the asset, plus the cost of its reconstruction during the tax year. Reconstruction expenditures on an asset in a year must exceed 20% of the asset's purchase or creation cost in order to be recorded as an addition to the asset's value and depreciated over time. If such expenses are less than 20% of the cumulative cost of acquiring or creating the asset, they are treated as operating expenses for the tax year and reported as deductible expenses for that period.
3. If an asset becomes obsolete during a tax year, its remaining book value for tax purposes is deductible in that year, provided that any potential revenue from its obsolescence is included in taxable income. Obsolescence means its sale, either as an asset, for scrap, or even disposal as waste if the type of asset is such that it has no value even as waste or scrap.
4. Business asset revaluations, carried out by it in accordance with Accounting Standards and principles, or in accordance with any applicable law for the revaluation of fixed assets, are not taken into account for the purpose of the basis on which depreciation is calculated.

52. Inventory Valuation

1. For the valuation of inventories, including work-in-progress inventory, the taxpayer may use any of the valuation methods provided for by accounting legislation. However, the method used for its valuation must be continuous for no less than 5 years.
2. Revaluations or possible revaluations of inventories, financial assets, and intangible assets, after their initial recognition according to accounting rules, are not recognized for the purpose of calculating taxable profit. This rule also applies to financial assets and intangible assets.

53. Bad Debt Write-offs

Except for financial institutions, including insurance companies, if income from the sale of goods or services is recorded in accounting as such, but the money cannot be collected, the taxpayer treats it as bad debt according to the provisions of Article 53 of the law. If the debtor is a related party as defined in this law, the deduction of bad debt is not allowed. The deduction is allowed if the taxpayer believes that the debt will not be fully or partially settled, while having taken the necessary steps to collect the debt. The taxpayer bears the burden of proof to convince the tax administration that they have taken the necessary steps to collect the debt, including engaging private debt collection companies under contract.

The taxpayer will fully write off the amount of this debt if it is verified that they have taken all possible legal actions to collect the debt, but have been unsuccessful, and having no hope of collection, have written it off as a receivable from their accounting books. Taking all actions implies the results of the court process, the results of engaging private bailiffs, or other measures and information that justify writing off the debt as uncollectible.

Carrying Losses

1. Losses from economic activity, resulting in a specific tax year, can be carried forward, meaning they can be offset against profits from the next five tax years. Losses declared by the taxpayer, which the tax administration has audited and concluded cannot be carried forward, should not be carried forward by the taxpayer. The administrative act for not allowing the carryforward of losses can be accepted by the taxpayer, otherwise, a Decision from the Administrative and/or Judicial Appeal structures is required.

Example 1.

A million leks

No	Years	Tax Profit/Loss	Allowed carry-on baggage loss	Gain/Loss for the year after carrying forward prior year losses	Taxable income
1	2023	-10	-10	-10	0
2	2024	1	-1	0	0
3	2025	2	-2	0	0
4	2026	1	-1	0	0
5	2027	3	-3	0	0
6	2028	2	-2	0	0
7	2029	6	0	6	6

In 2029, the remaining loss from 2023 of -1 million Albanian Lek (10-1-2-1-3-2) is not carried forward as 5 years with taxable profit have passed, the profit of which has been offset by the losses carried forward from 2023. In 2029, the taxable profit of 6 million Albanian Lek will be taxed according to the applicable tax rate.

Example 2

one million lek

No	Years	Tax Profit/Loss	Allowed carry-on baggage loss	Allowed carry-on baggage loss	Gain/Loss for the year after carrying forward prior year losses	Taxable income
1	2023	-10	0		0	0

2	2024	1	-1 (2023)		0	0
3	2025	2	-2 (2023)		0	0
4	2026	1	-1 (2023)		0	0
5	2027	2	-2 (2023)		0	0
6	2028	-2		-2 (2028)	0	0
7	2029	8	-2 (2023)	-2 (2028)	6	6

Any loss can be carried forward and reduce taxable profits for the next 5 years. The loss of each year will be itemized, following the principle of “earlier loss carried forward before later loss.” If a loss cannot be carried forward against the profits of the next 5 years, because the taxpayer may end up with a loss in any of those 5 years, the loss carryforward will be terminated.

• If the taxpayer reports a taxable loss in a year, but may also have allowable losses to carry forward from prior years, and in that year a direct or indirect change in ownership occurs that exceeds 50% of shares, shares or voting rights, the carryforward of the loss incurred in that year or the right to carry forward losses from previous years is not permitted. This limitation applies in cases where the change in ownership is accompanied by a change in the type of activity that the taxpayer was engaged in and will engage in:

Example 1.

A taxpayer engaged in the production of plastic pipes began investing in this economic activity in 2022. The economic activity in 2023 resulted in a loss of -4 million lek, while there is a carryover loss from 2022 of -10 million lek. In 2023, a change in the ownership of this enterprise occurs, a change that exceeds 50% of shares, quotas, or voting rights. But this enterprise, in 2023 as well as in subsequent years, continues to operate in the production of plastic pipes, consequently, based on the paragraph "2" of Article 54 of the Law, the taxpayer will continue to carry forward the losses of 2023 and those of 2022, in accordance with the provisions of paragraph 1 of Article 54.

Example 2.

A taxpayer engaged in the production of plastic pipes began investing in this economic activity in 2022. The economic activity in 2023 resulted in a loss of -4 million lek, while there is a carried-forward loss of -10 million lek from 2022. In 2023, there is a change in the ownership of this enterprise, a change that exceeds 50% of the shares, quotas, or voting rights. However, in 2023 this enterprise decides to sell the plastic pipe production line and use the building where this activity took place for the wholesale trade of industrial goods. In this case, based on paragraph 2 of Article 54 of the Law, the taxpayer is not entitled to continue carrying forward the losses of 2023 and those of 2022, as provided in paragraph 1 of Article 54.

Example 3.

