24-04-2013

Double Taxation Treaties

Authors

  • Alban Ulqini, Assistant Manager, Tax
    KPMG Albania Sh.p.k.

What is a Double Tax Treaty (DTT)?

A business or individual resident in one country may realize a taxable gain in another country. This gain may be taxed in the country in which the gain was made and in the country of residence. In order to minimize this double taxation, two countries may agree to conclude double tax treaties with each other with the result that the individual or business activity pays tax once only.

What are the common benefits provided by a DTT?

DTTs may provide for exemption or lower tax rates in relation to Albanian source income (such as income from interest, royalty, dividends, capital gains, salaries, etc.) generated by a tax resident of another country with a reciprocal DTT.

In addition, the DTTs in force between Albania and other countries contain a standard provision (Article 7) which states that business income generated in Albania by an enterprise that is tax resident of another country with a DTT is not taxable in Albania as long as this enterprise has not created a permanent establishment in Albania.

How many DTTs are in force between Albania and other countries?

Currently, there are 33 DTTs in force between Albania and other countries. The first DTT signed between Albania and Poland entered in force on 1 January 1995. Meanwhile, the latest DTTs signed with Germany, Ireland and Singapore entered into force on 1 January 2012.

Do the provisions of a DTT prevail over the Albanian default legislation?

Yes, they do. The provisions of a DTT prevail over the Albanian tax legislation with the exception of the provisions of the Albanian Constitution. However, it is a common understanding and interpretation that DTT provisions should apply only when they provide a better treatment for the foreign taxpayer than the treatment provided by the Albanian default tax legislation.

Do DTT provisions apply automatically in Albania?

Based on Instruction No. 6 dated 10 February 2004 on Bilateral Agreements for the Avoidance of Double Taxation and Fiscal Evasion, there is a procedure that should be followed with the Albanian General Tax Directorate.

The General Tax Directorate is the competent body entitled to confirm that the parties of a specific transaction may benefit from the provisions of a DTT. The confirmation is issued by the General Tax Directorate in writing upon a formal request made by the parties to the transaction.

What is the procedure to be followed in order to benefit from the DTT provisions?

The provisions of any DTT take effect only after application and approval by the Albanian General Tax Directorate. In order to benefit from the provisions of a DTT, an application form should be completed by the interested parties and submitted to the General Tax Directorate.

The form should be prepared for each invoice or group of invoices issued in relation to the provisions of a specific contract/agreement entered between two parties entitled to benefit from the provisions of a DTT.

The application form should contain information with regard to the payer of the income and the beneficiary of the income (income from services, interest, dividends, etc.) who should be tax resident in the other Contracting State. There is also a section in the application form to be completed by the tax authorities of the other Contracting State.

The Albanian General Tax Directorate requires supporting documentation attached to the completed form such as contracts and invoices related to the services provided, interest or royalty paid, etc. The application should specify the amounts paid and should also contain signatures of the responsible parties to the contract and the seal of the beneficiary legal entity (when applicable).

The application form is composed of seven sections as follows:

1- Information on the recipient of income

Section 1 is completed with information required from the beneficiary of the income (e.g. business name, legal form, registered activity, business number, registered address).

2 - Information on the payer of income

Section 2 is completed with information required for the payer of the income (e.g. business name, legal form, registered activity, business number, registered address).

3 - Information on income

Section 3 is completed with details on the type of income (income derived from services, interest, royalty, capital gains, etc.), total amount paid or to be paid, date of payment, etc.

4 - Information on the supporting documents

Section 4 is completed with the list of supporting documents, reference numbers of documents and the respective issuing date.

5 - Other information

Section 5 may be completed only in case that there is any other relevant information to be declared and related to the DTT application.

6 - Declaration of the claimant (beneficiary)

Section 6 should be completed by the beneficiary of the income who confirms and signs that the information given in the form and the attached documents is true. The signature of the person in charge should be accompanied by the seal of the legal entity (when applicable).

7 - Certification by the Tax Authority of the beneficiary’s residence country

Section 7 should be completed by the foreign Tax Authorities of the other Contracting State. The Tax Authorities certify that the beneficiary of the Albanian source is/was a resident of the Contracting State in respect to the DTT provisions during the period of the transaction. The signature of the person in charge should be accompanied by the seal of the Tax Authorities in the Contracting State.

Are there any practical difficulties arising for taxpayers entitled to benefit from the DTT provisions?

Practical issues may arise due to the lack of exhaustive internal provisions or inconsistent practice of the Albanian Tax Authorities. For example, based on Instruction No. 6 dated 10 February 2004 on Bilateral Agreements for the Avoidance of Double Taxation and Fiscal Evasion, the parties to a transaction have two years to benefit from the provisions of a treaty. However, the Instruction does not specify whether during the application process (i.e. before obtaining the approval of the General Tax Directorate) the parties should apply the Albanian default legislation or may apply the provisions of the DTT.

Other practical issue that may arise concern the moment in which a foreign company creates a permanent establishment in Albania and thus becomes subject to taxation in Albania in relation to the income generated by the permanent establishment.

Are new DTTs expected to enter into force in the coming years?

Yes, they are. Albanian authorities are in the process of negotiation or ratification of DTTs with Luxembourg, Estonia and Kuwait. Normally, these DTTs enter into force at the beginning of the calendar year following the year in which the diplomatic notes confirming the completion of the ratification procedures have been exchanged between the Contracting States.

GREEK LAW DIGEST REPUBLIC OF ALBANIA MINISTRY OF INTEGRATION Union of Chambers of Commerce and Industry of Albania
Nomiki Bibliothiki ALBANIA INVESTMENT DEVELOPMENT AGENCY Foreign Investors Association of Albania
     

 

Login

Log in to your account or