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TAX SYSTEM IN ALBANIA
2004
A complete guide by ALBIC / IDRA © ALBIC / IDRA. All rights reserved. Të gjitha të drejtat e rezervuara. DIRECT TAXES ON BUSINESS 2. GENERAL REVIEW There are three main direct taxes paid by registered taxpayers in the Republic of Albania . Tax on profit, which is paid by taxpayers who exceed the VAT registration threshold. Simplified tax on profit , which is paid by registered taxpayers having an annual circulation that does not exceed the VAT registration threshold. Local tax on small business , which is paid by registered taxpayers having an annual circulation that does not exceed the VAT registration threshold. The VAT registration threshold is 8 million lek per calendar year.
The definition of tax residence criteria for individuals, legal entities and physical persons is closely related with the place where they pay their taxes. Under the law, taxable Albanian residents are taxed in Albania on all incomes realized on a world level (incomes deriving inside or outside Albania ). Non-residents are taxed in Albania only on incomes deriving from within the Republic of Albania . In particular, for persons who are residents in countries with which Albania has signed Agreements (Treaties) to eliminate double taxes and when these agreements have entered in force, the provisions of these agreements will be adopted. • The individual is regarded as an Albanian resident for tax purposes, when he has a permanent place of residence, when he has his own family, i.e. when he has vital and economic interests vested in Albania (place of vital interests), although he may work outside the country for indefinite periods of time, or have foreign citizenship. • For tax purposes, an Albanian resident is also considered an individual who stays in Albania for a tax year, whether for the entire period or a part of it totaling above 183 days, regardless of citizenship or place of vital interests. The calculation of duration of stay in Albania includes the days of his physical presence, i.e. not only workdays, but also days of arrival, departure and holidays. To conclude, a taxable Albanian resident is considered every individual (regardless of nationality or citizenship), who meets one or both of the above-mentioned requirements. A legal entity is considered a taxable Albanian resident if: • Its headquarters (head office) are in the Republic of Albania ; and/or • Its place of business management is in the Republic of Albania . A person is considered an Albanian taxable resident when he runs his own business and is registered as a physical trader in the Albanian Court and the Albanian Tax organs.
• Tax on Profit As we pointed out, all taxpayers registered in tax organs, whose annual circulation exceeds the VAT registration threshold are subject to the tax on profit. This category of taxpayers includes: • Legal entities created according to the Law “ On trade companies” and that are registered to the VAT ; • Legal entities established on the basis of Civil Code which have profit activities in the territory of the Republic of Albania ; • All other legal entities established or recognized as such by special laws; • Partnerships as defined by law; • Legal entities, partnerships or all other groupings of persons established or organized on the basis of a foreign law and exercising their activity in the territory of the Republic of Albania through a permanent headquarter. • Every other person regardless of their legal registration form, including traders, who are not subject to simplified tax on profits, but who are otherwise registered as Value Added Tax subjects. • Simplified tax on profits The simplified tax on profits applies to all taxpayers who are not registered, or bound by law to register as taxpayers for Value Added Tax. • Local tax on small business Subject to local tax on small business is every person who runs a business in the territory under the jurisdiction of a local government entity in the Republic of Albania at any given time of a calendar year and who is not subject to Value Added Tax.
• All taxpayers are registered once, in the moment they begin their economic activity, before starting their business. Taxpayers of local tax on small business and/or of simplified tariff on earnings are excluded from this rule in the year 2005. These taxpayers must re-register within the 20-th of March. If the taxpayers are not registered or re-registered in the right time the tax authorities do their registration. This registration has the same effects as if the taxpayers would have done the registration their self. • From January 1 -st , 2006, the local tax on small business, the registration for the first time of the taxpayers is done after they are furnished from the local authorities with the License for Activity Exercise. In the law No.8438, Dated 28.12.1998 “On the tariff of incomes” and in the law No.8978, Dated. 12.12.2002 “On local tax on small business” it was defined that all the subjects that paid these taxes would re-register every year near the tax authorities. With the 2005 Fiscal Package, these subjects are obliged to register only once in the beginning of their activity.
• Tax level on profit for the fiscal year that begins in January 1-rst 2005 – December 31-rst 2005 is 23%, and 20% for the coming years. • Simplified tax on profit is 3% of the taxpayer gross incomes. For the tax basis on which this tax is calculated, no discounting expense is recognized . • The local tax on small business is a fixed, annual and mandatory quota. Every business, whenever it is located, is taxed separately. Categories and their respective tax levels are given in the following table. The Municipality Council or the Communal Council of the territory where the business is located may increase or decrease the indicator level value by no more than 30%. Each increase or decrease equally applies to all business categories.
