Azerbaijan Oil and Gas Taxation Guide Azerbaijan Oil and Gas / Taxation Guide

02 Azerbaijan Oil and Gas / Taxation Guide

Introduction 04 Azerbaijan’s oil and gas sector: the legal framework 06 Taxation in Azerbaijan 07 PSA taxation 08 MEP and SCP taxation (HGA taxation) 09 Statutory taxation 10 Contacts 18

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Azerbaijan is one of the world’s oldest The exchange rate used hereunder, Azerbaijan oil-producing countries and is a crucial is AZN 1.7 for USD 1 in accordance with oil and gas supplier in the Caspian Sea the exchange rate set by the Central Bank region. Its largest hydrocarbon basins of the Azerbaijan Republic as of 30 July Introduction are located offshore in the Caspian Sea. 2018. One of the first and largest development and production areas in the country are Export routes the Azeri and Chirag fields and the Deep Azerbaijan currently operates the following Water Portion of the Gunashli Field (ACG) export pipelines: in Azerbaijan’s Sector of the Caspian •• The Baku-Tbilisi Ceyhan pipeline (BTC) Sea oilfield, which was commissioned is used to transport the oil produced in 1994. Azerbaijan’s Government and at ACG and condensate from Shah Deniz, contractors of the State Oil Company mostly to Georgia and Turkey. Crude of the Republic of Azerbaijan (SOCAR) oil and condensate from Turkmenistan signed an amendment to the existing and Kazakhstan are also transported ACG Production Sharing Agreement (ACG through BTC. BTC has been in operation PSA) on 14 September 2017 to conduct since June 2006 and its current capacity further development of ACG until 2050. of is 1.2 million barrels per day.4 The investment potential of the project is estimated at over USD 40 billion.1 •• The South Caucasus pipeline (SCP) is a part of the Southern Gas Corridor Since the signing of the ACG PSA in 1994, project, which is aimed at diversifying about 440 million tonnes of oil have energy supplies in Europe. Gas from Shah been produced and a similar volume can Azerbaijan key facts3 Deniz is exported to Georgia and Turkey be produced potentially. The current through SCP, too. With the completion Population: total oil production of Azerbaijan of Shah Deniz 2 gas exports through the is approximately 36.7 million tonnes per 9,898,100 SCP will exceed 20 bcma. 5 year (according to the official data for 2017). Territory: •• The Trans-Anatolian gas pipeline (TANAP) Azerbaijan’s role as a gas production and is also a part of the Southern Gas 86,600 square kilometres export hub is also growing. The Shah Deniz Corridor project. It will transport gas field is located in the Caspian Sea offshore Neighbouring states: produced at Shah Deniz 2 and other Azerbaijan. It was discovered in 1999 Caspian deposits to Turkey and Europe. Russia, Iran, Turkey, and has an area of approximately 860 TANAP will reach its peak capacity Georgia, Armenia square kilometres. Its estimated reserves of 31bcm by 2026.6 hold approximately one trillion cubic Titular nation: metres of gas. Shah Deniz 1 is the first •• The Trans-Adriatic Pipeline (TAP) is the Azerbaijani (85 percent) phase of the field’s development, where European leg of the Southern Gas gas has been produced since 2006. The Corridor, which will also be used to export Ethnic minorities: second phase, Shah Deniz 2 is expected gas produced at Shah Deniz 2 to Europe. Russian, Lezghi, to produce 16 billion cubic meters of gas TAP's initial capacity is 10 bcma.7 Talysh, Tatar per year (bcma) in addition to the current •• The Western Route Export Pipeline Shah Deniz’s production. Once Shah Deniz Capital: (WREP) is used to transport crude oil 2 is up and running, the total production from offshore production areas to the Baku (pop. 2,262,600) from Shah Deniz field may reach Supsa terminal on the Georgian coast 26 bcma of gas and up to 120,000 barrels Other main cities: of the Black Sea. Eight million barrels of condensate a day.2 of oil were exported through WREP in the Ganja (pop. 332,600) Azerbaijan was the first country of the first quarter of 2018.8 Sumgait (pop. 341,200) Commonwealth of Independent States (CIS) •• The Northern Route Export Autonomy: to adopt a fiscal regime, allowing a wide Pipeline (NREP) is used to transport use of production sharing agreements The Nakhichevan Azerbaijan’s crude oil via Russia (PSA or PSAs) to attract inward investment Autonomous Republic to Novorossiysk (a Russian Black Sea to the onshore and offshore fields in the (pop. 452,800) port). Its maximum throughput capacity Caspian Sea. is 105,000 barrels a day.9 04 Azerbaijan Oil and Gas / Taxation Guide

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Azerbaijan’s oil and gas sector: the legal framework

