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Tax System, Rules And Rates In Albania 2012

Taxes in Albania are grouped into three main categories: indirect taxes (VAT, excise, gambling and other indirect taxes), direct taxes (income tax, personal income taxes, taxes on capital); local taxes, and social and health security contributions. These three categories are under authority like below:

National Taxes, administered by the Central Tax Administration and Customs Administration include:

Indirect taxes include: Value added tax; Excise; Taxes on gambling, casinos and hippodromes;

Direct taxes include: Income tax; National taxes; Other taxes, which are defined as such by special law, and Customs taxes.

Social and health security contributions, as defined in the social insurances law

Local taxes and tariffs administered by Local Tax Administration include: Local tax on small business; Tax on immovable property, which includes tax on buildings and agricultural land; Tax on hotel accommodation; Tax on impact of new constructions upon infrastructure; Tax on transfer of ownership right on real estate; Annual tax for vehicle registration; Tax for occupation of public space; Board tax; Temporary taxes; Registration tariff for various activities; Cleaning and waste disposal tariff; Vehicle parking tariff; Tariff for services.

How is going on the Taxation of commercial companies?
Each individual, who is a partner in a commercial company, is responsible for the company’s tax liabilities to the tax administration, according to provisions in the company charter. According to commercial registry, over 95 percent of companies are limited liability companies. The remainder is joint stock companies, partnerships and less than 0.5 percent is limited partnerships. At the moment a company is created and starts its economic activity, it is responsible for:

- Calculation of VAT and timely declaration and payment;
- Payment of advance tax installments for profit tax to pay every month;
- Calculation, timely declaration and payment of tax on incomes from employment for employers and employees;
- Calculation, timely declaration and payment of social and health insurances contributions;
- Monthly payment of advance income tax installments in time;
- Withholding and payment of withheld tax, under obligation from the Law On Income tax;
- Calculation, timely declaration and payment of taxes according to specific activity for gambling, casinos and hippodromes;
- Calculation, timely declaration and payment of excise under specific law;
- Calculation, timely declaration and payment of national taxes and local taxes.

In order to calculate taxes, taxpayers who are subject to VAT or profit tax keep registers, accounting records, books and financial information and issue tax receipt or tax coupon, in accordance with relevant laws and regulations pursuant to them. Taxpayers keep their accounts in accordance with provisions of the law “On accounting and financial statements” and act pursuant to that law in accordance with IFRS principles. In order to register economic transactions related to taxes, taxpayers can also use books, records or documents specified in specific tax laws and respective regulation provisions. Taxpayers are required to use basic documentation, including tax invoice, in accordance with tax legislation and relevant legal provisions.

What Tax exemption are applied?
Albania’s tax regime is considered by far one of the most important incentives for foreign investment as it is the lowest in Europe; however, the tax system as such does not discriminate against or in favor of foreign investors.

Likewise, legislation relating to the public procurement process makes little distinction between foreign and domestic companies, as many activities in Albania require licensing within the territory. The procedures for obtaining a license are, however, the same for national and foreign companies. The government to date has not screened foreign investments and provided little in the way of tax, financial or other special incentives.

The Value Added Tax
The majority of goods and services are subject to VAT at a standard rate of 20 per cent, although certain exemptions apply (such as for financial services, postal services, non-profit organization supplies, packaging and materials used in drug production, supplies of electronic and written media for advertising, supplies of services at casinos and hippodromes (race tracks), sales of newspapers, magazines and advertisement services in them, as well as certain hydrocarbon operations).

According to the instruction of the Minister of Finance (No. 17, 2008), the most significant incentives for investors in Albania are as follows:

- VAT credit at the rate of 100 per cent for importers of machinery and equipment which will serve entirely their taxable economic activity;
- exemption of VAT for export of international services;

The tax export regime can be considered a kind of investment incentive for both foreign and national entrepreneurs, and is applicable to all Albanian products destined for export outside the Albanian customs territory. The export VAT rate it is 0 per cent. Exporters can benefit from a VAT credit for purchases made on behalf of their exports.

Overall, if the tax credit for a taxation period is higher than the VAT applicable in that period, taxpayers have the right to use the credit surplus for the following taxable period. Taxable persons have the right to request a reimbursement of the credit surplus when they have a taxable credit amount over three months that is above 400,000 Albanian Leks. As stated above, and since they are essentially exporters, investors are entitled to VAT reimbursement on the purchase of domestic goods or raw materials when it is for production purposes.

The Corporate taxation
Definition of Residence
A company is considered resident in Albania if it has its legal seat or place of effective management in Albania. Further, partnerships and legal entities with a permanent establishment in Albania would be considered resident taxpayers. Residents must register with the National Registration Center (NRC).

Taxable Basis
Residents are taxed on their worldwide income; non residents are taxed only on their Albanian- source income.

