The Ministry of Finance and Economy has completed the drafting of the directive for the implementation of the new draft law “For income taxt.
The accompanying explanatory memorandum of the draft law, published by Institute of Certified Public Accountants, establishes a progressive tax rate from 15 to 231 TP3T on business net income (after deducting allowable expenses, the net profit will be taxed at these rates).
For business income, for which the tax base is net income, meaning the difference between revenue and deductible expenses, the following rates apply:
15% on net profits up to 14,000,000 lek in a tax year and
23% tax on each lek of net profit above a net profit of 14,000,000 lek per year.
An individual taxpayer with income from employment and business may deduct, from the respective taxable base for the tax period, the amount of 600,000 ALL if the annual income is up to 600,000 ALL; the amount of 420,000 ALL if the annual income is over 600,000 ALL up to 720,000 ALL; the amount of 360,000 ALL if the annual income is over 720,000 ALL, and a compensatory amount for each dependent child under 18 years of age living with the taxpayer in a common household of 48,000 ALL.
According to the guidance, if a natural person who is a trader or self-employed, after deducting from gross income all deductible expenses and any allowed deductions, reports a net profit of 12,000.000 lek, the tax he will pay will be 12,000,000 × 15% = 1,800,000 lek.
For a natural person who is a trader or self-employed, after deducting from gross income all deductible expenses and any allowances permitted under Article 22 of the law, declares a net profit of 20,000,000 lekë. The tax to be paid will be: 14,000,000 × 15% + 6,000,000 × 23% = 2,100,000 + 1,380,000 = 3,480,000 lek.
The draft law in Article 69 of the transitional provision stipulates that the new tax will be implemented from January 1, 2023 for liberal professions, while the self-employed will continue to have a zero tax rate until 2029.
For i. trading individuals; ii. the self-employed; and iii. entities with gross income of up to 14 million lek per year, the 0% income tax rate will apply until the end of 2029.
The 0%–1% VAT rate does not apply to the taxpayers mentioned in subparagraphs "ii" and "iii" above, who provide professional services. The detailed list of professional services is determined by a decision of the Council of Ministers.
Exclusively for 2023, for taxpayers providing professional services, who are subject to income tax as of January 1, 2023, income tax prepayments will be made in two installments: October 31 and December 31, 2023.
Some instructions
- Annual Tax Base
21.1 For the purpose of determining the annual tax base of an individual's income, all three categories of income are considered: annual taxable employment income, annual taxable business income, and annual taxable investment income. This annual tax base is reduced by the compensations and deductions determined by law.
21.2 For the three categories of personal income which constitute the taxable base, tax rates are applied individually to each category, as defined by law:
- Employment income is taxed at progressive rates of 13% and 23%.;
- Net business income is taxed at progressive rates of 15 and 23 percent.;
- Investment income is taxed at the respective rates of 8% for dividends and profit distributions and 15% for other investment income.
22. Deductions from the tax base
22.1 The taxpayer may deduct from the respective tax base for the tax period:
- a sum of 600,000 lekë if the annual income is up to 600,000 lekë;
- an amount of 420,000 Lek if the annual income is above 600,000 Lek up to 720,000 Lek;
- a sum of 360,000 lek if the annual income is over 720,000 lek;
- a compensation amount for each dependent child under 18 years of age and living with the taxpayer in a joint family of 48,000 ALL.
22.2 The request for personal deductions, for an income taxpayer with income from employment, can be made through the Declaration, from their payroll agent, on a monthly basis, in the amount of 1/12 of the sum mentioned in Article 22, Paragraph 1. The personal deduction can only be claimed once in a tax year.
22.3 An employee requesting a personal exemption or a portion thereof can only claim it once per month. The payroll tax agent is obligated to consider 1/12 of the exemptions on a monthly basis and calculate income tax on the payroll for the employee who has signed the personal status declaration with this payroll tax agent. An employee cannot sign a personal status declaration with more than one payroll tax agent for the same calendar month.
22.4 The request for a deduction from the tax base regarding compensation for a dependent child is made by the family member with the highest annual taxable income, through the annual income statement.
Example 1:
Iliri works full-time as a financier at company “XX” and has a gross salary of 70,000 Lek/month or 840,000 Lek/year. Meanwhile, he also works part-time at an accounting office with a salary of 40,000 Lek/month or 480,000 Lek/year.
Calculation of tax base deduction: Iliri chooses to sign the Personal Status Declaration with the accounting office. The accounting office withholds income tax from employment, and is required to consider 1/12 of the tax base deductions on a monthly basis. Specifically, Iliri's taxable income from the accounting office is 480,000 ALL/year. The law states that for salaries up to 600,000 ALL/year, a deduction of up to 600,000 ALL/year is applied. In the specific case, the tax agent must apply a monthly deduction of 600,000 ALL / 12, which is 50,000 ALL per month. The employee earns a salary of 40,000 ALL/month from the accounting office, where after applying the tax deduction, the taxable base remains zero, and in this case, the employee does not pay income tax from employment for the income from the accounting office.
