In everyday practice, gifting shares is a frequently used mechanism for transferring ownership in a business entity, whether between family members, business partners, or other closely related persons. However, such transactions are often carried out without a thorough legal and tax analysis, potentially resulting in significant consequences for the parties involved. This article examines the treatment of gifts of shares under the tax legislation and the law of obligations of the Republic of Kosovo.
I. Tax Treatment of Gifts in Cash or in Kind
Under Law No. 05/L-028 on Personal Income Tax, gifts constitute taxable income unless expressly exempted by law. Article 14, paragraph 2, of this Law provides:
“Gifts in cash or in kind received by residents shall be included in other income if such gifts exceed the amount of five thousand euros (€5,000) during a tax period.”
Meanwhile, paragraph 3 of the same Article provides a tax exemption only where the gift is made:
“…between spouses, or from a parent to his or her natural or legally adopted child, or from children to their parents, […] regardless of the amount or value of the gift.”
This provision establishes an exhaustive list of exemptions and does not include siblings, grandparents, aunts, nephews, nieces, or other close family members. Although Article 2, paragraph 1.30, defines “related persons” as relatives up to the second degree, this definition does not extend the tax exemption provided under Article 14.3.
Consequently, a gift from a brother or sister exceeding €5,000 is taxable in its entirety, meaning the full value of the gift rather than only the amount exceeding this threshold.
Practical Example:
If an older sister gifts her younger brother 40% of the shares in a company with an actual market value of €80,000, the value of the gift would amount to €32,000.
Since the relationship between siblings does not fall within the exemptions provided under Article 14.3, the entire amount is considered income received by the brother and is subject to taxation.
Applying the progressive tax rates established by law (with a 10% rate applicable to income exceeding €5,000), the approximate tax liability in this case would be:
- Taxable income: €32,000.00
- Tax at 10%: €3,200.00
Therefore, the brother would be required to declare the gift as income and pay approximately €3,200.00 in tax.
II. Tax Valuation of Gifted Shares
The value used to calculate the tax liability is not the nominal value of the shares but their actual market value at the time of the gift.
This value is determined based on the company’s net assets, accumulated profits, and any other factors affecting the economic value of the shares.
The Tax Administration of Kosovo has the right to request financial statements, supporting documentation, or even an independent valuation to determine the accurate value of the shares.
If the value declared in the agreement does not reflect the actual market value, it may be rejected and reassessed for tax purposes.
III. Legal Aspects of the Gift Agreement
Law No. 04/L-077 on Obligational Relationships regulates gift agreements under Articles 536 to 547.
These provisions describe a gift as a unilateral contract through which the donor transfers a right or property to the beneficiary without consideration, subject to the beneficiary’s acceptance.
A gift agreement is valid only if it satisfies the form prescribed by law.
In the case of immovable property and shares registered in official business registers, the agreement must be executed in writing and duly registered.
Under Article 537, a gift becomes valid only upon acceptance by the beneficiary, while Article 540 provides that the donor cannot demand the return of the gift after its delivery, except in cases expressly provided for by law.
Revocation of a gift agreement is possible under certain circumstances.
Pursuant to Article 547, revocation may occur where the beneficiary demonstrates gross ingratitude toward the donor, where the donor falls into serious financial hardship, or where extraordinary circumstances arise that justify the return of the gift.
In practice, using a gift agreement for transactions that are, in substance, property divisions, disguised sales, or settlements between shareholders creates not only tax risks but also legal uncertainty.
IV. Practical Experience and the Importance of Professional Legal Advice
In a case handled by Vokshi & Lata Law Firm, the parties had planned to use a gift agreement to transfer shares between siblings, following suggestions from notaries that this would provide a straightforward procedural solution.
Although the intention was not to avoid taxation but rather to simplify the transaction, our analysis demonstrated that such an approach would result in a substantial tax liability for the beneficiary, as the family relationship in question did not fall within the statutory exemptions.
Following legal consultation and the drafting of an agreement reflecting the true nature of the transaction, the clients avoided unnecessary taxation and the risk of legal uncertainty that could have arisen from incorrectly structuring the transaction as a gift.
Conclusion
Gifting shares is a transaction with clear tax and legal consequences.
Every such transaction should be based on the genuine intention of the parties, documented in accordance with the legal nature of the agreement, and carefully examined from the perspectives of tax law and the law of obligations.
Formalizing a transaction through a gift agreement when it does not constitute a genuine gift creates tax risks and may undermine the parties’ legal protection.
Therefore, in such cases, specialized legal advice is essential to ensure the validity and clarity of the legal transaction.
Author: Florin Lata
