Calculation of taxable profits
Taxable losses
Tax planning tips
The corporate tax rate in Albania is currently 10%. This tax is levied on taxable profits, the calculation of which is regulated by the Income Tax Law (8438/1998, as amended) and Ministry of Finance Instruction 5/2006. While the fiscal year in Albania is the calendar year, the annual corporate tax return must be filed and tax paid before March 31 of the following year.
Calculation of taxable profits
The main difference between financial profits and taxable profits for companies operating in Albania concerns disallowed expenses, as determined by the Income Tax Law and related regulations. Other factors include temporary differences between the accounting and fiscal treatment of certain components of the financial statements which give rise to deferred tax. Albanian companies that prepare their financial statements based on national accounting standards can choose whether to calculate deferred tax, whereas those applying International Financial Reporting Standards must follow rigorously their requirements on this matter.
As a general rule, expenses are disallowed for tax deduction purposes if they do not relate directly to the company's business activity and if they are not supported by regular fiscal invoices. The main expenses which are considered non-deductible under the Income Tax Law include:
- interest payments which exceed the annual interest rate published by the Bank of Albania or the thin capitalisation ratio (ie, 1:4);
- fines and penalties;
- expenses that exceed certain rates or limits defined for tax purposes (eg, depreciation expenses, per diems, representative expenses, sponsorships);
- all provisions (with the exception of those determined by other laws and regulations relating to financial and insurance institutions); and
- all expenses which qualify for capitalisation.
There is plenty of room for interpretation as to whether other expenses that are not specifically identified in the Income Tax Law are deductible. This depends mainly on the type of activity in which the company engages, as well as the attitude and practice of the Albanian tax authorities.
Taxable losses
Pursuant to Article 27 of the Income Tax Law, companies that end up with a tax loss in one year can carry forward this loss and offset it against taxable profits during the three years following the loss, on condition that the loss incurred first is offset first.
However, if during a tax period (ie, a fiscal year) the company undergoes a direct or indirect change in ownership or voting rights of more than 25%, then any tax losses incurred during that tax period or carried forward from previous tax periods cannot be claimed for set-off against future taxable profits.
Tax planning tips
In light of these provisions, newly established companies or companies planning to incorporate in Albania would be well advised to factor such issues into their their tax planning agenda, to help them to save tax or ensure the most favourable tax treatment.
As most companies usually suffer financial losses in their first years of activity, and thus most probably tax losses as well, it is important to avail of the tax loss carry-forward rules. Strategies might include the proper allocation of expenses (eg, postponement), so that any significant resulting tax losses can be offset in the first profitable years, taking into consideration the three-year carry-forward period.
Additionally, based on the Albanian tax legislation, for corporate tax calculation purposes start-up expenses are capitalised and amortised at a rate of 15% yearly, whereas for accounting purposes they are recognised as incurred. Consequently, tax benefits resulting from the amortisation expense of start-up costs can be obtained for a period of approximately seven years, as opposed to three years if such costs were expensed in the first year of establishment and offset according to the tax loss carry-forward rules.
Other opportunities for smart tax planning might exist, depending on the nature of the company's business activities, location and similar. The tax provisions should thus be carefully assessed with the needs and specifics of each company in mind.
For further information on this topic please contact Brunila Leskaj at Hoxha Memi & Hoxha by telephone (+355 4 227 4558), fax (+355 4 224 4047) or email ([email protected]).