After 10 years of 10% flat personal income tax rate in FYR Macedonia, the Minister of Finance has recently announced a draft law on progressive personal taxation which will become effective as of 1 January 2019. Aiming at a creation of a more fair tax system, the Ministry of Finance is currently fine-tuning the personal tax reform. The proposed provisions will result in the following main changes to the current approach to personal income tax in the country.
Introduction of 2 tax brackets and rates
A personal income tax rate of 18% will be applied to the portion of income exceeding MKD 90,000 per month (MKD 1,080,000 a year). The amount up to MKD 90,000 per month will continue to be taxed with 10%. Effectively, the tax reform introduces an additional tax bracket taxed with extra 8% for the part of the income exceeding MKD 90,000 per month.
It is expected that for most of the citizens the tax rate will remain 10 percent due to the relatively high threshold for additional personal tax. The Ministry has stated that such threshold was selected because it only affects the highest-earning 1% of the total population.
It is important to note that the above will be applicable to earnings from employment as well as income from pensions, independent activity and royalties.
Change in taxation of income from property rights, rent and capital
Income from industrial property rights, rent (lease) and sublease as well as income from capital, capital gains, gains from games of chance, insurance and other income will be taxed at a single rate of 15% as opposed to the current tax rate of 10%. The new rate will become applicable as of 1 January 2019.
Introduction of taxation of interest
Following multiple delays in introducing taxation on bank interest, interest from deposits exceeding MKD 15,000 a year will be taxed at 15%. However, this provision will only apply as from 1 January 2020 and there are multiple unanswered questions as to how this new tax will be technically implemented. A 15% tax will also be levied on income from securities starting from 2020.
Change in tax base deduction for rental income
Currently, a deduction of 30% of the gross rental income tax base (for furnished units) and a deduction of 25% (for unfurnished units) applies. The percentages of 30% and 25% will be lowered to 15% and 10% respectively starting from 2019.
The new Law on Personal Income Tax is expected to be submitted to the parliament for adoption by the end of 2018 and to become effective as from 1 January 2019, with the exception of the provisions with a delayed date of entry into force.
This reform should provide for fair taxation as a step forward towards building a fair society, strengthening public education, public health services and social welfare, and increasing the standard of living. No changes have so far been announced in the corporate tax regime.
We advise businesses active in FYR Macedonia to seek professional advisory in regards to ensuring compliance with the changes. The amendments will affect all active businesses with employees as they will impact payroll processing and may require HR-related advisory to make sure employment documents such as work contracts are up to date. Companies leasing office space from individuals will also be affected and should carefully review existing lease agreements to evaluate the additional tax burden the amendments may create.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
