The Law no. 29/2023 "On Income Tax" dated 30 March 2023, effective starting from 1 January 2024, brings some novelties regarding the Corporate Income Tax (CIT) and some changes to the categorization of the taxpayers subject to this tax. In the following issue, KPMG in Albania has summarized the general rules applicable to taxpayers subject to CIT and new provisions on how CIT shall be applied in the case of specific long-term contracts.
Taxpayers subject to Corporate Income Tax
The existing Income Tax legislation which will apply until the end of 2023 has a vague definition of the Corporate Income Tax and the taxation is merely based on annual turnover levels rather than based on the legal form of taxpayers. Currently, the taxpayers exceeding the annual turnover of ALL 8 million are subject to CIT and need to comply for CIT purposes. The CIT is applied at 0% rate for taxpayers having an annual turnover from ALL 8 million to ALL14 million, while for taxpayers with an annual turnover exceeding ALL 14 million the CIT is applied at 15% rate on their taxable profit.
In comparison to the existing law, the new Law on Income Tax provides an explicit definition of the Corporate Income Tax and the categories of the entities subject to CIT. In principle, all entities despite their annual turnover are considered as taxpayers for CIT purposes. The new Law comprises in the definition of “entity” all types of entities established as per the provisions of the Law "On entrepreneurs and commercial entities", the Civil Code, and among others different types of partnerships, forms of cooperation recognized as a legal entity, assets or equity management entities, trusts and entities which may be established through specific laws. Inclusion of various types of entities, even those which are not currently stipulated in the existing Albanian legislation, aims to capture all types of entities which may be recognized by legislation and established in the future. Starting from 1 January 2024 any type of legal entity established in Albania as defined in the new Law will be subject to and required to comply for CIT purposes.
Similarly to the existing provisions, the new Law gives exemptions for certain categories of entities which are not considered to be subject to CIT. Although exempted for CIT purposes, these entities are required to submit to the tax authorities the CIT declaration and financial statements within the same deadline as other CIT taxpayers (by 31 March of the following year). This requirement does not apply to executive, legislative and judicial bodies and Bank of Albania, Financial Supervisory Authority and to Albanian Deposit Insurance Agency.
Taxable profit and calculation of CIT liability
The general rules applied in the new Law for the determination of the taxable profit remain similar to the existing rules.
- The taxable profit includes any income generated by the taxpayer subject to CIT during the fiscal year, by deducting the allowable expenses.
- The taxable profit and deductible expenses are determined based on the information presented in the financial statements prepared in accordance with the accounting legislation in force, and by the provisions of the new Law and its sub-legal acts.
In determining the taxable profit, a resident taxpayer shall exempt from taxable income any dividends received that meet the following conditions:
- The recipient of dividends holds at least 10% participation either in the equity or in voting rights of the entity distributing the dividends; and
- The shares or minimal participation have been held for a continuous period of at least 24 months.
The CIT payable for the fiscal year (calendar year) is calculated by applying the CIT rate to the taxable profit. Any resulting tax liability shall be reduced with:
- The credit of any foreign tax paid during the year
- Any withholding tax paid during the year
- Advance CIT installments paid during the year.
If at the year end the taxpayer results with overpaid CIT, then the taxpayer is eligible to request reimbursement of the tax overpaid. The tax administration is obliged to return the overpaid amount no later than 60 days from the reimbursement application date. If the taxpayer does not request the reimbursement, the overpaid tax will be considered as advance payment of CIT for the following fiscal year.
Corporate Income Tax rates
According to the new law the CIT rate shall apply at 15%. Based on the transitory provisions of the new Law, some of the existing reduced tax rates and certain CIT exemptions will continue to apply as following:
- Existing entities operating in software development will be subject to 5% CIT until 31 December 2025.
- Entities operating in automotive industry will be subject to 5% CIT until 31 December 2029.
- Agriculture cooperative entities and those operating in agritourism will be subject to 5% CIT until 31 December 2029.
- Entities operating accommodation structures classified by the end of 2024 as "4 & 5 stars Hotel/Resort, special status" and holding an international brand name will be exempt from CIT for a period of 10 years.
Long term contracts
The new Law has introduced important provisions regarding taxation rules applied for long-term contracts. By definition provided in the new Law, a long-term contract can be classified as such if it is concluded for the purpose of production, installation, construction, or provision of services; and the duration of the contract exceeds or is expected to exceed a period of 12 months.
Income related to a long-term contract should be recognized for tax purposes to an amount that corresponds to the part of the contract completed during the fiscal year concerned. The percentage of completion may be determined by referring to the proportion of the costs incurred in that year against the overall expenses estimated for the contract, or otherwise by referring to the national and international accounting standards.
The new Law brings an important change since it gives the right to the taxpayer to recognize for tax purposes the annual income from a long-term contract in line with the requirements provided by the national and international accounting standards. Considering that these contracts are extended for a period exceeding one fiscal year, it is necessary to allocate the expenses incurred for the realization of the income in the corresponding fiscal year. The expenses related to the long-term contracts which are incurred in a year in accordance with the accounting standards, shall be deductible for tax purposes in that tax year in which these expenses are incurred.