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Tax opportunities under the Albanian partnership taxation regime

The Albanian tax system, has not provided complete and consistent tax treatment to partnerships, but the income tax law in Albania mention the possibility of business organization in the status of partnership for corporate tax purposes.

However, in Albania, a partnership it’s treated differently according to whether or not it is registered in a court.

A multinational enterprise holding a business or considering starting a business in Albania may use the partnership taxation regime through which to save money for taxation, following the tax legislation in Albania.

The partnership taxation regime treats a partnership as simply a conduit (rather than a taxable entity) through which the profit (income) or loss of the partnership are passed onto partners, who will report it together with other profits (income) or losses on their income tax returns. By doing so, so-called double taxation (i.e. one taxation at the entity level and another taxation at the partner level) can be avoided. Also, the taxpayers’ final tax load can be reduced partly by the avoidance of double taxation and partly because the profits of the partnership can be netted against losses of the other sources (and vice versa).

The partnership taxation regime may be no novelty to foreign business operators since most advanced countries have already incorporated such a regime in their tax systems.

Depending on the scope of liabilities of the partners, such a company is legally classified as either a limited partnership company or simply as a partnership However, neither is treated as a conduit for tax purposes. In other words, such a company even though the true characteristics of the company remain those of a partnership becomes subject to corporate income tax, whereby the partnership itself is taxed as a taxable entity.

In the case where the partnership is not registered in a court, it is treated as a conduit for tax purposes, subject to the individual income tax law. However, that law provides only a few articles, leaving a number of legal issues unanswered.

Albania’s tax legislation with regard to partnership clarifies all issues regarding partnerships and partner rights based in the Civil Code and the Law "On merchants and commerce companies". Furthermore, it treats all types of partnership equally for tax purposes regardless of their legal forms once such partnerships elect the application of partnership taxation.

Provided below is a brief summary of the important features of the partnership taxation regime.

Eligible entities

Any type of a partnership falling under the following categories is eligible for the partnership taxation under the Civil Code, Law "On merchants and commerce companies":

  • Merchants;
  • An association (or a partnership);
  • Limited partnership company and other type of companies;

However, partnership taxation is applicable only to those entities that elect partnership treatment prior to the commencement of the eligible taxable year. Such election would be valid for a minimum of one project and may not be rescinded during this period.

Computation and distribution of partnership profits (income) or losses

In order to compute each partner’s profits (income) or losses, should be identified first, whom from the partners will be the authorized entity which will declare on behalf of the entire partnership.

The figures are to be computed by viewing the partnership as an individual resident, individual non-resident, domestic corporation and foreign corporation in turn. This process is necessary because Albanian tax law may treat the same income differently depending on whether that income is attributed to an individual resident, an individual non-resident, a domestic corporation or a foreign corporation.

For example, capital gains arising from the transfer of shares in a domestic corporation are not taxable if those gains are attributed to an individual shareholder and a foreign corporation (without a domestic place of business) engaged in portfolio investments, while a domestic corporation and a foreign corporation having a business place in Albania are subject to tax at the maximum 15 percent tax rate. On the other hand, capital gains from a beneficiary certificate are not taxable if such gains are attributed to an individual resident while taxable in other cases.

However, partnership losses cannot be distributed to a passive investment partner who makes contributions to the partnership but does not take part in the management of partnership. Further, losses may only be distributed to the extent of the partner outside basis as of the closing day of the concerned taxable year of the partnership. Here, the outside basis is defined as the book value of a partner’s partnership interest for tax purposes, which serves as the basis for computing taxable income in connection with transfer of partnership interest, and distribution of partnership property, etc. Losses in excess of the outside basis may be carried forward for five years.

For more information, you have to read Albanian partnership taxation regime