{"id":54498,"date":"2026-08-03T13:03:34","date_gmt":"2026-08-03T13:03:34","guid":{"rendered":"https:\/\/alprofitconsult.al\/?page_id=54498"},"modified":"2026-08-03T20:50:32","modified_gmt":"2026-08-03T20:50:32","slug":"taxable-base","status":"publish","type":"page","link":"https:\/\/alprofitconsult.al\/en\/tatime\/tatimi-mbi-fitimin\/baza-e-tatueshme\/","title":{"rendered":"How is taxable income calculated?"},"content":{"rendered":"

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Home Page<\/a><\/span> | Tax legislation<\/a><\/span> | Profit Tax<\/a><\/span> | How is taxable income calculated?<\/span><\/span><\/div>\n\n\n

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\"Accountant<\/figure>\n\n\n\n

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Taxable profit is not the profit figure that appears in the financial statements. The starting figure is exactly that, but adjustments are made to it: expenses that the law does not recognize are added, revenues that should be recognized at a later date are adjusted, and the carried-forward loss from previous years is deducted. The result of these adjustments is the base on which the rate is applied.<\/p>\n\n\n\n

This page traces the path from the accounting result to the tax base: which revenues are included and which remain excluded, how contracts lasting more than one year are recognized, how the arm's-length principle operates within the base, and what the full calculation with actual figures looks like.<\/p>\n\n\n\n

Read also: Profit tax rates and thresholds<\/a>.<\/p>\n\n\n\n

Short answer<\/h2>\n\n\n\n

Taxable profit is determined on the basis of financial statements prepared in accordance with accounting legislation, adjusted in accordance with the provisions of the Income Tax Law. On this basis, the 15% tax rate applies to companies, or 15% and 23% on the excess for natural persons, or 1% if annual gross turnover remains below 14,000,000 lek\u00eb until December 31, 2029.<\/p>\n\n\n\n

Thus, accounting is not a formal obligation parallel to taxation. It is the legal starting point for calculation, and when the statements are not accurate, the taxable base cannot be established.<\/p>\n\n\n\n

The starting point is the financial statement.<\/h2>\n\n\n\n

The accounting profit before tax is the only figure from which the calculation is allowed to start. This has two practical consequences that the business experiences every year.<\/p>\n\n\n\n

First, any deficiency in accounting goes straight onto the tax return. An unrecorded invoice, an unclosed inventory, or uncalculated depreciation don't remain accounting issues\u2014they become tax issues.<\/p>\n\n\n\n

Secondly, the difference between accounting profit and taxable profit is normal and expected. It is not a sign of an error. It results from the fact that accounting standards and tax law have different objectives, and this difference must be documented line by line to be defensible during an audit.<\/p>\n\n\n\n

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Rule of thumb: if you can't document why taxable income differs from accounting income, the audit in your country will explain the difference\u2014usually to your disadvantage.<\/p>\n<\/blockquote>\n\n\n\n

Read also: Tax Audit and Your Rights<\/a>.<\/p>\n\n\n\n

Taxable Income<\/h2>\n\n\n\n

Revenues from operations<\/h3>\n\n\n\n

Revenue includes income from the sale of goods and services, income from the leasing of business assets, financial income, gains from the disposal of assets, and other income that increases the entity's net assets. The rule is inclusion, whereas any exclusion must have a basis expressly provided by law.<\/p>\n\n\n\n

For resident entities, the base covers profit realized both within and outside Albania. For non-residents, it covers profit attributable to a permanent establishment in Albania.<\/p>\n\n\n\n

Read also: Tax residency, non-residents and double taxation<\/a>.<\/p>\n\n\n\n

Dividends received from other companies<\/h3>\n\n\n\n

When your company holds an equity interest in another company, the dividend you receive may be excluded from taxable income, provided that the holding is at least 10% and has been held for at least 24 months. This is the participation exemption, and it exists to avoid double taxation of the same profit within a group.<\/p>\n\n\n\n

