Kosovo

Eylem Philippou and Faton Lekaj
Eurofast
Kosovo

Eylem Philippou and Faton Lekaj of Eurofast explore Kosovo's young, but developing tax system.

Kosovo, with a population of about two million people, covers an area of 10,877 km². It is situated in the south eastern part of Europe and borders with Serbia to the north, Montenegro to the west, the Former Yugoslav Republic of Macedonia to the south-east, and Albania to the south.

It has a fairly young tax system, having its first state taxes and duties introduced in 1999.

Kosovo is not yet a member of the UN ,however its independence has been recognised by 75 UN member states and the Republic of China (Taiwan).

Kosovo is becoming one of the most competitive countries within the Balkans by continuously enhancing its business environment and attracting foreign direct investment.

Kosovo's legislation enables foreign physical as well as legal persons to invest directly into Kosovo. Accordingly, non-resident companies do invest in the country directly or indirectly via companies incorporated in Kosovo. Companies incorporated in Kosovo are subject to a 10% corporate income tax on their worldwide income, subject to the deduction of any allowable expenses and tax exempt income.

Non-residents are the physical or legal persons which are not Kosovo residents. A legal person may be classified as a Kosovo resident if it is established in Kosovo or has its place of effective management inthe country.

Non-residents are subject to tax in Kosovo only on income sourced in Kosovo, where Kosovo source income is intended to include, among others, income from business activities; income from the use of property in the country, whether movable, immovable, or intangible; gains deriving from the disposal of property, whether movable or immovable, and securities situated in Kosovo; and generally any income resulting from economic activity within the country.

Kosovo's corporate income tax is applicable to a permanent establishment of a non-resident person in Kosovo. The term permanent establishment (PE), is in line with the definition provided under the OECD model convention, and includes:

any place of management;
any branch;
any office;
any factory;
any workshop;
any mine; and
any oil or gas source, quarry or other place of exploitation of natural resources.

The term PE also includes any related building site, construction, assembly or installation project or supervisory activity if its duration is more than 183 days. The provision of any service by non-residents through personnel within the territory of Kosovo, which lasts for over 90 days within 12 months also constitutes a PE.

Permanent establishments are to keep proper accounting books and records, and make their tax payments within the timeframes provided under the Kosovo's law.

Withholding taxes in Kosovo

Previously withholding tax at a rate of 10% was levied on dividends paid to non-residents. As from February 20 2010 this provision was abolished and there is no withholding tax applicable on dividends paid to a resident or non-resident persons.

10% withholding tax applies to interest and royalties paid to resident and non-resident persons.

In addition, a 9% withholding tax applies to rental payments made to resident and non-resident persons.

Likewise, income earned, as a result of agreements or contracts, whether written or verbal made between a Kosovan person/entity and a non-resident person/entity, from services performed in Kosovo and the gross compensation paid to a non-resident exceeds €5,000 ($7200) in any tax period, is subject to a 5% withholding tax if the non-resident person/entity has no permanent establishment in Kosovo (Article 31 Law on Corporate Income Tax- Law Nr.03/L- 162).

Capital gains in Kosovo

Kosovo's tax legislation defines capital gains as incomes that are realised from the sale or other disposition of capital assets including securities and real-estate. In Kosovo, capital gains are taxed as business income at 10%. The gross income of capital gains does not include the gains from the sale of the Kosovo Pension Savings, Trust or other pension fund. Determined as a capital gain, is the positive difference between the sales price of the capital asset and the cost of the capital asset. In line with this, the cost of the capital asset is the amount that the taxpayer paid for the acquisition of the asset, including expenses incurred in acquiring the asset that have not been previously expensed, increased by the cost of improvements and reduced by the depreciation and other expenditures allowable under the Corporate Income Tax Law of Kosovo (LAW Nr.03/L- 162).

VAT in Kosovo

The standard rate of VAT in Kosovo is 16%.

All persons, whether legal or physical, are obliged to register with the VAT authorities if:

They are active in the provision of goods and services and their turnover is in excess of €50,000 per calendar year (registration should be effected within 15 working days commencing from the day the €50,000 threshold is reached);
They import and export goods and services (including from/to Serbia and Montenegro).

VAT is imposed on all supplies of goods and provisions of services.

Zero-rated transactions include:

Supply of goods and services in connection with the international transport of goods and passengers.

Exempted transactions:

Supply of medical services, pharmaceutical products, or medical and surgical instruments and apparatus
Supply of public education services and religious services
Supply of financial services
Transfer of title or lease of land or residential property.

When registering a person for VAT, the Tax Administration issues a registration certificate containing a unique taxpayer identification number. The registration takes effect on the date stated on the registration certificate.

Double tax treaty network

Kosovo has only one double tax treaty that is in force which is signed with Albania. Accordingly withholding taxes on dividends, interests and royalties are set at a rate of 10%.

Recently, Kosovo and Germany have agreed on the continuation of a Germany and Former Yugoslavia double tax treaty on income and capital to be applicable between the two countries. Accordingly, an exchange of notes has been signed which entered into force on June 10 2011. Likewise, according to the decree published in the Dutch Official Gazette on September 30 2009, in relations with Kosovo, the Netherlands continues to apply the former double tax treaty for capital and income of February 22 1982 entered into with the Former Republic of Yugoslavia.

A new treaty has been initialed between Kosovo and the Czech Republic in Prishtina on June 30 2011. The treaty is yet to be signed.

Finally, Kosovo and FYR Macedonia have signed a new treaty on April 6 2011, which will come into force after the ratification by both parties.

Advantages of legal simplicity

Apart from its most favourable corporate income tax rate, its simple and straightforward legislation on foreign investments, and skilled and motivated labour force, Kosovo has also adopted simple and speedy business registration procedures. European investors can also benefit from the eliminated currency exchange risks, given that Kosovo has adopted the Euro as its official currency.

The tax incentives introduced are increasing and among others include provisions on tax free reorganisations. Reorganisations arising as a result of bankruptcy, a merger, acquisition or otherwise, leading to the transfers of property, is tax free subject to the approval of a written reorganisation plan of a taxpayer by the tax administration. Distributions to the shareholders, relating to the shareholders' participation, are outside the scope of taxable income at the level of the shareholder. The receiving party may in certain cases also benefit from loss carry forward.

Eylem Philippou (eylem.philippou@eurofast.eu) of Eurofast Taxand, Cyprus and Faton Lekaj (faton.lekaj@eurofast.eu), Eurofast Global, Prishtina Office, Kosovo