In December 2019, the Ministry of Finance and Economy issued an instruction on VAT refund procedure for foreign donors’ funds to CSOs. With this regulation in place, all bilateral and multilateral agreements ratified by the Albanian Parliament or grant agreements approved by the Council of Ministers, qualify for VAT refund. Also, subjects of VAT reimbursement are sub-granting schemes implemented through intermediary organizations. This is a huge step towards improvement of legal regulation on VAT refund and reflects the results of the advocacy efforts of the sector to this regard. According to the General Directory of Taxation there are 12 certifications issued for VAT reimbursement of IPA projects, but there is no official data on the actual number of VAT reimbursement executed.
CSOs’ activity continues to remain subject to VAT, while goods and services related to social assistance and care, child protection and young people, sport and physical education, and cultural and education, are exempted from VAT. Tax exemption for such goods and services is issued based on certain criteria CSOs should meet and is regulated by government decision.
CSO can carry out economic activity which shall be in line with its mission and does not make the primarily activity of the CSO. The revenues from the economic activity should not exceed 20% of the total annual income of the CSO and are subject to VAT if the amount exceeds the VAT registration limit specified in the Law on Tax Procedures.
Claiming of VAT reimbursement from the CSOs is practically impossible, as they may not fulfil the two minimum conditions of claiming a refund because of the non-continuity of the economic activity of CSOs: (1) having carried forward an amount of tax credit for three successive months, and (2) refund amount claimed must exceed 400,000 ALL (approx. 3,000 EUR).
According to the data received from the General Directory of Taxation, there are 1,562 CSOs registered for VAT reporting. Compared with the MM Report 2018 the number has increased almost by 4 times.
0 – 20 Fully disabling environment20 – 40 Disabling environment
40 – 60 Partially enabling environment60 – 80 Enabling environment
80 – 100 Fully enabling environment
Regarding local taxes, in general there is no differentiated treatment for CSOs, taking in consideration their non-profit nature, mission, financing model, ways of operation, and beneficiaries. Most big municipalities apply the same tax levels for CSOs as for businesses.
With regards to social enterprises and referring to financial terms, based on the Law 65/2016 “For the Social Enterprises in the Republic of Albania” the social enterprise is obligated to use “the entire profit (positive balance) for its development and expansion”, which is taxed according to the Income Tax Legislation.
Financial viability and sustainability remains the weakest aspects of CSOs in Albania. As shown in Figure 3, 28% of the surveyed CSOs have an annual budget of less than 5,000 EUR or have no funds (13% with less than 5000 EUR and 15% with no funds).
Only three organizations have an annual budget higher than 1,000,001 EUR and they are all branches of international organizations, serving also as intermediaries in sub-granting for larger donor institutions.
The 28% of surveyed CSOs that declared an annual budget between 100,001 and 500,000 EUR are organizations that provide social services and assistance to marginalized groups and people with special needs, and 82% of their budget comes from European Union funding schemes and other foreign institutions.
Only 21 out of 152 surveyed CSOs are engaged in economic activity out of which 67% declare to perform the economic activity without any challenges, 38% are faced with excessive administrative requirements to obtain a license, and 29% with complicated accounting rules.
Overall, the surveyed CSOs report unclearness and confusion with interpretation of legal framework on social enterprises and VAT reimbursement procedures.
With regards to fiscal treatment, 67% of the surveyed CSOs declare that they have not been subject to any fiscal benefits. Only 15% of surveyed CSOs, mostly those that provide social services, have benefited from VAT exemption.