The income tax treaty between Albania and Israel entered into force on 29 December 2021. The treaty, signed 3 May 2021, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Albanian income taxes, including corporate profits tax, personal income tax, and capital gains tax from the alienation of the movable or immovable property, and the tax on small business activities. It covers Israeli income tax and company tax (including tax on capital gains), and the tax imposed on gains from the alienation of property according to the Real Estate Taxation Law.

Residence

If a person other than an individual is considered resident in both Contracting States, the competent authorities of both States will determine its residence for the purpose of the treaty through mutual agreement, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. If no agreement is reached, such person shall not be entitled to any relief or exemption from tax provided by the treaty except to the extent and in such manner as may be agreed upon by the competent authorities of the Contracting States.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services in a Contracting State through employees or other engaged personnel if the activities last more than 12 months.

Withholding Tax Rates

• Dividends - 5% if the beneficial owner is a company that has directly held at least 25% of the paying company's capital throughout a 365-day period that includes the day of payment; otherwise, 15%
• Interest - 10%, with an exemption for interest paid by or to the government of a Contracting State, a political subdivision, a local authority, or Central Bank
• Royalties - 5%

Note, Article 10 (Dividends) also provides certain rules for distributions made by a real estate investment fund registered in a Contracting State to a resident of the other State. This includes that such distributions may be taxed in accordance with the laws of the first-mentioned State, but if the resident of the other State directly holds less than 10% of the fund, the rate of tax is limited to 15%

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

• Gains from the alienation of immovable property situated in the other State;
• Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State;
• Gains from the alienation of shares or comparable interests if, at any time during the 365 days preceding the alienation, the shares or comparable interest derived more than 50% of their value directly or indirectly from immovable property situated in the other State.

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State, unless the alienator was not the beneficial owner of the alienated property during the entire period for which the gains are calculated.

Double Taxation Relief

Both countries generally apply the credit method for the elimination of double taxation.

Limitation on Benefits

Article 26 (Limitation on Benefits) includes the general provision that a benefit under the treaty shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the treaty.

Article 26 also includes the provision that where:

• an enterprise of a Contracting State derives income from the other Contracting State and the first-mentioned State treats such income as attributable to a permanent establishment of the enterprise situated in a third jurisdiction, and
• the profits attributable to that permanent establishment are exempt from tax in the first-mentioned Contracting State,

the benefits of the treaty shall not apply to any item of income on which the tax in the third jurisdiction is less than 60% of the tax that would be imposed in the first-mentioned State on that item of income if that permanent establishment were situated in the first-mentioned State. In such a case, any income subject to this provision shall remain taxable according to the domestic law of the other State. However, this will not apply if the income derived from the other State emanates from, or is incidental to, the active conduct of a business carried on through the permanent establishment (other than the business of making, managing or simply holding investments for the enterprise's own account, unless these activities are banking, insurance or securities activities carried on by a bank, insurance enterprise or registered securities dealer, respectively).

Effective Date

The treaty applies from 1 January 2022.