A taxpayer engaged in the production of plastic pipes began investing in this economic activity in 2022. The economic activity in 2023 resulted in a loss of -4 million lek, while there is a carried-forward loss of -10 million lek from 2022. In 2023, a change in ownership of this enterprise occurs, a change that exceeds 50% of the shares, quotas, or voting rights. However, in 2023, this enterprise decides to sell the plastic pipe production line and use the land for construction. In this case, based on paragraph 2 of Article 54 of the Law, the taxpayer is not entitled to continue carrying forward the losses of 2023 and those of 2022, as provided in paragraph 1 of Article 54.

Losses transferable if we are in the conditions of business reorganization according to the provisions of this law and the legislation in the field, the limitations of the second paragraph of Article 54 do not apply. In these cases, the carried-forward losses can be used by the acquiring company, and used to reduce taxable profits during the remaining tax periods for future years according to paragraph 1 of Article 54 of the Law.

Example: If a taxpayer carries forward the loss from 2023 to the profits of 2024 and 2025, while in 2026 this taxpayer's business is reorganized, the still-unutilized loss from 2023 can be carried forward under the new reorganization conditions even to the profits of 2026 through 2028.

55. Ownership change tax for special sectors

1. Gains from indirect sales/transfers of assets located in Albania, or of capital quotas related to these assets, included in paragraph 1 of Article 55 of the Law, are subject to capital gains tax in Albania. An indirect sale occurs when a company owns an asset/property in Albania, which a third party wishes to purchase. However, the company does not sell the asset to the third party, but the third party buys the shares of the company that owns the asset, thereby indirectly buying the asset. The purchased shares may belong to the company that owns the asset in Albania, or even to other companies that hold shares directly or indirectly in the company owning the asset in Albania. Typically, there is a chain of interconnected companies between the asset/property located in Albania and the ultimate indirect owner, while the sale can occur at any point in the shareholder chain.
2. A legal entity holding an asset in Albania is considered the beneficiary of income from the sale of shares/quotas/rights, where such income is equal to the market value of the portion of the asset treated as transferred. The market value of an asset is what a third party would consider when negotiating the sale terms of shares that cause a change in ownership. Acknowledging the terms of the share sale helps determine the market value of an asset treated as sold. Additionally, other relevant methods for determining market value may be used. The amount of income treated as received from the sale will subsequently be reduced by the proportionate purchase cost/value of the asset, thus determining the profit or loss for the presumed sale of the asset. The resulting profit will be included in the income calculation of the entity holding the asset in the year the asset transfer occurs. While a loss that may result from this difference will be deductible, if this loss contributes to an overall loss for the year, it may be offset.
3. The legal entity holding the asset is treated as the buyer of the asset that is treated as transferred. In this way, while the legal entity is treated as if it is transferring the asset, this person remains the holder (owner) of the asset. The cost of the asset will change due to the assumed transfer and repurchase. The new depreciable cost of the asset will be equal to the sales revenue that the legal entity is considered to receive.

Example 1

It is assumed that the asset's cost is 80 million lek and its market value is 100 million lek. In a transfer that results in a change of ownership, the legal entity realizes 20 million lek (100 million sales proceeds – 80 million asset cost), an amount that is included in the legal entity's taxable income. The asset's cost is then revalued at 100 million lek. If the asset is subject to depreciation, depreciation will be calculated on the 100 million lek cost (not 80). Similarly, if the asset is later sold, the 100 million amount will be used as the asset's historical cost to determine whether there is a gain or loss on sale.

Example 2

Suppose the change of ownership of the legal entity is 60%, meaning the third party buys only 60% of its shares. In this case, only 60% of the asset is treated as sold and only 60% of the asset's market value is treated as proceeds from the sale. For this reason, only 60% of the asset's cost will be attributed to the transfer. The gain will be 12 million lekë: (100 million × 60% = 60 million) – (80 million × 60% = 48 million). Thus, 60 − 48 = 12 million lek profit, which will be included in the calculation of the legal entity's income. The new cost of the asset will be the portion of the old cost that is attributed to the part of the asset that is not disposed of (80–48=32) plus the sale proceeds treated as received (60). Therefore, if the asset is a depreciable asset, the basis from which it will be depreciated after the change of ownership will be 92 million lek (32 + 60).

• Article 54 applies in all cases if the legal entity is a resident or non-resident in Albania and if the assets are attributable to the assets of a permanent establishment in Albania, provided that for the preceding three years, the average turnover achieved has been over 500,000,000 (five hundred million) ALL. Tax on any profit resulting from the transfer of assets applies to all assets regardless of their value, regardless of whether they are movable or immovable.

• In order to avoid double taxation, when a legal entity pays profit tax due to a deemed transfer according to point 1, then the sale of shares that caused the change of ownership (deemed transfer) is exempt from profit tax.

Example 3

An Albanian company is wholly owned by a company incorporated in the Cayman Islands, which in turn is wholly owned by a person resident in another country. The Albanian company owns real estate with a market value exceeding its cost. A third party wants to buy the real estate, not directly, but by purchasing shares in the company registered in the Cayman Islands. (It is assumed that more than 50% of the value of the shares in the Cayman Islands company is attributable to the real estate in Albania). Thus, the Albanian company will undergo a change of ownership and will therefore be treated as transferring the real estate at market value and then reacquiring it. The transaction will result

in a profit that is taxable for Albanian society. Article 54 exempts the sale of shares in the Cayman Islands company from profit tax, provided that the sale is taxed in the Albanian resident company.

• A legal entity that undergoes a change of ownership must notify the tax authority within 45 days of the change. The notification must contain the details of the change, such as the parties involved in the transactions causing the change, as well as their relationships with the legal entity in question. The notification also includes the terms of the transaction, including sales revenue and how this revenue was calculated.

• Point 4 of Article 27(1) extends the notification requirement of paragraph 3 beyond ownership changes to which the deemed transfer rule under point 1 applies. (change of ownership of more than 20 %). This is effectively a notification requirement for indirect sales, those in which the gain from the sale of shares that is subject to taxation is realized. As such, the notification requirement applies only to indirect transfers of real estate.

Example 4

It is assumed that an Albanian company is wholly owned by a company incorporated in the Cayman Islands, which in turn is wholly owned by a person resident in another country. The Albanian company owns real estate with a market value exceeding its cost. A third party wants to buy the real estate located in Albania, not directly, but by purchasing 15% of the shares in the Cayman Islands company. Suppose that more than 50% of the value of the shares in the Cayman Islands company is attributable to the real estate located in Albania.

