Doing Business in 3 Doing Business in Azerbaijan Contents

Country overview ...... 2

Economy...... 4

Business overview...... 6 Licensing of entrepreneurial activity...... 7 Labor licensing requirements ...... 7 Profit repatriation ...... 8 Currency regulations...... 8 Land ownership ...... 8 Establishing a business...... 8 Types of business presence...... 9

Taxation...... 10 Introduction...... 11 Statutory tax regime ...... 11 Corporate taxation...... 11 Individual tax ...... 14 Value added tax (VAT)...... 15 Other taxes and fees ...... 18 Withholding tax ...... 21

Accounting and reporting...... 24 Investment Incentive Certificates...... 25

EY Azerbaijan...... 26 Introduction...... 27 Services ...... 27 Assurance...... 27 Tax & Law...... 27 Advisory Services...... 28 Strategy and Transactions...... 28

Doing Business in Azerbaijan 1 Country 1overview

2 Doing Business in Azerbaijan According to the Constitution adopted General statistics* on 12 November 1995, Azerbaijan is Population Approx. 10 million a democratic, secular, unitary republic based on the rule of law. The country Territory 86,600 square kilometers (approx. 33,400 sq. miles) is governed by the president, who is Neighboring countries , , Armenia, , Turkmenistan, , directly elected for a seven-year term by Main ethnic group Azerbaijani (91.6%) popular vote. Ethnic minorities Russian, Lezghi, Talysh, Tatar Currently, the President of Azerbaijan Capital (pop. 2,277,500) is Ilham Aliyev. The First Vice-President Other populous cities Sumgait (pop. 345,300) of Azerbaijan is appointed by and Gandja (pop. 335,600) subordinate to the President. This Autonomous Republic Nakhchivan Autonomous Republic (pop. 459,600) position is currently held by Mehriban *Source: https://www.stat.gov.az/ Aliyeva. The Government (Cabinet of Ministers) is subordinate to the President, who appoints the Prime Minister (subject to the approval of the legislature) and other ministers. The highest legislative body is the 125-member single-chamber parliament, known as Milli Majlis, which is elected for a five-year term by popular vote. Milli Majlis may be dissolved by the President in cases prescribed by the Constitution. In addition, the President is able to veto its decisions. The Republic of Azerbaijan gained its independence from the Soviet Union in 1991. It joined 11 other former Soviet republics to form the Commonwealth of Independent States (CIS) in 1993.

Doing Business in Azerbaijan 3 2Economy

4 Doing Business in Azerbaijan Azerbaijan’s vast oil reserves attract In addition, there are 5 so-called That decree set up a special body foreign investment into the country’s industrial parks and 3 high-tech parks in (Commission) tasked with generating economy. Several major oil contracts Azerbaijan. These provide a 10-year tax proposals for the establishment of have been signed since 1994. holiday for entrepreneurs operating as a favorable business environment, residents of the parks. developing an appropriate legal and According to a report issued in 2019 institutional framework and preparing by the Azerbaijani State Statistics The President of Azerbaijan signed an action plan to achieve the goals set. Committee, foreign investments in the a decree on additional measures to oil & gas sector comprised 54% (US$ improve the business environment and 4,900.8 m) of all foreign investments. strengthen the country’s position in international rankings on 13 July 2016. Following the success of oil & gas projects, the Government declared a policy calling for the development of the non-oil sector. Owing to the rapid development of the non-oil sector, the share of oil & gas investments in total foreign investments has gradually decreased compared with earlier years. On 26 May 2000, the President of Azerbaijan signed the Law on the Main Export Pipeline (“MEP”). The MEP, which connects Baku with the Turkish oil terminal in Ceyhan via Georgia, is the main route for the transportation of Azerbaijani crude to the world oil market. On 26 October 2001, Milli Majlis also passed a law ratifying the Agreement on the South Pipeline (“SCP”). The SCP is the main route for the transportation of Azerbaijani gas to the world market. In particular, the SCP pipeline is used to ship natural gas from the offshore Shah- Deniz gas field to Turkey. The country has one state-owned oil refinery. Large petrochemical and metallurgical plants are located in Sumgait, 28 kilometers from Baku.

Doing Business in Azerbaijan 5 Business 3overview

6 Doing Business in Azerbaijan Licensing of Furthermore, a foreigner or stateless temporary residence permit before their person has the right to work in the visas or visa-free stay expire. Temporary entrepreneurial activity Republic of Azerbaijan without obtaining residence and work permits are issued The Law on Licenses and Permits, a work permit provided that he/she is under the one-stop-shop principle. State adopted on 15 March 2016, establishes on a business trip in an area of business duty for a temporary residence permit a “one-stop-shop” principle for issuing specifically permitted by the Cabinet of or for a work permit varies depending licenses. The Ministry of Economy of Ministers of Azerbaijan and the period on the period of validity (e.g., AZN 120- Azerbaijan maintains the Registry of of the business trip does not exceed a 160 for a one-year temporary residence Licenses and Permits. cumulative total of 90 days in a year. permit and AZN 1,000-1,400 for a one- year work permit). It should also be noted that licenses to Foreign citizens coming to Azerbaijan conduct business activity are normally for more than fifteen days must register The employer must register the granted for an indefinite term, save for with the State Migration Service within conclusion, amendment and termination specific exceptions. fifteen days, based on an application of employment contracts electronically made by the landlord (owner) of the in the E-government web-based premises where the visitor is residing. information system using an enhanced Labor licensing electronic signature to authenticate Foreign citizens wishing to live in requirements entries made. Azerbaijan are required to obtain a Foreign employees are required to have individual work permits issued by the State Migration Service of Azerbaijan. The legislation prescribes severe penalties for employers that fail to obtain a work permit: AZN 3,000 to AZN 4,000 for executive officers and AZN 15,000 to AZN 20,000 for legal entities. The penalty rises to AZN 35,000 if the violation is committed in relation to three or more foreign employees. Heads and deputy heads of branches/representative offices of foreign companies and foreign entrepreneurs are exempt from the requirement to obtain work permits. The same rule applies to heads and deputy heads of legal entities established in Azerbaijan that have at least one foreign (corporate or individual) founder.

