Assessment of the reduced dividend tax and its long-term effects on the economy and the capital market

Dividend taxation as a key fiscal policy element in Albania and its long-term effects on the economy and capital market.

Dividend taxation is a key component of fiscal policy in Albania and has undergone significant changes over the years. For the first time in 2019, the Albanian government reduced the dividend tax rate to 8%, making it lower than the standard capital income tax rate of 15%.

This tax cut aimed to stimulate profit distribution and encourage investment in the country, particularly after a period of fiscal tightening and high public debt.

Additionally, it helped attract foreign capital and improve liquidity in capital markets, creating a more favorable environment for companies planning to distribute dividends and attract new investors.

In 2019, revenues from this tax peaked at 11 billion ALL, mainly from a few large companies. However, this initial revenue level quickly declined after the first year of implementation.

In the following years, dividend tax revenues showed a notable decrease, reaching only 5.5 billion ALL in 2024—a significantly lower level compared to 2019. This indicates that despite the immediate benefits of a lower tax rate, the policy had varying effects over time.

ALTAX has prepared a study that focuses not only on the incentives provided by dividend taxation but also on a proposal for its restructuring.

Dividend taxation and its economic effects

The reduced dividend tax rate of 8% can have two distinct effects on the Albanian economy and capital market. Its impact can be analyzed on two main levels: investment stimulation and fiscal stability enhancement.

Investment incentives and impact on capital

To analyze the impact of dividend taxation on investment and capital markets, we can use the real business cycle (RBC) model developed in the study “Fiscal Financing and Investment Irreversibility: The Role of Dividend Taxation.” This model shows that lower dividend taxes can create a “boom-bust” investment cycle, where[1]:

• Initially, the tax cut leads to increased dividend distributions by companies. This may stimulate short-term investments, allowing shareholders to benefit from lower dividend tax rates.
• Temporarily, this may result in a “bust” phase of lower investments, as investors perceive uncertainty about future tax increases.
• In the long run, a potential investment rebound (“boom”) may occur if favorable financing conditions and low tax rates create opportunities for new investments and greater capital market stability.

In Albania, the implemented fiscal policy does not appear to have followed the above model in practice.

The decline in tax revenues from 11 billion ALL in 2019 to 5.5 billion ALL in 2024 suggests that the expected investment boost from the reduced dividend tax did not materialize.

This may be linked to the lack of sustained dividend distribution, as companies preferred to retain earnings to grow their capital base and maintain liquidity, rather than distribute dividends.

This situation raises concerns over the continued use of a reduced tax rate on dividends, especially as the need for public debt financing increases and the tax burden remains unevenly distributed between labor and capital.

Investment levels and declining fiscal benefit

Following 2019, dividend distributions were significantly lower compared to the first year of the reduced tax implementation:

• 2019 = ALL 137.5 billion
• 2020 = ALL 28.7 billion
• 2021 = ALL 45 billion
• 2022 = ALL 52.5 billion
• 2023 = ALL 68.1 billion
• 2024 = ALL 69.1 billion

This trend indicates that after an initial stimulus period, investments and dividend distributions stabilized at lower levels, possibly due to capital constraints and the lack of sufficient financial market stability to support sustainable growth in dividends and investments.

For Albania, this suggests that while the low tax rate may have supported the short-term economy, it might also have created a cycle of uncertainty that discouraged long-term investment commitments from companies.

Investment barriers and the effect of dividend taxation on fiscal stability

In an economy like Albania’s—characterized by a limited capital market and the need to stabilize public debt—the reduced dividend tax may help balance the budget in the short term, but its impact on long-term investments is more complex.

According to investment barrier mechanisms, when investors perceive uncertainty around fiscal policies and potential tax hikes, negative effects can arise—companies may delay or reduce investments due to concerns over possible tax increases and capital limitations.

This means that a reduced dividend tax can be effective only after a period of uncertainty has passed. If the tax cut is accompanied by a reduction in uncertainty, it may help restart investments and stimulate sustainable growth in both investment and profit distributions.

A dual impact and policy recommendations

The reduced dividend tax rate in Albania has had a dual impact. On one hand, it has helped stabilize profit distribution during uncertain periods; on the other, it has hindered long-term investment growth by creating uncertainty for investors and contributing to a cycle of declining investment over the years.

To achieve sustainable long-term investment growth and minimize “boom-bust” cycles, fiscal policy should be reviewed more deeply to:

• Increase transparency and trust in fiscal policies to reduce uncertainty for investors and stimulate long-term investments.
• Implement stable and predictable tax policies to ensure stronger fiscal consolidation and capital market stability.

An in-depth analysis of investment barriers and fiscal stability mechanisms is necessary by fiscal authorities and experts to better balance dividend taxation policy and maximize potential economic benefits for Albania.

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[1] “Boom-bust” refers to a cycle of rapid investment growth followed by a sharp decline