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LAW. TAX.

TRANSPARENCY

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.

Howewer, in Albania, a partnership its 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

INFORMATION REGARDING PARTNERSHIP TAX SYSTEM IN ALBANIA, 2016

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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.

Albanias 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.

INFORMATION REGARDING PARTNERSHIP TAX SYSTEM IN ALBANIA, 2016

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Computation and distribution of partnership profits (income) or losses


In order to compute each partners 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 partners 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.

INFORMATION REGARDING PARTNERSHIP TAX SYSTEM IN ALBANIA, 2016

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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 arms 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 partners outside basis


A partners outside basis is increased by the amount of the partnership interest acquired in return
for contribution of the partners property to the partnership, or through purchase, inheritance
or gift of the other partners 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 partners 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

INFORMATION REGARDING PARTNERSHIP TAX SYSTEM IN ALBANIA, 2016

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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 partners interest


Any gain from the sale of a partners 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 partners distributed
share of income (losses), the partners outside basis, which must be adjusted in accordance with
the partners distributive share of income or losses, should be treated as the acquisition price in
computing capital gains of the partners interest.

Distribution of partnership assets


When a partnerships assets are distributed to a partner, the difference between the market price
of distributed assets and the partners 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 partners 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.

INFORMATION REGARDING PARTNERSHIP TAX SYSTEM IN ALBANIA, 2016

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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 partnerships 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 partnerships 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

INFORMATION REGARDING PARTNERSHIP TAX SYSTEM IN ALBANIA, 2016

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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 businesspeople 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.

ALTAX CENTER

Tirana, July 2016

INFORMATION REGARDING PARTNERSHIP TAX SYSTEM IN ALBANIA, 2016