In accordance with the legislation Tax Code of Azerbaijan, ownership of all In June 2000, the first Tax Code of the Republic of Azerbaijan (the Tax Code) was petroleum resources existing ratified by Milli Majlis (the Parliament), in their natural state in the coming into force on 1 January 2001. With a few exceptions, the Tax Code is the only underground and surface strata document governing taxation in Azerbaijan. (including the portion of the However, Article 2.7 of the Tax Code establishes the precedence of PSAs over Caspian Sea under the jurisdiction the provisions of the Tax Code. of Azerbaijan) is vested in the state PSAs of Azerbaijan. The vast majority of oil and gas contracts signed in Azerbaijan to date were negotiated based on PSAs. Each PSA has Several international oil the status of a separate law and establishes consortiums are engaged in contractual relations between the foreign operating companies and SOCAR the exploration and production in relation to the development of a specific activities in Azerbaijan’s sector of oil and gas field. the Caspian Sea and in onshore Although the terms of each PSA are unique, exploration. Almost all offshore all current PSAs are similarly structured and contain many standard clauses and consortiums operate under provisions. These include: PSAs; however, there are several •• The rights and obligations of the parties risk service agreements (“RSAs”) •• The contract area signed for the new exploration •• Development and production period and production areas. •• Recovery of exploration costs and sharing of production There are substantial taxation •• Taxation differences between the PSA and •• Bonus payments non-PSA activities as the terms of a PSA typically include substantial tax reliefs for investors.

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Taxation in Azerbaijan

Azerbaijan’s tax system comprises three alternative taxation regimes: the statutory tax regime governed by the Tax Code, the tax regime established by existing PSAs, and the tax regime established by the two existing Host Government Agreements (HGAs).

The HGAs on BTC (Baku-Tbilisi-Ceyhan) and SCP (South Caucasus Pipeline) signed by the Government of Azerbaijan and Main Export Pipeline (MEP) Participants provide for different taxation rules.

Below is a general overview of these taxation regimes.

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Taxation in Azerbaijan PSA taxation

Currently, there are more than 20 PSAs 1. Profit tax According to new PSAs and RSAs, a foreign signed and ratified in Azerbaijan. PSAs Under a PSA, the contractor carrying out subcontractor with legal presence in the contain certain provisions governing business related to petroleum operations Republic of Azerbaijan must pay profit tax taxation. In addition, detailed taxation in Azerbaijan, should pay a profit tax. in accordance with the provisions of the Tax procedures are set out in tax protocols The rate is negotiable and varies from Code. to PSAs. A PSA is signed by the Government 20 percent to 32 percent. 4. Taxation of employees of the Republic of Azerbaijan, represented The contractor should submit its financial The personal income tax of the local by SOCAR, and a Contractor(s) – a well- statements and a profit tax return employees is calculated in accordance with known foreign oil & gas company. Also, (prepared exclusively in US dollars) for each the tax legislation. The personal income tax PSAs set the taxation rules for foreign calendar year, together with an appropriate of foreign tax residents is calculated only subcontractors, who perform work auditor's report, to the tax authorities on income earned as a direct result of their or render services in connection with PSAs. by the dates established in the PSAs. employment in the Republic of Azerbaijan. Foreign employees who do not become tax 2. VAT residents are not liable to pay Azerbaijani Contractors, operating companies, local and personal income tax. foreign subcontractors are exempt from VAT with a zero percent rate on petroleum- 4.1 Tax Residency related activities. These activities include: Usually, a PSA provides for three tax residency criteria. Normally, an expatriate •• Supply of goods, works, and services, employee who stays in Azerbaijan for to or by them ordinary business purposes becomes •• Exports of petroleum products a tax resident if he or she spends more than 30 consecutive days in the country •• Imports of goods, works, and services in a calendar year. Income earned after the To confirm their VAT-exempt status and 30th day is taxable in Azerbaijan. avoid VAT charges, contractors, operating •• Individuals spending less than companies, local and foreign subcontractors 30 consecutive days, but more than should obtain a VAT exemption certificate, 90 days in Azerbaijan in a calendar year issued by the Ministry of Taxes. Only the in total are also treated as tax residents. companies registered in Azerbaijan are Income earned after the 90th day eligible for the exempt status. becomes taxable.

3. Withholding tax •• Employees working on rotational shifts In lieu of profit tax, foreign subcontractors and foreign employees who have pay withholding tax at a rate varying from their primary place of employment five percent to 10 percent, assessed on the in Azerbaijan qualify as tax residents gross revenues from works or services if they spend more than 90 days performed in Azerbaijan. Under PSAs, in Azerbaijan in a calendar year in total. a foreign subcontractor is defined as a legal Their income is taxable from the first day entity incorporated outside Azerbaijan and of their presence in Azerbaijan. providing goods, works or services, directly An employee is considered to work or indirectly, to a contractor under a PSA. rotational shifts, if Tax must be withheld by any person making •• He works according to an on-and-off a payment to such foreign subcontractor rotational schedule, developed and and remitted to the government approved prior to his or her assignment/ of Azerbaijan. This is the final profit tax employment liability of a foreign subcontractor.

