TAXATION OF PROFESSIONALS New Regulations

TAXATION OF PROFESSIONALS – New Regulations

Starting from January 1, 2024, the implementation guidelines for the "Income Tax" law come into force.

The published guidelines in the Official Gazette, through concrete examples, specify that under the new law, employment income will be taxed at progressive rates of 13% and 23%; net business income will be taxed at progressive rates of 15% and 23%; investment income will be taxed at respective rates of 8% for dividends and profit distributions and 15% for other investment income.

Under the "Income Tax" law, starting from January 1, 2024, self-employed professionals will no longer be treated as small businesses with a 0% tax rate. Instead, the net income (profit) from business, after deductible expenses under Article 22 of the law, of self-employed professionals will be taxed at rates of 15% for income up to 14,000,000 lekë and 23% for income above 14,000,000 lekë.

For annual business income, for which the tax base is the taxable net income, which is the difference between income and deductible expenses, progressive rates are applied as follows:

1. a) 15% for taxable net income (taxable profit) up to 14,000,000 lekë in a tax year;
2. b) 23% for each additional lekë of taxable net income (taxable profit) over 14,000,000 lekë per year, as stated in the General Guideline "Income Tax."

The law specifies two implementation deadlines. For self-employed professionals, the progressive tax from 15% to 23% will start from January 1, 2024, while for small businesses (including self-employed categories), the effects of the law will begin to be implemented from January 1, 2029.

Guidelines

Annual Taxable Base

For the determination of the annual taxable income base of an individual, all three categories of income are taken into account: annual taxable employment income, annual taxable business income, and annual taxable investment income. This annual taxable income base is reduced by the compensations and deductions specified by the law. For the three categories of personal income that make up the taxable base, tax rates are applied separately for each category, as specified in the law:

1. a) Employment income is taxed at progressive rates of 13% and 23%;
2. b) Net business income is taxed at progressive rates of 15% and 23%;
3. c) Investment income is taxed at respective rates of 8% for dividends and profit

distributions and 15% for other investment income.

Deductions from the Taxable Base

1. A taxpayer with personal income from employment and business may deduct from the respective taxable base for the tax period: a) an amount of 600,000 lekë if the annual income is up to 600,000 lekë, or an amount of 50,000 lekë per month if the monthly income is up to 50,000 lekë; b) an amount of 420,000 lekë if the annual income is above 600,000 lekë up to 720,000 lekë, or an amount of 35,000 lekë per month if the monthly income is above 50,000 lekë up to 60,000 lekë; c) an amount of 360,000 lekë if the annual income is above 720,000 lekë, or an amount of 30,000 lekë per month if the monthly income is above 60,000 lekë; ç) a compensation amount for each child in their care under 18 years old of 48,000 lekë per year.
2. The request for personal deductions can be made by a taxpayer with income from employment through the appropriate declaration, submitted to their withholding agent on a monthly basis. Personal deductions can only be claimed once in a tax year.
3. A taxpayer who requests personal deductions or parts thereof as described in paragraphs "a," "b," and "c" of Article 22.1 may not make such requests more than once in a month. The withholding agent is required to take into account the monthly basis deductions and calculate the income tax withheld for the employed person who has signed the personal status declaration with this withholding agent. An employer may not

sign a personal status declaration with more than one withholding agent for the same calendar month period.

1. The request for a deduction from the taxable base for child compensation is made only once by the family member with the highest annual taxable income, through the annual income statement or the personal income tax statement from business.

Examples

Individual "A" works full-time as a financier at company "XX" with a gross salary of 70,000 lekë/month or 840,000 lekë/year. Additionally, they work part-time at an accounting office with a monthly salary of 40,000 lekë or 480,000 lekë/year.

Calculation of the deduction from the taxable base: Individual "A" chooses to sign the Personal Status Declaration with the accounting office. The accounting office handles income tax from employment and is required to consider monthly deductions from the taxable base. Specifically, the taxable income of individual "A" from the accounting office is 40,000 lekë/month. The law provides that for salaries up to 50,000 lekë/month, a deduction of up to 50,000 lekë/month is applied.

In this specific case, the employer pays 40,000 lekë/month in the accounting office, and after applying the tax deduction, the taxable base remains at zero. In this case, the employer has zero obligations for income tax on employment income for the monthly income received in the accounting office. Company "XX," according to paragraph 1 of Article 65 and paragraph 1 of Article 24 of the law, applies a progressive tax of 13% and 23% on the salary and does not apply any deductions from the taxable base.

A taxpayer with personal income from employment and/or business with less than 1,200,000 lekë may also deduct current education expenses for their dependent children, up to a maximum of 100,000 lekë. The request for a deduction from the taxable base for education expenses can only be made by the family member with higher annual taxable income, through the annual income statement.

Deduction Request
Child compensation and education expenses are requested by the family member with the highest annual taxable income. They must provide supporting documents such as the family status certificate, contracts with educational institutions, payment documents for children, or documents related to foreign language course fees, etc. A taxpayer with income from employment can request personal deductions from their withholding agent on a monthly basis, for the amounts mentioned in Article 22 paragraph 1/a, b, Personal deductions can only be claimed once in a tax year. A taxpayer who requests personal deductions or parts thereof as described in Article 22 paragraph 1/a, b, c may not make such requests more than once in a month. Other deductions, apart from personal deductions according to Article 22, paragraph 1/a, b, c, can only be requested through the annual income statement.