Doing Business in Azerbaijan 7 Profit repatriation Land ownership Establishing a business Under the Law on the Protection Land ownership in Azerbaijan is The Foreign Investment Laws provide of Foreign Investment (adopted on governed by a set of legal acts, including the legal framework for foreign 15 January 1992) and the Law on the Law on Land Reform, the Law investment in Azerbaijan. They stipulate Investment Activity (adopted on on the Land Market, the Civil Code the types of entity foreign companies 13 January 1995) (collectively the of Azerbaijan and the Land Code. can invest in, the rules governing the “Foreign Investment Laws”), foreign Azerbaijani citizens and legal entities are repatriation of profit, and the general investors are entitled to repatriate permitted to own land. rights and guarantees provided to profit in convertible currency after the foreign investors. Foreigners can invest payment of all taxes and other fees that Foreign individuals and legal entities in a business venture in Azerbaijan in a are due. cannot acquire land in Azerbaijan, but number of ways, such as: they have the right to lease land. Foreign individuals and legal entities may • Establishing a fully owned subsidiary Currency regulations purchase dwellings. In such instances, • Acquiring shares in an existing The official currency of Azerbaijan is the land on which the acquired dwellings company the Manat (AZN). Foreign companies are situated is rented to those foreign • Establishing a joint venture and individuals may have both AZN and individuals and legal entities. with Azerbaijani companies and foreign currency accounts with local individuals banks. All settlements within Azerbaijan, including the payment of salaries, • Entering into other acceptable forms must be made in AZN, save for certain of investment agreement specific exceptions.

8 Doing Business in Azerbaijan Various registration requirements apply Joint-stock companies (JSCs) Branch or Representative Office to foreign companies establishing a A JSC is governed by the Civil Code. A Foreign companies may operate business presence in Azerbaijan. A JSC is established by at least one legal in Azerbaijan without establishing special license to conduct business entity or individual. The liability of a JSC a local legal entity if they instead is required for companies operating shareholder is limited to the value of his register a branch or representative in telecommunications, sea and air shares. JSCs fall into two categories — office with the State Tax Service. transportation, insurance and other “closed” and “open” JSCs. The shares of Branches and representative offices regulated industries. The State Tax closed JSCs are not freely transferable are allowed to conduct commercial Service is charged with registering and the company must have a minimum activities in Azerbaijan. The state duty the business presence of commercial capital of AZN 2,000. The shares of for the registration of a branch or legal entities based on a one-stop-shop open JSCs are not subject to the transfer representative office is AZN 220. principle. restriction, but the company must have a minimum capital of AZN 4,000. Other forms of legal entity Types of business As well as commercial entities, presence Limited liability companies (LLCs) Azerbaijani legislation also provides for LLCs may be founded by one or non-commercial legal entities and public The following forms of commercial legal more legal entities and/or individuals legal entities. entity exist in Azerbaijan: with the founding members having A non-commercial legal entity is an • Open and closed joint-stock a participating interest in the LLC entity that neither generates profit as companies proportional to the amount paid into the its main purpose nor distributes profit charter capital. Each owner’s liability is among its members. Non-commercial • Additional and limited liability limited to the amount invested in the companies legal entities may be created in the form LLC. LLCs do not issue shares. of public associations, funds or unions of • General and limited partnerships A participating interest in an LLC is legal entities. freely transferable to third parties. Foreign investors wishing to establish a Public legal entities engage in activities presence in Azerbaijan may opt for any of state and public significance. They Partnerships of the above forms. Foreign entities may may be founded by executive authorities also operate in Azerbaijan through a General and limited partnerships are designated by the President of branch or a representative office. governed by the Civil Code. A general Azerbaijan on behalf of the government partnership is established by at least two or by municipal bodies on behalf legal entities or individual entrepreneurs of municipalities. They may also be with all partners having unlimited liability. founded by other public legal entities if A limited partnership is established by at the charters of the latter authorize this. least two legal entities and/or individual entrepreneurs with at least one partner having unlimited liability.

