Exemption from VAT is not a favor; it is special treatment that comes at a price. Supplies are not subject to VAT, but the business also cannot deduct the VAT on purchases that serve those supplies. The main categories are activities in the public interest, financial activities, the supply of buildings and land, the leasing of real estate, and a list of imports.
This page provides the categories confirmed under the law, clarifies the fundamental difference between exemption and zero-rating, shows how the deduction is calculated when a business makes both taxable and exempt supplies simultaneously, and offers a complete example.
Read also: How VAT works: collected, deductible, and liability.
Three terms that sound alike and have completely different consequences.
| Treatment | VAT on the invoice | The right to deduct purchases |
|---|---|---|
| Taxable supply at 20%, 61% or 101% | VAT included | Complete |
| Supply at zero rates, like exports. | 0% VAT | Complete |
| Exempt supply | Excluding VAT | It doesn't arise. |
This table is the whole issue. The exporter does not collect VAT and recovers the VAT on purchases, so its surpluses go toward a refund. The entity with exempt activities does not collect VAT and does not recover anything, so the VAT on purchases remains a net cost and is included in the price.
Caution. If your activity is exempt, the VAT on rent, energy, equipment, and services you purchase is not refundable. It is a business expense and must be included in the price calculation from the outset.
Article 51 of the law lists the supplies exempt in the public interest. The confirmed categories are as follows.
Universal postal service
✔ Implantable drugs and devices
✔ Health services
✔ Human organs and blood
Social welfare
✔ Child protection
K-12 and higher education
✔ Supplies for nonprofit organizations
✔ Sport
✔ Culture
✔ Patient transport
✔ Public radio and television
✔ Agricultural machinery
✔ Veterinary services
✔ New electric vehicles
Article 52 imposes restrictions on the application of these exemptions, so membership in a category is not determined solely by the name of the activity. For health, educational, and cultural services, the threshold is determined by the nature of the service and the status of the entity providing it, and is verified in the text of the article before invoicing is prepared.
Article 53 of the law excludes financial activities and a group of supplies related to real estate.
✔ Insurances and reinsurances
✔ Loans and guarantees
✔ Deposits and payments
✔ Currency transactions
✔ Stocks and bonds
✔ Investment funds
✔ Bets and gambling
✔ Supply of buildings and land
✔ Real estate rental
✔ Printing presses for newspapers
✔ The construction process by the builders
Real estate rental is exempt, but the law excludes certain cases from the exemption, which are therefore taxed normally, such as hotels and accommodation structures, campsites, parking lots, fixed machinery and equipment, and the rental of safes.
In practice, this means that the rent for an office space is exempt, while the hotel room, parking space, and bank safe deposit box are taxable supplies. When a contract includes both the lease of office space and the lease of fixed equipment, the allocation is made in the contract and on the invoice.
Read also: Tax exemptions for accommodation facilities with special status.
Article 55 of the law provides the right to opt for VAT treatment in specified cases. The election makes sense when the landlord or supplier works with business clients who deduct VAT and have significant VAT on investments and costs. Before it is exercised, it is checked which supplies fall under this right and how the election is documented.
Article 56 of the law contains a long list of exempt imports, with more than thirty cases. Among these are imports under investment contracts, personal effects, inherited items, traveler's baggage, specified gifts, and pharmaceutical products.
The full list is set out in the text of Article 56, because import exemption often depends on formal conditions such as value, destination, and the accompanying document. Customs clearance is carried out on the basis of these conditions, so a mistaken assumption is revealed at the time of clearance.
Read also: VAT on imports, zero-rated exports, and customs regimes.
The zero-rated supply chain begins with the export and continues with other supplies that the law treats in the same way.
| Article | Category |
|---|---|
| 57 | Export of goods |
| 58 | The traveler's luggage |
| 59 | International transport |
| 60 | Supplies similar to the export |
| 61 | Gold supplied to the Bank of Albania |
| 62 | Brokerage services |
| 63 to 67 | International Trade and Customs Regimes |
These supplies are not subject to VAT but retain the full right to deduct input tax. Therefore, the exporter is the classic case of a credit surplus that qualifies for a refund, with a shorter deadline than other taxpayers.
Read also: VAT refund, conditions and deadlines.
The above categories are those confirmed by the text of the law. The full list of exemptions and zero-rate supplies is found in Articles 51 through 67 of Law No. 92/2014, divided as follows. Article 51 general interest, Article 52 restrictions, Article 53 financial activities and real estate, Article 54 other exemptions, Article 55 the right to opt for VAT, Article 56 imports, and Articles 57 to 67 the zero rate.
When your activity falls on the borderline between an exempt category and a taxable supply, the section's text is read literally before invoicing is determined, because correcting it later costs more than verifying it beforehand.
Read also: Recent amendments to VAT Directive No. 6/2015.
When a business carries out both taxable and exempt supplies simultaneously, purchases are divided into three groups: those that serve only the taxable activity, those that serve only the exempt activity, and those that are common.
✔ Purchases solely for the taxable activity provide a full deduction.
✔ Purchases solely for the exempt activity do not provide a discount.
✔ Shared expenses, such as rent, utilities, accounting, and office supplies, are deducted in the portion attributable to the taxable activity.
✔ The allocation is made in accounting every month, not at year-end, because the statement is monthly.
A business has two activities: taxable consulting revenue of 8,000,000 lek and exempt educational courses of 2,000,000 lek, for a total of 10,000,000 lek in supplies and an 80% weighting for the taxable activity. The VAT collected on the consulting services is 8,000,000 × 20%, i.e. 1,600,000 lek. The purchases solely for the consulting services are 1,500,000 lek without VAT, i.e. 300,000 lek of VAT fully deductible. Joint purchases, rent, energy, and accounting amount to 2,500,000 lekë excluding VAT, which is 500,000 lekë VAT, from which 80% is deductible, i.e., 400,000 lekë. The total deductible VAT is 700,000 lekë. The payment obligation is 1,600,000 minus 700,000, i.e., 900,000 lek. Of the 500,000 lek in joint purchases, 100,000 lek remain as business expense.
This is the practical meaning of the exclusion: 100,000 lek that are non-refundable and should have been included in the course fee.
Activities in the general interest under Article 51, financial activities and supplies related to real estate under Article 53, other exemptions under Article 54, and a list of imports under Article 56. The full list is found in Articles 51 through 67.
Real estate rentals are exempt, but hotels and accommodation structures, campsites, parking lots, fixed machinery and equipment, and safes are taxed normally.
When the supply is exempt, it cannot. When the supply is zero-rated, like exports, it can, and the right is full. This is the main difference between the two treatments.
Healthcare services are an excluded category, but the limitations of Article 52 define the scope of application. For a private clinic, the threshold is determined by the text of the article before invoicing is established.
School and university education is an excluded category. For courses and training outside the formal education system, the treatment depends on the nature of the service and must be verified with the official source, because the impact on the deduction is significant.
Fully deduct the VAT on purchases that serve only the taxable activity, zero for purchases solely for the exempt activity, and the proportionate share from mixed purchases.
The construction process by builders and the supply of buildings and land are on the list of exempt supplies under Article 53. The specific application in a construction project has nuances that are determined on a case-by-case basis.
For specified cases, the law provides the right of election in Article 55. It is checked whether your supply falls under this right and how the election is documented, because the consequence is long-term.
It doesn't always make things easier. It removes VAT from the invoice, but it also eliminates the right to deduct it, so for businesses with large investments and purchases the result can be a higher cost.