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•• He only returns to his home country employees or their employers on their 4.7 Customs Duties under PSAs (country of residence) upon completion behalf are entitled to receive a tax receipt PSAs exempt all imports made of assignment from the tax authorities for the amount in connection with them from customs of income tax paid. duties and VAT. •• The employer/customer approves the rotation schedule and the transportation Contractors, operating companies, 4.5 Tax Reporting arrangements for rotational workers and their subcontractors may obtain Employers are responsible for reporting a certificate of exemption from import/ to the Ministry of Taxes on all Azerbaijan 4.2 Taxable Income export duties, issued by the State personal income tax payments made Almost all types of income of foreign Customs Committee of the Republic in respect of its local and foreign employees employees earned in Azerbaijan, including of Azerbaijan. Only the companies who are tax residents. their salaries, bonuses, personal travel registered in Azerbaijan are eligible for the cost reimbursement, reimbursement exempt status. 4.6 Social Insurance and of educational costs of family members, etc. Unemployment Insurance To claim the exemption, a contractor, are taxable. Foreign nationals employed by the operating company, or subcontractor companies engaged in the petroleum sector importing goods in connection to a PSA 4.3 Tax Rates under PSAs are exempt from the mandatory should submit copies of its VAT and The personal income tax rates for expatriate social insurance and unemployment customs duties exemption certificates employees are the same as the statutory insurance payments. to the customs authorities. rates (see Section III, 4.3 of this Guide). The rates of social insurance and 4.4 Personal Income Tax Withholding unemployment insurance contributions Each employer withholds the personal for foreign employees are the same income tax from payments made to the as the statutory rates (see Section III.5 and local and foreign employees. Foreign III.6 of this Guide).

MEP and SCP taxation (HGA taxation)

1. Profit Tax MEP participants are entitled to import into, however, that any sale of such imported Profit tax is assessed on the yearly taxable export or re-export from Azerbaijan, free goods to any other person in Azerbaijan profit from a MEP project at a fixed rate of taxes and restrictions (in their own name will be taxable (for automobiles, furniture, of 27 percent. or on their behalf), any equipment, materials, professional tools and instruments, machinery, tools, vehicles, spare parts, a customs import tariff must be paid MEP Participants should file their profit supplies, petroleum, fuels and lubricants in accordance with Azerbaijan’s laws). tax return for each calendar year with the to be used in connection with MEP-related tax authorities no later than April 15 of the The personal income tax of foreign activities, as well as all other goods following calendar year. employees is assessed only on the (other than natural gas), works, services income earned as a direct result of their or technology necessary or appropriate employment in the Azerbaijan Republic 2. Other Taxes for use in connection with MEP-related and only if an employee stays more than Under the Host Government Agreements activities. 182 days a year in Azerbaijan. (HGAs) on BTC and SCP, no taxes are Foreign employees of MEP participants charged on or withheld from payments or contractors and their family members to any contractor in connection with MEP- are entitled to import into, or export or re- related activities. Contractors do not have export from Azerbaijan, free of taxes and any tax compliance or filing obligations restrictions, any goods, works, services related to their MEP activities. or technology for their own use, provided,

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Taxation in Azerbaijan Statutory taxation

The Tax Code sets out the general taxation 1. Profit tax Deductibility of Interest Expenses framework. The following taxes are payable 1.1 Tax Jurisdiction and Payers Any interest expenses paid or incurred under the statutory tax regime: of Profit Tax by the taxpayer in the course of its Both resident and non-resident enterprises business activities are generally deductible. •• Profit Tax in Azerbaijan are payers of profit tax. However, there are some limitations. The •• Value Added Tax (VAT) deducted amount cannot exceed the Legal entities incorporated in Azerbaijan interest computed at 1.25 the inter-bank •• Property Tax are normally treated as residents and are credit auction rate set forth by the Central taxable on their worldwide income. Legal •• Personal Income Tax Bank of Azerbaijan. entities incorporated abroad are normally •• Social Insurance Contributions (governed treated as non-residents and are taxable Depreciation and Amortisation by the Law “On Social Insurance” dated on their Azerbaijan-sourced income. Allowance 18 February 1997) The Tax Code uses the group method for 1.2 Taxation of Resident Enterprises. •• Unemployment insurance (governed the depreciation of fixed and intangible Taxable Base by the Law “On Unemployment assets with the following rates: Resident enterprises are taxed on their Insurance” dated 30 June 2017) profit, which is determined as the gross •• buildings, facilities, installations, and •• Mining Tax income from economic activities less structures - up to 7 percent deductions, at a flat rate of 20 percent. •• Land Tax •• machinery and equipment - For resident enterprises, gross income up to 20 percent •• Excise Tax includes all income, regardless of its source or place of payment, except for the income •• electronic equipment and technology – •• Road Tax specifically exempted by the Tax Code. up to 25 percent

