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EY
+994 (12) 490-7020
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Business Tax Advisory
Arzu Hajiyeva
+994 (12) 490-7020 Mobile: +994 (50) 335-1964 Email: arzu.hajiyeva@az.ey.com
Because of the rapidly evolving economic situation in Azerbaijan, readers should obtain updated information before engaging in transactions.
A. At a glance
Corporate Profits Tax Rate (%) 20
Capital Gains Tax Rate (%) 20 Permanent Representation Tax Rate (%) 20 Withholding Tax (%)
Dividends 10 (a)
Interest or Financial Lease Payments 10 (b) Royalties from Patents, Know-how, etc. 14 (a) Management Fees 10 (c) Income from International Transportation and Telecommunication Services 6 (c)
Insurance Payments 4 (c) Payments of other Azerbaijani-Source Income to Foreign Companies 10 (c) Payments to Countries and Territories with a Preferential Tax Regime 10 (c)(d) Transfers of Funds to Accounts Created in the Electronic Wallets of Nonresidents 10 (c)(e) Branch Remittance Tax 10 (c)
Net Operating Losses (Years)
Carryback 0
Carryforward 5
(a) These are final withholding taxes applicable to payments to Azerbaijani and foreign legal entities.
(b) This is a final withholding tax applicable to payments to Azerbaijani and foreign legal entities, excluding Azerbaijani banks and leasing entities, and foreign banks and leasing entities operating in Azerbaijan through a perma nent representation.
(c) This is a final withholding tax applicable to payments to foreign legal enti ties.
(d) Direct or indirect payments made by residents of Azerbaijan or permanent establishments of nonresidents located in Azerbaijan to persons incorporated or registered in jurisdictions with a preferential tax regime or payments made to bank accounts located in such jurisdictions are considered to be income from an Azerbaijani source and are subject to a 10% withholding tax on the gross amounts of the payments. The list of jurisdictions with a preferential tax regime is approved by the President of Azerbaijan on an annual basis. Certain
payments are specifically excluded from the list of payments considered to be made to the countries and territories with preferential tax regimes (princi pal amount of a loan, dividends derived from investments to Azerbaijan, interest from deposits held in financial institutions of Azerbaijan and pur chase of bonds, and others).
(e) Transfers of funds to accounts created in the electronic wallets of nonresi dents (online payment systems) by residents of Azerbaijan not registered for tax purposes are subject to a 10% withholding tax. This tax must be withheld by a local bank, branch of a foreign bank located in Azerbaijan or national postal operator from the residents making the transfers.
B. Taxes on corporate income and gains
Corporate profit tax. Enterprises carrying on activities in Azerbaijan, including enterprises with foreign investment, joint ventures and legal entities operating through a permanent representation, are subject to tax.
Azerbaijani resident legal entities are subject to tax on their worldwide income. For tax purposes, Azerbaijani resident legal entities are entities incorporated in Azerbaijan and entities that have their effective management located in Azerbaijan, including 100%-owned subsidiaries of foreign companies.
Nonresident legal entities are subject to tax on profits earned through a permanent representation only. A permanent representation is defined as a place where the entrepreneurial activities of a nonresident are carried out in Azerbaijan for a period amount ing to or exceeding 90 days in the aggregate. The term permanent representation includes, but is not limited to, the following:
• Persons who are performing the function of a permanent estab lishment of a nonresident legal entity or a person acting on their behalf, accumulating a client base for their benefit and organizing works with their clients, entitled to prepare and conclude contracts in the name thereof and commonly carrying out the enlisted responsibilities
• A place of management, a bureau, an office, a branch or an agency
• Construction and repair sites, installation, commissioning or assembly object, as well as supervisory activities associated therewith
• A place of exploration, exploitation or extraction of natural resources or drilling equipment or a vessel used for such pur poses, as well as supervisory activities over such items
• A place where the business activity of a nonresident is carried out, including a place where goods are produced or services, including consulting services, are performed
• A person who acts in Azerbaijan on behalf of a nonresident and who has and habitually exercises an authority to negotiate and conclude contracts on behalf of that nonresident
The Azerbaijan Law on the Protection of Foreign Investments allows foreign investment in various forms, including investment through 100% foreign-owned subsidiaries, share participations in joint stock companies and in joint ventures with Azerbaijani legal entities, individuals and establishments of branches and represen tative offices.
Tax rate. All entities operating in Azerbaijan are subject to corpo rate profit tax at a rate of 20%.
Capital gains. Capital gains are included in taxable income and taxed at the regular rate.
Administration. The tax year is the calendar year. The tax year for newly created enterprises or permanent representations of for eign legal entities runs from the date of formation through 31 December of the year of formation.
