Income Tax

Profit limitations are subject to:

• Legal entities and partnerships registered for VAT.
• Legal entities, as well as other partnerships of persons established or organized under a foreign law and operating within the territory of the Republic of Albania;
• Any other person, regardless of their registration or legal recognition status or form, when they are subject to value added tax, except when this person is subject to simplified profit tax for small business.

Caution: Every person, regardless of their status or legal form of registration or recognition, when they become or are subject to profit tax, has the right to request de-registration at any time, but not to become a subject subject to the simplified tax on small business profits. The obligation to pay profit tax Resident taxpayers are subject to tax on profits realized from all sources:

• Brenda and
• outside the territory of the Republic of Albania.

Non-resident taxpayers are subject to tax on realized gains:

Who is exempt from income tax?

• from all income, sourced in the Republic of Albania

Exemption from profit tax Exempt from income tax: – Central and local government bodies, the Bank of Albania, humanitarian associations, international organizations, when provided for by special agreements, enterprises provided for in international agreements ratified by the Assembly, foundations or non-bank financial institutions established or transferred by a Council of Ministers' Decision, film production companies subsidized by the National Center of Cinematography, the administered voluntary pension fund. Caution: All of the above-mentioned entities are required to submit to the tax authorities the tax return and the annual balance sheet within the same deadlines as entities subject to income tax. Accommodation structures “Four- and five-star hotel/resort with special status,” as defined in the tourism legislation and holding a registered, internationally recognized trademark (“brand name”), are exempt from income tax,  for a 10-year period for those structures that obtain the special status until December 2024. The effects of the exemption begin at the time the accommodation structure commences its economic activity, but no later than 3 years from obtaining the special status. Taxable Profit The taxable profit is determined as the difference between total revenues realized during the tax period (calendar year) and recognized expenses. The taxable profit for the tax period is determined based on the balance sheet and its annexes, which must be prepared in accordance with the law “On Accounting and Financial Statements.” Revenue Total revenue means any type of income, realized during the tax period and include, but are not limited to, revenues from the supply of goods and services, income from participations, income from interest, and income from the use of tangible and intangible assets. Expenses Deductible expenses For expenses to be recognized (deductible), they must meet these conditions:

Conditions for recognizing expenses

1. to be performed in the direct interest of the enterprise's economic activity;
2. to be performed effectively;
3. to be reflected through an accounting entry by decreasing net assets;
4. to be proven with the relevant legal justification documentation.

Unknown expenses (deductible) For the purpose of determining taxable income, expenses that are specified in a closed list by the income tax law are not recognized. For more information, refer to Law No. 8438 “On Income Tax,” Article 21, which can be found below. Tax Rate The tax rate for profit tax is 15%. For legal entities engaged in software production/development, the profit tax is 5%. Tax Payment Advance payments on corporate income tax The profit tax is paid quarterly or monthly as an advance payment during the year, based on monthly installments. The installments can also be paid on a monthly basis, in the amounts as follows: General term

• for the months of January and March of the following tax period, the amount of income tax for the tax period of two years prior, divided by 12;
• for the months of April and December of the current tax period, the amount of profit tax for the previous tax period divided by 12.

Special cases In the event the taxpayer commences activity during the tax period of the second prior year, the prepayments are:

How are prepayments calculated by month?

• for the months of January and March of the current tax period, the amount equal to the income tax for the tax period of two years prior, divided by the number of months during which the taxpayer conducted the taxable activity.
• for the months of April and December of the next tax period, the amount of the profit tax for the previous tax period divided by 12.

In the event that the taxpayer begins their activity during the previous tax period, the advance payments are:

• for the months of January and March of the current tax period, the amount of the estimated profit tax for the previous period, divided by the number of months in the previous period during which activity was carried out.
• for the months of April and December of the next tax period, the amount of the profit tax for the previous tax period divided by 12.

In the case where a taxpayer begins to carry out an activity in the subsequent tax period, the prepayments are:

• the estimated profit tax for the following period, divided by the number of remaining months in the following tax period.

Exception

Exclusion for new productive activities

• Taxpayers who begin their activity in the following period and engage in productive activities will not be subject to advance payment of the profit tax obligation for a 6-month period or for the remaining period until the end of the following year, if this period is even less than 6 months.

Correction of advance installments In the event that the taxpayer, at any time during the tax period, demonstrates that the profit tax for that tax period will be lower than the profit tax for the previous period or the second preceding period, the tax authorities shall accept a reduction of the prepayments. In the event that the taxpayer has reduced the prepayment installments set by the tax authority, and the annual tax liability on profit, as determined from the balance sheet, exceeds the prepayment by more than 101%, it must pay interest on the difference between the actual annual liability and the amount prepaid during the year. If the tax authorities estimate that the profit tax for the next tax period will exceed the profit tax for the previous tax period by more than 10%, they may increase the prepayments in accordance with the profit tax they have assessed. Declaration and final tax calculation The taxpayer, upon the close of the calendar year, prepares the annual taxable income statement in the form prescribed in the Minister of Finance's instruction, which you can find below. The Profit Tax Return and Payment Form must be filed with the tax authorities by March 31 of the following year, simultaneously submitting the accounting balance sheet along with its annexes. These cases may arise: If the declared and paid tax based on the annual declaration is greater than:

Payment of the difference until March 31

• The sum of the monthly installments of advance payments paid during the year and
• foreign tax paid, (which is credited) the taxpayer pays the difference, by March 31 of the following year.

If the tax declared and paid based on the annual declaration is less than:

• total of monthly advance payments paid during the year; and
• Foreign tax paid (which is credited) The tax administration transfers the overpaid amount to other tax liabilities not paid by the taxpayer.

If the taxpayer has no other outstanding tax liabilities, with their written consent, the remaining amount, if any:

• automatically reimbursed, within 30 calendar days from the date of declaration and payment by the taxpayer;
• is transferred towards the taxpayer's future tax liabilities.

Apportionment of Profit Trading companies, after paying the corporate income tax, must, within a six-month period from the date of the financial year-end, approve in the shareholders' assembly or the company's competent decision-making body:

• the previous year's financial results and
• to allocate profit after tax,

defining

Allocation of profit and the July 31 deadline

• the sum of the legal reserves
• the portion to be used for investment or capital increase and
• the portion to be distributed as dividend.

Trading companies and individuals must submit to the tax administration, no later than July 31 of the calendar year, the decision of the responsible body or the individual's decision approving the results and allocating the profit after tax. This obligation remains even if the result for the fiscal year was a loss or zero. Caution: For the late filing of this decision, a fine of 10,000 lekë per month of delay applies. The legal entity must declare and pay to the tax administration the dividend tax due no later than August 20 of the year in which the results are approved, regardless of whether the dividend has been distributed.