Corporate tax in Azerbaijan

Summary

 

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)
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 perma­nent representation.

c) This is a final withholding tax applicable to payments to foreign legal entities.

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 the following:

  • Persons who are performing the function of a permanent estab­lishment of a nonresident legal entity or natural person and who are authorized to conclude contracts on behalf of such nonresi­dent entity or natural person
  • A bureau, office or agency
  • A location where activities are carried out relating to the devel­opment of natural resources
  • The rendering of consultation services
  • A fixed base used for entrepreneurial activities for a cumulative amount of 90 days during any 12-month period

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 and citizens, permanent representations and other types of participations.

Tax rate. All entities operating in Azerbaijan are subject to corpo­rate 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 for­eign 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 multi­plying the company’s revenues for the quarter by the company’s effective tax rate for the prior year. 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. Con se-quently, 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.

Foreign tax relief. Foreign income tax paid by taxpayers in Azerbaijan on income derived from sources outside Azerbaijan may be credited against Azerbaijani tax imposed on the same in – come, limited to the amount of Azerbaijani tax imposed on such income. In determining the amount of the allowable foreign tax credit, it is unclear if a limitation based on the country of source is imposed or if all foreign-source income is pooled.

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 deter­mined by the Central Bank of Azerbaijan.

Statutory norms limit the deductions for certain categories of ex­penses, such as business travel expenses, repair expenses, interest 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 disallow ed except for companies providing therapeutic nourishment items, milk and similar products to their employees. Such deductions will be al­lowed within norms, which have not yet been introduced by the government.

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 aggre­gate. Depreciation rates, which are specified by law, are applied to the aggregate book values for each of the groups. The depre­ciable 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 limita­tion 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.

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

 

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.

Treaty withholding tax rates

Azerbaijan currently considers none of the tax treaties of the former USSR to be in force. 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 sav­ings 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 10 10 10
Croatia 5/10 10 10
Czech Republic 8 5/10 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
Italy 10 10 5/10
Japan 15 10 10
Kazakhstan 10 10 10
Korea (South) 7 10 5/10
Latvia 5/10 10 5/10
Lithuania 5/10 10 10
Luxembourg 5/10 10 5/10
Macedonia 8 8 8
Moldova 8/15 10 10
Montenegro 10 10 10
Norway 10/15 10 10

 

Dividends

%

Interest

%

Royalties

%

Netherlands 5/10 10 5/10
Pakistan 10 10 10
Poland 10 10 10
Qatar 7 7 5
Romania 5/10 8 10
Russian Federation 10 10 10
Saudi Arabia 5/7 7 10
Serbia 10 10 10
Slovenia 8 8 5/10
Switzerland 5/15 5/10 5/10
Tajikistan 10 10 10
Turkey 12 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 countries 10 10 14

Treaties with Jordan, Kuwait, San Marino and Spain are in the ratification stage. Azerbaijan has initialed tax treaties with Denmark, India, Ireland, Israel, Malta, Morocco, Singapore, the Slovak Republic and Sweden. Treaties with Kyrgyzstan and Turkmenistan are in the negotiation stage.