Legal framework
Taxation mechanisms
Creative interpretations
The legal framework regulating the taxation of capital gains comprises the Income Tax Law (8438/1998) and Ministry of Finance Instruction 5/2006. These provide that a 'capital gain' is the difference in value between the purchase price (ie, the capital contribution) and the sale price of company shares.
Capital gains are taxed at a rate of 10% and the tax application mechanism is different according to whether the capital gain is realised by a resident or a non-resident individual, or a legal entity.
The Income Tax Law applies to the global income of Albanian tax residents (individuals and companies), and income realised in Albania by non-resident individuals and companies.
Under the legal acts mentioned above, if the seller is an individual who is tax resident in Albania, and the buyer is either an individual with or without tax residence in Albania or a foreign company purchasing shares other than through its Albanian permanent establishment, the seller should declare the capital gain realised through the transfer of shares in its annual tax declaration (to be submitted by April 30 of the following year) and should pay the applicable taxes on its total annual taxable income resulting from such declaration.
If the seller is an Albanian company and the buyer is an Albanian company, an individual with or without tax residence in Albania or a foreign company, the seller should declare the capital gain realised through the transfer of shares in its profit and loss statement of the relevant business year and in its annual tax declaration (to be submitted by the end of March of the following year), and should pay the applicable taxes on its total annual taxable income resulting from its profit and loss statement.
In contrast, if the seller is an individual with or without tax residence in Albania or a foreign company holding the shares other than through a permanent establishment, and the buyer is an Albanian company, the buyer is obliged to withhold from the purchase price the capital gains tax applicable to the seller and to pay this amount to the tax authorities no later than the 20th day of the following month.
The final scenario is the case where both the seller and the buyer are individuals without tax residence in Albania or a foreign company acting other than through its permanent establishment in Albania.
Under Article 7 of the Income Tax Law, non-resident individuals are subject to Albanian income tax for income realised from a source in Albania. In addition, non-resident companies are subject to Albanian profit tax on income realised from a source in Albania.
According to Article 4 of the Income Tax Law, the gain realised through the transfer of shares issued by Albanian companies constitutes income from an Albanian source, and is thus taxable by the Albanian tax authorities unless a double taxation treaty is in force between Albania and the country of origin of the non-resident seller. In such cases the double taxation treaty will apply.
The Tax Procedures Law (9920/2008) allows a non-resident taxpayer to pay taxes in Albania through either the appointment of a tax representative or the voluntary submission of a tax declaration regarding the income (in cases other than when the gain has been withheld at the source according to the law).
Notwithstanding the above legal provisions, the tax collection mechanisms have been ineffective in cases where the seller is an individual with or without tax residence in Albania or a foreign company. Consequently, the Albanian tax authorities have established creative interpretations for compensating loss from uncollected capital gains tax.
Under Article 33 of the Income Tax Law, an Albanian company is obliged to act as a tax agent and apply a 10% withholding tax on any dividends that it pays to its shareholders if the shareholder is different from another Albanian registered business (and unless there is a treaty for the avoidance of double taxation in force).
In a 2008 ruling the tax authorities considered that a capital gain has a similar nature to a dividend. As a result, they held that when the seller is not an Albanian registered taxpayer, the target company must also act as a tax agent to collect the capital gains tax related to the transfer of its shares, even though the target company does not actually pay the price for the share transfer and is not in the position to withhold tax.
In practice, target companies have been held liable for failing to collect and pay the withholding tax on a capital gain, and have been ordered to pay the relevant tax plus administrative penalties and interest for late payment. In some cases, this interpretation has been upheld by the courts.
Nonetheless, based on some recent rulings, the tax authorities have relaxed their position and have confirmed that if the seller is an individual with tax residence in Albania, he or she is directly responsible for paying the capital gains tax. By implication, the target company is released from its obligation to act as tax agent.
However, target companies have not yet been excused from the role of agent for the collection of capital gains tax in cases where the seller and buyer of a share transfer transaction are foreign taxpayers. In such cases, the applicable double taxation treaties seem to be the last safe harbour against this creative tax practice.
For further information on this topic please contact Ilir Johollari at Hoxha Memi & Hoxha by telephone (+355 4 2 27 4558), fax (+355 4 2 244 047) or email ([email protected]).