Vala Consulting

Sophie Stylianou		Ariana Rozhaja

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

After a package of tax changes that took effect on January 1 2009, reducing among other moves the corporate income tax rate to 10%, new legislation from January 1 2010, provides additional benefits to investors.

The legislation of Kosovo enables foreign physical as well as legal persons to invest directly into the country. 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 physical or legal entities that 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 in Kosovo. Non-residents may face particular challenges yet at the same time benefit under Kosovo's Tax legislation.

Non-residents are subject to tax in Kosovo on their Kosovo source income only, where Kosovo source income is intended to include, among others, income from business activities within the country; 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.

The scope of tax under Kosovo's corporate income tax laws is extended to non-resident persons having a permanent establishment in Kosovo. The term permanent establishment, is in line with the definition provided under the OECD model convention, and includes: any place of management;, branch, office, factory, workshop, mine, oil or gas source, quarry, or any other place of exploitation of natural resources.

In addition, the term also includes any building site, construction, assembly or installation project, or supervisory activity related thereto, if its duration exceeds 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 permanent establishment. The ownership of properties, as well as the provision of insurance services in Kosovo, not including re-insurances, by non-residents also qualifies as a permanent establishment.

The profits allocated to a permanent establishment of a non-resident in Kosovo will be a subject to Kosovo's corporate income tax, at 10%, as of 2009. Equally, such permanent establishment will be liable to meet certain compliance requirements under Kosovo's legislation, namely, to keep proper accounting books and records, and make their tax payments within the timeframes provided under the law.

Kosovo is an investor-friendly country, rich in natural resources, seeking to attract more foreign direct investment based on its transparent tax system, one of the most competitive in the Balkan region.

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, as 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 transfer of property, are tax-free subject to the approval of a written reorganization plan of a taxpayer by the Tax Administration.

Distributions to the shareholders, relating to the shareholders' participation, arising thereof, 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.

Notwithstanding the above, a most important benefit introduced to investors under the revised legislation of Kosovo which entered into effect on January 1 2010, is the fact that tax exempt income is further expanded to also include dividends received by both resident and non-resident taxpayers.

Interest paid to either resident or non-resident taxpayers, equally qualifies as exempt income if paid on financial instruments issued or guaranteed by a public authority of Kosovo.