Taxable income
Taxable income of residents includes business profits, as well as dividends, interest, and realized capital gains. Taxable profit is the difference between gross profit and related expenses. The determination of the taxable profit is generally based on the profits shown on the financial statements.

Tax income Rate
The rate of income tax is a flat tax of 10% as of January 1st, 2008.

Taxation of dividends received by residents
Dividend income is generally considered taxable income, unless the participation exemption or a double tax treaty relief is applicable.

Participation exemption: Resident companies – Dividends and distribution of earnings are excluded from a resident’s taxable profit when dividends and earnings are distributed from resident companies or partnerships which:

- are subject to corporate income tax; and
- the beneficiary resident’s shareholding comprises at least 25%, in value or number, of stock capital or voting rights, while for partnerships at least 25% of the initial capital.

However, if the recipient shareholder has ownership of less than 25% of the distributing company, the dividends are included in the taxable income of the recipient shareholder.

Participation exemption: nonresident companies – No participation exemption is in place for holding of foreign companies. Consequently, dividends received from foreign companies would be included in taxable income. Taxation of dividends paid to nonresidents – Dividend income distribution to a nonresident is subject to a withholding tax of 10%, unless a double tax treaty provides for a lower rate.

Capital gains
Realized capital gains are considered as taxable income and are taxed together with other income, at 10% on a net basis.

Losses can be carried forward for three consecutive years, unless there is a change of ownership of 25% of the company’s shares. Carry-back of losses is not permitted.

There’s no Surtax in Albania.

Alternative minimum tax

Reign tax credit
Double taxation is avoided through tax treaties. Albania currently has 25 treaties in effect with other countries.

Tax Treaties with Albania:
Poland (1995), Romania (1995), Malaysia (1995), Hungary (1996), Turkey (1997), Czech Republic (1997), Russian Federation (1998), Macedonia (F.Y.R.O.M.) (1999), Croatia (1999), Italy (2000), Bulgaria (2000), Sweden (2000), Norway (2000), Greece (2001), Malta (2001), Switzerland (2001), Moldova (2004), Belgium (2005), China (2006), France (2006), Netherlands (2006), Egypt (2006), Serbia and Montenegro (2006), Korea (2008), Austria (2009), and Latvia (2009).

Holding company regime
Tax Incentives
Occasional tax relief from Corporate Income
Tax is granted for selected projects on a case-by-case basis. These projects may include investments channeled to public services, infrastructure projects, as well as tourism and oil industries.

Withholding tax
Withholding tax is applicable to dividend, interest, and royalty payments, as well as certain other types of Albanian-source income earned by nonresidents.
Dividends are subject to a 10% withholding tax rate, unless the rate is reduced under an applicable tax treaty.

Interest is taxed at a 10% withholding tax rate, unless the rate is reduced under an applicable tax treaty.

Royalties are subject to a 10% withholding tax rate, unless the rate is reduced under an applicable tax treaty.

Other Albanian-source Income
A withholding tax of 10% is applicable to the gross amount of: a) technical service fees; b) management fees; c) payments for construction, installation, assembly or related supervisory work; d) rental payments; and e) payment for the performance of entertainment activities, which are made to nonresident taxpayers.

Filing Requirement
Withholding tax must be paid no later than the 20th day of the month following the month the remittance upon which the withholding tax is assessed. The payer of such amounts is responsible for retaining and paying the tax on the account of the tax authorities.

Branch remittance tax

Other taxes on corporations
Capital duty

Real property tax
Municipalities levy taxes based on the occupation of real property. A real estate tax on construction projects is levied on the value of a new investment at a rate of 2% to 4% in Tirana and 1% to 3% in other municipalities. Property tax is also applicable to agricultural land at rates varying from ALL 700 to ALL 5,600 per hectare, depending upon their use. A tax credit of 50% may be available for certain rural projects.

How to Claim a 4% Building Allowance and Get Away With It!

THE BUILDING ALLOWANCE is a deduction that enables property investors to offset the hard construction costs of their investment property against their assessable income.

Hard construction costs may include items such as concrete, brickwork and common property items that are not plant and equipment, and even excavation. This deduction is allowed under Division 43 of the Income Tax Assessment Act 1997, which sets out deductions for capital works. What’s so good about claiming a 4 per cent building allowance? Well obviously the higher the deduction, the less tax you have to pay. The building allowance is one of those “non-cash deductions”. This means you don’t have to fork out cash to claim it. You already did when you purchased the property.

For example – if your house was built for $250,000 and the plant and equipment was $30,000 – this leaves a Division 43 claim of $220,000. At 2.5 per cent, annually this amounts to a $5500 deduction. At the 4 per cent rate the claim is $8800 per year.

Ways to claim:

Here are four ways in which you can claim the 4 per cent building allowance:

- Purchase a residential property (eg. house, unit or townhouse) where the construction commenced between July 18, 1985 and September 15, 1987.