• The following are exempted from tax on profit : • Units/institutions of central and local government; • Bank of Albania . • Legal entities which exercise activities of a religious, humanitarian, charity, scientific or educational character, whose wealth or profits are not used for profits by its leaders or members. • Labor organizations (unions, confederates) chamber of commerce, industry or agriculture, and any other organization similar in function, which do not have profit purposes. • International organizations and their representations in the Republic of Albania, agencies of technical cooperation and their representatives, who are acknowledged as such by the Albanian State on the basis of legal provisions, whose tax exemption has been envisaged by special agreements. • Persons envisaged in international agreements ratified by the People's Assembly. • Foundations and financial non-banking institutions founded or delegated with a decision of Council of Ministers, whose main objective have the support of government development politics through crediting. • Picture studios, licensed and subsided from the National Center of Cinematography.
• Ambulant vendors. • Persons exercising individual transport. • Individuals that gather waste of metals, glasses, paper and individuals who gather herbs and spices, etc. • Individuals that produce fire wood, mountain stones, etc, The new law No. 9326, Date 06.12.2004 ”For some amendments and changes in the law “On tariff on incomes”, predicts that all subjects that have an annual turnover less than 3 million Leks are no longer excluded from he simplified tax on profit.
2.6. Establishing the taxable profit • For taxpayers of the tax on profits: The financial balance sheet and its annexes will provide the basis to establish the taxable profit for a certain tax period. The financial balance sheet must comply with law no. 7661, of 19.1.1993 “ On Accounting ” valuable till January 1-rst, 2006 , with the provisions of law no. 8438, of 28.12.1998 “On Income Tax” as well as other sub-legal acts issued by the Minister of Finance for purpose of calculating the taxable profit. After January 1-rst, 2006, will come into act the law No.9228, date, 29.04.2004, “On accounting and Financial Declarations”. In principle, the taxable profit or net income, is the difference between total incomes (incomes from normal activity and extraordinary incomes), including the value of profits and advantages in nature, with effective and recognized expenditures, for the purpose of income realization and protection. Under recognized expenditures fall all those expenditures made for business purposes, that is, expenditures that intend to realize and secure incomes. In order to be recognized or deductible expenditures should meet these conditions: • They must be made to the direct benefit of the economic activity out of which incomes are achieved or to have been related to the normal course of the taxpayer's activity. • They must be effectively made or faced and based on legally recognized justifying documents. • The must be reflected by an accounting action, reducing the net active. • In any case the taxpayer must evidence expenditures with relevant legal documentation
This category of taxpayers it is taxed for the gross incomes. So, every taxpayer must declare before 31-th of March of every year his gross incomes, for all his businesses that are objects of the Simplified Tax on Profit. The taxpayer is obligated hold the books of purchase and sell, where the every day sales and buys are registered. These books are kept for every location of the activity.
2.7.1. Amortization Amortization of assets is one of the major items of recognized, deductible business expenses. Amortization of business assets is calculated by: • Owner of assets • Person who runs the risk, in the case of rented assets (usually long-term), with loans or leasing contracts; Such assets as land, building grounds, works of art, artifacts, jewellery, precious metals or stones are not amortized. The following are individually amortized and in a linear manner : • Purchase or construction costs; building improvement, renovation and reconstruction costs, as well as costs of machineries and equipment with a utilization lifetime of above 20 years. The amortization norm of these assets is 5%. Similar amortization applies to water pipelines, oil pipelines, gas pipelines, the higher voltage transmission lines, and other similar assets; • All the following business assets such as patents, trademarks, expenses for starting a business, “the good name” in cases when the latter is purchased etc. are amortized by a 10% permissible norm for fiscal effects. The calculation basis for the amortization of both ‘'a'' and ‘'b'' categories of the above-mentioned activities is the initial value of the asset (historical cost) to which are added the asset's improvement, renovations and restructuring costs. The following are amortized on a group basis: • Computers, information systems, computer programs and all data protection software and equipment. The amortization norm on this asset category is 25%. • All other assets which are not grouped under the above-mentioned ”a'', ‘'b'' and ‘'c'', such as production and service machineries and equipments, all means of transportation, are amortized with a permissible norm for fiscal effect at 10%. The calculation basis for the amortization of categories “c” and “d” of above-mentioned assets is the remaining accounting value of the asset group (the initial value minus amortization), to which are added the improvement, renovation and reconstruction costs of group assets and from which the incomes from sales and compensations received are deduced. “Bad debt” implies a payment request (debt obligation), which becomes an obligation that can be totally or partially unpaid because of the debtor's bad financial situation, his placement in bankruptcy or because of any other reasons not depending on the creditor. A bad debt must meet the following conditions in order to be recognized as such during the activity year, i.e. to reduce the taxable profit: • The total sum of this debt must be included previously in the taxpayer's incomes. • All necessary legal efforts must have been made for its payment; • When this debt has been deleted from accounting books;
