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Impact of the new VAT draft law on foreign investments in Albania

July 2014 - Tax & Private Client. Legal Developments by Drakopoulos Law Firm.

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The Government of Albania has issued the final version of the draft law on Value Added Tax. According to the Minister of Finance, once approved by the Parliament, the new VAT law is expected to enter into force on January 1, 2015 and replace the current law on VAT, as well as all respective regulations. The draft law has been prepared with the support of the European Union, setting as its principal aim to harmonize legislation on VAT with the acquis communautaire, in compliance with the Stabilisation and Association Agreement.

One of the main intentions of the draft law is to remove double VAT taxation for transactions between Albanian and foreign businesses located in any EU member state (according to the "destination" principle).

The draft law provides for several advantages in respect of foreign investments in Albania.

It defines in detail the concept of supply of goods and services, for which VAT shall apply, by clarifying the ambiguity of current legislation, which has often required interpretation by tax authorities, in particular with regard to the place of transaction.

The new draft law defines the place of supply of services by distinguishing, in compliance with the Council Directive 2006/112/EC as amended, whether the services are supplied to taxable or non-taxable persons. Thus, the place of supply of service is deemed to be Albania in case that:

-          The customer is a taxable person in Albania, where they have established their business or have a fixed establishment (i.e. in business-to-business transactions, the place of supply of services shall be where the customer is located);

-          The supplier is a taxable person in Albania, where they have established their business or have a fixed establishment, provided that the customer is a non-taxable person (i.e. in business-to-consumer transactions, the place of supply of services shall be where the supplier is located).

Exceptions to the above rule apply for the supply of services related to immovable property, transport, cultural and sports events, restaurants and electronically supplied services to non-taxable persons.

Furthermore, the current legislation stipulates that a non-resident taxable person, who supplies services in Albania and is thus subject to VAT in Albania, is obliged to appoint a tax representative for payment of VAT in Albania. However, under the new draft law, foreign companies are not required to appoint a tax representative in Albania, neither when they have registered branches in Albania, nor when services are provided to a taxable person in Albania.

The draft law provides for exemptions from VAT in certain activities of general interest, including postal services, supply of medications and health services provided by public and private institutions, education, insurance and reinsurance services, media, except for advertising services in print or electronic media, which will no longer be exempt from VAT. 

On the other hand, the new VAT draft law has lifted the exemptions provided under current law for the supply of iron and cement to companies building hydropower stations, which use them as raw material for the construction, based on respective agreements. Also, the supply of goods and services related to the stages of research and development of hydrocarbon operations will become subject to VAT.

In comparison to the current VAT law, which has been regularly amended to clarify legal semantics and close loopholes, leading often to arbitrary interpretations from tax authorities, the new VAT draft law constitutes a complete and inclusive legislation, unifying Albanian and EU tax systems and offering legal certainty and security for businesses, thus making Albania a more attractive jurisdiction for foreign investors.