•• means of transport – up to 25 percent Deductible Expenses The Tax Code allows some expenses, •• costs of geological exploration and incurred in the course of economic preparatory works for the production activities, to be deducted from the gross of natural resources – up to 25 percent income earned from such activities. •• intangible assets with an indefinite useful Expenses not connected with the income- life – up to 10 percent; with a finite useful generating activities, personal expenses, life – in annual instalments pro-rata and entertainment expenses (unless to the remaining useful life entertainment is considered to be the taxpayer's economic activity) are not •• other fixed assets – up to 20 percent deductible. Acquisition costs of fixed assets and intangible assets are not deductible, Any expenses incurred on the acquisition, although such assets may be depreciated. construction or improvement of assets for business use may not be deducted The Tax Code also provides for rules immediately, but should be capitalised and and limitations, relating to some specific depreciated over time. expense types: interest payments, bad and doubtful debts, reserve funds, depreciation State-owned companies are not allowed of fixed and intangible assets, repair to deduct more than 40 percent expenses, insurance payments, expenses of depreciation charges on the assets on geological exploration and extraction acquired with state financing. of natural resources.

Works of art and heritage sites, as well as other wear-proof assets, may not be depreciated.

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Deductibility of Repair Expenses quarter by a weighted tax coefficient of the drilling equipment or vessel (used for the The amount of deductible repair expenses gross income for the previous year (see exploration and production of natural for the year is limited to a fixed percentage the formula below): resources, as well as the supervisory of the residual value of each group of fixed activities associated therewith), any fixed Advance profit tax payment = C x (A/B), assets as of the previous year-end. base (location) where a non-resident Any amounts in excess of the limits are where A=last year's profit tax, B=last individual carries out entrepreneurial capitalised at the end of the current year. year's gross income, C=current activity, and premises used for the provision quarter's gross income of consulting services. It also provides for If the repair expenses are below the limit, any places of employment in which other they are deductible. Unused amounts can The annual profit tax return and the types of entrepreneurial activity conducted be carried forward to the next year. final profit tax payment are due no later in the territory of Azerbaijan, persons than 31 March of the year following the executing the functions of a permanent Net Operating Loss Carry-Forward reporting year. establishment for non-resident enterprises The Tax Code allows carrying forward or non-resident individuals in Azerbaijan, the net operating loss (up to the next five 1.3 Taxation of Non-residents or people acting on their behalf, authorised years without limitation). Tax Jurisdiction Over Non-residents to enter into agreements on their behalf, A non-resident enterprise operating and usually performing such responsibilities, Tax Accounting Rules in Azerbaijan through its permanent as well as the places of production and sale Taxpayers are required to maintain establishment pays a tax on the share of goods, and the delivery of works and accurate and current records of their of its profit (i.e. on the gross Azerbaijan- services. income and expenses in accordance with sourced income) related to the permanent the Tax Code of Azerbaijan. A taxpayer establishment, less the amount A place is not considered a permanent may record income and expenses, of expenses incurred with respect to this establishment of a non-resident enterprise using either the cash or accrual method income, as per the Tax Code, at a flat rate in Azerbaijan, if used (regardless of the user) of accounting. of 20 percent. exclusively to: store goods or products owned by a non-resident enterprise; The gross income of a non-resident Cash Method keep a stock of goods or products owned enterprise not connected with the Using the cash method of accounting, by a non-resident enterprise only for the permanent establishment is taxed a taxpayer is required to record its purposes of their eventual processing at source, no expenses are deducted. income upon receipt, regardless of when and subsequent export from Azerbaijan the income was earned. Expenses are by a third party; purchase goods Permanent Establishment recorded when a payment is made, rather or manufacture products by a non-resident According to Azerbaijan’s Tax Code, the than when the expense item is incurred. enterprise for its own needs; conduct any permanent establishment of a foreign preparatory or support activity for a non- individual or legal entity in Azerbaijan Accrual Method resident enterprise for its own needs. is a taxpayer's establishment, through Contrary to the cash method, a taxpayer which its economic activity is carried out, records income when it is earned, Azerbaijan-sourced Income either fully or partially, for a total of 90 days regardless of when it is actually received. For withholding tax purposes, the following or more within a 12-month period, including Expenses are generally recorded when income types are treated as Azerbaijan- the activities of an authorised incurred, rather than when paid. sourced: representative. •• Interest Income Tax Payment & Reporting The Tax Code provides for the following Enterprises pay profit tax at a rate equivalents to a permanent establishment: •• Dividend Income of 20 percent and are required to make a place of management, a subdivision, •• Royalty Income quarterly advance payments, computed an office, a branch or agency, a construction/ either as 25 percent of the previous repair site, an installation and assembly •• Rent Income year's tax liability or by multiplying the facility (as well as supervisory activities •• Insurance Income amount of their income in the current associated therewith), a platform, sites,

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Taxation in Azerbaijan Statutory taxation