• The change in ownership of the Albanian company is less than 20%, so the rule set out in paragraph 2 of Article 55 does not apply. However, the gain realized from the transfer of the shares has its source in Albania, therefore the Albanian company is required to notify the tax authority of the sale of 15% of the shares in the Cayman Islands parent company.

• The notification obligation does not apply if the sale of shares results in less than a 10% change in the ownership of the Albanian company. The 10% threshold presupposes that the Albanian company may not be aware of the sale transaction. However, even if there is no notification obligation, if the change is below 10%, the sale of shares remains taxable in Albania, provided that the shares derive more than 50% of their value from real estate assets in Albania.

General Provisions for Withholding Tax at Source

56. Withholding Tax Agent

1. The withholding agent is required:
   • To withhold tax when making any of the payments listed in Article 58 “Income and payments subject to withholding tax at source” of this law;
   • To transfer the exact amount of tax, within the required deadline for withholding tax, to the account of the competent tax authority.;
   • To submit the detailed statement “Withholding Tax Statement” which identifies each income beneficiary, whether an individual, sole proprietor, self-employed person or entity, whether resident or non-resident, also indicating the corresponding tax withheld at source;
   • To keep records of payments made, tax calculated for transfer to the budget, and to make available any document to the tax authority upon request, in order to verify the accuracy of tax calculation, withholding and/or payment.

2. The date of payment of income subject to withholding tax means either the date on which the payment was made, or the date on which the withholding tax agent calculated the obligation in question, whichever of these events occurs first.
3. For the payment of declared dividends, the tax of which is to be withheld at source and has not been paid, the tax must be withheld and transferred by the end of the third month after the month in which the statutory body of the entity decided on the distribution of the relevant profit. If the competent body of the entity decided to distribute dividends at the meeting of May 31, 2024, the dividend tax must be transferred to the budget revenue account no later than August 31, 2024.
4. The withholding tax agent is responsible for paying the tax on behalf of another taxpayer as if it were their own tax liability. The tax withholding agent is obligated to declare and pay the withheld tax to the tax authorities' revenue account by the 20th of the month following the month of payment or withholding.
5. Employers (payroll agents) are also considered withholding agents in relation to their obligations to withhold income tax from employment and social security and health insurance contributions.

57. Tax Withheld at Source Statement

1. The withholding tax statement is according to Model No... Attached

• The declaration contains all identifying information for the payer and the income beneficiary, whether this is an entity, including non-profit entities or those not subject to corporate income tax, a sole proprietorship, self-employed person, or individual.

58. Income and payments subject to tax withheld at source.

1. Income categories under letters “a” through “e” of paragraph 1 of Article 58, income for which the law stipulates that the tax for the income beneficiary is withheld at source by the income payer at the time of payment, include cases where the payment is made in favor of an Albanian resident taxpayer, or a non-resident taxpayer who has established a permanent establishment in Albania.
2. For income categories under letters “a” through “e” of paragraph 1 of Article 58, withholding tax at source shall be applied regardless of whether the income recipient (Albanian resident, or non-resident with a permanent establishment in Albania) is an individual, sole proprietor, self-employed person, or entity.
3. Withholding tax is levied in all cases where payments fall under the concept of royalties (copyrights, license fees, trademarks, usage rights, etc. of this nature). Tax on royalty payments is withheld regardless of whether the income recipient is an entity, individual, self-employed, or merchant. Each of the taxpayer categories has the right to credit the withholding tax on royalties against their tax liability for their income.
4. Withholding tax is withheld in all cases where payments are made in connection with gambling income. Generally, gambling winners are individuals for whom the withholding tax on gambling income is a final tax.
5. Withholding tax is also withheld when payments are made in relation to leases, but only when the lessor, the beneficiary of the income, is an individual and the lessee is either an entity, self-employed, a trader, a state entity, NGO, Project, Program, i.e. when the lessee is a person equipped with a Unique Subject Identification Number and makes lease payments in favor of an individual beneficiary, based on the lease agreement.
6. In summary, the tax on rent is withheld/not withheld at source by the tenant depending on the status of the payer and the beneficiary as follows:
7. In cases where the lessee is: (i) an entity subject to corporate income tax; (ii) a merchant subject to income tax; (iii) self-employed individual subject to income tax; (iv) an entity, not subject to corporate income tax and:
   • The taxpayer is an entity subject to corporate income tax - Tax is not withheld
   • Is the self-employed person or trader a taxpayer - Income tax is not withheld
   • The taxpayer is an individual - Taxable
   • The payer is not subject to income tax - No tax is withheld

• In cases where the tenant is an individual and:

1. The taxpayer is an entity subject to corporate income tax - Tax is not withheld
   1. Is the self-employed person or merchant subject to income tax – no tax withheld
   1. The tenant is an individual. No tax is withheld.
   1. The payer is not subject to income tax - No tax is withheld

• For cases where individuals possessing an NUIS: corporate profit tax subjects, the self-employed, and traders subject to personal income tax, as well as entities not subject to corporate profit tax such as public institutions, NGOs, etc., make rent payments to individuals, they shall always withhold tax at source, which is a final tax paid by the individual landlord. Individuals possessing an NUIS are obligated to submit a declaration of tax withheld at source, and this declaration includes the tax on rent.
• For cases where the tenant is an individual, and if the landlord is an entity with a NUIS (entity, merchant, self-employed, but also state entity or NGO), the individual paying the rent does not withhold any tax at source. Even if the landlord and the tenant are both individuals, no tax is withheld at source. Not having the obligation to withhold tax at source, regardless of the tenant's status, the individual beneficiary of the rent declares the income themselves and pays the tax liability according to the declaration and payment procedures applicable in these cases.

• For cases where an entity receives a service from a resident or non-resident individual who is not equipped with a NUIS, meaning they are not self-employed, the withholding tax regarding the payment they receive is clarified in Article 65, paragraph 1, letter “b” of the law.
• The cases in which withholding tax is not applied under paragraph 1 of Article 58 of the law are listed in paragraph 3 of the same article and include:
  • income according to categories “a” through “e” of paragraph 1 of Article 58, and which can be paid to persons exempt from income tax. The exemption for this category is made because persons exempt from corporate income tax, even if they realize some profit, do not allocate it for distribution to founders, as is the case with Non-Profit Organizations.