In order to avoid double tax, dividends and profit-shares gained by companies and Albanian resident partnerships (beneficiaries) are exempted from tax on profits, provided that these dividends be paid by an Albanian resident tax company or the profit be shared by an Albanian resident tax company (i.e. these dividends or profit-shares are distributed after tax on profits in Albania has been paid) and the beneficiaries of dividends or distributed profit should possess no les than 25% of the stock or capital of the company or partnership making the distribution. Hence, dividends and profit-shares made by a company or partnership (i.e. beneficiaries) are exempted from the tax on profits, when all three following conditions are met: • The beneficiary is an Albanian tax resident; • The payer (company or partnership making the distribution of dividends is an Albanian tax resident; • The beneficiary owns no less than 25% of the payer's stock capital, right to vote, or initial capital (in the case of partnerships). 2.7.4. Recapturing losses If taxable profit in a certain tax period turns out as negative, that is if expenses are bigger than incomes, the resulting losses may be covered by the profits of three consecutive years. If a loss is not recaptured for three consecutive years in a row (and the entity results in losses again), it cannot be extended farther and thus affecting the results of other years, prior to the application of tax on profit. Crediting foreign tax has to do with crediting and recognition of taxes that taxpayers residing in the Republic of Albania have paid in other countries (outside the territory of the Republic of Albania ) on profits that they have made in those countries. But this reduction or recognition cannot exceed the Albanian tax level to be applied on those incomes if they had been made within the territory of the Republic of Albania .
• Tax on profits During the activity year the tax on profits is paid by the taxpayer one month in advance. To determine the monthly payment amount of tax on profit the law has foreseen a formula, which takes into account the tax on profit the taxpayer has paid in the last two preceding years. During the coming tax period, the taxpayer pays the respective monthly tax on profit to the tax organ accounts no later than the 15 th of each month, accounting for the next month, according to the calculation formula described above. The final calculation of the tax on profits is based on the factual data included in the tax declaration (Annex A) and other supporting documents, such as the balance sheet and its annexes, data from tax controls, as well as any other legal document that helps to determine the tax obligation. If the tax declared on the basis of the annual income declaration is far bigger than the advance payments made during the year, the taxpayer is obliged to pay the difference at the moment he presents the declaration. If the advance payment amounts turn out to be far bigger than those declared in the annual income declaration, or those resulting from a tax control, the tax organs are obliged to recognize these sums for overdue payment of tax obligations or for the payment of future obligations, including the advance payment amount for the coming periods. Upon taxpayer's request, these sums could be returned to him within 60 days after receiving the tax declaration. • Simplified tax on profits Taxpayers pay the rate of their annual obligation considering the estimation of the flows for the calendarian year. These rates are paid as follows: • Not later than 20-th of April, 20-th of July and 20-th of October, respectively in the first, second and the third quarter of the year • Not later than the 20-th of December for the fourth quarter of the respective year. • Possible differences that are related with the changes of the turnover, are declared and paid in the moment of presentation of the tax declaration that cannot be submitted later 31-th of March of the coming year. When a business starts during a taxable period, the calculation of rates is based in the estimated circulation according to the predicts that are made by the taxpayer and the estimations done by the tax authorities. The payment is done according to the deadlines specified above. When a business delivers e declaration for the close down of its activity, the payment of the tax is done not later than 10 days from the day of declaration delivery. The gathered taxes are shell out in the state budget and are transferred to the municipalities or communes' budget, once a month, where the taxpayer is registered or has his activity going. • Local tax on small business Local tax on small business is paid in two equal rates. The first rate has to be paid within the 30-th of April and