Withholding Tax Rates 1.4 Tax Exemptions The following withholding tax rates normally apply to the following items of income from The Tax Code envisages the following Azerbaijan sources payable to non-residents, provided such income is not attributable exemptions from profit tax: income to a non-resident's permanent establishment in Azerbaijan: of charitable organisations (except for income from entrepreneurial activities); Azerbaijan-sourced income Tax rate, % grants, membership fees and donations received by non-commercial organisations; Dividends 10 income of international, interstate, and Interest 10 intergovernmental organisations (except for income received from entrepreneurial International communication and transportation services 6 activities). Royalties 14 The Tax Code also grants a seven-year Management fees 10 tax exemption for residents of industrial or technology parks. Additionally, the part Interest on financial leasing 10 of profits that the managing companies Risk insurance and re-insurance fees 4 of industrial or technology parks allocate to improving the infrastructure of such Income received from performing works and rendering services 10 parks is also exempt from profit tax. Other items of income from sources in Azerbaijan 10 The legal entities holding an investment Payments to persons registered in the jurisdictions with preferential promotion certificate are granted 10 taxation regimes a 50-percent exemption from profit tax for seven years.

In addition, the Tax Codes provides a five-year exemption from profit tax for the income of legal entities generated from production of agricultural products (including the industrial production of foods) starting from 1 January 2014.

1.5 Taxation of Cross-Border Transactions. Outbound Transactions Since resident entities may be taxed on their worldwide income in Azerbaijan and may also be taxed by foreign countries on the income derived from sources or from carrying out business in such countries, there is a risk of double taxation.

In terms of domestic tax law, income or profit tax paid outside Azerbaijan is credited upon the payment of tax in Azerbaijan. Excess foreign tax credits may not be offset against a resident taxpayer's Azerbaijan tax liabilities or any domestic income, nor can they be carried forward or backward.

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Double Tax Treaty Relief in Azerbaijan Azerbaijan has double tax treaties with 53 (currently 51 of them are valid) countries that generally follow the OECD Model Income Tax Convention.

Country of recipient Dividends Interest Royalties Country of recipient Dividends Interest Royalties

1 Austria 5-10-15 10 5-10 26 Lithuania 5-10 10 10

2 Belarus 15 10 10 27 Luxemburg 5-10 10 5-10

3 Belgium 5-15 10 5-10 28 Macedonia 8 8 8

4 Bosnia and Herzegovina 10 10 10 29 Malta 8 8 8

5 Bulgaria 8 7 5-10 30 Moldova 8-15 10 10

6 Canada 10-15 10 5-10 31 The Netherlands 5-10 10 5-10

7 China 10 10 10 32 Norway 10-15 10 10

8 Croatia 5-10 10 10 33 Poland 10 10 10

9 The Czech Republic 8 10 10 34 Qatar 7 7 5

10 Denmark 5-15 8 5-10 35 Romania 5-10 8 10

11 Estonia 5-10 10 10 36 Russia 10 10 10

12 Finland 5-10 10 5-10 37 San Marino 5-10 10 5-10

13 France 10 10 5-10 38 Saudi Arabia 5-7 7 10

14 Georgia 10 10 10 39 Serbia 10 10 10

15 Germany 5-15 10 5-10 40 Slovenia 8 8 5-10

16 Greece 8 8 8 41 Sweden 5-15 8 5-10

17 Hungary 8 8 8 42 Switzerland 5-15 10 5-10

18 Iran 10 10 10 43 Tajikistan 10 10 10

19 Israel 15 10 5-10 44 Turkey 12 10 10

20 Italy 10 10 5 45 The UK 15 10 5-10

21 Japan 15 10 0-10 46 The Ukraine 10 10 10

22 Kazakhstan 10 10 10 47 The United Arab Emirates 5-10 7 5-10

23 South Korea 7 10 5-10 48 Uzbekistan 10 10 10

24 Kuwait 5-10 7 10 49 Montenegro 10 10 10

25 Latvia 5-10 10 5-10 50 Pakistan 10 10 10

51 Vietnam 10 10 10

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Taxation in Azerbaijan Statutory taxation

