Dividend Distribution in Albania: Key Tax and Compliance Considerations for Businesses

 

 

 

Dividend distribution is an important decision for any profitable company. However, before profits are transferred to shareholders, businesses must ensure that the distribution is properly approved, documented and reported in accordance with Albanian corporate and tax legislation.

In practice, dividend distributions require coordination between a company’s management, shareholders, accountants and tax advisers. Incomplete documentation, incorrect tax treatment or missed filing deadlines may result in additional tax liabilities, penalties and interest.

This article outlines the main legal, accounting and tax considerations that Albanian companies should review before distributing profits to their shareholders.

What Is Considered a Dividend?

Under Albanian income tax legislation, the concept of a dividend includes income arising from shares, quotas or other participation rights in a company, as well as other forms of profit distribution by an entity.

Depending on the circumstances, dividend income may also include amounts received during the liquidation of a company that exceed the shareholder’s contributed capital, as well as certain amounts arising from a reduction of capital attributable to previously capitalised retained earnings.

Companies should therefore examine the economic substance of a payment to a shareholder rather than relying only on the description used in the accounting records or payment documentation.

Corporate Approval of the Profit Distribution

Before distributing dividends, the company should confirm that sufficient distributable profits are available.

The distribution should generally be supported by:

• duly prepared and approved financial statements;
• a formal resolution of the General Meeting of Shareholders or Partners;
• a clear determination of the amount to be distributed;
• identification of the beneficiaries and their respective ownership percentages;
• consideration of accumulated losses, legal reserves and other restrictions;
• confirmation that the distribution does not affect the company’s ability to meet its liabilities.

The shareholders’ resolution should clearly specify whether the profit will be retained, transferred to reserves, used to cover previous losses or distributed as dividends.

Under the current income tax legislation, entities must submit the decision concerning the allocation or destination of the profit to the tax authorities no later than 31 July of each year.

Dividend Withholding Tax Rate

The standard withholding tax rate applicable to dividends in Albania is 8%.

The company distributing the dividend generally acts as the withholding tax agent. It is therefore responsible for calculating the tax, withholding it from the gross dividend and transferring it to the tax authorities.

For example, where a company approves a gross dividend of ALL 10,000,000 and the 8% withholding tax applies, the calculation would generally be:

• Gross dividend: ALL 10,000,000
• Dividend withholding tax: ALL 800,000
• Net amount payable to the shareholder: ALL 9,200,000

The company remains responsible for the correct calculation and payment of the tax, even though the tax is withheld on behalf of the shareholder.

When Must Dividend Tax Be Declared and Paid?

As a general rule, withholding tax must be declared and paid by the 20th day of the month following the month in which the payment or withholding took place.

Special attention is required when a dividend has been formally approved but has not yet been paid to the shareholder.

Under the current legislation, where an approved dividend remains unpaid, the withholding obligation cannot be postponed indefinitely. The tax must be withheld and transferred based on the statutory timing linked to the end of the third month following the month in which the competent corporate body approved the profit distribution.

Businesses should therefore avoid assuming that dividend tax becomes due only when the shareholder physically receives the funds. The date of the shareholders’ resolution and the date of the actual payment should both be reviewed when determining the applicable tax deadline.

Dividends Paid to Foreign Shareholders

Where dividends are paid to a nonresident shareholder, the Albanian company must first determine the treatment provided under domestic legislation.

The domestic withholding tax rate on dividends is generally 8%. However, an applicable double taxation agreement between Albania and the shareholder’s country of tax residence may provide a reduced rate or other relief, subject to the conditions of the relevant agreement.

Before applying treaty benefits, the distributing company should generally obtain and retain appropriate supporting documentation, including:

• a valid tax residence certificate for the foreign shareholder;
• documentation confirming the shareholder’s ownership interest;
• evidence that the shareholder is entitled to the income;
• the relevant corporate resolution;
• any forms or declarations required by the tax authorities.

Treaty eligibility should be reviewed before the payment is processed. The existence of a double taxation agreement does not automatically mean that a reduced rate can be applied without supporting documentation.

Participation Exemption

Albanian legislation provides a participation exemption for certain dividends received by qualifying entities.

In general, dividends received by a resident entity may be excluded from taxable corporate income where the recipient holds at least 10% of the shares, capital participation or voting rights in the distributing entity and the minimum participation has been held continuously for at least 24 months.

Where these conditions are satisfied, the dividend may also fall outside the standard withholding tax treatment, subject to the specific circumstances and documentation of the transaction.

As the exemption is conditional, companies should perform a detailed review before applying it.

Key Documentation to Retain

A properly documented dividend distribution file should normally include:

• the approved annual financial statements;
• the resolution approving the allocation and distribution of profits;
• the calculation of the gross dividend and withholding tax;
• the shareholder or partner register;
• evidence of each shareholder’s ownership percentage;
• copies of the withholding tax declaration and payment;
• bank documents confirming the dividend payment;
• tax residence certificates for foreign shareholders;
• analysis of any applicable double taxation agreement;
• documentation supporting the application of a participation exemption.

Maintaining a complete audit trail is particularly important where the company has foreign shareholders, several classes of shares, historical retained earnings or complex ownership arrangements.

Common Risks for Businesses

Some of the most common issues identified in practice include:

• distributing profits without a properly approved shareholders’ resolution;
• applying the 8% tax to the wrong taxable base;
• failing to recognise a withholding obligation for an approved but unpaid dividend;
• missing the deadline for submitting the decision on the destination of profits;
• applying treaty benefits without a valid tax residence certificate;
• applying the participation exemption without satisfying the ownership or holding-period requirements;
• incorrectly treating shareholder withdrawals or personal expenses as dividends;
• failing to reconcile the distribution with the company’s financial statements and retained earnings.

A dividend payment should not be treated as an isolated bank transaction. It should be supported by consistent corporate, accounting and tax records.

How HLB Albania Can Assist

HLB Albania can support companies throughout the dividend distribution process by:

• reviewing the availability of distributable profits;
• assessing the applicable corporate and tax requirements;
• preparing or reviewing dividend calculations;
• assisting with shareholders’ resolutions and supporting documentation;
• determining the applicable withholding tax rate;
• reviewing double taxation agreements;
• assessing participation-exemption eligibility;
• preparing and submitting the relevant tax declarations;
• assisting with communication with the Albanian tax authorities;
• reviewing historical profit distributions and potential compliance risks.

Early coordination between management, accountants and tax advisers can help ensure that the distribution is completed efficiently and in accordance with Albanian legislation.

This publication is intended for general information purposes only and does not constitute legal or tax advice. The appropriate treatment should be assessed based on the specific circumstances of each company and transaction.