Doing Business in Azerbaijan 9 4Taxation

10 Doing Business in Azerbaijan Introduction Statutory tax regime Taxable profit includes trading profit, capital gains, profit from financial There are currently two separate and The tax regime outlined below is based activities and other profit sources. distinct tax regimes in operation in on the Tax Code enacted on 1 January Residents, including entities with foreign Azerbaijan. These are the statutory 2001, as amended up to November investments, are taxed on worldwide profit tax regime and the special tax 2019. The main taxes and payments profit. Non-residents are taxed only regime. The latter is applicable in affecting foreign investors operating on profit from business carried on in limited cases, in particular to oil & under the statutory regime are as Azerbaijan. gas and mining companies operating follows: under Production Sharing Agreements • Corporate profit tax Permanent Establishments (PEs) (“PSAs”) and/or Host Government Agreements (“HGAs”), as well as • Personal income tax The Tax Code defines a PE as a non- companies operating in special areas resident foreign legal entity or natural • Value added tax (e.g., ports and high-tech parks). The person that carries on commercial statutory (general) profit tax regime is In addition to the above, the legislation activities for no less than 90 cumulative applicable to all other entities operating envisages social fund contributions and days in any twelve-month period. in Azerbaijan. other taxes and charges (e.g., excise However, the Tax Code also provides tax, property tax, road tax and land tax). Foreign companies that are deemed to that entities that carry on exclusively have a permanent establishment (“PE”) any or any combination of the following in Azerbaijan are taxed on income Corporate taxation activities do not create a PE in derived from the commercial activities Azerbaijan: Profit tax of the PE in the country. Foreign • The storage and display of goods companies receiving income from The following entities are subject to Azerbaijani sources other than through profit tax in Azerbaijan: • The storage of goods for processing by another entity and subsequent a PE are subject to withholding tax on • Azerbaijani legal entities, with or export from Azerbaijan the amount of such income. without foreign ownership • The purchase of goods for The PSA regime is a set of rules covering • Permanent establishments of foreign proprietary use and the collection of 20+ production-sharing agreements legal entities that have been ratified by the Milli information • Representative offices of foreign Majlis. The PSA regime generally applies • Any other preparatory or auxiliary legal entities engaged in commercial to all contractor parties under the PSAs activities for proprietary purposes and their direct and indirect foreign activities in Azerbaijan Foreign companies that do not operate subcontractors. The HGA tax regime • Non-commercial organizations in Azerbaijan through a PE situated applies to entities working on the Baku- deriving income from commercial therein are subject to withholding tax Tbilisi-Ceyhan oil export pipeline and the activities South Caucasus Pipeline. For a complete (see below) on any taxable income summary of the PSA and HGA regimes received from Azerbaijani sources. mentioned in this paragraph, please It should be noted that the provisions refer to our separate Azerbaijan oil & of double tax treaties (see the list of gas tax guide. effective double tax treaties below) prevail over those in the Tax Code.

Doing Business in Azerbaijan 11 Tax rates Gains arising from the alienation of Type of assets Rate of The general profit tax rate is 20%. An shares or other participating interests depreciation (%) additional branch remittance tax of 10% in resident enterprises are also subject Capitalized land applies to profit remittances from the to general profit tax. Such gains are improvements and up to 7 branch to the head office. The taxable calculated as the difference between the buildings base is net profit after taxes. actual sale price and the nominal value Machinery and up to 20 of sold shares if the shares/participating equipment interests are sold for a price exceeding Determination of taxable profit High technology the proportional value of net assets up to 25 Annual income disclosed in a company’s equipment of the company corresponding to Azerbaijani statutory accounts is Means of transport up to 25 the alienated shares/participating reduced by all business expenses except Livestock up to 20 interest. If the sale price is lower than for those specifically disallowed by the the proportional value of net assets, Intangibles 10 (for those with Tax Code. The most significant items the gain is calculated as the difference an indeterminate of non-deductible expenditures for tax period of use) between the proportional value of net purposes are: assets as at the date of sale and the All other assets up to 20 • Depreciation and repair expenses in nominal value of the alienated shares. excess of the established limits (to 50% of a taxpayer’s income from the Micro-enterprises are entitled to make be capitalized and expensed through sale of shares/participating interests depreciation deductions for fixed assets depreciation) owned by the taxpayer for at least 3 used in their entrepreneurial activities at • Entertainment, accommodation (three) years is exempt from profit tax. 2x the depreciation rates shown above, and meal expenses (except for while small enterprises may make meal expenses for the provision of Interest and dividends deductions at 1.5x the rates shown above. “therapeutic nourishment”, milk Interest (except for interest on loans and similar foodstuffs to employees, paid to local banks or non-resident Depreciation rates are applied to the which are deductible up to certain banks with PEs in Azerbaijan) and net book value of assets. Depreciation limits) dividend income received from may be applied at a lower rate than the • Business travel expenses in excess of Azerbaijani companies and PEs of maximum rate. The balance resulting the statutory limits foreign companies are subject to 10% from using the lower rate may be withholding tax. claimed in future periods. Capital gains Depreciation charges Losses and bad debts There is no separate capital gains tax All assets with a net book value of more Entities that have deductible expenses in Azerbaijan. Capital gains are subject than AZN 500 and a useful life of more in excess of their annual income may to profit tax in Azerbaijan only when an than one year must be capitalized and carry the resulting losses forward for asset is alienated. Gains arising from expensed through depreciation. The a period of up to five years and offset the disposal of assets are calculated as applicable depreciation rates depend them against profits for those years the difference between the sale price on the category to which the assets without any limitation. Bad debts may and the net book value of an asset belong. The following are the maximum be deducted from taxable income only if (excluding VAT). depreciation rates by category for the they are recognized as having no value most common groups of assets: in the company’s accounts and were

12 Doing Business in Azerbaijan reflected as income in previous periods. Losses and bad debts recovered in future periods are recognized as income in the period of their recovery.