Non-residents are entitled to the Failure to comply with the filing 2.4 VAT Rate tax exemptions or reduced tax rates requirements is punishable by a fine The current rate of VAT is 18 percent. The applicable under double tax treaties of AZN 500 (approx. USD 294). Tax Code also provides for a zero VAT for with respect to the income derived from certain transactions. sources in Azerbaijan for all income types, 2. Value added tax including business profits, dividends, 2.1 Concept of Value Added Tax 2.5 VAT Payment and Reporting royalties, and interest. In Azerbaijan’s tax legislation, the concept Registered VAT payers compute the of VAT is based on the principles used amount of VAT to be remitted to the State Azerbaijan’s tax legislation also in most European countries. In accordance Budget by reducing their output VAT liability establishes the rules for claiming with Azerbaijan’s laws, VAT payers may by the input VAT credit. a refund of taxes withheld from recover the amount of VAT paid on their payments to non-residents, subject purchases (Input VAT) that exceeds the Registered VAT payers are required to the provisions of double tax treaties VAT received from their taxable supplies to submit monthly VAT returns and pay VAT signed between Azerbaijan and other (Output VAT). on a monthly basis by the 20th day of the countries. Tax refund applications are following month. reviewed by the tax authorities within 2.2Payers of VAT 20 working days. An individual or legal entity whose 2.6 VAT Invoice taxable sales amount to more than AZN A VAT payer that carries out a taxable The tax refund must be made within 200,000 (approximately USD 117,647) transaction is required to issue a tax 45 days following the submission in a consecutive 12-month period must invoice to the person who receives goods of the application and approval register for VAT purposes. The Tax Code or services. of the tax authorities. also envisages voluntary registration for VAT purposes. The taxpayer must draw up and issue 1.6 Transfer Pricing to the purchaser of the goods (works Transfer pricing rules in Azerbaijan A taxpayer which has registered voluntarily or services) a tax invoice, upon delivery are generally in line with the OECD and whose total taxable supplies during or no later than five days after the delivery. TP guidelines; the following transactions the preceding 12 months did not exceed are treated as controlled: AZN 100,000 (approximately USD 58,824) VAT invoices are issued in an electronic may apply for a cancellation of the format. The Ministry of Taxes registers and •• between an Azerbaijan’s resident and registration at any time within a year after administers them online via the taxpayers’ mutually dependent non-resident the last registration for VAT purposes, electronic tax cabinets. persons subject to some exceptions indicated •• between a non-resident’s permanent in the Tax Code. 2.7 VAT Administration Remittance establishment in Azerbaijan and the VAT on the domestic supplies and import non-resident itself or any representative, 2.3Taxable Base of services is administered by the tax branch or other division of such non- According to the Tax Code, supply of goods authorities, while VAT on imported goods resident, located in other countries (rendering of services) and import of goods is administered by the customs service. are subject to VAT. Services rendered •• between a resident of Azerbaijan or work performed outside Azerbaijan are Any taxable person should assess the or permanent establishment of a non- not taxable. amount of VAT to be remitted to the State resident in Azerbaijan and entities Budget by reducing its output VAT liability established (registered) in countries with However, payments made by persons by input VAT credit. preferential taxation regimes without tax registration for works and Taxpayers are required to submit special services supplied via e-commerce to non- forms to the tax authorities, if the volume residents that are not registered for VAT of transactions with any related party purposes (with the exception of airline exceeds AZN 500,000 (approx. USD tickets purchased and hotel bookings made 294,118) per calendar year. outside Azerbaijan) are subject to VAT.

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2.8 VAT Refund properties for seven years from the date Enterprises pay property tax at a rate The reporting period for VAT is a calendar of obtaining the investment promotion of one percent of the average annual month. According to the Tax Code, the certificate. residual value of their fixed assets, which amount of input VAT remaining after is determined as a sum of the residual the offset against a taxpayer's output In addition, the Tax Code provides a five- values of the enterprise's property as of the VAT in a current month is automatically year exemption from property tax for beginning and the end of the reporting transferred to the next three months and individuals with regard to the properties year, divided by two. should be offset against the VAT liability used in agricultural production (including arising during that period. the food industry), starting from 1 January 3.3 Property Tax Payment and 2014. Reporting The tax authorities have the right to offset Quarterly advance payments of property the VAT receivable from the budget against Individuals pay property tax in the following tax should be made at 20 percent of the other tax liabilities, late payment penalties, manner and at the following rates: previous year's property tax amount financial sanctions, and administrative no later than the 15th day of the second penalties. Taxpayers may request that the On buildings: month of each quarter. The annual tax authorities set off the repayable VAT property tax return is due by 31 March •• Property tax is calculated by multiplying against other tax liabilities. of the year following the reporting year. a certain fixed rate per square meter, varying between AZN 0.1 to AZN If after a three-month period, the 4. Personal Income Tax 0.4 depending on the building’s location, amount of input VAT is not fully offset, the 4.1 Tax Residency by the total floor area. remaining amount of VAT must be refunded Individuals staying in Azerbaijan for more to the taxpayer within 20 days upon On aircraft and watercraft: than 182 days cumulatively in a calendar the submission of an application to the year, or those with a place of permanent •• AZN 0.02 per cubic cm of the tax authorities. After that, late payment residence, or vital interests, or a permanent watercraft’s engine replacement volume interest is accrued at a rate of 0.1 percent. abode in Azerbaijan, or having •• AZN 0.02 per cubic cm of the Azerbaijan’s citizenship are considered A taxpayer may claim the overpaid taxes aircraft’s engine replacement volume Azerbaijan’s tax residents. within five years after the end of the tax •• One percent of the market value, if the reporting period. 4.2 Taxable Income and Exemptions watercraft/aircraft has no engine Azerbaijan’s residents are subject It should be noted that the VAT refund to income tax on their taxable income 3.2 Property Tax for Legal Entities process in Azerbaijan is extremely defined as the gross income received from For legal entities, the taxable base includes: complicated. Azerbaijan’s Ministry all sources (both in Azerbaijan and abroad) of Taxes and the Ministry of Finance are •• the average annual value of the fixed during the tax year, regardless of where the always reluctant to approve VAT refund assets recorded in an enterprise's balance income was earned or paid. Non-residents applications received from the taxpayers. sheet (except for vehicles) are subject to Azerbaijan’s income tax only on their Azerbaijan-sourced income. •• for non-resident enterprises, carrying out 3. Property tax business activity through a permanent 3.1 Property Tax for Individuals The taxable income tax is determined establishment in Azerbaijan, the average Property tax is assessed to resident and as a difference between the gross annual value of fixed assets connected non-resident individuals who own buildings income for the tax year and expenses with such permanent establishment and their parts, as well as watercraft and (or deductions) for this period. aircraft. Legal entities are exempt from property Virtually all forms of compensation are Individuals who hold an investment tax on fixed assets for seven years from the taxable for an employee, including hardship promotion certificate are fully exempted date of obtaining an investment promotion and payment of taxes on his behalf. from property tax for the respective certificate.