All entities operating in Azerbaijan must make advance payments of corporate profit tax by the 15th day following the end of each quarter. Each advance payment must equal at least one-quarter of the profit tax liability for the prior tax year. Alternatively, the amounts of the advance payments may be determined by multi plying the company’s revenues for the quarter by the company’s effective tax rate for the prior year. Advance tax payments for corporate profit tax of taxpayers that did not have an activity or taxable profit (income) in the prior tax year is calculated only based on the second option. The effective tax rate is equal to tax as a percentage of revenues.
If, at the end of the tax year, it is determined that the total of the advance payments exceeds the tax due for the year, the excess may be credited against future tax obligations or refunded. In practice, however, the tax authorities rarely, if ever, issue refunds. Consequently, entities generally credit overpayments against future taxes.
Dividends. Dividends paid are subject to income tax withholding at a rate of 10%. This is considered a final tax, and companies do not include the dividends in taxable profits. An allocation to a shareholder as a result of the liquidation of a company of its share of undistributed net profit or any asset sourced from such undis tributed profit is also treated as a dividend distribution.
Foreign tax relief. Corporate income taxes paid by residents of Azerbaijan in foreign countries on their income derived from those foreign countries may be credited against Azerbaijani profit tax imposed on the same corporate income. However, the amount credited may not exceed the tax calculated on such income under the tax legislation of Azerbaijan.
C. Determination of trading income
General. Taxable profit is determined by computing the profit or loss from business activities and then adding income from non trading operations, such as leasing income and capital gains, but excluding dividends received. Income received in foreign currency is converted into manats (AZN) at the daily exchange rate deter mined by the Central Bank of Azerbaijan.
Statutory norms limit the deductions for certain categories of expenses, such as business travel expenses, repair expenses, inter est paid on foreign borrowings and interest paid between related parties. Expenses for meals and entertainment as well as for the providing of food and housing to employees are disallowed except for companies providing therapeutic nourishment items, milk and similar products to their employees. Such deductions are allowed within norms approved by the Cabinet of Ministers.
Foreign legal entities doing business through a permanent representation in Azerbaijan are taxed on actual profits. If actual profits cannot be determined, the tax authorities may determine taxable profits based on either income or expenses, with a deemed profit margin of 20%.
Tax depreciation. Fixed assets, other than buildings, are subject to depreciation by a group method. Under this method, fixed assets are allocated to groups, and the groups are depreciated in aggre gate. Depreciation rates, which are specified by law, are applied to the aggregate book values for each of the groups. The depre ciable balance for a group is reduced by the depreciation accrued for the year by the group. If any assets of a group are sold during the year, the depreciable balance of the group is reduced by the residual value of such assets. The profit or loss on the sale of such assets is separately determined.
An acquisition of assets under a finance lease is treated as a loan from the lessor to the lessee and a purchase of assets by the lessee. The lessee may then claim depreciation on the assets.
Relief for losses. An enterprise incurring a loss in a tax year may carry forward the loss to the following five years, without limita tion on the amount, to offset the profit in such following years.
Groups of companies. There are no provisions permitting related enterprises to offset profits and losses among members of a group.
D. Other significant taxes
The following table summarizes other significant taxes.
Nature of tax Rate (%)
Value-added tax (VAT), on goods sold and services rendered, in Azerbaijan; the tax law contains specific rules for determining when services are deemed to be provided in Azerbaijan; Azerbaijani taxpayers that make payments to entities that are not registered taxpayers in Azerbaijan for services provided in Azerbaijan must calculate VAT on the payments 18 Assets tax, on the annual average net book value of fixed assets or the market price of the asset if the insurance value of assets exceeds the net book value 1 Import tariffs 0 to 15
E. Miscellaneous matters
Foreign-exchange controls. The manat (AZN) is a non-convertible currency outside Azerbaijan. Enterprises may buy or sell foreign currency through authorized banks or foreign-exchange offices in Azerbaijan.
To receive foreign-currency income in Azerbaijan, an enterprise must obtain a license issued by the Central Bank of Azerbaijan.
Transfer pricing. Recent legislative amendments to the Tax Code of the Republic of Azerbaijan introduced transfer-pricing rules, effective from 1 January 2017. These rules are conceptually based on the arm’s-length principle outlined in the transfer-pricing
guidelines developed by Organisation for Economic Co-operation and Development (OECD). The new rules apply to Controlled Transactions, as defined in the rules. The following are Controlled Transactions:
• Transactions between residents of Azerbaijan and nonresident related parties of such residents, as well as between the same residents and any of their establishments, branches or other subsidiaries located in another country or territory
• Transactions between permanent establishments of nonresidents and such nonresidents, as well as representative offices, branches and other establishments of such nonresidents in other countries and any other persons located in other countries that are related parties of such nonresidents
• Transactions between residents of Azerbaijan and/or permanent establishments of nonresidents in Azerbaijan and persons incorporated or registered under the laws of the jurisdictions recognized as preferential tax regime countries under the laws of Azerbaijan
• Transactions between a resident of Azerbaijan or a permanent establishment of a nonresident in Azerbaijan and an unrelated nonresident party if the following conditions are met:
The transaction involves sales commodities traded on inter national commodity exchanges.
