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Effective January 1, 2024, self-employed individuals and physical persons in specified liberal professions, as listed by the Council of Ministers, will be subject to progressive taxation rates of 15% and 23%. This applies to freelancers, individuals, and traders of services in liberal professions.
Albania has recently implemented changes in its taxation system, specifically targeting self-employed individuals and those engaged in liberal professions. According to the "Income Tax Law," effective January 1, 2024, self-employed professionals will no longer be treated as small businesses with a 0% tax rate. Instead, their net income (profit) from business, after deducting expenses according to the law, will be subject to taxation at rates of 15% for income up to 14,000,000 lekë and 23% for income exceeding 14,000,000 lekë.
The general guidelines state, "For annual income from business, where the tax base is net taxable income, i.e., the difference between income and deductible expenses, progressive rates are applied as follows:
► 15% for net taxable income (taxable profit) up to 14,000,000 lekë in a tax year.
► 23% for each additional lekë of net taxable income (taxable profit) exceeding 14,000,000 lekë per year."
Moreover, the directive outlines that if a self-employed individual secures 80% of their gross income from a single client or 90% from fewer than three clients, the taxation rates on salary income will apply for the calculation of annual/monthly tax liabilities.
The law introduces a dual-phase implementation timeline. The progressive tax rates ranging from 15% to 23% for self-employed professionals in liberal professions will commence from January 1, 2024. On the other hand, the effects of the law on small businesses (including self-employed categories) will start to apply from January 1, 2029.
Comparative Tax Burden and Impact on Businesses
According to the Ministry of Finance and Economy (MFE), self-employed professionals are expected to pay up to 50% less tax than regular employees. The 23% tax rate for the category with annual incomes exceeding 14 million lekë is equated to the tax rate paid by commercial companies (15% on profit and 8% on dividend tax).
MFE clarified to Monitor that the 23% tax rate aims to "block" the business movement towards other brackets to avoid tax obligations.
These changes raise concerns among accountants and fiscal experts, who argue that the new tax law creates inequality among businesses and disproportionately affects the middle class.
Defining Liberal Professions and Implementation Challenges
The decision listing liberal professions, published in the Official Gazette, is divided into 26 types of activities, encompassing 180 professions based on the nature of the activity. This includes IT services, accounting, legal services, education, healthcare, property, news agencies, employment agencies, sports, tourism operators, and others.
Sotiraq Dhamo, the Chairman of the Governing Council of the Institute of Certified Accountants, emphasized the delay in the publication of the detailed list of liberal professions. While the law was approved in March, the corresponding Council of Ministers' decision was expected to be published between July and August 2023, according to Dhamo. However, as per the government decision, many services beyond liberal professions are included in the taxation, not just regulated professions like auditors, lawyers, doctors, notaries, accountants, and nurses.
Amid these tax burdens, the implementation situation appears chaotic, primarily due to changes in the law approved on December 16, 2023, and the delayed publication of the list for liberal professions, ratified by the Council of Ministers on December 20.
Challenges and Concerns Raised by Accountants
Accountants from the Institute of Certified Accountants (IKM) expressed concerns about the challenges in implementing the new law. They criticized the government for not adequately preparing businesses for the changes.
According to IKM, the legal changes are primarily for tax administration purposes, without adequately informing businesses about the new legislation. The lack of readiness among businesses regarding the new tax system poses a potential challenge to its smooth implementation.
Accountant Armand Mala believes that the use of existing forms for declarations does not hinder the new law's implementation from January 1, 2024. Mala argues that the law will take time to assimilate among businesses and professionals, given the uncertainties surrounding its application.
Despite these concerns, the law marks a significant shift in Albania's taxation landscape, particularly affecting self-employed professionals. It remains to be seen how these changes will impact businesses and individuals over the coming years and whether adjustments will be made to address the raised concerns and challenges in the implementation process.