Transfer pricing rules The Regulations on the Calculation and Application of Transfer Prices (“Regulations”) were adopted by the Ministry of Taxes in 2017. They are used for profit tax purposes. Transfer prices calculated under the Regulations may be used to recalculate profit tax in respect of controlled transactions between the following persons:: • A resident of Azerbaijan and a related non-resident • A PE of a non-resident in Azerbaijan and the non-resident itself or any of its representative offices, branches or divisions located in other countries or any other person located in another country that is a related person of the non-resident • A resident of Azerbaijan and/or a PE of a non-resident in Azerbaijan and entities incorporated (registered) in jurisdictions identified as having preferential tax regimes

As a rule, where the prices or margins in controlled transactions involving supplies of goods (works, services) are not consistent with those of comparable transactions carried out between unrelated parties under the same or similar conditions at arm’s length, the tax base of the transaction may be recalculated based on transfer prices.

Doing Business in Azerbaijan 13 The Regulations also lay down certain as one quarter of the tax payable for determining the source of income. contingent methods for determining the previous calendar year or may be transfer prices if no information is calculated by multiplying income for Rates available on comparable transactions. the latest quarter by the ratio of tax to Income earned from employment in the annual income for the previous year. Taxpayers must submit a notification oil and gas or public sectors is subject to to the tax authorities in respect of The final payment of the balance due the following tax rates: controlled transactions exceeding must be made no later than 31 March of Monthly taxable Tax rates the following year. Failure to comply may AZN 500,000 during the reporting income period. The deadline for submitting result in penalties (for details of these, Up to AZN 2,500 14% the notification is 31 March of the year see the Interest and penalties section following the reporting year. below). Over AZN 2,500 AZN 350 + 25% of the amount exceeding AZN 2,500 Market prices Individual tax Starting from 1 January 2019, In the case of import and export individuals whose monthly income operations, barter transactions, Residency rules/scope is less than AZN 2,500 are exempt transactions between related parties A resident is defined as an individual from tax on the first AZN 200 of their and transactions in which the price who is physically present in the Republic income. Annual income of individuals differs by more than 30% from prices of Azerbaijan for a period of 183 days or engaged in non-entrepreneurial activity in transactions for the same (similar) more in a calendar year. Individuals not is taxed at the rate of 14%. Individuals goods (works, services) on the market meeting this requirement are considered whose annual income is less than during the preceding 30 days, or to be non-residents unless otherwise AZN 30,000 are exempt from tax on where property is insured for amounts determined by the application of tie- the first AZN 2,400 of their income. exceeding its net book value, or where breaker rules. Individuals who derive income from the minimum amount of monthly rent business activities without forming for real estate (other than housing) Residents are taxed on their worldwide a legal entity are liable to personal is required to be established for tax income, while non-residents are taxed income tax at the rate of 20%. purposes, taxes may be recalculated only on their Azerbaijani source income. based on the market price. Tax on Azerbaijani source income is Effective from 1 January 2019, normally paid by withholding tax at employees not working in the oil and source at progressive rates. Income gas and public sectors are eligible for Declarations and payments from overseas sources is assessed reduced PIT rates as follows for a period Profit tax is calculated on a calendar on a current year basis for residents. of 7 years: year basis. All taxpayers must submit An Azerbaijani source of income is their profit tax returns no later than defined as any income from commercial Monthly taxable Tax rates 31 March of the year following the activities and sources in Azerbaijan, and income reporting year. The deadline may be specifically includes dividends received Up to AZN 8,000 0% extended by three months provided from Azerbaijani companies, income Over AZN 8,000 14% of the amount that tax is paid in full by the original due from the sale of shares and participating exceeding AZN 8,000 date. Tax installments are due quarterly interests in Azerbaijani companies, by the 15th of the month following each income from employment in Azerbaijan, quarter. Tax installments are estimated etc. The place of payment is irrelevant in

