On 26th of September 2014, the Republic of Albania and the Republic of Iceland signed a treaty for the avoidance of double taxation and the prevention of tax evasion regarding income tax. This agreement was ratified by both countries and entered into force on the 6th of January 2016. Under the treaty provisions, its general implementation has begun as of the 1st of January 2017.
The treaty is the first of this kind between the two countries. The main objective of the legal act is to avoid income tax double taxation and tax evasion in both countries. The treaty will also be applied to any similar or identical tax that may be imposed in the future by the signing countries.
The agreement creates the legal framework for the information exchange and the cooperation between tax authorities of both countries, as a guarantee for the implementation of the agreement provisions.
The taxes covered in the treaty include personal income tax, corporate profit tax and tax on small business activities in Albania whereas in Iceland it covers the state income tax and the municipalities’ income tax. The competent authorities of both countries will notify each-other for any essential change regarding their tax legal framework.
A permanent establishment, as defined by the Treaty, will include any construction/building/installation project (or related supervisory activities) the duration of which exceeds six months in a twelve month period. The same duration rule is applicable to the provision of services through personnel engaged for such purpose (aggregate duration exceeding six months).
The withholding tax rate for dividends has been defined to be 10% in all cases except in those where there is at least 25% ownership in which case a 5% rate will apply. The standard 10% rate will also apply to interest and royalties payments.
In case a resident of one of the contracting states has income, which in accordance to this treaty’s provisions may be taxed in the other contracting state, than the first contracting state will allow a deduction from the resident’s tax liability. The deduction is equal to the tax amount paid for this specific income in the other state. However, such deduction will in no case exceed the income tax calculated before the deduction.
Albania and Iceland are trying to revive their commercial relations. Albania has signed the Free Trade Agreement with EFTA countries one of which is Iceland. The Double Taxation Treaty will be of additional help in achieving this objective.