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Company A has held 30% of Company B's capital for three years and receives 2,000,000 lek in dividends. This dividend is excluded from Company A's taxable base because both conditions are met. If the participation had been 6%, or if it had been held for only 10 months, the dividend would have been included in the base.<\/p>\n<\/blockquote>\n\n\n\n

Read also: Dividend, distribution procedure, and withholding tax<\/a>.<\/p>\n\n\n\n

When the basis is reduced without documentation<\/h3>\n\n\n\n

Revenues cannot be reduced by accounting adjustments not supported by documentation. Credit memos, trade discounts, and merchandise returns are recognized only when they comply with invoicing and fiscalization rules. An unfiscalized invoice is not a valid tax document.<\/p>\n\n\n\n

Read also: Taxation, invoice elements, and deadlines<\/a>.<\/p>\n\n\n\n

Adjustments that convert accounting profit into taxable profit<\/h2>\n\n\n\n

\u2714 Expenses that the law does not recognize are added, such as fines, expenses without a valid document, and amounts exceeding the permitted limits.
The difference is added when book depreciation is greater than tax depreciation.
\u2714 The timing of revenue recognition for long-term contracts is corrected.
\u2714 Transactions with related parties are adjusted when the price does not match the market price.
\u2714 Excluded are the income items that the law leaves out of the base, such as dividends that meet the participation requirements.
\u2714 The carryforward loss from prior years is deducted, in order and within the five-year period.<\/p>\n\n\n\n

Order matters. The carried-forward loss is deducted last, once the base has been fully adjusted, because otherwise more loss would be utilized than the year's profit allows.<\/p>\n\n\n\n

Read also: Which expenses are recognized and which are not.<\/a>.<\/p>\n\n\n\n

Example<\/h2>\n\n\n\n

Trading company, tax year 2026, registered for VAT.<\/p>\n\n\n\n

Calculated example, step by step<\/p>\n\n\n\n

Voice<\/th>Value<\/th><\/tr>
Sales revenue<\/td>42,000,000 lek<\/td><\/tr>
Revenue from the rental of a business space<\/td>1,800,000 lek<\/td><\/tr>
Total revenue<\/td>43,800,000 lek<\/td><\/tr>
Accounting profit before tax<\/td>6,500,000 lek<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

Step 1. Representation expenses. The allowable limit is 0.3% of total revenue, i.e., 43,800,000 x 0.3% = 131,400 lek. The company has spent 400,000 lek. The amount over the limit, 400,000 \u2013 131,400 = 268,600 lek, is added to the base.<\/p>\n\n\n\n

Step 2. The tax penalty of 150,000 lek\u00eb is not recognized and is added in full.<\/p>\n\n\n\n

Step 3. A purchase of 220,000 lek\u00eb documented with an unfactured invoice is not recognized and is added.<\/p>\n\n\n\n

Step 4. Accounting depreciation is 180,000 lek\u00eb higher than the tax-recognized depreciation. The difference is added.<\/p>\n\n\n\n

Step 5. The carryforward loss from 2025 is 900,000 lek\u00eb and is deductible.<\/p>\n\n\n\n

Calculated example, step by step<\/p>\n\n\n\n

Calculation<\/th>Value<\/th><\/tr>
Accounting profit<\/td>6,500,000 lek<\/td><\/tr>
Plus representation on the border<\/td>268,600 lek<\/td><\/tr>
Plus fine<\/td>150,000 lek<\/td><\/tr>
Plus expense without a valid document.<\/td>220,000 lek<\/td><\/tr>
Plus the depreciation difference<\/td>180,000 lek<\/td><\/tr>
Less carryover loss<\/td>900,000 lek<\/td><\/tr>
Taxable income<\/td>6,418,600 lek<\/td><\/tr>
Tax 15%<\/td>962,790 lek<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

