The Law No. 29/2023 "On Income Tax" dated 30 March 2023, effective starting from 1 January 2024, brings some changes and clarifications in relation to expenses that are considered as non-deductible for corporate income tax purposes. In the following issue, KPMG in Albania has summarized non-deductible expenses and the conditions for the deductibility of bad debts for entities excluding financial institutions and insurance companies.

Non-deductible expenses

In comparison to the existing law, the new Law on Income Tax has abolished the thin capitalization rules and the limits for the deductibility of donations in case of official natural disasters. The rules in relation to deductibility of the value of services invoiced by non-resident entities have changed by allowing the possibility for the deducting these expenses in the following year as payment is made.

In accordance with the new Law, the following expenses are non-deductible for tax purposes:

  • Costs of purchasing and improving land and construction sites;
  • Cost of purchase, improvement, renovation and reconstruction of depreciable assets. Classification of such costs as capital expenditure or repair and maintenance is determined in accordance with IFRS and NAS;
  • Depreciation expenses as per accounting policies of the entity but limited as per the methods and rates stipulated in the Income Tax Law;
  • Capital increases;
  • Dividends to shareholders or partners, as well as dividends to other entities;
  • Interest paid that exceeds the average annual 12-month loan interest rate of commercial banks, as officially published by the Bank of Albania, excluding interest on loans granted by microcredit institutions;
  • Fines and penalties paid to public authorities for violation of the legislation and indemnities paid to other taxpayers for non-fulfilment of contractual obligations.
  • Expenses for the creation or increase of provisions, reserves or other special funds. Specific rules are applicable for provisions and other reserves created by financial institutions and insurance companies;
  • Corporate profit tax, deductible VAT and excise duty paid;
  • Representation expenses that exceed 0.3% of annual income;
  • Representation expenses of entities operating in export sectors which exceed 3% of annual income;
  • Expenses for personal consumption of shareholders, partners, administrators and their family members;
  • Expenses that exceed the limits for business trip per diems, travel and accommodation specified in the Income Tax Instruction;
  • Gifts and donations, excluding small value amounts as part of representation activities;
  • Expenses for technical, consultancy and management services invoiced by non-residents, if the invoice and the respective withholding tax are not paid within the deadline of submission of the CIT return. However, these expenses may be deducted in the following tax period if the payment is done within December of the following year;
  • Expenses for salaries, bonuses and other forms of employment income paid to employees, including administrators, which are not paid through the banking system or other institutions licensed by the Bank of Albania;
  • Amounts paid in cash in excess of the limits determined in the Law "On tax procedures in the Republic of Albania";
  • Life and health insurance expenses of employees exceeding 5% of their gross salaries for the tax year;
  • Scholarships given to students of public or private educational institutions other than those determined by the Albanian Council of Ministers;
  • Expenses for contributions made by the employer on behalf of its employees to a private pension plan, exceeding the minimum annual salary at a country level;
  • Expenses related to generation of income, but not included in the taxable profit of the said year. Such expenses should be recorded as prepayments and recognized in the profit and loss statement of the period of revenue recognition;
  • Bribes and facilitation payments;
  • Sponsored amounts, exceeding the following limits:
    • 5% of profit before tax for press publishers and publications of literary, scientific, encyclopedic works, as well as for cultural or artistic activities;
    • 5% of profit before tax for sports activities provided that certain conditions are met;
    • 3% of profit before tax for sponsorship of any other activities.
  • Waste, losses and damages during production, transit, storage, and trade exceeding the limits defined in separate laws and by-laws;
  • Any other expenses not supported by appropriate documentation, or which does not represent a real transaction.

Bad debt deductions

In comparison to the existing law, the new Law on Income Tax allows partial tax deduction of bad debts if the necessary steps have been undertaken, including but not limited to engagement of private debt collection companies.

The partial allowable tax deductions are calculated based on tax year-end outstanding balances using the following percentages:

  • up to 20% if the bad debt is unpaid for more than 6 months;
  • up to 40% if the bad debt is unpaid for more than 12 months;
  • up to 60% if the bad debt is unpaid for more than 24 months;
  • up to 85% if the bad debt is unpaid for more than 36 months.

The full deduction of bad debts is allowed if the following conditions are met at the same time:

  • The bad debt, previously included in income, is written off from the accounting records, and
  • Thsdfhs.
  • The taxpayer has taken all possible legal steps to collect the bad debt including bailiff and court procedures.

Deduction of bad debts is not allowed if the debtor is a related party entity as per the definitions of the Law on Income Tax.

The above provisions are not applicable for financial institutions and insurance companies, for which specific provisions apply.