The total turnover of a resident of Azerbaijan or a perma nent establishment of a nonresident in Azerbaijan exceeds AZN30 million and the share of a transaction with any nonresident exceeds 30% of total revenue or expenses, respectively.
Except for the last two abovementioned listed transactions, Controlled Transactions are subject to reporting requirements if the annual turnover of transactions per each counterparty exceeds AZN500,000 (approximately USD294,100).
For the last two abovementioned listed transactions, there is no annual turnover threshold for the reporting requirement. Therefore, they should be reported regardless of the annual turn over. Reporting is achieved through the submission of a Notification on Controlled Transactions by 31 March of the year following the reporting year. The taxpayers must submit documentation on request of the tax authorities. There is no specifi cally prescribed form for documentation.
Controlled Transactions can be subject to review by the tax authorities largely based on arm’s-length principles assuming a comparability analysis under five transfer-pricing methods that are outlined in OECD transfer-pricing guidelines and recognized in local transfer-pricing rules, subject to certain specific provi sions. These provisions in the local transfer-pricing rules must be considered while performing the comparability analysis.
If the tax authorities make a price correction during the on-site tax audit, the additional tax accrual could be subject to 50% financial sanction.
Country-by-country reporting. Effective from 1 January 2020, constituent entities of a Multinational Enterprise Group (MNE Group) that are residents of Azerbaijan should report their opera tions in the established form to the tax authorities for country-bycountry reporting purposes. An MNE Group is a group of two or
more enterprises that are resident in different jurisdictions or a group that includes an enterprise resident in one jurisdiction that carries out business activities through a permanent establishment located in another jurisdiction. A constituent entity of an MNE group consists of the entity and its subsidiaries, affiliates, branches and representative offices. Reporting obligations are imposed on constituent entities of MNE Groups whose overall income within a financial year exceeds EUR750 million.
F. Treaty withholding tax rates
Azerbaijan currently considers none of the tax treaties of the former USSR to be in force, except for the tax treaty between the USSR and Japan. This treaty is kept in force based on a separate exchange of diplomatic notes between the Ministries of Foreign Affairs and ratification by the Azerbaijan parliament. Azerbaijan has entered into tax treaties with various countries.
The withholding rates under Azerbaijan’s ratified treaties are listed below. Because of recent reductions in domestic withholding tax rates, the tax treaties may now specify rates that are the same as, or in excess of, domestic rates and, consequently, offer little or no sav ings with respect to withholding taxes. The rates in the table reflect the lower of the treaty rate and the rate under domestic tax law.
Dividends Interest Royalties % % %
Austria 5/10/15 10 5/10
Belarus 15 10 10 Belgium 5/10/15 10 5/10
Bosnia and Herzegovina 10 10 10
Bulgaria 8 7 5/10
Canada 10/15 10 5/10
China Mainland 10 10 10 Croatia 5/10 10 10
Czech Republic 8 5/10 10
Denmark 5/15 8 5/10
Estonia 5/10 10 10
Finland 5/10 10 5/10
France 10 10 5/10
Georgia 10 10 10 Germany 5/15 10 5/10 Greece 8 8 8
Hungary 8 8 8
Iran 10 10 10
Israel 15 10 5/10
Italy 10 10 5/10
Japan 15 10 10
Jordan 8 8 10
Kazakhstan 10 10 10
Korea (South) 7 10 5/10
Kuwait 5/10 7 10
Latvia 5/10 10 5/10
Lithuania 5/10 10 10
Luxembourg 5/10 10 5/10
Malta 8 8 8
Moldova 8/15 10 10
Montenegro 10 10 10
Dividends Interest Royalties % % %
Netherlands 5/10 10 5/10
North Macedonia 8 8 8
Norway 10/15 10 10
Pakistan 10 10 10
Poland 10 10 10
Qatar 7 7 5
Romania 5/10 8 10
Russian Federation 10 10 10
San Marino 5/10 10 5/10
Saudi Arabia 5/7 7 10
Serbia 10 10 10 Slovenia 8 8 5/10
Spain 5/10 8 5/10
Sweden 5/15 8 5/10
Switzerland 5/15 5/10 5/10
Tajikistan 10 10 10
Turkey 12 10 10
Turkmenistan 10 10 10 Ukraine 10 10 10
United Arab Emirates 5/10 7 5/10
United Kingdom 10/15 10 5/10
Uzbekistan 10 10 10
Vietnam 10 10 10
Non-treaty jurisdictions 10 10 14