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Albania: Changes in the tax deductibility of cross-border management and consulting fees

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A new law, which becomes effective April 30 2013, has made stricter the requirements for the tax deductibility of consulting, technical service and management fees invoiced from abroad.

Pursuant to the income tax law provision amendment, consulting, technical and management fees invoiced from abroad had been tax deductible to the extent the amount invoiced was paid during the fiscal year which the service referred to. Moreover, according to the Minister of Finance’s instructions, the amounts have also been tax deductible when the corresponding 10% withholding tax was paid to the tax authorities within the fiscal year of the service supply.

Pursuant to the new law, the tax deductibility of the relevant expense for technical and consultancy services and management fees becomes dependent not on the payment of the invoice, but on the payment of the withholding tax to the tax authorities which will have to take place before December 31 of the year in which the service was provided. Therefore, local entities will need to communicate with their foreign service providers, whether affiliates or third parties, requesting to receive invoices or at least pro-forma invoices well in advance of December 31 of the year the service was rendered and plan to effect the corresponding withholding tax payment before year-end.

In case of an applicable tax treaty protecting the relevant income from being subject to Albanian withholding tax at the standard 10% rate, the local entity will have to communicate with the foreign service provider to receive the complete file of supporting documents for filing the tax treaty relief claim with the Albanian Tax Authorities several months before the calendar year-end, which the service refers to. Otherwise, it may risk not obtaining the tax treaty relief clearance on time and thus to have to withhold and pay tax at 10% on the invoiced amount to ensure the tax deductibility of the expense. Under the old provisions, settlement of the invoice was sufficient, which could be followed by initiating the tax treaty relief procedure in a subsequent year. Pursuant to the new rule, unless tax treaty relief has been previously applied for and obtained, the failure to withhold the 10% tax on the relevant cross-border consulting, technical service and management fees before the year-end causes the relevant expense not to be tax deductible.

Jona Bica (Jona.Bica@al.ey.com) is a tax senior at Ernst & Young, principal Corporate Tax correspondent for Albania.

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