Kosovo: Tax laws amended

Recent changes to the corporate and personal income tax rules in Kosovo – in particular, the elimination of withholding tax on dividends – aim to encourage foreign investment in the country. Unless otherwise indicated, the new rules are effective retroactively as from 1 January 2010.


Corporate income tax

Withholding tax on dividends – Dividends received by both resident and nonresident companies are not subject to withholding tax as from 20 February 2010. The previous rate of 10% created issues for foreign investors who were unable to credit the tax against income/profits tax in their home country since Kosovo has only concluded a tax treaty with one country (Albania).

Representation costs – Only 50% of expenses incurred for representation are deductible for tax purposes. The maximum amount of representation expenses may not exceed 2% of annual gross income.

Depreciation of fixed assets – Depreciation of second and third category assets (i.e. all tangible assets, except buildings and other construction structures) acquired on or after 1 January 2010 is determined by applying depreciation rates of 20% and 10% to the individual capital assets (previously applied on a pooled account) under the straight-line method. The depreciation rate for the third category is reduced from 15% to 10%. Assets that were purchased and whose depreciation commenced under the pooling method before the new law became effective may continue to be depreciated under the old rules until the value of the pool equals zero.

Capital goods (assets) with a purchase price of more than EUR 1,000 and less than EUR 3,000 acquired after 1 January 2010 must be placed in a single asset pool and depreciated at a rate of 20% of the value of the assets in the pool, regardless of the asset category in which the goods would be placed.

Repairs and improvements – Amounts expended for repairs or improvements of depreciable assets, excluding day-to-day maintenance, must be capitalized and added to the basis of the assets if the repairs or improvements extend the useful life for at least one year and the amount of the repair/improvement exceeds EUR 1,000. If the repair/improvement is under EUR 1,000, the amount will be treated as an expense in the year paid or accrued. If the repairs/improvements meet the criteria for capitalization, the amount should be capitalized and added to the remaining book value of the capital assets, with the new book value used as the basis for depreciating the asset.

Allowances for new assets – Taxpayers purchasing production lines for plant and machinery, railway inventory and locomotives used for railway transportation, aircraft, ships, heavy transport vehicles, earth moving equipment, bulldozers, scrapers and other heavy vehicles to be used between 1 January 2010 and 31 December 2012 will be entitled to a special deduction equal to 10% of the cost of acquisition of the asset in the year the asset is first put into service. The deduction applies in addition to the normal 10% depreciation deduction. The deduction is granted only if the asset is new or is placed into service in Kosovo for the first time; no deduction is available if the asset is transferred from an existing or a former business in Kosovo.

Tax rate for insurance companies – Insurance companies operating in Kosovo are now subject to tax at a rate of 5% (previously 7%) of the gross premiums accrued during the tax period.


Personal income tax

Elimination of tax on dividends – As with corporate taxpayers, dividends paid to resident and nonresident individuals are not subject to withholding tax on dividends as from 20 February 2010.

Withholding tax on payments to nonresidents – Income attributable to a nonresident of Kosovo as an entertainer (e.g. theatre, motion picture, radio or television artist, singer/musician or athlete) from personal activities carried out in Kosovo are subject to a 5% withholding tax, whether paid directly or indirectly, where the gross compensation from the activities exceeds EUR 1,000 in a tax period.

Income earned by a nonresident entity or individual from services carried out in Kosovo under an agreement (written or oral) with a Kosovo resident is also subject to a 5% withholding tax if the nonresident does not have a permanent establishment in Kosovo and the gross compensation paid exceeds EUR 5,000 in a tax period.

Exempt income – The concept of exempt income for purposes of the personal tax rules is expanded to include the following:

- Interest on financial instruments issued or guaranteed by a public authority of Kosovo, whether paid to residents or nonresidents.
- Income derived by primary contractors and subcontractors, other than a resident, from contracts for the supply of goods and services to the United Nations (including UNMIK), Specialized Agencies of the United Nations, KFOR and the International Atomic Agency, provided the contractors and subcontractors are directly engaged in projects and programs for these organizations. An exemption also applies to income derived from contracts with foreign governments, their organs and agencies, the EU and specialized agencies of the EU, the World Bank, IMF and international inter-governmental organizations for the supply of goods and services in support of programs and projects for Kosovo.
- Education expenses paid by an employer on behalf of an employee provided the expenses are paid directly to a legally recognized educational institution in Kosovo and the employee remains employed with the employer for at least 24 months after completion of the education for which the expenses are paid.
- Scholarships received by an individual to attend an institution of higher learning or trade or a vocational school provided the scholarship is paid directly to the institution and no part of the scholarship is refundable to the student.
- Training expenses paid by an employer for an employee to attend formal training programs to acquire basic skills necessary to perform assigned tasks or update the employee's job-related skills provided the expenses do not exceed EUR 1,000 in the tax period.