New income tax law proposes the introduction into the tax scheme from 2023 of businesses supplying mainly professional services, while maintaining the existing tax scheme with a 0% rate mainly of small family businesses (production, trade, transport, social food , crafts, etc.), where natural persons and legal entities with a turnover of up to 14 million ALL, will pay 0% tax respectively on business income and on corporate income until 2029. 

According to a report that the Ministry of Finance sent to the deputies of the Economy and Finance Committee, the effective tax rate for the self-employed in professional services (lawyer, consultant, notary, etc.) is 9% of income or 12% of assumed net profit. with an annual gross income of ALL 5 million. 

As for manufacturers, traders, bars and restaurants, who will start paying from 2029, the effective tax rate will vary from 3-4.5% of income. 

To give free time to professionals, the first installment will be paid in October 2023 and the second in December 2023. 

The draft law has provided that the self-employed and traders will be taxed: 

with the rate of 15% on the net profit (income-expenses) when the net profit is up to ALL 14 million per year; 
with the rate of 23% of the net profit, only for the part of the profit above ALL 14 million per year. 
Starting next year, only the self-employed will begin to be taxed under this scheme. The Minister of Finance Delina Ibrahimaj explained earlier that there are a total of 14 thousand self-employed people who are expected to pay about 2 billion additional lek per year. 

The draft law proposes maintaining the existing tax scheme with a 0% rate mainly for small family businesses (production, trade, transport, social food, handicrafts, etc.), where natural persons and legal entities with a turnover of up to 14 million ALL will pay 0% tax respectively on business income and on corporate income until 2029. 

According to finance, the proposed tax system for natural persons, traders and self-employed persons aims to treat all taxpayers equally and fairly, regardless of their legal form. 

How much effective tax will the self-employed and other natural persons pay 

Finances clarify that self-employed people and traders enjoy the right of deduction from the tax base, i.e. reduction of the tax liability, for all the elements that are provided for employees. 

By applying deductions from the tax base, the effective tax rate for traders and the self-employed is reduced beyond the statutory rate: 

The effective tax rate for the trader or the self-employed with an annual gross income of 5 million ALL: 

producer (bakery, pastry chef, etc.) 4.5% of income or 11% of assumed net profit; 
commodity trader 3% of revenue or 10% of assumed net profit; 
bar restaurant 4.5% of revenue and 11.2% of assumed net profit; 
self-employed in professional services (lawyer, consultant, notary, etc.) 9% of income or 12% of assumed net profit 
 
According to the finance report, through the introduction of the tax scheme from January 1, 2023 for businesses supplying mainly professional services, the phenomenon identified in relation to the provision of services, mainly in free professions, is addressed. This phenomenon which has eroded the base of the payroll and has created dissatisfaction among the ranks of employees with medium and high salaries, in relation to the tax policies that apply to the free professions, or suppliers of other services in general. 

Through the new scheme, it is intended to discourage tax avoidance through the transition from employment relationships, to business relationships as self-employed, as well as to discourage the use of the status of a natural person and the existing tax rate as a mechanism for shifting profits from the entity. which is taxed at 15%, to the natural person without tax. 

Finance clarifies that the progressive system with rates of 15% and 23% for income from self-employment and trade for natural persons is necessary as a category of taxpayers maintain the status of a natural person to avoid tax on dividends as business partners. 

For example, in the services sector, out of about 50,000 taxpayers with the status of a natural person: 6 natural persons declare a net profit of over 100 million ALL each; 36 natural persons declare a net profit of over ALL 30 million each; 119 natural persons declare a net profit of over 14 million ALL each. The net profit over 14 million ALL declared is 4.7 billion ALL. If these taxpayers with such high levels of profit had the status of a legal entity, the tax on the theoretical dividend that would be paid would be 320 million lek;

While in the sectors of production, transport, trade: 91 natural persons declare a net profit each over 14 million ALL per year, a total of 2.3 billion ALL profit. If these taxpayers with such high profit levels had the status of a legal entity, the tax on the theoretical dividend that would be paid would be 160 million ALL; Just by maintaining the legal form as a natural person, the tax on the theoretical dividend that is lost by this group is 0.5 billion ALL per year. 

According to the finance report, the 23% progressive fee provided for self-employed and traders with a net profit over ALL 14 million per year does not harm small business as a whole: 

In the group of Natural Persons who exercise their activity in the services sector, out of over 50 thousand taxpayers, only 161 taxpayers or 0.3% of their total have a net profit over 14 million. They will pay 23% tax, only for profits over 14 million starting from 2023, while for net profits up to 14 million allek they will pay only 15% tax. 
In the group of Natural Persons who exercise their activity in trade, out of over 42 thousand taxpayers, only 65 taxpayers or 0.15% of their total have a net profit over 14 million. They will pay 23% tax for profits over 14 million, while for net profits up to 14 million ALL they will pay only 15% tax. Their taxation starts from January 1, 2029 
In the group of Natural Persons who exercise their activity in the production sector, out of over 12 thousand taxpayers, only 9 taxpayers have a net profit over 14 million. They will pay 23% for the portion of profit above 14 million, while for net profits up to 14 million allek they will pay only 15% tax. Their taxation starts from January 1, 2029. 

In the group of Natural Persons who exercise their activity in the construction sector, out of over 6 thousand taxpayers, only 11 taxpayers have a net profit over 14 million. They will pay 23% for the portion of profit over 14 million, while for net profits up to 14 million allek they will pay only 15% tax. Their taxation starts from January 1, 2029. 
In the group of Natural Persons who exercise their activity in the transport sector, out of over 6 thousand taxpayers, only 4 taxpayers have a net profit over 14 million. They will pay 23% for the portion of profit over 14 million, while for net profits up to 14 million allek they will pay only 15% tax. Their taxation starts from January 1, 2029. 
Taxpayers with very large turnover maintain the status of a natural person mainly to avoid taxes on dividends (8%). There are about 300 businesses with an annual income of over 100 million ALL, which continue to maintain the status of a natural person and pay only tax on profit and not tax on dividends. In order to regulate this phenomenon and close the spaces for avoidance, the progressive tax rate on business income was set at the rate of 23%.

(Source: Monitor)