Over the past few years the corporate income tax legislation has been amended several times. Since January 1 2010 corporate taxation has been governed by the Corporate Income Tax Law (03/L-162), which replaced Law 03/L-113, enacted on January 1 2009.

Company taxation

In addition to corporations and business organisations that are established as legal entities under the Commercial Law, the following entities are subject to the Corporate Income Tax Law:

• business organisations operating with public or socially owned assets;
• not-for-profit organisations; and
• permanent establishments of non-resident persons.

All taxpayers should prepare annual financial statements. For the purposes of declaring and paying corporate income tax, a taxpayer should complete and file the annual tax declaration in which its taxable income and deductible expenses are declared.

The corporate income tax rate is 10% of the taxable profit.

Taxpayers with an annual gross income of €50,000 or less that are not required to, or do not opt to, submit an annual tax declaration and financial statements pay corporate income tax on the gross income, as follows:

• 3% of each quarter's gross income resulting from the activities of trade, transport, agricultural and similar commercial activities, but not less than €37.50 per quarter;
• 5% of each quarter's gross income resulting from the provision of services, professional/vocational activities, entertainment and similar activities, but not less than €37.50 per quarter; and
• 10% of the net rental income for the quarter (gross rental income minus the 10% allowance).

The list of adjustments needed to calculate the taxable profit is quite short and includes:

• the cost of acquiring and improving land;
• expenditure on the acquisition, improvement, renewal and reconstruction of assets that are capitalised, depreciated or amortised;
• any fines, penalties and interest related to such assets; and
• any loss from the sale or exchange of property between related persons.

In general, reserve funds and provisions are not deductible, except for financial institutions. Bad debts are considered to be allowable if certain conditions are met.

The law provides for an exception for accrued expenses which are subject to a withholding tax if the expense is not fully paid by March 31 of the following year. Such expense will be considered to be tax deductible in the year when it is paid.

In addition, the law establishes limits for charitable contributions, which are deductible up to 5% of the taxable income, and representative expenses, which are deductible up to 50% of the amount invoiced, but for no more than 2% of the annual turnover.

The law gives an asset owner depreciation allowances. In case of a finance lease, depreciation may be claimed by the lessee as the person that bears the risk of the loss or destruction of the asset. The law also sets down methods and rates of depreciation of tangible assets and amortisation of intangible assets for fiscal purposes (ie, the straight-line method and the pooling system).

Exceptionally, new assets, machineries and methods of transport purchased between January 1 2010 and December 31 2012 are depreciated at an additional rate of 10%.

Losses may be carried forward for seven consecutive years and deductions from the taxable profit of each year are applied in the order in which they arose. In case of a change of type of business organisation or a change of ownership of more than 50%, the carry-forward of losses will no longer apply.

Cross-border taxation

According to the Corporate Income Tax Law, the tax paid by Kosovo residents for business activities abroad should be considered as a tax credit to the extent of the tax which would have been due if the business had been carried out in Kosovo.

With regard to the creation of a permanent establishment, the definition of a 'permanent establishment' is quite similar to that provided in the Organisation for Economic Cooperation and Development Model Tax Convention on Income and Capital. Exceptionally, the law states that a permanent establishment would be constituted by the supply of any services, including any consultancy services, carried out in Kosovo by a non-resident person or entity through employees or others if such activities continued for a period or periods totalling 90 days or more within any 12-month period.

Foreign corporations that do not create a permanent establishment in Kosovo but render specific services to Kosovo entities exceeding the amount of €5,000 in one tax period are subject to withholding tax at a rate of 5% of the gross amount.

In addition, foreign and domestic corporations are subject to withholding tax for payments made in their favour and consisting of interests, royalties, rent, lotteries and games of chance.

For further information please contact Mirjeta Emini or Andi Pacani at Boga & Associates by telephone (+355 42251050), fax (+355 42251055) or email (memini@bogalaw.com or apacani@bogalaw.com).

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