Albania – Luxembourg New Tax Treaty

Starting from 1 January 2026, a new income tax treaty ("DTT") entered between Albania and the Grand Duchy of Luxembourg will be added to the Albanian DTT network. The text of the DTT was approved since 2009, however the administrative arrangements took place and entered into force during 2025. The newly signed Agreement largely reflects the principles of the OECD Model Convention and introduces, among other measures, reduced rates of withholding tax applicable to certain types of cross-border income. The DTT entered between Albania and Luxemburg has been awaited with a high interest from investors to possibly reduce the tax burden in the respective countries. 

Dividend Withholding Tax (Art. 10 of the DTT):

• Reduced Rate for Qualifying Shareholdings: The withholding tax on dividends is set at 5% if the beneficial owner is a company (excluding partnerships) holding at least 25% percent of the payer’s capital.
• Other cases: The withholding tax on dividends shall apply at 10% in all other cases. However, in the case of Albania the standard rate provided in the DTT is not applicable since the domestic tax legislation is more favorable (8% rate applied). 

Interest Withholding Tax (Art. 11 of the DTT):

• Reduced rate: The withholding tax on interest is set at 5%, if the beneficial owner is tax resident in the other State.
• No withholding tax for government authorities or specific entities: No withholding tax would apply in the source country, if the interest involves the State itself, a local authority, a statutory body, or an export financing agency. 

Royalties Withholding Tax (Art 12 of the DTT)

• Reduced rate: The withholding tax on royalty is set at 5%, if the beneficial owner is tax resident in the other State. The reduced rate shall not apply if the beneficial owner of the royalties carries a business or has a fixed office in the State where the royalties come from, and the royalties are tied to that business. The taxation of the income in such cases would be determined based on the Articles dealing with Business Profits or Independent Personal Services. 

Permanent establishment (Art 7 of the DTT)

Under the DTT entered between Albania and Luxembourg a Permanent Establishment (PE) would be generally considered as created where a fixed place of business through which the business of an enterprise is wholly or partly carried on. Based on this DTT, a PE especially includes a place of management, a branch, an office, a factory, a workshop, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

PE for construction activities: A PE would be deemed as created where a building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only where such site, project or activities continue for a period of more than 12 months.

PE for services: A PE would be deemed created even when services are furnished by an enterprise through employees or other personnel engaged by the enterprise for such purposes, including consultancy services, but only where activities of that nature continue within the country for a period of more than 12 months.

Law Nr.10094 dated 12.03.2009 ratifying the “Agreement between the Government of the Grand Duchy of Luxembourg and the Council of Ministers of the Republic of Albania for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital” is published in the Official Gazette No. 42/2009. Notification No. 9845 dated 14.0.2025 of the Ministry for Europe and Foreign Affairs is published in the Official Gazette No. 127/2025.

The provisions of the DTT entered between Albania and Luxembourg shall be effective starting from 1 January 2026.

Application of the DTT provisions in Albania requires an administrative procedure for notification of the Albanian tax authorities. Failure to make the application on time is associated with penalties for late filing up to a certain period, after which the taxpayer loses the right to apply the treaty provisions.

KPMG has extensive experience and technical knowledge in DTT compliance procedures and can fully support you in such compliance procedures.