Company "XX", referred to as "XX", paragraph 1 of Article 65 applies a progressive tax of 13% and 23% in accordance with paragraph 1 of Article 24 of the Law on Wages and does not allow deductions from the taxable base. The personal income taxpayer with annual taxable employment income, annual taxable income from business and annual taxable income from investment of less than 1,200,000 lekë may deduct, in addition to the individual amounts under the paragraph above, current expenses for: a. expenses for the education of his dependent children, up to a maximum of 100,000 lek; b. medications for his children or dependents and for persons under his guardianship, up to a maximum of 30,000 lek. The request for a deduction from the tax base for education and medication expenses is made by the family member with the highest annual taxable income, through the annual income tax return.
- Tax rate
24.1 For employment income, the applicable tax rates are 13% and 23%.
The reduction of the tax burden for low-income employees is not carried out by applying a 0.1% rate to a specific pay bracket, but by reducing the tax base (gross wage) by a fixed amount provided for in Article 22 of the law.
24.2 For business income, for which the tax base is net income (i.e., the difference between income minus deductible expenses), the rates applya. 15% for net profits up to 14,000,000 lek in a tax year b. 23% on every lek of net profit above 14,000,000 lek per year
24.3 If a natural person who is a trader or self-employed, after deducting from gross income all deductible expenses and any allowances permitted under Article 22 of the law, declares a net profit of 12,000.000 lek, the tax he will pay will be 12,000,000 × 15% = 1,800,000 lek.
24.4 If a merchant or self-employed individual, after deducting all expenses from their gross income after deducting all allowable deductions under Article 22 of the law, declares a net profit of 20,000,000 lek, the tax to be paid will be: 14,000,000 × 15% + 6,000,000 × 23% = 2,100,000 + 1,380,000 = 3,480,000 lek.
24.5 Investment income is taxed at 81 percent for dividend/profit-sharing income and 15 percent for any other item of investment income. Except as otherwise provided by law, no expenses are deductible against investment income.
24.6 Examples of Tax Calculation:
Ana works in a programming office and her gross salary is 230,000 ALL/month or 2,760,000 ALL/year. Ana's husband has a business for trading hydro-sanitary equipment and has a net income of 3,250,000 ALL/year. Meanwhile, Ana has a term deposit from which she receives an interest rate of 20,000 ALL/year, while Beni has some shares in the company “XX” which paid dividends worth 25,000 ALL/year this year. Ana and Beni also have three children aged 13, 15, and 18, respectively.
a) Calculation of income tax from employment: Ana has annual employment income of 2,760,000 lekë, so her income exceeds the 600,000 lekë threshold, and the deduction from the taxable base that Ana benefits from, as referred to in paragraph 1 of Article 22 of the law, is 360,000 lekë. Also, Ana has two children under the age of 18 for whom she receives a tax-base allowance of 48,000 lekë per child, i.e., 96,000 lek in total. However, since Beni has higher income, it will be Beni who claims this tax-base relief, as well as the deductions provided for in paragraph 2 of Article 22. The employment income tax that Ana will pay will be: Annual employment income of 2,760,000 lekë per year is reduced by the deductions provided for under this law. 2,760,000 lek/year – 360,000 lek/year = 2,400,000 lek/year The annual income, after applying the deductions and offsets, is taxed: 2,040,000 lek/year * 13% + (2,400,000 lek/year – 2,040,000 lek/year) * 23% = 265,200 lekë/year + 82,800 lekë/year = 358,000 lekë/year tax that Ana pays on her employment income.
b) Calculation of business income tax: Beni has an annual net income as a self-employed individual of 3,250,000 lekë. Referring to paragraph 1 of Article 22, Beni's income exceeds 600,000 lekë per year, so the tax base deduction he receives is 360,000 lekë. As the highest-earning taxpayer in the family, Beni will receive a tax-base compensation of 48,000 lekë for each child under the age of 18, i.e., 96,000 lekë in total for the two children under 18. Meanwhile, Beni does not benefit from the tax base deductions provided in paragraph 2 of Article 22, since his annual income exceeds 2,000,000 lekë. The annual net income from the business is reduced by the tax deductions and credits provided for under this law. 3,250,000 lekë/year – (360,000 lekë/year + 96,000 lekë/year) = 2,890,000 lekë/year The annual income, after applying the deductions and credits, is taxed: 2,794,000 lekë/year × 13% = 363,220 lekë/year tax that Beni pays on business income.
c) Calculation of income tax from investment: The income from Ana's term deposit and the dividend income that Beni received from investing in stocks are investment income. Investment income taxpayers may deduct from their taxable base the deductions provided in paragraph 2 of Article 22, but these deductions are not available to the taxpayers in question because Ben's income exceeds 2,000,000 lekë per year. The investment income tax that Ana will pay on the interest earned from the term deposit will be: 20,000 lek/year * 15% = 3,000 lek. The investment income tax that Ana will pay on the interest earned from the term deposit will be: 20,000 lek/year * 15% = 3,000 lek. The investment income tax that Beni will pay on the dividends received from the stock investment will be: 25,000 lek/year * 8% = 2,000 lek.
Source: Monitor Magazine.