Source of income and permanent establishment rules for 2024

The new Law no. 29/2023 “On Income Tax” dated 30 March 2023, effective starting from 1 January 2024, includes separate provisions on the determination of the Permanent Establishment (PE) and broader category of income which are deemed to have a source in Albania. In the following issue, KPMG in Albania has summarized the changes introduced by the new Law on Income Tax in this regard.

The new Law on Income Tax similarly to the current legislation provides that in case income is considered to be sourced in Albania, it will be subject to the provisions of the Law and therefore be subject to taxation in Albania. The new Law provisions related to the sources of income have been updated to include additional types of income considered to be sourced in Albania.

Generally, income sourced in Albania includes income related to employment as well as income from fee payments for services carried out in Albania, income paid by resident employers for work performed abroad, business income attributable to a PE, income or capital gains from immovable property located in Albania, dividends or profit sharing from Albanian companies and interests paid by residents of Albania.

In addition to the above, the new Law introduces other types of income which are to be considered as being sourced in Albania. These include income from business activity and income of entrepreneurs and self-employed individuals for activities and services provided in Albania, income from mining of virtual assets or deriving from transactions with virtual assets realized by a person resident in Albania. The new Law specifically considers as Albanian sourced income any type of income that arises from activities physically carried out in Albania. This change may affect many entities which deal with foreign service suppliers which are required to come to Albania in person to provide their services.

The list included in Article 4 of the new Law on the income sourced in Albania is lengthy but not exhaustive. A case-by-case analysis should be conducted in order to determine the source of any other income which is not included in the above list aiming to decide further whether any tax obligations in Albania would arise. 

Similarly to the current legislation, the new Law provides that income attributable to a PE is taxed in Albania as income sourced in the country. However, the definition of a PE has been amended in comparison to the current provisions in the legislation. The new Law provisions on the PE are outlined separately and more extensively in Article 5 of the Law.

The definitions of PE provided in the new Law which are similar to the current legislation, include among others a certain place of business, where a non-resident person conducts business in whole or in part. This particularly includes a place of administration, a branch, an office, a factory, a workshop, a mine, an oil or gas well, a quarry or any other place for extracting natural resources.

However, Article 5 of the new Law on adds other detailed conditions when a PE is created, for instance:

i)   a building or a construction site, installation or assembly project or any supervisory activity related only if such construction site, project or activity in Albania continues for a period or periods in total of more than 6 months during any 12-month period;

ii)   any activity, including the use or installation of substantial equipment carried out in Albania in relation to the search, extraction or exploitation of natural resources for a period or periods in total of more than 3 months during each 12-month period;

iii)  performance of services, including consulting services provided by a non-resident person through its employees or other individuals, only if these activities in Albania continue (for the same person or a related person) for a period or periods in total of more than 6 months during any 12-month period.

Creation of a PE shall not include:

• the use of facilities only for the purpose of storage, display or delivery of goods; 
• keeping a stock of goods only for storage purposes, exposure or distribution, processing by another person; 
• maintaining a fixed place of business only for purchasing goods or collecting information for the non-resident person, or for exercising any other activity for non-resident person, or otherwise for abovementioned combined activities provided that the general activity of the fixed place of business is of a preparatory or auxiliary character.

Agency provisions

Agency provisions are also detailed in Article 5 of the new Law. This is an update from the current legislation and it brings the PE provisions provided in the local legislation closer to the provisions of the OECD. More specifically, agency provisions specify that when a person acts in Albania on behalf of a non-resident person, the latter is considered to have a PE Albania.

This would be the case if the local agent concludes contracts, or usually has a main role in concluding contracts in a routine way without material modifications by the non-resident person and these contracts are concluded on behalf of the non-resident person, for the transfer of ownership or for granting the right to use the property owned by to the non-resident person or that the non-resident person has the right to use, or for the provision of services by a non-resident person.

Agency PE would also be created in the case when the local agent does not conclude contracts, nor plays the main role in concluding such contracts, but maintains a stock of goods or commercial product from which the person regularly delivers goods or product on behalf of the non-resident person.

These provisions would not apply in case the local agent is acting as part of his normal course of business and the non-resident person is one of many clients of the agent.

PE implications for insurance companies

Another update presented by the new Law relates to provisions that may affect insurance brokers in Albania. This is because foreign entities operating in the field of insurance of another country, excluding reinsurance activity, may be considered to have a PE in Albania if, through another person, collects premiums in Albania or insures risks located in Albania. 

For information

Endri Lito 
Manager, Tax
Tel: +355 (4) 2274 524