the one not later than the 20-th October of the respective year. The place and the way of tax payment it is defined with a special instruction. If a taxpayer begins its commercial activity during the year, the taxes are paid for effective working months according to the Instruction of the Minister of Finances. The law predicts the reduction of the tax level, if the taxpayers pay their obligation, before the deadlines stated below: • If the taxpayer pays the whole sum of his annual obligation within the 1-rst of February, the sum that has to be paid is reduced by 5% • If the taxpayer pays the whole sum of his annual obligation within the 1-rst of March, the sum that has to be paid is reduced by 3% If the information given from the taxpayer is incorrect and if the fixed sum to be paid is more than the one paid, the authorities must notify the taxpayer. The taxpayer must pay his tax obligation within 15 days from the day that he was noticed. In the same way, if a business shuts down and the value of the tax obligation is lower than the value paid than the tax authorities must reimburse the difference within 30 days from the day the business shuts down. The new law No. 9327, Date 06.12.2004, “For some changes and amendments in the law No.8978, Date 12.12.2002 “On local tax on small business” predicts a delay of the deadlines for the payment of the rates of this tax. The old law predicted the reduction of the annual obligation, in different levels from the ones presented above; this reduction was related with the ending of the re-registration process and the gaining of the registration certificate from the taxpayers. With coming into act of the law No. 9327, Date. 06.12.2004, approved with the 2005 Fiscal Package, we see a unification in the reduction of the sum of annual obligation, based only in the above mentioned deadlines. 2.9. Record Keeping For the purpose of determining the tax calculation basis, the registered taxpayers should keep the required legal records and documentation. Models of the basic documents that are used for the calculation of the tariffs are given in Annex B
• Taxpayers of tax on profit This taxpayer category is taxed on net incomes (that is on net profit). To this effect, they should keep accounting records, issue the balance sheet with its annexes, which should comply with the law “On accounting” and the provisions of the law “On incomes tax”. Being subject to VAT, these taxpayers are obliged to abide by the rules of the law “On Value Added Tax” related to the tax bill and its use.
• Taxpayers of simplified tax on profit This taxpayer category is not obliged to keep accounting records and issue the balance sheet, since the tax object is not the net profit, but the realized turnover (gross incomes). The taxpayer should keep a series of records and documentation regarding the activity. The taxpayer should keep the following records and documents: • Purchase documents, which include the VAT bills, simple bills, and tax bills, as evidence of the purchases made; • Sales documents, simple tax bills, tax bills, and daily summaries of registering cash box (for sales from cash boxes). • Purchase book and sales book. Small business taxpayers are obliged to issue the following documents for each sale of goods or services made: • Tax coupon in cases when the taxpayer is equipped with a registering cash box. This coupon is given to the buyer for each sale made. • Tax bill when the taxpayer is not equipped with a registering cash box; • A simple tax bill issued only by taxpayers selling goods or services to clients who are not the final consumers of those goods or services but purchase them for the purpose of processing or re-sale, i.e. they are registered tax entities. • At the end of each day's work, the taxpayer should record in the purchase book the total of purchases made during that day, as well as other expenses made, such as rent, electricity, salary payment, etc. • At the end of each day's work, the taxpayer should record in the sales book the total value of sales made by him, respectively grouping them as sales with simple tax bill, sales with cash box (the daily total of cash box) and sales with tax bill.
• Tax on fortune games, casinos and hippodromes Taxpayers exercising an activity in the realm of fortune games, casinos and hippodromes, like all other taxpayers, are subject to tax legislation provisions. Like all other taxpayers, they pay all taxes and tariffs specified in fiscal laws (such as VAT, tax on profits, various national and local taxes, etc). Except usual tax and tariffs, every person that benefits from the fortune games and casinos, pays a tariff equal to 20% of the earnings. This tariff is taken from the owner of the game or casino, whom is obliged to shell out within 24 hours near tax authorities. 2005 Fiscal Package, and respectively the law No.9326, Date 06.12.2004, ”For some amendments and changes in the law No. 8483, Date. 24.12.1998 “On Tariff on Incomes”, predicts a reduce of tax level by 5% 2005 Fiscal Package, and respectively the law No. 9326, Date 06.12.2004, ”For some amendments and changes in the law No. 8483, Date 24.12.1998, “On Tariff on Incomes” predicts a reduce of the simplified tariff on profit by 1%. Letters “g“ and “h” are part of the exclusions from the tax on profit in the 2005 Fiscal Package according to the law No. 9326, Dated. 06.12.2004 “For some Changes and Amendments in the law No. 8583, Dated.28.12.1998 “On Tax on Incomes”.
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Tax System in Albania 
