Annual Tax Base and Tax Rates

21.1 Calculation of the annual tax base

The annual tax base includes income from employment, business, and investments, reduced by the allowances and deductions provided by law.

21.2 Tax rates for income categories

21.2.2 Tax on income from employment

For employment income, the progressive tax rates that apply are 13% and 23%. For employees with low income, the tax burden is reduced by lowering the tax base (gross salary) by a certain amount provided under the law, instead of applying a 0% rate to a portion of the salary.

• For annual employment income up to 2,040,000 ALL (equivalent to 170,000 ALL/month), a 13% tax rate applies.
• For annual employment income above 2,040,000 ALL, a 23% tax rate applies.

21.2.3 Tax on income from business

For annual business income (where the tax base is net taxable income, meaning total revenues minus deductible expenses), the following progressive rates apply:

• 5% for net taxable income up to 14,000,000 ALL per tax year.
• 23% for each additional lek of net taxable income above 14,000,000 ALL per year.

21.2.3 Example of Tax Calculation for a Business with Taxable Profit of 12,000,000 Lekë

If a sole proprietor or self-employed individual, after deducting from gross income all deductible expenses and any deductions allowed under Article 22 of the law, declares annual taxable profit of 12,000,000 lekë, the tax payable will be:

12,000,000 lekë x 15% = 1,800,000 lekë.

21.2.4 Example of Tax Calculation for a Business with Taxable Profit of 20,000,000 Lekë

If a sole proprietor or self-employed individual, after deducting from gross income all deductible expenses and any deductions allowed under Article 22 of the law, declares taxable profit of 20,000,000 lekë, the tax payable will be:

14,000,000 lekë x 15% + 6,000,000 lekë x 23% = 2,100,000 + 1,380,000 = 3,480,000 lekë.

21.2.5 Tax on Income from Investments

Investment income is taxed as follows:

• 8% for income from dividends/profit distributions.
• 15% for any other type of investment income.

Unless otherwise provided by law, no cost is deducted against investment income.

21.2.6 Examples of Tax Calculation

Example 1: Tax on Income from Employment

Individual “A” works in a programming office and her gross salary is 230,000 lekë/month or 2,760,000 lekë/year. Individual “B” (the spouse of individual “A”) has a business trading plumbing equipment and has net income (taxable profit) of 3,250,000 lekë/year. Meanwhile, individual “A” has a term deposit from which she earns interest of 20,000 lekë/year, while individual “B” has shares in company “XX”, which for this year has paid dividends of 25,000 lekë/year. Individuals “A” and “B” also have three children, aged 13, 15 and 19 respectively.

Calculation of tax on employment income for individual “A”:

• Annual employment income: 2,760,000 lekë.
• Tax deductions (30,000 lekë/month for 12 months): 360,000 lekë.
• Deduction for two children under 18 years old (48,000 lekë per child): 96,000 lekë.

Annual taxable income after deductions:

2,760,000 lekë – 360,000 lekë = 2,400,000 lekë.

Tax on employment income:

2,040,000 lekë x 13% + (2,400,000 lekë – 2,040,000 lekë) x 23% = 265,200 lekë + 82,800 lekë = 348,000 lekë.

Example 2: Tax on Business Income for individual “B”:

• Annual net income: 3,250,000 lekë.
• Tax deductions (360,000 lekë) and compensation for two children under 18 years old (96,000 lekë): 456,000 lekë.

Net taxable income after deductions:

3,250,000 lekë – 456,000 lekë = 2,794,000 lekë.

Tax on business income:

2,794,000 lekë x 15% = 419,100 lekë.

Example 3: Tax on Income from Investments:

• Income from term deposit of individual “A”: 20,000 lekë.
• Tax on investment income for earned interest: 20,000 lekë x 15% = 3,000 lekë.
• Income from dividends received by individual “B”: 25,000 lekë.
• Tax on investment income for dividends: 25,000 lekë x 8% = 2,000 lekë.

22. Deductions from the tax bas

Taxpayers may deduct from the tax base allowances for dependent children and education expenses, by submitting the relevant supporting documentation.