14 Doing Business in Azerbaijan Determination of taxable income In addition, effective from 1 January A 50% relief from compulsory medical Virtually all forms of compensation to an 2018, employers must withhold 0.5% insurance contributions applies for non- employee are taxable, including hardship from the employee’s monthly wage oil and gas and non-public sector during and cost of living allowances, payments and contribute it to the Unemployment the period from 1 January 2021 to 1 by an employer for the education of an Fund as an unemployment insurance January 2022. employee’s child and payment of taxes premium. on behalf of an employee, unless they are specifically exempted. One such Capital gains and investment income Compulsory medical insurance exemption is accommodation and meal Sales of movable assets are not expenses incurred by an employer on According to the Law of the Republic generally subject to income tax unless behalf of employees, provided that of Azerbaijan «On Medical Insurance», the disposal relates to business or other no tax deduction is made for these compulsory medical insurance was entrepreneurial activities. The sale of an expenses on the profit tax return. introduced from 1 January 2021. immovable asset is not subject to tax if However, the Government is it has been the place of residence of the seller for at least five years. Except for Social Insurance Fund contributions implementing the compulsory medical insurance system gradually across the these two exemptions, all other gains payable by employees country. The implementation process resulting from the sale of property are Subject to the exception below, both will be completed in 2021. taxable based on the annual income tax Azerbaijani and foreign nationals rates for individuals and the profit tax earning employment income in The collection of compulsory medical rate for legal entities. Azerbaijan must contribute 3% of their insurance contributions started from 1 Gains arising from the alienation of gross salary to the Social Insurance Fund January 2021. shares or other participating interests of Azerbaijan (“Fund”). Compulsory medical insurance in resident enterprises are also subject For individuals engaged in employment contributions are determined based on to general income tax. Such gains activities in neither the oil and gas taxable monthly income: must be calculated as the difference sector nor the public sector, the • below AZN 8000 – 2% at the expense between the actual sale price and the following amounts must be withheld of the employee and 2% at the nominal value of the sold shares if the from the employee for a period of 7 expense of the employer shares/participating interests are sold years starting from 1 January 2019: for a price exceeding the proportional • above AZN 8000 – 0.5% of the value of net assets of the company Gross taxable monthly income of: amount exceeding AZN 8000 plus corresponding to the alienated shares/ • below AZN 200 – 3% of the amount AZN 160 at the expense of the participating interest. If the sale price employee and same amount at the is lower than the proportional value of • above AZN 200 – 10% of the amount expense of the employer. net assets, the gain is calculated as the exceeding AZN 200 plus AZN 6. Contributions are to be withheld at difference between the proportional Contributions are to be withheld at source and remitted to the State Agency value of net assets as at the date of sale source and remitted to the Fund by the for Compulsory Medical Insurance by the and the nominal value of the alienated employer. Fund contributions are not employer. shares. applicable to foreign employees who are employed under PSA-related contracts.

Doing Business in Azerbaijan 15 50% of a taxpayer’s income from the sale The deadline for filing declarations may VAT registration of shares/participating interests owned be extended by three months provided There are detailed requirements for by the taxpayer for at least 3 (three) that tax is paid in full by the original due VAT registration and accounting, with years is exempt from income tax. date. Failure to comply may result in set penalties for non-compliance. Legal penalties (for details of these, see the Interest on deposits of individuals entities and individuals with taxable Interest and penalties section below). and dividends received by individual turnover exceeding AZN 200,000 over shareholders of JSCs are exempt from twelve consecutive months, excluding taxes until 1 February 2023. those involved in trade and public catering Value added tax (VAT) services, must register as VAT payers. Declarations and payments Scope Other companies doing business in Both residents and non-residents must All companies that do business and/ Azerbaijan may register voluntarily. Only complete and file their income tax or import goods and services into registered VAT payers may charge VAT or declarations no later than 31 March Azerbaijan are subject to VAT. Effective claim credit for input VAT that they pay. of the following tax year. Tax must be from 1 January 2017, the trade-markup paid before the filing deadline. Where applied to retail sales of agricultural Determination of the taxable base produce is also subject to VAT. a taxpayer only has Azerbaijani source VAT is levied on turnover from supplies income, which is subject to withholding of all goods and services, including tax at source, the individual is not Rate imports, unless they are zero-rated or required to submit an income tax The standard VAT rate is 18%. specifically exempt. Barter and free declaration. supplies of goods and services are

16 Doing Business in Azerbaijan specifically included in the taxable base. Reverse charge of VAT Provisions have been introduced to All excise taxes and customs duties paid Foreign companies that provide services clarify the concept of payment in are also included in the taxable base for in Azerbaijan without establishing a specific cases. Specifically, the date of VAT purposes. PE must pay VAT on taxable sales in payment is defined as: Zero-rated goods and services include Azerbaijan. In such cases, VAT is applied • The date on which money is received exports, transit and international through the reverse charge mechanism. by the taxpayer in cash or as a transfer transportation, purchases of goods In other words, it is self-assessed by the to an account held by or otherwise at and services for projects funded by recipient of the services and remitted to the disposal of the taxpayer international loans, and imports paid the state budget. • In the case of mutual settlements – the for with foreign financial donations. date of the discharge or settlement of Exempted goods and services include: VAT deposit accounts an obligation All VAT payers are required to remit • Financial services VAT amounts through designated • In the case of accounts receivable • Currency and securities transactions bank accounts known as VAT deposit – the date of the expiration of the accounts. Only VAT payments made recovery period • Publications through these accounts may be credited • In the case of in-kind and barter Generally, goods are deemed to be against output VAT. The VAT is then transactions – the date of the imported or exported if they undergo claimed by the payer. alienation of assets customs clearance. • In the case of alienation without There are detailed place of supply Declarations and payments consideration – the actual date of such rules for determining the treatment Declarations must be filed and VAT must alienation of exported and imported services. be remitted monthly by the 20th of Azerbaijani tax legislation generally the following month. Whereas before 1 • In the case of the assignment of allows credit for input VAT on January 2020, output VAT was generally a claim – the actual date of such commercial goods or services. accounted for on both accrual and cash assignment bases and input VAT was accounted for However, credit is allowed only if VAT is on a cash basis, starting from 1 January Where a purchaser does not pay paid to suppliers through a designated 2020 both output and input VAT is for goods or services received from VAT deposit account (see below for accounted for on a cash basis. VAT on a supplier, but grants a loan to the additional information). Credit is not imported goods is paid separately at the supplier, a taxable transaction is deemed allowed for input VAT in relation to VAT point of customs clearance. to have occurred: exempt goods or services (such input VAT can only be claimed as a deduction for • On the date of the supply if the loan Timing of transactions for VAT purposes profit tax purposes). If input VAT exceeds was granted before the supply was output VAT, the excess input VAT may be In accordance with amendments made made carried forward or offset against certain to the Tax Code which are effective from • On the date of the loan if the loan was VAT or other tax liabilities. Taxpayers 1 January 2020, for VAT purposes granted after the supply was made may also apply to the tax authorities for transactions are recognized based on a refund of excess input VAT. VAT on the date of payment. “Payment” in Where payment for goods or services purchases of fixed and intangible assets is this context means the receipt of the supplied is made in installments, each not capitalized as part of the asset’s cost, principal amount due (exclusive of VAT) installment is considered as a separate but offset against output VAT. for goods (works, services) supplied. taxable transaction.

