Dividend tax regime
Double tax treaties
The Albanian tax regime provides for a flat tax rate of 10%. This rate also applies to dividends distributed by Albanian companies, and is levied through a 10% withholding tax. In addition to this attractive tax treatment of dividends, foreign investors may plan for efficient dividend taxation through the network of double tax treaties to which Albania is a party.
Dividend tax regime
Under Article 4 of the Income Tax Law (8438/1998, as amended), income in the form of dividends distributed by Albanian resident companies is treated as Albanian-source income and is thus taxable in Albania.
Moreover, under Article 33, Albanian-resident companies must withhold 10% of the gross amount to be paid as a dividend to any shareholder which is not a registered taxpayer in Albania.
Under Article 26, income realised by an Albanian-resident-company in the form of dividends paid by other resident companies and/or non-resident companies which are registered for profit tax is exempt from profit tax and is not considered for the purpose of calculating its taxable profits, regardless of the size of its stake in the company paying the dividend.
Double tax treaties
Although Albania is a relatively small economy, it has nonetheless established a network of double tax treaties with a considerable number of countries.(1)
These treaties are ratified by the Albanian Parliament through special laws, and thus become integrated into national legislation. Under Article 122(2) of the Constitution, an international treaty ratified by law prevails over other local legislation. Therefore, in case of conflict, the provisions of a ratified double tax treaty should prevail over local tax provisions. The laws ratifying the double tax treaties usually provide that the treaties shall be interpreted pursuant to the Organisation for Economic Cooperation and Development Commentary on the Model Tax Convention on Income and Capital.
Additionally, the minister of finance has approved Instruction 6 of February 10 2004 on the application of double tax treaties.
Under the different double tax treaties to which Albania is a party, dividends paid by a company which is a resident of one contracting state to a resident of the other contracting state may be taxed in that other state.
However, Albania generally reserves the right to tax dividends paid by Albanian-resident companies to their foreign shareholders, usually at the following rates:
- 5% if the foreign company owns between 25% and 50% (depending on the provisions of the relevant double tax treaty) of the capital of the Albanian company;
- 10% in all other cases (some treaties provide for a 15% rate, but this no longer applies under the flat-rate system).
Under several treaties (eg, with Italy, Russia, China, Egypt and Kosovo), Albania has reserved the right to apply a 10% dividend tax in all cases.
The tax is collected by withholding the applicable tax rate on the gross dividends paid by the Albanian company to its foreign shareholders.
The double tax treaties with Spain and the Netherlands provide for special exceptions to these general rules.
Under the treaty with Spain, Albania reserves the right to tax dividends paid by Albanian-resident companies to their Spanish shareholders at the following rates:
- 0% if the Spanish shareholder owns at least 75% of the share capital of an Albanian-resident company;
- 5% if the Spanish shareholder owns at least 10% of the share capital of an Albanian-resident company; and
- 10% in all other cases.
Under the treaty with the Netherlands, Albania reserves the right to tax dividends paid by Albanian resident-companies to Dutch shareholders,(2) at the following rates:
- 0% if the Dutch shareholder owns at least 50% of the share capital of an Albanian-resident company and has invested at least $250,000 in it;
- 5% if the Dutch shareholder owns at least 25% of the share capital of an Albanian resident company; and
- 15% in all other cases (10% will apply under the flat-rate system).
These provisions offer efficient solutions for international tax planning for foreign investors interested in the Albanian market, especially where appropriate holding vehicles offering beneficial tax regimes are used (eg, a Dutch holding company or a Spanish holding company) .
For further information on this topic please contact Shpati Hoxha at Hoxha Memi & Hoxha by telephone (+355 4 227 4558), fax (+355 4 224 4047) or email ([email protected]).
(1) A list of active double tax treaties can be found at http://www.tatime.gov.al/gdt/International_Treaties.aspx.
(2) Specific exclusions may apply.