The Ministry of Finance is preparing a new income tax law, a significant part of which relates to the taxation of self-employed individuals in the service sector.
In the draft, which is still in preliminary form, it is provided that
“Incomes earned from freelance and independent professions are considered employment income.
Earlier, the Director General of Fiscal Policies, Niko Lera, told “Monitor” that self-employed individuals who provide services (who do not sell goods, but offer services) after all expenses have been deducted and after all applicable tax incentives have been applied, they will be taxed at the same rate as employees.
The draft provides that ”If a taxpayer's annual turnover does not exceed [10,000,000] Lek, he is entitled, from business income, to deduct estimated expenses in a single amount as follows, without being required to document each expense.” For independent activities, this expense is 35% of the income.
Lera explained earlier that the changes aim to address the distortions that have arisen from tax avoidance, where employees subject to progressive tax rates of 13 to 23 percent have left payrolls, registering as self-employed.
“The new system provides that self-employed service providers, the liberal professions, will be treated the same as salaried employees. From their income, any expenses they incur will be deducted to arrive at net profit, and from that net profit the benefits that employed individuals receive will also be deducted, such as zero taxation on wages up to 40,000 lek. The net profit after all deductions will be taxed, just as it is for any employee. Therefore, the tax rate for this category will be 0% for income up to 40,000 lekë, 13TP3T for monthly income up to 150,000 lekë, and 23TP3T on the excess.,
Mr. Lera has stated.
Even if an individual is self-employed but derives his income from a few clients, it will be considered employment income.
The new draft provides that employment income includes income earned by a self-employed person if:
i) 50 percent or more of the revenues earned are received, directly or indirectly, from a single client; or
ii) more than 90 percent of total revenues earned are derived from fewer than three clients; or
iii) The taxpayer is obligated to follow the client's instructions in order to receive the income.
Salaries above 2 million lek per month should be taxed at 28.1%.
The draft proposes that for annual income above 24 million lekë per year (almost €200,000 per year, or about €16,000 per month), the personal income tax be 28%, up from 23% today. For annual income up to 2.4 million lek (about €20,000 per year, or roughly €1,600 per month), the tax remains 13%. For annual income above 2,400,000 and below 24,000,000, it is 23%.
Law
The Income Tax Law has been in effect since 1998 and has undergone numerous changes. In 2015, the finance ministry drafted a new law, but it never reached its final form. A new draft has now been prepared, which is still in its preliminary stage and has not yet been released for consultation with interest groups. The law is expected to take effect on January 1, 2023.
Part of the draft
Income from Employment
Employment income includes:
Wages, salaries, bonuses and benefits arising from employment relationships or similar, whether these relationships are current, future or past, and where the taxpayer is required to follow the income payer's instructions in order to receive payment/the remuneration;
Director's fees, remuneration as a member of a company's board of directors or legal body, as well as fees for management and participation in supervisory boards.
The rewards and benefits paid by the company to its partner for the work performed for this company;
The rewards and benefits received by members of parliament, officials, and civil servants for their services, as well as for any activities carried out in connection with their functions;
Payments/rewards for the performance of actors, musicians, or athletes.
The income earned by a self-employed person if:
- 50 percent or more of the earned income is received, directly or indirectly, from a single client; or
- more than 90 percent of total earned revenue is generated by fewer than three clients; or
- The taxpayer is obligated to follow the client's instructions in order to earn income.
Business Expenses in a Single Amount
If the taxpayer's turnover does not exceed [10,000,000For millions of Lek per year, he is entitled, from the business's income, to deduct the estimated expenses in a single amount as follows, without being required to document each expense.
- 60 percent of the income from productive activities;
- 80 % of revenue from wholesale trading activities
- 70 % of revenue from retail trade activities and individual transportation.
- 60 % of the revenue from bar and restaurant activities;
- 50 % of the income for service and craft activities;
- 35 percent of the income from independent activities.
Tax rate
1) The applicable personal income tax rate for the annual tax base of employment income and business income is as follows:
| Annual tax base | Tax rate |
| 0 – 2,400,000 | 13% |
| Over 2,400,000 and under 24,000,000 | 23% |
| Over 24,000,000 | 28% |
2) The personal income tax rate applicable to the annual tax base and annual investment income is 15%, except for annual income from dividends and profit distributions, which is 8%.
3) The personal income tax rate on annual income from other sources is 15%.
Source: Monitor Magazine.