- Purchase a property that falls into the category of “short-term traveller accommodation” (eg. serviced apartments) where construction commenced after February 27, 1992.

- Purchase a manufacturing building where the core activities qualify under Section 43-150 of the ITAA 1997.

- Buy a commercial, industrial, manufacturing or serviced apartment built within the “window of opportunity”. This is for any building (not residential) with a construction commencement date between August 22, 1984 and September 15, 1987.

Option 1

Many investors specifically target residential property commenced between July 18, 1985 and September 15, 1987.

Not a bad strategy – but time is running out. Why? Well if you do buy a property built in say 1986, it means that 19 years of its useful 25 years have been eaten away (from 2005 to 1986). This means you can depreciate the residual for the next six years at 4 per cent. This is OK for now but the window is rapidly closing.

However, if you buy a property where construction commenced in 1988, you still have 23 years to depreciate the property, at 2.5 per cent. So the amount of time you wish to the keep the property is one factor to consider.

Determining the construction commencement date can be tricky. The commencement date is defined as the date the footings were poured. Local councils generally keep records of this inspection, but not always. Remember this is an event that occurred close to 20 years ago.

It’s not always practical to go to the local council and retrieve these documents every time you are interested in a property.

Online programs such as RP Data can give useful information about the original settlement date of the property. Some people then work backwards one year as an approximation before approaching the local council.

Option 2

If you purchase a unit that can be defined as “short-term traveller accommodation” you may be able to claim a 4 per cent building allowance.

ATO ID 2003/513 has provided clearer definition as to what can now be defined as short-term travellers accommodation. Unfortunately, it’s not good news for investors, as most serviced apartments fall back into the 2.5 per cent category. If your serviced apartment has a kitchen, you should be claiming 2.5 per cent not the 4 per cent building allowance – unless you own 10 in the same building.

Some investors expect to receive the 4 per cent building allowance because they own a holiday house and have it fully furnished. But this type of accommodation does not fit into the category.

The construction needs to have commenced after February 27, 1992 to be eligible. This type of investment generally has the highest depreciation claim as a proportion of the purchase price. This is in part to the higher building allowance but also because these types of investments have more plant and equipment in them. They generally have lifts, pools, and also are often fully furnished.

But a high depreciation schedule does not necessarily make a good investment. Many people have been burnt in the past buying these types of investments based upon the available tax deductions.

Option 3

Purchase a building that qualifies under the industrial activities of s43-150 of the ITAA 1997. According to s43-150, certain core activities will qualify the industrial building for a 4 per cent write off.

But not all industrial buildings qualify. More than likely, if you have purchased a single factory in a complex of 50 factory units, it’s unlikely your building will qualify.

However, if your building is involved in refining petroleum, milling timber, freezing primary products, printing, curing meat, canning or bottling, then it might qualify.

Other operations that qualify include buildings in which items are brought in or maintained in the condition in which they are sold. For instance, recently we were able to claim this allowance for a major car manufacturer on the property where its vehicles were serviced.

Option 4

Option 4 refers to the “window of opportunity” – August 22, 1984 to September 15, 1987.

The building allowance is a tool the Government can use to stimulate growth within the economy. Stimulation must have been high on the agenda during this period, as any non-residential building which commenced construction at this time qualifies. This is the only period where an office building or suite qualifies for the 4 per cent allowance.

Any downside?
Surely there must be some downside in claiming the 4 per cent building allowance? Well there’s no such thing as a free lunch.

There is one downside – any amount claimed under Division 43 will need to be factored in when calculating your capital gains tax liability. This rule applies generally to assets acquired after July 1, 1997.

But under the principal of “a dollar today is a better than a dollar tomorrow”, coupled with the CGT relief allowed, it’s still worth the exercise, especially to higher income earners.

Hotel and Guesthouse – Criteria For Loan Approval!

You may want to set up a hotel and are looking out for funds to start of or expand your old one. Commercial finance for your guest house will offer you funds to buy a property, build a hotel, get your appliances and a vehicle for your business. Banks may reject loans for small business owners but there is a solace in the form of commercial brokers who will help you out if you have a small business set up.

Commercial lenders will consider your credit scores, asset value, business plan on the basis of which your loan amount will be approved. If your credit score is low, they will not deny you the loan but the size of the loan may be smaller. Your loan rates may also be set high as they have to take risks in lending loans to a poor credit holder. If possible, you may choose to repair your credit scores by closing those accounts which have smaller pending amount. This will reflect a positive credit score on your report.

Your asset will be the next best determinant of your loan rate. If your asset value is higher it will definitely attract better rates. A creditor needs some assurance that in case you don’t repay the loan on time, he will have some asset which will provide him guarantee of repayment.

Business plan is also considered before approving funds for you. It shows a creditor how good a candidate you are, do you have workable and lucrative plans. If a creditor is assured of this, he will be sure that you will repay your loan on time and your business will do well. There is no risk involved in lending funds to you.