Albanian partnership taxation regimeALTax
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.
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”:
- 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.
Transactions between a partnership and its partners
In certain transactions between a partner and the partnership where the partner is not acting in his/her capacity as a partner but acting as a third party, the partnership and the partner may recognize the income arising or the expense incurred in connection with such transactions in computing their taxable income. Here, a transaction is treated as occurring between third parties if profits or losses arising from the transaction are not dependent on the partnership income but are determined by the arm’s length price of goods or services provided.
However, types of transactions regarded as occurring between third parties are confined to:
- Transfer of property;
- Lending and borrowing of money or other properties; and
- Provision of services (excluding services associated with the partnership business).
Also, transactions between a partner and the partnership would be regarded as “transactions of related parties” and thereby be subject to provisions of the Corporate Income Tax provisions on part of “transaction between related parties” if such transactions are found to be made for tax avoidance purposes.
Adjustment of partner’s outside basis
A partner’s outside basis is increased by the amount of the partnership interest acquired in return for contribution of the partner’s property to the partnership, or through purchase, inheritance or gift of the other partner’s interest. Here, the basis is adjusted by the fair market value of the partnership interest at the time of acquisition. It is also increased by the distributed share of partnership income.
Conversely, a partner’s outside basis is decreased in the event of distribution of partnership property, as well as in the case of disposition or extinguishment of the partnership interest through transfer, inheritance or gift, thereof. Here, the basis is adjusted by the fair market value at the time of distribution, disposition or extinguishment. It is also decreased by the distributed share of partnership losses.
It should be noted that a partner may be liable to pay capital gains tax on a property contributed to a partnership at the time of contribution where capital gains (i.e. the difference between the fair market value at the time of contribution and the acquisition or book value of the property) are to be recognized at the time of contribution.
Transfer of partner’s interest
Any gain from the sale of a partner’s interest would be taxed as capital gains in the same way as the gain from sales of shares in a corporation. In order to prevent double taxation of income (or double deduction of losses) that has already been taxed (deducted) as the partner’s distributed share of income (losses), the partner’s outside basis, which must be adjusted in accordance with the partner’s distributive share of income or losses, should be treated as the acquisition price in computing capital gains of the partner’s interest.
Distribution of partnership assets
When a partnership’s assets are distributed to a partner, the difference between the market price of distributed assets and the partner’s outside basis (if the difference is positive, i.e. more than zero) would be treated as dividends to the partner for tax purposes. Conversely, if the market price of distributed assets is lower than the partner’s outside basis, capital losses can be recognized by the partner only in cases of “liquidating distribution.”
Such distribution refers to the distribution of partnership assets in the course of terminating the partnership by dissolution, division, merger, etc. or in return for the redemption of all the interests of a particular partner.
In the event of non-liquidating distribution, downward adjustment of the outside basis is required while the recognition of capital losses is prohibited.
Information return requirements of a partnership
A partnership would be required to file its income tax return, which shows its taxable income and partners’ respective distributive shares, with the concerned tax office by the 15th day of the third month following the end of the partnership’s taxable year.
Accompanying documents required are:
- The financial statements, including balance sheet and income statement duly prepared in accordance with the financial reporting standards; and
- The outside basis adjustment statement.
A return filed without the balance sheet, income statement or outside basis adjustment statement is treated as if it were never filed at all. The information return requirement applies even to partnerships with no taxable income or only losses for the taxable year in question.
Withholding tax on income of non-residents or foreign corporations
When a partnership files its information return, if income to be distributed to a non-resident or a foreign corporation partner is attributable to its domestic place of business, such income is withheld at the withholding rate applicable of 15 percent. Since a partnership’s place of business in Albania is deemed to be that of a partner also, most partners are supposed to file tax returns in Albania.
If income to be distributed to a non-resident or a foreign corporation partner is not attributable to its domestic place of business, withholding tax rates applicable to non-residents and foreign corporations under the domestic tax law will apply, except of tax treatment available under double tax treaties or specific laws that have provisions in this regard. In order to enjoy treaty benefits, non-residents or foreign corporate partners are required to file a request.
The incentives to be part of partnerships in Albania
With the partnership taxation system in Albania, foreign business people would be able to take greater advantage of their investments than before.
First, they can expect more reasonable and consistent tax treatment when running a business in the form of a partnership without formally establishing a company, which requires a registration with an Albanian court.
Second, even if they opt for a company for other legal purposes, they can save their tax monies by electing partnership taxation treatment.
Third, they may be in a better position in terms of saving their taxes due in their home countries by netting out losses of a partnership in Albania, if any, against profits in their home countries, since tax law requires the partnership to prepare partners’ respective distributive shares of its profits or losses by the end of every taxable year of such partnerships.