Welcome to our Tax News series, dedicated to keeping you informed about the latest changes of Income Tax Law in Albania. In a world where tax regulations are in a constant state of change, staying well-informed is not just beneficial but essential.
In the course of the following weeks, we'll delve into particular topics of the new Albania's Income Tax Law which shall be effective from 1st of January 2024. The new Law No. 29/2023 dated 30 March 2023 will replace the existing Law on Income Tax No. 8438 dated 28 December 1998 which has been applied for 25 years. The approval of the new Law on Income Tax has been marked as one of the most important changes of the existing tax legislation in the recent years and its impact in the business but also individuals tax compliance is considered of great relevance. We will be providing you with short guidelines on the novelties of the new law and highlighting the most important tax compliance matters, by aiming to provide insights for an easier navigation to the particulars of the new law. We invite you to join us on this informative journey as we unravel the complexities of the new rules on direct taxation of the income in Albania from a corporate and individual's perspective.
In our inaugural issue, we'll be focusing on Taxation of employment income.
The new Law no. 29/2023 “On Income Tax” dated 30 March 2023, effective starting from 1 January 2024, provides a broader definition of employment income for tax purposes, compared with the existing law. By definition, the employment income includes wages, salaries, allowances, other compensations and additions derived from labour or similar relations, payments made in case of loss or termination of employment relationships, as well as benefits in kind measured at market value which were previously not treated as employment income subject to payroll taxes.
In addition to the above, the new Law provides that the definition of the employment income encompasses the income earned by a self-employed individual if at least 80% of the revenue earned is derived directly or indirectly from a single customer or if at least 90% of the total revenue earned is derived from 2 clients. However, such criteria do not apply if the self-employed individual provides services only to non-tax resident individuals or non-resident entities having no permanent establishment in the Republic of Albania.
Certain types of income are categorized as non-taxable for personal income tax purposes, including private health insurance, contributions of the employer to a private pension plan for the employee, life and accidents insurance, value of meals, refreshments, work equipment, medical treatment and other benefits provided by the employer being available to all the employees. Moreover, the reimbursement of travel and accommodation expenses, travel allowances, compensations for diseases or life hardships will continue to be treated non-taxable employment income.
Taxation rates and reporting deadlines
The new law introduces a new progressive taxation of employment income by setting annual thresholds and tax rates as follows:
— For the income up to ALL 2,040,000, the tax will be applied at 13% rate.
— For the income over ALL 2,040,000, the tax will be applied at 23% rate.
The new law introduces the deductions from the annual tax base keeping similar level of tax burden for individuals as the previous taxation scheme, while reducing the tax burden only for employment income up to ALL 720,000 per year or ALL 60,000 per month.
The employer will continue to act as a payroll agent and will be responsible for withholding the employment income tax based on the monthly basis calculated proportionally to the annual thresholds set by the Law. The employer has the obligation to declare and remit employment or payroll taxes to the tax authorities by 20th of the following month.
Deductions to the taxable base deriving from employment income
According to the provisions of the new law, the standard deductions are estimated on annual basis as follows:
— Annual deduction of ALL 600,000, if the annual income is up to ALL 600,000.
— Annual deduction of ALL 420,000, if the annual income falls between ALL 600,000 to ALL 720,000.
— Annual deduction of ALL 360,000, if the annual income is over ALL 720,000.
The above annual deductions are required to be prorated and reported on a monthly basis by the principal employer through the payroll list declaration. If the individual is employed by more than one employer, then the other employers different from the principal one are required to calculate the tax on employment income without taking into consideration any deductions as per above.
Apart from the standard deductions as specified above, the taxable base reported under the payroll list could be deducted with the contributions made to a private pension fund up to the level of the minimum monthly salary applicable in Albania (e.g. currently ALL 40,000). Other annual deductions at the extend provided by the law can be claimed by the individual through the annual personal income tax return as detailed below.
Payroll compliance related documents
Any employer, acting as a payroll list agent, is obliged to require from any employee the signing of Declaration on the Personal Status before the first payment of the salary. The employee cannot sign with more than one employer the Declaration on the Personal Status for a calendar month. The Declaration on the Personal Status includes all information required for applying the standard deductions which could be applied through the monthly payroll at 1/12 of the annual allowed deductions.
Annual personal income tax return
Annual personal income tax return is due for any employed individual in Albania provided that the annual gross income from all sources exceeds ALL 1,200,000 or if the individual has entered into an employment relationship with more than one employer. As an exception from the above, individuals having earned any other personal income exceeding ALL 50,000 which has not been taxed during the reporting year are obliged to file the annual tax return to report and pay the tax due for such income.
The tax return may be filed also voluntarily by individuals who do not reach the threshold but are eligible to claim the deductions allowed by the law as detailed below.
The deadline for submission of the annual personal income tax return is 31 March of the following year (previously 30 April). For the purposes of completion of the tax return, the Albanian tax residents are identified with their personal identification number as shown in their identification document, while non-Albanian tax residents are assigned with a specific tax number as to be provided in the Instruction of the Minister of Finance.
Besides the employment income, the individual should report in the annual tax return any other personal income earned during the year and the respective taxes paid. Albanian tax residents are eligible to claim foreign tax credit provided that they possess documentation issued by the tax authorities of the foreign country. The foreign tax credit is limited up to the maximum tax rate applicable in Albania for any specific income reported. The annual taxable income reported under the annual personal income tax return may be reduced by the individuals with the following allowable deductions:
— Annual deduction for any dependent child (<18 years old) at the amount of ALL 48,000.
— Annual deduction for any dependent child (<18 years old) for educational expenses capped at ALL 100,000 if the parent earns an annual employment income up to ALL 1,200,000.
If upon completion of the annual tax return the individual is in a refundable position, he/she may claim for tax refund which should be returned by the tax administration not later than 60 days from the application. If the individual does not claim the refund, the overpaid amount will be treated as an advance payment and can be utilized in the future tax reporting periods for the settlement of any future tax obligations.
Entry into force
The Law no. 29/2023 dated 30 March 2023 “On Income Tax” is published in the Official Gazette no.70 dated 2 May 2023 and becomes effective starting from 1 January 2024, except from certain articles specified in the transitory provisions.