Tax Rate
For employment income, the progressive tax rates applied are 13% and 23%. The reduction of the tax burden for low-income earners is not achieved through a 0% rate for a specific income segment but by reducing the tax base (gross income) by a certain amount specified in Article 22 of the law.

Specifically, after applying tax deductions as per Article 22, for annual employment income up to 2,040,000 lekë (or monthly income up to 170,000 lekë), a tax rate of 13% is applied. For the portion of annual employment income above 2,040,000 lekë (or monthly income above 170,000 lekë), a tax rate of 23% is applied.

For annual business income, for which the tax base is the net taxable income, which is the difference between income and deductible expenses, progressive tax rates are applied as follows:

1. a) 15% for net taxable income (taxable profit) up to 14,000,000 lekë in a tax year.
2. b) 23% for each additional lekë of net taxable income (taxable profit) above 14,000,000 lekë in a year.

If a self-employed individual, after deducting all deductible expenses and allowable deductions as per Article 22 of the law, declares a taxable profit of 12,000,000 lekë, the tax to be paid will be 12,000,000 x 15% = 1,800,000 lekë.

If a self-employed individual, after deducting all deductible expenses and allowable deductions as per Article 22 of the law, declares a taxable profit of 20,000,000 lekë, the tax to be paid will be: 14,000,000 x 15% + 6,000,000 x 23% = 2,100,000 + 1,380,000 = 3,480,000 lekë. So, the tax payable by the taxpayer for a taxable profit of 20,000,000 lekë will be 3,480,000 lekë.

Income from investments is taxed at 8% for dividend income and 15% for all other investment income unless otherwise specified by law. No costs are deducted from investment income unless specified by law.

Examples of tax calculations:

Individual "A" works in a programming office and their gross salary is 230,000 lekë per month or 2,760,000 lekë per year. Individual "B" (the spouse of individual "A") has a business selling plumbing supplies and has a net income (taxable profit) of 3,250,000 lekë per year. Individual "A" also has a fixed-term deposit that earns 20,000 lekë per year in interest, while individual "B" owns some shares in company "XX," which paid dividends of 25,000 lekë for the year. Both individuals have three children aged 13, 15, and 19.

Calculation of income tax on employment income for individual "A":

Individual "A" has employment income of 2,760,000 lekë per year, which exceeds 60,000 lekë per month, so the deduction from the taxable base that individual "A" is eligible for, according to paragraph 1 of Article 22 of the law, is 30,000 lekë per month. Additionally, individual "A" has two children under the age of 18, for which a compensation of 48,000 lekë per child is applicable, totaling 96,000 lekë. However, since the spouse has higher income, it will be individual "B" who will claim this compensation from the taxable base, as well as the deductions provided for in paragraph 2 of Article 22. The income tax on employment income that individual "A" will pay is calculated as follows:

Annual employment income of 2,760,000 lekë is reduced by the deductions specified in this law: 2,760,000 lekë/year - 360,000 lekë/year = 2,400,000 lekë/year.

The annual income, after applying deductions and tax credits, is calculated as follows:

2,040,000 lekë/year * 13% + (2,400,000 lekë/year - 2,040,000 lekë/year) * 23% = 265,200 lekë/year + 82,800 lekë/year = 358,000 lekë per year.

This is the tax that individual "A" pays on employment income.

Calculation of income tax on business income for individual "B":

Individual "B" has a net annual income as a self-employed person of 3,250,000 lekë.

According to paragraph 1 of Article 22, their income is above 600,000 lekë per year, so the deduction from the taxable base they are eligible for is 360,000 lekë. Individual "B," as the taxpayer with the highest income in the family, will also receive compensation from the taxable base of 48,000 lekë per child for two children under 18, totaling 96,000 lekë. However, individual "B" does not qualify for the deductions from the taxable base specified in paragraph 2 of Article 22, as their annual income is higher than 1,200,000 lekë. The net annual income from the business is reduced by tax deductions and compensation provided for by this law:

3,250,000 lekë/year - (360,000 lekë/year + 96,000 lekë/year) = 2,794,000 lekë/year.

The net annual income (taxable profit), after applying deductions and compensation, is

less than 14,000,000 lekë/year, and it is taxed as follows:

2,794,000 lekë/year * 15% = 419,100 lekë/year.

This is the tax that individual "B" pays on business income.

Calculation of tax on investment income:

The income from the fixed-term deposit for individual "A" and the dividend income for individual "B" from investments are considered investment income.

The tax on investment income that individual "A" will pay for the interest earned from the fixed-term deposit will be:

20,000 lekë/year * 15% = 3,000 lekë.

The tax on investment income that individual "B" will pay for the dividends received from the investment in shares will be:

25,000 lekë/year * 8% = 2,000 lekë.

These are the taxes that individuals "A" and "B" pay on their investment income, respectively.