Major Tax Shift in Albania: When Does Self-Employment Become Employment?

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The Ministry of Finance has updated Instruction No. 26, dated September 8, 2023, regarding income tax, clarifying the tax treatment of self-employed individuals who derive the majority of their income from one or a few clients. This update aligns the reporting system more closely with standard accounting practices and clarifies when taxes should be applied.

Key Changes:

  • Calculation Basis: Previously, tax obligations for self-employed individuals were calculated based on collected income. Now, they are calculated based on invoiced income, meaning taxes are due on invoiced amounts regardless of payment status.​

  • Employment Classification: According to Article 12 of Law No. 29/2023 "On Income Tax," a self-employed individual who earns 80% or more of their income from a single client, or 90% from fewer than three clients, is considered an employee for tax purposes. Their income is thus treated as employment income. This provision does not apply if the self-employed individual provides services exclusively to non-residents or entities without a permanent establishment in Albania; in such cases, the income is considered business income.​

Implications for Taxpayers:

  • Financial Planning: Self-employed individuals who previously planned their taxes based on collected income may need to adjust their financial strategies to ensure liquidity for tax obligations on invoiced amounts.​

Example:

Consider a self-employed individual, "A.B.," operating under economic code J6201 "Computer Programming Activities," who, in 2025, has a gross business income of 4,000,000 lekë. Of this, 3,280,000 lekë (82%) is from a single client, "C.D.," with the remaining 720,000 lekë from five other companies. Tax-deductible expenses for 2025 are 1,000,000 lekë. Additionally, "A.B." has a child under 18 and is the highest earner in the household.​

Tax Treatment:

  • Income Classification: Since 82% of "A.B."'s income comes from one client, they are considered an employee for tax purposes.​

  • Tax Calculation: The 3,280,000 lekë from the primary client is treated as employment income, subject to personal income tax rates. The remaining 720,000 lekë is treated as business income, taxed accordingly.​

  • Reporting: In the annual tax declaration, "A.B." must report the 3,280,000 lekë as employment income and the 720,000 lekë as business income.​

These clarifications aim to ensure accurate tax reporting and compliance for self-employed individuals with concentrated client bases.