• For dividends, revenue from dividends distributed under the conditions set forth in Article 29 "Participation Exemption" of this law. If entity "A" owns less than 10 percent of the capital, shares, or voting rights in the entity "B" and the latter distributes a dividend, entity "B" must withhold tax on the dividend received by entity "A" at the rate in effect at the time of distribution and transfer it to the state budget accounts. Meanwhile, entity "A," which has paid the dividend tax, must recognize the dividend received as income and deduct from its corporate income tax liability the amount of dividend tax withheld at source.

c. For interests:

1. Interest income from the Eurobond issued by the Albanian Government, paid to non-resident entities without a permanent establishment in Albania, as well as capital gains that may be realized from their trading by this category of persons
2. interest income paid to banks and other financial institutions.
3. Income categories according to letters “a” through “g” of paragraph 2 in Article 58, income for which the law stipulates that the tax for the income beneficiary is withheld at source by the income payer at the time of payment, include cases where payment is made in favor of a non-resident individual taxpayer, or a non-resident entity without a permanent establishment in Albania:
   • dividends, interest, and royalties. For these income categories, the tax is withheld at source by the payer. If the recipient of the income is a resident of a country with which the Republic of Albania has signed a Double Taxation Avoidance Agreement that is in force, the provisions of the agreement regarding the division of taxing rights shall apply. If the recipient of the income is a resident of a country with which the Republic of Albania does not have such an Agreement in force, domestic legislation shall apply in all cases, and the tax shall be withheld in Albania;
   • Winnings from gambling are taxed in Albania;
   • services attributable to a permanent establishment in Albania under Article 4 of this law. If the recipient of the income is a resident of a country with which the Republic of

Albania has signed an Agreement for the elimination of double taxation, which is in force. The clauses of the agreement regarding the timeframe defined in the agreement concerning the allocation of the right to tax are applied. If the beneficiary of the income is a resident of a country with which the Republic of Albania does not have such an Agreement in force, the domestic legislation shall apply in all cases, and tax shall be withheld in Albania.;

• insurance premiums, tax is withheld in Albania;
  • Income from participation in boards of directors and other governing councils or bodies. Such income is considered to be sourced in Albania, relates to the management of activities with a permanent establishment in Albania, consequently it is taxed in Albania, regardless of whether any board, council, etc. meeting takes place in Albania, online, or in any other country.;
  • income from construction, installation, assembly services, or related supervisory work. In cases where the income recipient is a resident of a country with which the Republic of Albania has signed a Double Taxation Avoidance Agreement that is in force, the provisions of the agreement regarding the time limit specified in the agreement for the allocation of taxing rights for construction, installation, and assembly services shall apply. If the income recipient is a resident of a country with which the Republic of Albania does not have such an agreement in force, in any case, domestic legislation shall apply, and tax shall be withheld in Albania.;
  • Income from the performance of actors, musicians, or athletes, including income from persons who employ artists or athletes or act as intermediaries in the organization of shows or performances, is taxed in Albania. Such income is usually taxed in the country where the show, event, or activity takes place, even in cases where an agreement is in force.

59. Rule for withholding tax at source

• For payments of dividends and profit distributions approved by the entity's governing bodies, the income payer withholds tax at source at the statutory rate of 8%.
  • For any other category of income listed in paragraphs 1 and 2 of Article 58, excluding those mentioned in point 59.1 above, the applicable withholding tax rate is 15%.
  • In cases of withdrawals from capital, including reserves, the entity withholds tax at source for the beneficiary at a 15% rate. Withholding tax does not apply when the person withdraws their initial contribution to the invested capital, which had previously been taxed as personal income.

GENERAL PROVISIONS ON INHERITANCE TAX, GIFTS, AND GAMBLING WINNINGS

• Inheritance, gift, and gambling winnings tax

Incomes from gifts, inheritances, and gambling are taxed at a rate of 15% without any deductions. Incomes from gifts and inheritances provided for in paragraph 7 of Article 60 of the Law are not taxed.

For the purpose of calculating income from gifts and inheritances, items given or inherited are valued at their nominal value or at their market value, whichever is higher. If a nominal value for the donated or inherited item is available, it is compared with the market value of that item, and whichever is higher serves as the basis or income on which the 15% tax rate is applied. The valuation rules for the value of donated or inherited items are based on recognized practices by accredited appraisers or on official acts in force regarding the methodology for determining the value of those items.

Examples:

• The value of a painting, a vintage car, a gemstone ring, an antique set of equipment, etc. of this nature, when gifted/inherited, can be determined by licensed experts in the field.;
• The value of a gifted/inherited dwelling can be determined either by licensed field experts or by using the currently in-force legal/sub-legal acts for real estate valuation.

Tax Collection Provisions

• Declaration Annual Report

1. The annual taxable profit tax return is submitted to the tax administration by:
   • entities that declare and pay corporate income tax
   • Legal entities, traders, and self-employed individuals in connection with the economic activity they carry out.

2. The annual personal/business income tax return is submitted to the tax administration by every person, with the exception of:
   • resident individuals who receive payments subject to final withholding tax according to paragraph 2 of Article 58 “Income and payments subject to withholding tax”.

Annual tax returns, including the Annual Tax Return of Taxable Profit and the Annual Personal/Business Income Tax Return, shall be submitted to the tax authority no later than March 31 of the year following the tax year for which the return is filed.

• The legal heirs of the individual are responsible for filing the return if the taxpayer has died. This return must include the total income earned up to the date of death.

• In case the taxpayer changes their tax residence, they must file a tax return for all income earned up to the date of the residence change. Example: If a resident individual of Albania, who is obligated to declare income, leaves Albania on July 31, 2024, they are obligated to declare income for the period of residence in Albania from January to July 2024.

• The declaration by taxpayers is made in accordance with the provisions of the Law “On Tax Procedures in the Republic of Albania” and the sub-legal acts for its implementation. The declaration is submitted electronically, according to the relevant declaration forms, attached to this Instruction:

• Annual corporate income tax return, which is filed by entities that pay corporate income tax.

