Despite facing challenges throughout its history, Kosovo has undergone significant transformations in its social and economic structures. The tax system in Kosovo is designed to be straightforward, aiming to cover a broad tax base and offer low taxes that attract foreign investors seeking tax advantages. This article aims to provide an overview of Kosovo’s income tax system, offering valuable information for anyone interested in moving to or investing in Kosovo.

Residency for tax purposes in Kosovo

For tax purposes, a person is determined as a resident if they primarily live in Kosovo temporarily or regularly, spend at least 183 days there within a tax year, or have significant personal, financial, or social connections in Kosovo.

Income Determination

In Kosovo, personal income tax applies to several types of income, such as wages, rental income, earnings from intangible assets, specific interest types (like those from loans, savings accounts, and bonds), replacement income, capital gains, lottery winnings, and pensions. Employment income includes not just wages but also bonuses, per-diems, insurance premiums, debt forgiveness, payment of personal expenses by the employer, and benefits in kind over a certain threshold.

Equity compensation, or any additional compensation provided by an employer, falls under personal income tax rates. Business income from self-employment and income from capital gains, such as from selling real estate or securities, are taxed according to personal income tax rates. However, dividend income is exempt from the personal income tax rate.

Interest income is taxable except for interests from specific sources like the Kosovo Pension Savings Trust, other defined pension funds, and financial instruments issued or guaranteed by Kosovo’s Public Authority.

Rental income from both real estate and equipment is taxable, and if the rental activities form part of economic activities, they are treated as business income. Certain types of income are exempt from the personal income tax, including wages of foreign staff of diplomatic missions and international organizations, wages of persons with disabilities, certain compensations, inherited assets, and educational expenses covered by employers.

Tax Rates for Personal Income in Kosovo

In Kosovo, personal income tax is levied on gross income using progressive rates that vary from 0% to 10%. Incomes up to 960 euros per year are not taxed, reflecting a 0% rate. For annual earnings between 960 euros and 3,000 euros, the tax rate is set at 4%.

Salaries falling within the range of 3,000 euros to 5,400 euros per year are taxed at 8%. Any income exceeding 5,400 euros per year is subjected to the highest tax rate of 10%. This progressive tax structure is designed to tax individuals based on their ability to pay, with higher-income earners contributing a larger percentage of their income in taxes.

For self-employed taxpayers, those earning over €50,000 or voluntarily opting for real income taxation face the same rates specified earlier, while those with annual gross income of €50,000 or less are taxed at 3% or 9%, depending on the nature of their activities. Additionally, these self-employed individuals are required to pay Pension Contributions.

Employee wages are taxed by the primary employer at rates of 0%, 4%, 8%, and 10%, and by the secondary employer at a fixed rate of 10%. Kosovo citizens, whether employees or employers, must contribute 5% of their gross income to Pension Contributions. Both the primary and secondary employers of a Kosovo citizen employee also contribute 5% each on the gross wage towards pension contributions.

Deductions

In Kosovo’s tax framework, taxpayers are allowed to deduct charitable contributions from their taxable income. These contributions can support a variety of causes including humanitarian, health, and education, religious, scientific, cultural, environmental protection, and sports activities, as recognized by the personal income tax law. Such deductions are permitted up to a maximum of 10% of the taxable income before the deduction of these contributions.

An additional deduction of 10% may be available for certain activities as specified by other laws related to sponsorships. To claim a deduction for charitable contributions, taxpayers must provide receipts from the beneficiaries that detail the purpose, amount, and timing of the donations. However, this deduction is only available to taxpayers who pay tax based on actual income received or accrued.

Deadlines

The personal income tax operates on a calendar year basis. However, withholding taxes on wages and pension contributions are conducted monthly, matching with the payment period. Personal Income Tax Annual Filing and Payment Form deadlines are from 1 January to 31 March. Meanwhile, Statement of Pension Contribution and Remittance Form deadlines are from 1 to 15 of each month.

Kosovo is working towards economic stability and higher personal incomes. Despite facing challenges, the country is seeing steady progress, thanks to policy reforms, foreign investments, and a focus on education and entrepreneurship. Before deciding to invest or live in Kosovo, companies and individuals should understand the country’s legal, financial, and tax systems. Our firm brings a wealth of knowledge and experience in international taxation. We invite you to get in touch with us for an introductory meeting, where we can explore how we can assist you in navigating these complexities.