Doing Business in Azerbaijan 17 Electronic Delivery Notes Excise tax for platinum is AZN 4 per Taxpayers are expected to submit their gram; for gold it varies from AZN 1.5 declarations no later than 31 March of Effective from 1 January 2017, an to AZN 6 per gram depending on the the following year. Tax due is payable in electronic delivery note is defined as a amount of gold in a thousand weight quarterly installments by the 15th of the primary accounting document prepared units; for diamonds it is AZN 400 per second month of the calendar quarter in in electronic format that is issued by carat, but the calculation may differ a person supplying goods, services or the amount of 20% of the property tax depending on the diamond’s size. Where works to individual entrepreneurs and due for the previous year. excisable goods are produced from legal entities. As from 1 January 2020, excisable supplies, any excise tax paid on electronic VAT invoices have been Road tax the supplies may be deducted from the abolished and electronic delivery notes Non-resident owners of vehicles excise tax due on the finished product. are the only documents required to be entering the territory of Azerbaijan to issued by suppliers to their customers Declarations must be filed and payment transport passengers or cargo must pay when selling goods or providing services must be made monthly by the 20th road tax. The road tax payable by such or works. Electronic delivery notes of the following month. Excise tax is non-resident owners is collected by the issued by the supplier suffice for a deductible for profit tax purposes. customs authorities at rates depending transaction to be recognized and for on the engine size and weight of the input VAT to be reclaimed. Property tax vehicle, the period of stay in Azerbaijan, Electronic delivery notes must be Property tax is levied at the rate of 1% the number of seats, the axle load and provided for supplies of goods (services, of the average annual net book value the nature of imported products. works) to legal entities and individuals of fixed assets, including buildings, Tax is also indirectly applicable to engaged in entrepreneurial activities. machinery and equipment (excluding vehicles used locally through the The general format and content of vehicles). The taxable base is calculated taxation of automobile gasoline, electronic delivery notes and the as the average of the values at the diesel fuel and liquid gas producers procedures for their issue, amendment beginning and end of the year. If and importers. Specifically, AZN 0.02 and cancellation are laid down in the property of an enterprise is insured for is added to the wholesale price per Regulations on Electronic Delivery Notes an amount exceeding its residual value, liter of automobile gasoline, diesel property tax is calculated at the rate of approved by a Resolution of the Cabinet fuel and liquid gas produced for 1% of its market price. Property tax is of Ministers. local consumption or imported into deductible for profit tax purposes. The Azerbaijan. following are exempt from property tax: Other taxes and fees • Facilities that are used for Land tax environmental protection, fire safety Excise tax Companies using land are generally or civil defense purposes subject to land tax calculated at Excise taxes range from 3% to 72% for • Product pipelines, railways and AZN 2 to AZN 20 per 100 square domestically produced hydrocarbon motorways, communication and power meters, depending on location. products and from AZN 0.2 to AZN 3.2 transmission lines, irrigation facilities, Land tax is deductible for profit tax per liter for alcoholic beverages. The satellite and other aerospace assets purposes. rate for tobacco products is AZN 31 per 1,000 units. Excise tax and VAT are not • Vehicles Taxpayers are required to submit their included in the taxable base. Imported • Property of educational, health, sport declarations annually by 15 May. The automobiles, yachts, platinum, gold, and and cultural institutions used only for tax is payable twice a year, no later than diamonds are also subject to excise taxes. officially designated purposes. 15 August and 15 November.