• Annual profit tax return for sole proprietors and self-employed individuals, which is filed by sole proprietors and self-employed individuals.

• Personal income tax return submitted by individuals according to the provisions of the Law.

Taxpayers who are required to keep accounts according to the requirements of the law “On Accounting and Financial Statements” submit a tax return to the tax administration. Based on the Law ‘On Tax Procedures in the Republic of Albania," the tax administration has the right to request any information provided for in this law, while taxpayers have the obligation to provide the requested information to the Tax Administration. Payment of tax liabilities according to the declaration is made to accounts authorized by the state budget treasury.

62. Documentation Requirements

• Taxpayers subject to corporate income tax and business income tax (merchants and self-employed) calculate the tax base (net profit) by subtracting deductible expenses from gross income. The data is fully reflected in the respective declaration by completing each of its lines.

• For the effect of recognition as a deductible expense, the taxpayer must possess an invoice, as defined in the law “On the Invoice and Circulation Monitoring System”:
• Electronic invoice for sales without cash payment, issued by resident entities obligated to issue invoices;
• Self-invoicing within the meaning of the Law “On Invoicing and the Monitoring System of Turnover.”;
• Import invoice according to customs procedures;
• Invoice issued by a non-resident for services;
• Documents recognized for payments of fees and other similar charges made to institutions such as state bodies, entities with diplomatic status like embassies, etc.

63. Installments

1. Calculation of advance payment installments during the tax year for corporate income tax

The taxpayer subject to corporate income tax, during the tax year, prepays the monthly/quarterly installments of income tax:

• by March 31, for the months of January, February, and March;
• by June 30, for the months of April, May, and June;
• Brenda September 30, for the months of July, August, September; and,
• by December 31, for the months of October, November, and December.

Based on the taxable profit statement data from the preceding year, submitted by the taxpayer, which must be filed by March 31st of the following year, the Tax Administration calculates the monthly and quarterly installments for corporate profit tax prepayments for the April-December period of the subsequent year and for the January-March period of the year after that. The prepayment installments are communicated to the taxpayer electronically to their account by April 10th of the following year.

Estimated advance payments are paid by the taxpayer at the end of each quarter, but can also be paid monthly, by the 15th of each month. When advance payments are paid quarterly, the installment for each quarter is calculated as the sum of the installments for each month of the respective quarter.

• Calculation of installments for advance payments of corporate income tax:

• In cases where the taxpayer has more than one prior tax period in which they commenced economic activity, the monthly installments of advance payments of profit tax are calculated as follows:

Example for calculating prepayments for the current year 2023 and beyond:

The 2022 profit tax was 1,200,000 lek. The monthly/quarterly advance payments for 2023 will be:

• For the first quarter of 2023, the advance payment installment has been determined in April of the preceding year 2022, based on the taxable profit declaration for 2021.

• For the period April – December 2023: 1,200,000 / 12 months = 100,000 ALL/month. The total for the 9-month period April-December 2023 will be 100,000 x 9 months = 900,000 ALL, or 300,000 ALL for every 3 months or 100,000 ALL each month.

• For the period January – March 2024: 1,200,000 / 12 months = 100,000 ALL/month. The total for the first 3 months of the following year 2024 is 100,000 x 3 months = 300,000 ALL, or 100,000 ALL per month.

• In cases where the taxpayer has commenced economic activity for less than one tax period, the monthly installments of income tax prepayments are calculated as follows:

Example:

Data: Economic activity began on April 1, 2022. The taxpayer has declared that the estimated income tax for the period April-December 2022 and January-March 2023 could be 100,000 lekë per month.

According to the balance sheet filed for the economic activity of 2022, the profit tax for the period April-December amounts to 1,350,000 ALL.

Calculation of advance income tax payments for the following periods:

• For the period January-March 2023, the taxpayer's self-assessment from April 2022 is considered, and the prepayments for this period will be 100,000 lekë per month or

300,000 lek for the first quarter of 2023.

• For the period April-December 2023: The declared profit for the year 2022 was 1,350,000 / 9 = 150,000 ALL per month. Thus, for the period April-December 2023, profit tax prepayments will be 150,000 ALL each month, or 150,000 x 3 = 450,000 ALL quarterly, or 1,350,000 ALL for the nine-month period.

• For the period January-March 2024, the monthly installments will be 150,000 ALL, or 150,000 x 3 = 450,000 ALL for the quarterly payment.

• In cases where the taxpayer starts their activity in the following year, the monthly installments of advance profit tax payments are calculated based on the taxpayer's projected declaration of the estimated amount of profit and profit tax, divided by the number of remaining months until the end of the year, but without considering the first month of registration. This calculation formula will also serve to determine the monthly installments of advance profit tax payments for the first quarter of the following year. For the subsequent 9-month period, April-December of the following year, the monthly installments of advance profit tax payments are calculated by taking into account the data from the taxable profit declaration of the previous year.

Example:

The taxpayer registers on August 10, 2023, and declares that his income tax for the remaining period of 2023 will be 800,000 lek.

His monthly advance payments of income tax are calculated:

• For each of the months from September to December 2014: 800,000: 4 = 200,000 lekë/month
  • For each month of the first quarter of 2024: 200,000 lekë/month, or 200,000 x 3 = 600 thousand lekë for the first quarter of 2024.

The same methodology will be used to calculate monthly/quarterly tax installment payments even in cases where previous tax periods resulted in losses.

• Downward adjustment of the monthly installments of corporate income tax prepayments.

The taxpayer, each month during the tax period, can request and prove to the tax authorities that the profit tax for this tax period will be significantly lower than the profit tax in the preceding period or the second preceding period. In these cases, the tax authority, based on the taxpayer's arguments, documentation, and evidence, will reduce the calculated advance payment amounts.

The arguments that a taxpayer may present to request the reduction or elimination of the calculated prepayment installments are:

• When reported sales in the most recent quarter are down by more than 20.1% compared with the average monthly sales over the twelve months preceding that quarter, installment payments are reduced in proportion to the decrease in sales of goods and services.