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Taxation in Azerbaijan Statutory taxation

Income of sole entrepreneurs operating 4.4 Withholding the Personal Employers are also responsible for in industrial parks is exempt from taxation. Income Tax submitting quarterly reports to the Moreover, a seven-year 50-percent The personal income tax on employment social protection fund in respect of the exemption from personal income income is withheld at source. The withheld unemployment insurance contributions tax is granted to individuals holding tax amounts are to be remitted to the calculated and paid with regard to the local an investment promotion certificate. Budget not later than the 20th day of the employees and foreign employees on the following month. local payroll by the 20th day of the month Moreover, interest on term deposits following the reporting quarter. of individuals paid by a local bank 4.5 Individual Filing or a branch of a foreign bank, as well Taxpayers that pay their taxes individually Employers are also responsible for as dividends, market discount income must complete and file their income tax remitting the unemployment insurance (resulting from investing in bonds below declarations no later than 31 March of the contributions on the day of salary payment, their face value), and interest paid following tax year. but no later than the 15th day of the month by an issuer of investment securities are following the calendar month of payment. exempted from personal income tax for 5. Social insurance seven years, beginning from 1 February According to Azerbaijan’s laws, both 7. Mining tax 2016. Azerbaijan’s nationals and foreign individuals Legal entities and individuals extracting must pay social insurance contributions. mineral resources in Azerbaijan and 4.3 Tax Rates on the Caspian shelf pay the mining tax The worldwide income of tax residents Employers pay social insurance at various rates, ranging from three percent and Azerbaijan-sourced income for contributions at a rate of 22 percent of the to 26 percent. The tax is paid after the non-residents is subject to the following employee's gross salary and 3 percent of the extraction of minerals on a monthly basis, marginal income tax rates: employee's gross salary is withheld as the by the 20th day of the month following the employee's portion of the social insurance accounting month. Monthly contribution. Tax Rate, % Taxable Income Payers of the mining tax submit tax returns Employers are also responsible for on a monthly basis no later than the 20th Up to AZN 2,500 14 submitting quarterly reports to the social day of the month following the accounting (USD 1,470) protection fund in respect of the social month. AZN 350 + 25 insurance contributions calculated and percent of the paid with regard to the local employees 8. Land tax Over AZN 2,500 amount exceeding and foreign employees on the local payroll Land tax is assessed to owners and users AZN 2,500 by the 20th day of the month following the of land, depending on the use, location, and reporting quarter. the total area of a land plot. For instance, * AZN 173 of a salary below AZN 2500 is not taxable in Baku, the tax rate for plots of industrial 6. Unemployment insurance land up to 10,000 square metres is AZN Annual Taxable According to the Law “On unemployment 10 and AZN 20 for each next 100 square Tax rate, % Income insurance” of 30 June 2017, employees meters. as insured parties, employers as insurers Up to AZN 30,000 14% are required to make unemployment Legal entities calculate their land tax (USD 17,647) insurance contributions. on an annual basis in accordance with the AZN 4,200 + 25 size of land area and respective land tax percent of the Employers must pay unemployment rates and then submit their calculations Over AZN 30,000 amount exceeding insurance contributions at a rate to the tax authorities, no later than 15 May AZN 30,000 of 0.5 percent of the employee’s gross of each year. salary and 0.5 percent more is withheld * AZN 2,076 of an annual salary below AZN 30,000 from the employee’s gross salary as the is not taxable employee’s portion of the social insurance contribution. 16 Azerbaijan Oil and Gas / Taxation Guide