18 Doing Business in Azerbaijan Social Insurance Fund employer all types of metals at rates ranging from meter, while for other types of land contributions 3% to 26%. For all other taxable mineral tax is calculated at AZN 0.5 per Employers in the oil and gas sector and resources, the rates range from AZN 1 square meter and multiplied by the the public sector are required to make to AZN 10 per cubic meter. Taxpayers appropriate location coefficient contributions to the Fund amounting to are required to submit their declarations specified in the Tax Code monthly by the 20th of the following 22% of the gross payroll for both local Legal entities operating under the month. The tax is payable monthly by and foreign employees. simplified tax regime do not pay VAT or the 20th of the following month. profit tax. Effective from 1 January 2019, employers other than those operating Simplified taxation system Any taxpayer whose business is in the oil and gas and public sectors are transporting passengers or cargo Legal entities and individual required to make Fund contributions (except for international transportation) entrepreneurs that are not required to amounting to 22% of the gross taxable is liable to pay a fixed amount of register for VAT purposes in Azerbaijan monthly income of both local and simplified tax and is required to obtain are eligible to be registered as payers of foreign employees if their gross taxable what is referred to as a “distinguishing simplified tax, which is generally levied monthly income is below AZN 200, license plate”. Taxpayers who are at 2%. The taxable base is gross income and 15% of the amount exceeding AZN not involved in a local transportation received from sales of goods, works and 200 plus AZN 44 if their gross taxable business and own vehicles for the services, except for income subject to monthly income is above AZN 200, for a transportation of their own cargo and withholding tax. period of 7 years. employees must obtain a “special Persons engaged in public catering distinguishing license plate” to These contributions are made at the activities with a taxable turnover differentiate themselves from simplified expense of the employer and are exceeding AZN 200,000 in any taxpayers. Both distinguishing license deductible for profit tax purposes. month(s) over a period of 12 plates and special distinguishing license Relevant reports must be filed quarterly consecutive months are also entitled to plates are issued by the Ministry of by the 20th of the following month. register as payers of simplified tax. The Transport of Azerbaijan at no cost within Fund contributions do not have to be tax rate in such cases is 8%. two and five days respectively. made in relation to foreign employees employed under PSA-related contracts. Special simplified tax rates are Taxpayers under the simplified tax established for taxpayers engaged in regime must submit their declarations In addition, effective from 1 January certain activities (the list below is non- quarterly by the 20th of the following 2018, employers contribute 0.5% exhaustive): month. The tax is payable quarterly by to the Unemployment Fund as an the 20th of the following month. unemployment insurance premium. • Persons engaged in the provision of their own residential and non- Persons who do not have the right to Mining tax residential premises – AZN 15 become simplified taxpayers include: All companies and individuals engaged multiplied by the location zone rate, • Persons engaged in trading activities in extracting mineral resources are varying from 1.2 to 4.0 per square for whom the volume of taxable subject to mining tax at the appropriate meter transactions in any month (months) rate in addition to any land tax due. • Alienation of land – taxation depends during a period of 12 consecutive Mining tax is deductible for profit tax on the location and purpose of use. months exceeds AZN 200,000 purposes. The tax is applied to the Agricultural land is subject to tax • Persons who provide services other wholesale price of oil, natural gas and calculated at AZN 0.5 per square than services rendered to persons

Doing Business in Azerbaijan 19 not registered as taxpayers (except Interest and penalties for persons who pay fixed amounts of Interest and penalties are applied for non-compliance with tax legislation. For simplified tax) example, interest is charged on outstanding tax liabilities at the rate of 0.1% per day. • Persons engaged in the production of The following is a non-exhaustive list of penalties that may be applied for non- goods that are excisable and subject compliance with tax legislation: to mandatory labeling • Persons engaged in production Offence Penalty activities that have more than 10 employees Failure to file declarations AZN 40

• Persons engaged in activities Understatement of tax liability 50% of understated tax requiring a license, except for persons providing services under Payments from petty cash while bank accounts are 50% of expenses paid from petty under tax sanctions or penalties imposed by the tax cash compulsory insurance agreements authorities • Persons engaged in wholesale activities Failure to register a foreign bank account with the tax 100% of the revenue collected authorities on such accounts • Credit organizations, professional participants in the insurance market Delay in paying VAT on supplier/service provider invoices 50% of VAT paid in violation of (other than insurance agents in accordance with the rules on the payment of VAT using the special rules a designated bank account providing services relating to compulsory insurance agreements), Carrying out cash settlements in violation of the rules on 1st time in a calendar year — 10% investment funds and managers of cases where cash settlements are prohibited of the total transaction amount; such funds, persons licensed in the 2nd time — 20%; securities market, and pawnshops 3rd time or more — 40%.

Import tax Purchasing goods without receiving a delivery note, 1st time in a calendar year — 10% electronic delivery note or e-VAT invoice of the value of the goods purchased; The maximum rate of import tax is nd currently 15%. There are certain import 2 time — 20%; tax exemptions. 3rd time or more — 40%. Customs processing fees are payable on Supplying goods without issuing an electronic delivery 1st time in a calendar year — 10% imported goods in amounts ranging from note or an electronic tax invoice required to be issued of the value of the goods supplied; under the Tax Code nd AZN 10 to AZN 550 (depending on the 2 time — 20%; value of the goods declared and whether 3rd time or more — 40%. customs clearance takes place within or outside regular working hours and within The statute of limitations for a tax violation is three years. or outside the customs territory).

Export tax Most goods are exempt from export tax.