• When purchases reported in the last quarter have fallen by more than 30.1% compared with the average monthly purchases over the twelve months preceding this quarter. The reduction in prepayment installments is made in proportion to the reduction in purchases of goods and services.

• In case of a subsequent shortage of contracts for the sale of goods or services, works contracts, etc., which will significantly reduce the taxpayer's activity and revenue for the remaining months of the year for which the reduction of monthly advance payments of income tax is requested.

• When the contracts under which revenues were generated in previous years expire, or when the contracted public facilities or other public works are completed.

• When misfortunes or damages occur in the taxpayer's business during the following year and will lead to a significant reduction in economic activity.

• When lines are closed, certain activities are reduced, the workforce is significantly cut, etc., as a result of the contraction of activity.

In cases where the conditions under which advance payment installments have been reduced have changed, the tax administration, with the consent of the taxpayer, revises them upwards.

• Incremental adjustment of the monthly installments of corporate income tax prepayments.

In cases where, based on the data declared for the first nine months of the following year, it is found that the taxpayer has increased their average monthly revenue from the sale of goods and services by more than 10% compared to the average monthly revenue of the previous year, the tax administration may adjust upward the prepayments for the last quarter of the year. The increase in prepayment installments cannot exceed 75 %, in line with the percentage growth in revenue resulting from the comparison of the current year with the previous year.

Example:

The average gross monthly income in 2022 was 100,000 lek.

The average monthly gross income from January to September 2023 is 130,000 lek. The average monthly increase in income is 30%.

The increase in prepayment installments for the October–December period will not exceed 22.5% (30% × 75%) of the prepayment installments calculated at the beginning of the year.

The taxpayer:

• may accept the assessment of the tax administration;
  • review it for further increase, beyond the tax administration's assessment and to seek a higher increase in advance payments, or;

• may object to the increase in advance payments made by the tax administration, according to the procedures for tax appeals.

In cases where the taxpayer himself determines that the estimated income tax for the following year, will be more than 10% higher than the monthly prepayment installments calculated under the law, he must file an estimated profit tax return for the fiscal year no later than September 10. On this basis, the tax administration increases the installments for the months of October–December of the following year.

Example:

• Estimated costs for January - March: 300,000 lekë (100,000 lekë/month),
  • Estimated expenses for April – September: 1,200,000 ALL (200,000 ALL/month),

Ø January-September earnings: 300,000 + 1,200,000 = 1,500,000 lek

• Estimated costs for the months: October-November-December: 600,000 ALL (3×200,000),

Ø Estimated costs for the entire exercise year: 2,100,000 ALL (300,000 + 1,200,000 + 600,000)

The profit tax assessed by the taxpayer himself, who self-declares by September 10, is 2,700,000 lek, which is over 10 percent higher than the monthly prepayment installments calculated [(2,700,000-2,100,000)/2,100,000 = 28%]. Under these conditions, the additional installment for October–December is 200,000 lekë per month (2,700,000 – 2,100,000 = 600,000 / 3 = 200,000 lekë per month).

If, as a result of an audit through in-depth control and tax assessment, it is determined that the taxpayer's profit in the previous year has been declared lower than that resulting from the audit, the tax administration may increase the advance payment installments calculated previously for the following year and the first quarter of the subsequent year. The increase in advance payment installments is made in proportion to the increased amount of profit as a result of the reassessment compared to the declared profit.

The tax administration informs the taxpayer about the increase in advance payment installments in accordance with the provisions of law no. 9920, dated 19.5.2008, “On tax procedures in the Republic of Albania, as amended”.

• Calculation of advance installment payments during the tax year for personal income tax from business and self-employment.

A taxpayer who is subject to personal income tax from business and self-employment shall pre-pay trimesters of personal income tax during the tax year:

• by March 31, for the months of January, February, and March;
  • by June 30, for the months of April, May, and June.;
  • Brenda September 30, for the months of July, August, September; and,
  • by December 31, for the months of October, November, and December.

Based on the data from the personal income tax return for business/self-employment from the previous year, submitted by the taxpayer, which is due by March 31st of the following year, the Tax Administration calculates the quarterly installments of advance payments for personal income tax from business/self-employment for the period April-December of the following year and for the period January-March of the next year. The advance payment installments are communicated to the taxpayer electronically to their account by April 20th of the following year.

• Prepayment Installment Calculation:

• In cases where the taxpayer of personal income tax from business/self-employment has been conducting economic activity for more than two tax periods, the quarterly installments of advance payments of personal income tax from business/self-employment are calculated as follows:

Example for calculating prepayments for the current year 2023 and beyond:

Personal income tax from business/self-employment for the year 2022 was 120,000 lek. The quarterly advance payments will be:

• For the period April – December 2023: 120,000/12 months = 10,000 lekë/month. The total for the 9-month period April-December 2023 will be 10,000 x 9 months = 90,000 lekë, or 30,000 lekë for each 3-month period.

• For the period January–March 2024: 120,000/12 months = 10,000 ALL/month. The total for the first 3 months of the following year is 10,000 x 3 months = 30,000 ALL. So, for the first 3 months of the following year, the prepayment installment has been determined in April of the preceding year, based on the 2022 declaration of personal income from business and self-employment.

• In cases where the taxpayer has been operating their economic activity for less than one tax period, the quarterly installments of personal income tax prepayments for business/self-employment are calculated as follows:

Example:

Data:

The economic activity began on April 1, 2022. The taxpayer has declared that the personal income tax from business/self-employment estimated by them for the period April-December 2022 could be 10,000 ALL per month.

Based on the balance sheet filed for the economic activity of 2022, the personal income tax on business/self-employment for the period April-December resulted in 135,000 lekë.

Calculation of income tax prepayments for business/self-employment for subsequent periods:

• For the period January-March 2023, the taxpayer's self-assessment from April 2022 will be considered, and the prepayment for this period will be 30,000 lekë for the first quarter of 2023.

• For the period April-December 2023: The personal income tax for business/self-employment declared for 2022 was 135,000 / 9 = 15,000 ALL per month. Therefore, for the period April-December 2023, profit tax prepayments will be 15,000 x 3 = 45,000 ALL every 3 months.

