In a groundbreaking development, the Albanian government is set to usher in a new era of taxation with Law No. 29/2023, bidding farewell to the long-standing Income Tax Law No. 8438, which has been the norm since 1998. Starting from January 1st, 2024, this legislation is poised to impact both businesses and individual taxpayers, with a particular focus on the latter.
Expanding Horizons for Employment Income
Under the new law, employment income undergoes a remarkable transformation, encompassing a broader spectrum, which includes wages, salaries, allowances, and even payments arising from employment loss or termination. What's more, the law expands its purview to include benefits in kind, previously untouched by payroll taxes.
But that's not all. The new legislation stretches the definition of employment income to encompass self-employed individuals. This incorporates scenarios where a substantial chunk of their revenue originates from a single client or if the lion's share of their income comes from fewer than three clients. However, these criteria won't apply to self-employed individuals exclusively serving non-tax resident individuals or non-resident entities without a permanent establishment in Albania.
Sweetening the Pot with Non-Taxable Income
The list of non-taxable income sources is quite extensive, covering private health insurance, employer contributions to private pension plans, life and accident insurance, work-related equipment, meal benefits, and various other perks doled out by employers to their staff.
Additionally, travel allowances and accommodation reimbursements will remain untouched by employment income taxation.
Progressive Taxation Takes Center Stage
The new law ushers in a progressive taxation structure for employment income, establishing annual thresholds and tax rates as follows:
For income up to ALL 2,040,000, a tax rate of 13% applies.
For income exceeding ALL 2,040,000, the tax rate climbs to 23%.
The law introduces deductions from the annual tax base, maintaining a similar level of tax burden for individuals as the previous tax system but lightening the load for those with employment income up to ALL 720,000 per year or ALL 60,000 per month. Employers retain their role as payroll agents, responsible for monthly deductions, in line with the annual thresholds set by the law, as well as reporting and submitting employment taxes by the 20th of the subsequent month.
Annual Deductions at a Glance
Annual standard deductions are determined as follows:
For annual income up to ALL 600,000, the annual deduction is ALL 600,000.
If annual income falls between ALL 600,000 to ALL 720,000, the deduction is ALL 420,000.
For those earning above ALL 720,000 annually, the deduction is ALL 360,000.
These deductions must be proportionally allocated and reported by the primary employer on a monthly basis through the payroll list declaration. If an individual has more than one employer, the other employers must calculate the tax on employment income without considering these deductions.
Apart from the standard deductions, the taxable base in the payroll list can also be reduced by contributions to a private pension fund, up to a maximum of ALL 40,000 per month.
Personal Income Tax Return and Beyond
Individuals with annual gross incomes exceeding ALL 1,200,000 or those with multiple employers are required to file an annual Personal Income Tax return. Exceptions include individuals who have earned additional personal income exceeding ALL 50,000 during the year, which hasn't been taxed, obligating them to report and settle the tax liability.
Even if you don't meet the threshold, you can choose to submit a tax return to claim deductions specified by the law. In addition to employment income, you should also disclose any other personal income earned during the fiscal year and the corresponding taxes paid in your annual tax return.
Albanian tax residents can claim foreign tax credits, provided they furnish relevant documentation from the foreign country's tax authorities. This credit is capped at the maximum tax rate applicable in Albania for the specific income reported.
Other individual deductions encompass an annual deduction of ALL 48,000 for each dependent child under 18 and an annual deduction for educational expenses for dependent children under 18, limited to ALL 100,000, given the parent's annual employment income doesn't exceed ALL 1,200,000.
Lastly, the deadline for filing the Annual Personal Income Tax Return has been shifted to March 31st of the subsequent year.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.