Albania has officially implemented law no. 29/2023, dated 30.03.2023 “On Income Tax”, effective starting from 1 January 2024; repealing and replacing law no. 8438, dated 28.12.1998 “On Income Tax”, as amended. Despite successive amendments over the years, law no. 8438 is deemed outdated and inadequate in addressing the contemporary principles and methodologies associated with personal income tax and corporate income tax (the “New Income Tax Law”).
The New Income Tax Law is designed to regulate the taxation of individual and corporate income, along with the taxation associated with Inheritance, Gifts, and income originating from Games of Chance. It elaborates the concepts outlined in the preceding law while incorporating novel principles and treatments, encompassing, among other things, the following provisions:
New Regime on Employment Income Taxation
The New Income Tax Law provides for a new progressive taxation regime of employment income by setting annual thresholds [i.e., ALL 2,040,000 (approx., EUR 20,000)] and tax rates (i.e., 13% for income up to the annual threshold and 23% for the income over the threshold). However, it shall become effective starting from January 1st, 2025.
Additionally, diverging from the preceding law, income garnered by a self-employed individual is deemed as employment income under specific conditions. This includes instances where at least 80% of the earnings stem directly or indirectly from one client, or if 90% or more of the total revenue originates from fewer than three clients. Nevertheless, an exception is made if the self-employed individual exclusively offers services to non-tax resident individuals or non-resident entities lacking a permanent establishment in Albania.
Personal Income (Business Income and Investment Income) Tax Rates
Business Income Tax
The New Income Tax Law stipulates a 15% tax rate for annual taxable profits up to ALL 14 million (approx., EUR 135,000) and 23% for amounts exceeding this threshold for self-employed and registered entrepreneurs. Nevertheless, self-employed individuals and entrepreneurs with an annual turnover up to ALL 14 million will maintain a 0% tax until 31 December 2029, except for a specific group of self-employed professionals identified by Decision of Council of Ministers no. 753, dated 20.12.2023 “On the applicable provisions of law no. 29/2023 ‘On Income Tax Law’”.
Investment Income Tax
According to the New Income Law, income originating from interest, dividends and royalties, capital gains deriving from the alienation of financial instruments and other securities, capital gains deriving from the investment made in a life insurance plan, return from investment made in a private pension scheme, capital gains deriving from the alienation of immovable property, income from the rental of immovable property, mining of virtual assets and from transactions with virtual assets shall be considered as investment income (to the extent they are not classified as business income). Individuals receiving income from any of the investment categories mentioned above are liable to a 15% personal income tax rate, with the exception of income derived from dividends, which is taxed at a rate of 8%.
Corporate Income Tax
The New Income Law signifies a notable departure from the prior legislation, especially in its methodology for characterizing entities subject to corporate income tax obligations. As per the New Income Law, all entities (i.e., establishments, partnerships, forms of cooperation recognized as a legal entity, assets or equity management entities, trusts, and those established through specific laws in Albania), are deemed taxpayers for corporate income tax purposes, irrespective of their annual turnover. The standard corporate income tax rate stands at 15%, with a specific subset of entities eligible for an alternative rate under the transitory regime outlined in Article 69 of the New Law on Income.
Taxation of Inheritance, Gifts, and Games of Chance Income
The new law regulates the taxation of inheritance, gifts, and gambling income for Albanian residents who receive such income in the country or abroad and for non-residents who receive such income from Albanian sources. The tax rate for inheritances, gifts and gambling income under this article is 15%, without deduction of any costs.
The New Law on Income Tax has sparked significant debate among professionals, prompting contemplation of a potential appeal to the Constitutional Court. The contention centres around allegations of a breach of the freedom of economic activity and disproportionality. Critics argue that the law deviates from the principle of taxing based on income, instead introducing distinctions based on the nature of the economic activity, which is perceived as an infringement on fair taxation principles.
The information in this document does not constitute legal advice on any particular matter and is provided for general informational purposes only.
By Ermal Mema, Associate, Karanovic & Partners