• For the period January-March 2024, prepayments will be 15,000 x 3 = 45,000 as a quarterly payment.

• In cases where the taxpayer begins their activity in the following year, the quarterly installments of personal income tax prepayments from business/self-employment are calculated based on the taxpayer's predictive declaration for the estimated income amount.

personnel from business/self-employment, and the tax on this income, divided by the number of months remaining until the end of the year, but without considering the first month of registration. This calculation formula will also serve to determine the advance payment installment of income tax from business/self-employment for the first quarter of the following year. For the subsequent 9-month period, April-December of the following year, the quarterly advance payment installments of income tax from business/self-employment are calculated by taking into account the data from the previous year's taxable personal income declaration.

Example:

The taxpayer registers on September 10, 2023 and declares that the personal income tax from their business/self-employment for the remaining period of 2023 will be 60,000 lekë.

His quarterly prepayment installments of tax are calculated:

• For the last quarter, October-December 2023: 60,000 lek

• For the first quarter of 2024: 60,000 Lek

The same methodology will be used to calculate monthly/quarterly tax installment payments even in cases where previous tax periods resulted in losses.

• Correction of personal income tax installments from business and self-employment.

The downward correction of personal income tax installments from business and self-employment can be requested by the taxpayer at any time, while their upward correction can only be made for the last quarter of the year.

For the correction of personal income tax installments from business and self-employment, the principles provided in points 3 and 4 above, foreseen for corporate profit tax, apply.

64. Supplementary tax declarations

• The taxpayer has the obligation, if they determine that the tax payable on their latest income tax return should have been higher or the tax loss lower, to submit an additional tax return and pay the difference between the previously declared tax payable and the supplementary tax payable, within 30 days of discovering the discrepancy. In this case, no penalties will be imposed on them for late filing of the return, except for any late payment interest.
• The same procedure occurs if the recalculated tax liability is lower. In this case, overpaid amounts can only be claimed on the supplementary tax return, which contains the higher tax amount to be refunded.

65. Payroll Tax Agent

The employer is considered a “tax agent” in relation to the employees“ tax liability, which is linked to their employment income. The employer, in the role of a ”tax agent,“ has obligations stipulated in the Law ”On Income Tax“ and the Law ”On Tax Procedures" and is responsible for calculating the tax liability, withholding the liability from

payment and transfer of this obligation to the state budget revenue accounts. By the 20th of the following month, in addition to the payment of the obligation, the employer shall simultaneously submit a monthly payroll listing all elements of gross salary, deductions from the tax base for the calculation of contributions, the tax base for the calculation of income tax from employment, as well as the net salary earned by the employee.

The employer, acting as a payroll tax agent, withholds tax from the salary in accordance with the provisions of Article 24, “Tax Rates,” of the Law. The deduction from the tax base (from the gross salary) provided for in paragraph 1 of Article 22, “Deductions from the Tax Base,” may be made by the employer, if the tax-paying employee in the payroll has signed the personal status declaration with this employer, according to Article 66, “Personal Status Declaration,” of the Law.

If an employee enters into an employment relationship with other employers as well, they are not entitled to benefit from the “Tax Base Discount” with these other employers. Other employers will apply the progressive tax rate according to Article 24 of the law.

An employee who has an employment relationship with more than one employer submits a personal status declaration, according to Article 66 “Personal Status Declaration,” to the main employer, where they spend the most working time or receive the highest salary.

Employees employed by more than one employer, based on Article 67 “Annual Declaration of Personal Income,” Paragraph “1/b,” are obligated to submit the annual personal tax declaration, where they also calculate the final tax liability from employment with more than one employer, or even potential income from other sources.

Example 1

The employee “K.P.” is employed by the entity “Alpha” and has an employment contract with a gross monthly salary of 100,000 ALL. Simultaneously, “K.P.” works part-time in the evenings at the entity “Beta,” with whom they have an employment contract with a gross monthly salary of 50,000 ALL.

The employee "K.P." submits to the employer "Alpha" "Declaration on Personal Status" and on that basis, the payroll system calculates the personal income tax liability as follows: from the salary 100,000 – 30,000 = 70,000 × 13% = 9,100 lek tax.

Employee "K.P." should not submit the "Declaration of Personal Status" to the second employer, "Beta." Employer "Beta" calculates on the payroll the personal income tax liability on the salary 50,000 × 13 1/3 = 6,500 lek tax.

At the end of the year, by March 31 of the following year, the individual “K.P.”, based on Article 67 of the Law,

He is obligated to submit the “Annual Personal Income Statement” where he will recalculate the personal income tax liability from his salary, as he was employed by two employers.”

• Monthly income from salaries earned: 100,000 + 50,000 = 150,000 lekë

• Tax payable on income realized: 150,000 – 30,000 = 120,000 × 13%

= 15,600 lek

• Monthly tax paid during the year: 9,100+6,500 = 15,600 leke per month
• Tax Overpaid or Due: Zero

Example 3

If the monthly income of individual “K.P.” were 200,000 lekë from the first employer and

1. money to the second employer

• Monthly income from salary earned: 200,000 + 180,000 = 380,000 leks
  • The tax payable on the realized income is 380,000 – 30,000 = 350,000 lek per month. (170,000 × 13 months) + (180,000 × 23 months) = 22,100 + 41,400 = 63,500 monthly tax
  • Tax on monthly base paid during the year: (i) 200,000 ALL – 30,000 = 170,000 x 13

% = 22,100 lek tax and (ii) 170,000 × 13% + 10,000 × 23% = 24,400 lek tax. Total tax paid: 46,500 lek tax.

• Additional monthly tax to be paid: 63,500 – 46,500 = 17,000 lekë per month or

204,000 lekë per year, which the employee must pay by March 31 of the following year according to the “Annual Personal Income Tax Return”.

For income from employment to be treated as such and for the tax liability to be calculated according to the progressive rates of 13% and 23% provided for in the law, the employer must also be responsible for calculating the obligations for social security and health insurance contributions.

Other payments made by an entity.

