“Taxation according to income is the most effective instrument yet devised to obtain just contribution from those best able to bear it and to avoid placing onerous burdens upon the mass of our people.” – Franklin Roosevelt.
The Albanian income tax legislation has undergone a radical change with the adoption of the Income Tax Law on May 30, 2023 and the related Implementing Instruction on September 8, 2023. The new legislation represents a more comprehensive regulation of income taxation than the previous one, which was long overdue. The previous Income Tax Law, which dates back to 1998, had clearly failed to keep pace with current economic developments and provided band-aid solutions rather than mitigating the challenges.
The new Income Tax Law elaborates on the concepts presented in the previous law and introduces new principles and treatments, including, but not limited to, the following:
New Personal Income Tax Rates
Self-employed and registered entrepreneurs will be taxed at 15% on annual taxable profits up to ALL 14 million and 23% on amounts exceeding this threshold. The 15% rate won’t apply until December 31, 2029, maintaining a 0% income tax rate on profits up to ALL 14 million for the above category, except for a group of self-employed persons engaged in professional activities (so-called “liberal professions”), which will be further decided by the Council of Ministers.
In-Kind Income Will Become Taxable
A significant change in the Income Tax Act is the inclusion of income in kind as taxable income, which is assessed at its market value unless otherwise provided by this act or by sub-legal acts enacted for its implementation.
Digital Assets Are Taxable Under New Law
In addition, the law outlines the tax treatment of digital assets, stating that taxable income from investments in these assets is determined by the difference between their sale value and their purchase value.
New Guidelines for Business Reorganization
The treatment of business reorganizations is intended to promote growth, as the transfer of assets during the reorganization is not subject to taxable capital gains, except for cash payments made by the acquiring company in excess of a specified amount, which should not exceed 10% of the nominal value of the shares issued or transferred. The transfer of assets abroad is subject to a 15% tax rate, and a change of residence abroad triggers the obligation that the assets are considered sold at their market value on the day of the transfer so that any capital gains taxed upon the transfer of assets abroad won’t be within the jurisdiction of the Albanian tax authority.
Transfer of Shares Taxation
The transfer of shares is taxed in companies whose activity includes: the rights of use of land and sea, the telecommunications sector, or operating a financial institution. Profits resulting from the indirect sale or transfer of assets from Albania, as well as shares in such assets, are now subject to capital gains tax in Albania.
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 new law has caused a great deal of debate among practitioners, who are considering an appeal to the Constitutional Court against it for violating the freedom of economic activity and for being disproportionate since it differentiates taxation not based on income but on the type of activity. Despite its positive aspects in addressing some issues, the main concern is that its adoption without considering the opinion of interested groups will lead to a further distortion of the market. In a country where the official tax evasion rate is quite high, further complexity of the tax system may have a further dissuasive effect on the formalization of the economy.
By Aigest Milo, Co-Managing Partner, and Sara Kraja, Associate, Kalo & Associates