Note that four relatively minor adjustments increased the base by 818,600 lek\u00eb and the tax by about 122,790 lek\u00eb. This is the value of proper documentation: it's not a formality, it's money.<\/p>\n\n\n\n

Read also: How the loss will be carried over into the coming years.<\/a>.<\/p>\n\n\n\n

Long-term contracts<\/h2>\n\n\n\n

When a contract lasts more than 12 months, revenues and expenses are not recognized at the end, when the work is completed, but along the way, based on the percentage of completion. This protects the business from one year with an artificial loss and another year with an artificial gain.<\/p>\n\n\n\n

The completion percentage is measured by comparing the costs incurred through the end of the year with the total contract costs projected.<\/p>\n\n\n\n

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24-month construction contract, value 60,000,000 lek, total projected cost 48,000,000 lek. As of December 31 of the first year, costs of 18,000,000 lek have been incurred. The completion percentage is 18,000,000 \/ 48,000,000 = 37.51%. The recognized revenue for the first year is 60,000,000 \u00d7 37.51% = 22,500,000 lek, and the recognized profit is 22,500,000 \u2013 18,000,000 = 4,500,000 lek.<\/p>\n<\/blockquote>\n\n\n\n

When the total cost estimate changes during the contract, the percentage is recalculated using the new estimate. The revision must remain documented, because it changes the year's taxable profit.<\/p>\n\n\n\n

Read also: Finance & Accounting.<\/a><\/p>\n\n\n\n

The principle of the market within the base<\/h2>\n\n\n\n

The law requires that transactions be recognized at fair market value. This does not apply only to large international groups; it also applies to a small LLC that leases space from a partner or sells goods to another company owned by the same person.<\/p>\n\n\n\n

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The company leases a space from the sole partner for 30,000 lek\u00eb per month, while the market rent for the same space is about 90,000 lek\u00eb. The company reports lower expenses and declares higher profit, while the partner declares lower rental income. The administration has the legal basis to adjust both parties to the market value.<\/p>\n<\/blockquote>\n\n\n\n

When transactions with related parties reach significant proportions, the full price transfer rules come into play, with prescribed documentation and methodologies.<\/p>\n\n\n\n

Read also: When the price transfer rules apply<\/a>.<\/p>\n\n\n\n

Special cases that change the base<\/h2>\n\n\n\n

Reorganizations of companies<\/h3>\n\n\n\n

Mergers, divisions, and stock exchanges are treated as tax-neutral when the conditions are met, meaning no taxable gains arise at the time of the reorganization. Cash payments, when made, are allowed only up to the 10% limit of the nominal value of the securities exchanged. If the acquired securities are sold within three years, their tax cost is treated differently.<\/p>\n\n\n\n

Transfer of assets outside Albania<\/h3>\n\n\n\n

When assets or operations are moved outside the jurisdiction of the Albanian tax authority, a liability arises on the difference between the market value and the remaining tax value. This is why the relocation of structures is not planned solely from a legal standpoint.<\/p>\n\n\n\n

Land exchanged for building site<\/h3>\n\n\n\n

In land\u2010exchange contracts based on the built\u2010up area, the law refers to a methodology set by a Council of Ministers decision. This is one of the cases where the figure in the contract and the taxable figure systematically differ, so the calculation is done before signing, not afterward.<\/p>\n\n\n\n

Where is it registered and when is it declared?<\/h2>\n\n\n\n

Base adjustments are not recorded in the financial statements. The statements remain in accordance with accounting standards, while the adjustments are reflected in the annual income tax return, which is filed by March 31 of the following year.<\/p>\n\n\n\n

This means that the transition from accounting income to taxable income must be kept as a separate document\u2014a reconciliation schedule for each year\u2014showing the figures and the reason for each adjustment. This document is the only practical defense during an audit.<\/p>\n\n\n\n

Read also: Tax calendar with the year's deadlines<\/a>.<\/p>\n\n\n\n

The mistakes we see<\/h2>\n\n\n\n