If an employer makes payments to an individual, who, for the purposes of the Labor Code, is not in an employment relationship with it, but provides some non-continuous technical service, or the payment is made for participation in the entity's governing, advisory, etc., bodies, the 15% withholding tax rate applies to the gross payment made. Examples:

1. payment to members of supervisory boards or other governing bodies, who are not simultaneously employees of the paying entity but have functions or are employed in other entities;

• non-continuous payment in the sense of employment relationships, for any casual technical service, for any consultation, study, etc., provided by expert individuals in the field, who may be in employment relationships with other entities.;

• payment for teaching, courses, and training from individuals outside the entity, who, in the sense of the Labor Code, do not enter into an employment relationship with the entity and who are engaged either as employees in other entities, or may be such individuals (e.g., retirees) who do not carry out such continuous activity.

If payments, which are not related to employment relationships, such as those mentioned in paragraphs “b” and “c” above, are made to self-employed individuals with aTax Identification Number (NIPT), no tax is withheld.

The employer keeps records of employment income paid to employees, as well as the tax withheld. The payroll according to Model No. ….. attached, which is also the “Declaration of Calculation of Social and Health Insurance Contributions and Personal Income Tax from Employment,” is submitted in the form, manner, and deadlines prescribed by the applicable tax and social security legislation.

Payroll tax agents are responsible for paying the tax on employment income, with the same liability as if it were their own tax debt.

66. Declaration on Personal Status

1. Every employee signs a declaration regarding their personal status before the payment of income from salary begins.
2. For entities registered and conducting economic activities, the declaration will be required upon the entry into force of the Law “On Income Tax.” Therefore, the January 2023 payroll, which must be declared by February 20, 2023, must reflect the deductions from the tax base for cases where employees have submitted the personal status declaration.
3. For entities that are newly registered, the declaration of personal status will be taken at the start of individuals' employment relationships.
4. An employee cannot sign the personal status declaration with more than one payroll agent for the same monthly calendar period. If an employee, who may be employed by two entities, has submitted the declaration to employer “A” but not to employer “B”, and at the end of the month terminates employment with employer ‘A”, and will only be employed by employer “B”, they have the right to submit the personal status declaration to employer “B” in order to continue benefiting from the deductions according to paragraph 1 of article 22. Any undue benefit of deductions from the tax base constitutes a violation of tax legislation and is punishable according to the provisions of the Law “On Tax Procedures in the Republic of Albania”.”
5. The personal status declaration includes all information necessary to claim deductions from the taxable income according to Article 22, Paragraph 1 “Deductions from the tax base.”.
6. To benefit from the discounts according to points “a,” “b,” and “c” of paragraph 1 of Article 22, the employee must submit the employment contract where their gross salary is specified.
7. To obtain discounts under letter “a” of paragraph 2 of Article 22, the employee must submit the contract with the educational institution where the children study, as well as the bank transfers or payments for tuition installments.
8. To obtain discounts under letter “b” of paragraph 2 of article 22, the employee must submit the medical documentation (prescription issued by the competent doctor/institution, drug payment receipt).
9. The deductions provided for in paragraph 1 of Article 22 “Deductions from the taxable base” apply to:
   • Employers, whose tax base (gross salary) is reduced by these deductions
   • Self-employed individuals and merchants with business income whose net income is reduced by these deductions.

10. The deductions provided for in paragraph 1 of Article 22 “Deductions from the tax base” do not apply to:
    • Reference salary for the purpose of contributions calculated by sole proprietors, self-employed individuals and;
    • Reference salary for determining contributions of unpaid family members employed by sole proprietors and self-employed individuals.

10. The Declaration of Personal Status form to be completed by the employee is according to Model No. ... attached to this Instruction.

Annual personal income statement

Individuals who are required to submit an Annual Personal Income Tax Return include:

1. Individuals who have realized gross income from employment exceeding 1,200,000 ALL in a tax year, regardless of whether the year was full or partial.
2. Individuals, regardless of the amount of their gross annual income from employment, who have been simultaneously employed by more than one employer for even one month.
3. Individuals who have earned more than 50,000 ALL in total or partial year from income other than employment income, but for which tax was not withheld at source as per the provisions of Chapter 5 of the Law. Such income may include:
   • Rental income, when the tenant is an individual not registered as a commercial taxpayer, self-employed, or an entity;
   • Income earned outside the territory of the Republic of Albania, regardless of whether it has been taxed or not;
   • Any other income for which the payer has not withheld any income tax, even though they may have had a legal obligation to withhold under the provisions of Chapter 5 of the Law. The failure of the payer of any income to withhold tax does not relieve the recipient of the responsibility to pay the tax liability, since the recipient is obligated to pay the tax, while the income payer is penalized under the provisions for a tax agent.

• For the purpose of declaring the Annual Personal Income Statement:

For Albanian resident individuals, the personal identity card number/unique subject identification number serves as the tax identification number.

For non-resident foreign nationals, the personal identity card number/Unique Identification Number of the legal entity issued by the countries where these individuals reside serves as their tax identification number in Albania.

68. Declaration and payment by specific non-resident entities

• Article 68 of the law “On Income Tax” defines a separate declaration and payment procedure for non-residents, who according to Article 27 of the law, are subject to profit tax, but for whom the regular procedure provided for in Articles 61 and 63 does not apply.

• The procedure for declaration under Article 61 of the law requires the taxpayer to prepare financial statements and the taxable profit declaration for activities subject to profit tax in Albania. The provisions of Article 68 cover cases where a non-resident taxpayer is taxed for transactions and activities outside Albania, even though they are not obligated to prepare financial statements and the tax declaration under Article 61. In particular, this may be a case where a non-resident person is subject to tax for an isolated transaction conducted, for example, in an offshore zone, such as the sale of shares in a Cayman Islands company, as discussed in point 55 of this instruction in relation to point 5 of Article 55.

• Paragraph 1 of Article 68 provides for a separate declaration of taxable income for nonresidents, where a nonresident is subject to Article 27 of the law. For reporting purposes as above, the taxable profit return using the "Declaration and Payment by Specific Nonresident Persons" form, which is attached to these instructions, shall be used. Paragraph 2 of Article 68 excludes this category from the tax installment system and the foreign tax credit system. Tax for this category is declared and paid at the same time the income tax return is filed.

Source: Institute of Certified Accountants.

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