The new Law no. 29/2023 “On Income Tax” dated 30 March 2023, effective starting from 1 January 2024, includes revisions on the treatment of interest expenses for Corporate Income Tax (CIT) purposes. In the following issue, KPMG in Albania has summarized the changes introduced by the new Law on Income Tax in this regard.
The rules on the deductibility of interest expenses for CIT purposes have remained largely similar to the existing Law on Income Tax. However, there are some important changes which have been introduced with the new Law on CIT.
The new Law on CIT has abolished the application of the thin capitalization rules. As such, regardless of capital structure and amount, interest expenses can be deducted irrespective of the ratio of debt to capital size. Instead, the new Law on CIT has extended the application of interest limitation rules to debt received from all parties (related or unrelated). This is a change from the current Law on Income Tax which provided that interest limitation rules were applicable only to debt received from related parties.
This can be seen as a response of the Albanian government to the worldwide interest limitation rules introduced in many countries following the 2015 BEPS Action 4 report which established rules that linked an entity’s net interest deductions to its level of economic activity of a given company within one territory. Similarly to BEPS Action 4, the new Law on CIT measures economic activity of a company using taxable earnings before interest income, tax, depreciation and amortization (EBITDA).
The rules applicable to the deductibility of interests for CIT purposes as summarized as follows:
- Average interest rate limitations: Interest as a result of loan or debt contracts with conditions that exceeds the 12-month average annual interest rate of the loans set by commercial banks, as officially published by the Bank of Albania, will not be regarded as deductible for CIT purposes for any interest surpassing this average.
- Interest limitation rules: As outlined above, the interest limitation rules are applicable to all interest expenses arising on loans and debt that a company has, regardless of whether the provider is a related or an unrelated party. The interest that is deductible against the income from the activity in the tax year is limited to 30% of the company’s tax EBITDA.
Tax EBITDA is calculated by adding taxable income with the amounts adjusted by the tax on excess interest, as well as the amounts adjusted for tax depreciation and amortization. Tax-exempt income is excluded from the EBITDA of the entity.
Any deductible interest which exceeds the taxable income of the company (i.e. interest expenses above the 30% threshold) is considered as excess interest. Excess interest may be carried over and be deducted in the next 5 tax periods. Excess interest carried forward is not affected by changes of ownership of the company, another change introduced in comparison to the provisions of the current Law on Income Tax. Interest limitation rules are not applicable to banks, financial institutions and insurance institutions.
Interest limitation rules may have an impact on companies which finance the set-up phase through loans (such as construction) as well as companies with a high debt gearing and low EBITDA.
The above rules apply specifically to expenses arising from loans or debt. Nonetheless, other general rules are applicable to interest expenses as well as all other expenses in general such as business purpose, documentation, etc. In terms of hierarchy of application of the above rules, we are of the view that average interest rate limitation applies initially, and then any remaining interest is subject to the interest limitation rules.
Associate Partner, Tax
KPMG in Albania
Tel: +355 (4) 2274 524