Legal entities holding investment The road tax for imported motor petrol, number of seats in a vehicle, number promotion certificates are exempt from diesel fuel, and liquefied gas is calculated of cars, and carrying capacity. land tax for seven years from the date by adding AZN 0.02 to the customs value when an investment promotion certificate of each litre, exceeding the wholesale Proceeds from sale of residential and is granted. price. non-residential property, including from persons engaged in construction, are Land tax is paid semi-annually in equal 11. Simplified taxation eligible for simplified taxation at a rate instalments, no later than 15 August and Individuals and legal entities involved of AZN 15 per square meter multiplied 15 November. in entrepreneurial activity that are not by the location zone rate, which varies registered VAT payers have the right from 0.5 to 4.0. The rate for non-residential 9. Excise tax to register as taxpayers under a simplified buildings is 1.5 regardless of location. All individuals and legal entities producing tax regime. excisable goods in Azerbaijan or importing Legal entities and sole entrepreneurs pay excisable goods are subject to excise taxes. However, producers of excised goods, a one-percent tax on cash withdrawals credit and insurance organisations, from their bank accounts, withheld by the Tobacco products, alcoholic beverages, and investment funds, professional securities banks. petroleum products are subject to excise tax market participants, non-governmental at fixed rates, e.g. AZN 2 per litre of spirits pension funds, and certain other persons Proceeds from sale of a land plot are or AZN 4 per 1,000 cigarettes produced are not entitled to this regime. eligible for the simplified taxation at a rate in Azerbaijan. that depends on the use, location, and Tax under the simplified regime total area. For instance, in Baku, the tax Imported passenger cars, leisure and sports is assessed on the revenue from provision rate is AZN 0.5 per square meter multiplied yachts are subject to excise tax at different of goods, completion of works, rendering by the location zone rate, which varies from rates, depending on the size of their engines. of services, and non-sale income at the 1.2 to 4.0. following rates: Imported platinum, gold, jewellery and Taxpayers under the simplified regime •• In Baku – at 4 percent other items made of precious metals, must pay tax and file tax returns no later as well as processed, sorted, framed and •• In other regions – at 2 percent than the 20th day of the month following mounted diamonds are subject to excise tax each reporting quarter. •• For gambling operators (sports betting)– at different rates, depending on: at 6 percent The public notary who registers the sale •• weight (for platinum) •• Income of commissioners of sports- of residential and non-residential property •• purity (for gold) gambling games – 4 percent is responsible for calculating, withholding, and remitting the tax amount to the state •• size in carats (for diamonds) Persons engaged in trading and catering budget within one banking day. The notary Imports of fur and leather products is also activities whose taxable turnover exceeds is also responsible for filing a monthly tax subject to excise tax at a rate of 10 percent AZN 200,000 at any month within return with the tax authorities no later from their wholesale price. consecutive twelve months are entitled than 20th day of the month following the to the simplified taxation regime at the reporting month. Exports of excisable goods are not excisable. following rates:

•• For trading activities – at 6 percent 10. Road tax Road tax is paid by representatives of non- •• For catering activities – at 8 percent resident entities and individuals entering Azerbaijan, as well as by persons engaged Persons engaged in construction may in the production or import of motor register as simplified-regime taxpayers petrol, diesel fuel, and liquefied gas in(to) on a voluntary basis. The tax for them Azerbaijan. is calculated at a rate of AZN 45 multiplied by the location zone rate, which varies The tax is collected by the customs from 0.5 to 4.0. The rate for non- authorities at different rates, depending residential buildings is 1.5 regardless on the type of the vehicle, mileage, and of location. length of stay in Azerbaijan. Persons providing transportation The road tax for motor petrol, diesel fuel, services (except for the international and liquefied gas produced in Azerbaijan and transportation) are also eligible for the used for domestic consumption is calculated simplified tax regime. The tax rates for by adding AZN 0.02 to the wholesale price them vary from AZN 1 up to AZN 9 per of each litre. month, depending on such factors as the 17 Azerbaijan Oil and Gas / Taxation Guide

Contacts

Office location Deloitte & Touche LLAC Baku White City Office Building 25E Nobel ave., Baku, AZ1025, Azerbaijan Tel.: +994 (12) 404 12 10 Fax: +994 (12) 404 12 11 deloitte.az

Nuran Kerimov Emil Garayev Tax & Legal Partner Tax Director [email protected] [email protected]

Footnotes

1. https://www.bp.com/en_az/caspian/press/ 6. https://www.hydrocarbons-technology.com/ pressreleases/acg_psa_amended.html projects/trans-anatolian-natural-gas-pipeline- project-tanap/ https://www.tanap.com/tanap- 2. https://www.bp.com/en/global/corporate/ project/why-tanap/ media/press-releases/bp-starts-up-landmark- shah-deniz-2-development-in-azerbaijan.html 7. https://www.tap-ag.com/the-pipeline

3. Figures are as of beginning of 2018 8. https://www.bp.com/en_az/caspian/ operationsprojects/pipelines/WREP.html 4. https://www.bp.com/en_az/caspian/ operationsprojects/pipelines/BTC.html 9. https://neftegaz.ru/en/news/view/168202- SOCAR-and-Transneft-agree-on-oil-pumping- 5. https://www.bp.com/en_az/caspian/ this-year operationsprojects/pipelines/SCP.html

18 Azerbaijan Oil and Gas / Taxation Guide

Office location Deloitte & Touche LLAC Baku White City Office Building 25E Nobel ave., Baku, AZ1025, Azerbaijan Tel.: +994 (12) 404 12 10 Fax: +994 (12) 404 12 11 deloitte.az

19 deloitte.az About Deloitte

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