20 Doing Business in Azerbaijan Withholding tax Nature of payment Rate of withholding tax (%) Scope Insurance premiums 4% Withholding tax is applicable to the Fees for international communication and freight services 6% repatriation of profit and other cross- border payments to foreign companies Dividends and interest, including the interest element of financial lease 10% not related to a PE in Azerbaijan. The payments tax is payable at the following rates: Management fees and fees for other services performed or deemed to 10% be performed in the territory of Azerbaijan but not connected with an Azerbaijani PE Rents and royalties 14% Branch remittance tax – for the remittance of profit derived from a 10% permanent establishment in Azerbaijan to the head office Payments to countries with a favorable tax regime* 10%

* The list of countries with a favorable tax regime is approved by the President of the Republic of Azerbaijan.

Doing Business in Azerbaijan 21 22 Doing Business in Azerbaijan Double tax treaties The rate of withholding tax under existing double tax treaties varies depending on the content of a particular treaty. The maximum rates of withholding tax under current double tax treaties are shown in the table below.

Payee resident in Dividends (%) Interest (%) Royalties (%) Payee resident in Dividends (%) Interest (%) Royalties (%)

Austria 5/10/15 0/10 5/10 Malta 8 0/8 8 15 0/10 10 8/15 0/10 10 5/10/15 0/10 5/10 10 0/10 10 Bosnia and Herzegovina 10 0/10 10 Netherlands 5/10 0/10 5/10 8 0/7 5/10 10/15 0/10 10 Canada 10/15 0/10 5/10 10 10 10 10 0/10 10 10 0/10 10 5/10 0/10 10 7 0/7 5 8 0/5/10 10 5/10 0/8 10 Denmark 5/15 0/8 5/10 Russian Federation 10 0/10 10 5/10 0/10 10 San Marino 5/10 0/10 5/10 5/10 0/10 5/10 5/7 0/7 10 10 0/10 5/10 10 0/10 10 Georgia 10 0/10 10 Slovenia 8 0/8 5/10 5/15 0/10 5/10 Spain 5/10 0/8 5/10 8 0/8 8 South 7 0/10 5/10 Hungary 8 0/8 8 Sweden 5/15 0/8 5/10 Iran 10 0/10 10 5/15 0/5/10 5/10 15 0/10 5/10 10 0/10 10 10 0/10 5/10 Turkey 12 0/10 10 15 0/10 10 Turkmenistan 10 0/10 10 8 0/8 10 UAE 5/10 0/7 5/10 Kazakhstan 10 0/10 10 10 0/10 10 Kuwait 5/10 0/7 10 10/15 0/10 5/10 5/10 0/10 5/10 10 0/10 10 5/10 0/10 10 Vietnam 10 0/10 10 Luxembourg 5/10 0/10 5/10 No treaty country 10 10 14 Macedonia 8 0/8 8

Doing Business in Azerbaijan 23 Accounting 5and reporting

24 Doing Business in Azerbaijan All entities registered in Azerbaijan Investment Incentive for a period of 7 years from the date the (Azerbaijani legal entities, Certificates Certificate is obtained: representative offices and branches) • Personal income tax — 50% of an An investment incentive certificate are required to maintain their books and individual entrepreneur’s income records in the territory of Azerbaijan (“Certificate”) entitles its holder to tax in accordance with the appropriate and customs benefits. The Certificate • Profit tax — 50% of a legal entity’s standards. is granted by the Ministry of Economy income of Azerbaijan to entrepreneurs who • VAT — full exemption for the The Law on Accounting stipulates that have submitted investment projects import of machinery, production all public interest entities, including that meet criteria approved by the equipment and devices by individual credit institutions, insurance companies, Cabinet of Ministers regarding the field entrepreneurs and legal entities investment funds and managers of such of economic activity, the minimum • Property tax — full exemption for funds, non-public (private) social funds, investment amount and the region in relevant property of individual licensed participants in the securities which the investment project is to be entrepreneurs and legal entities market, listed entities, commercial carried out. Accordingly, the Tax Code organizations meeting certain criteria and the Law on Customs Tariffs set out • Land tax — full exemption for relevant and, subject to certain exceptions, the applicable tax and customs duty land parcels owned or used by public legal entities, must maintain their exemptions for entrepreneurs. The individual entrepreneurs and legal records in accordance with International following exemptions from taxes apply entities Financial Reporting Standards (“IFRS”). At the same time, large and medium- sized enterprises and medical and educational institutions must follow IFRS for Small and Medium-Sized Entities (“IFRS for SME”) if their charters allow them to engage in entrepreneurial activities. All other large and medium- sized enterprises may also use IFRS. Micro and small enterprises may either use the bookkeeping rules for micro and small enterprises set by the Ministry of Finance of Azerbaijan, or follow IFRS for SME.

Doing Business in Azerbaijan 25 6EY Azerbaijan

26 Doing Business in Azerbaijan Introduction We also provide accounting advice and business, migration, contract and labor other Assurance services to foreign law. We have provided advice on local EY has led projects in Azerbaijan and Azerbaijani companies preparing and international tax and legal issues continuously since 1993. We were accounts in accordance with IFRS, US to numerous international entities that the first international accounting and GAAP and UK GAAP. have already made or are considering tax consulting network to establish a making investments in Azerbaijan. member firm in Azerbaijan. Our office Our areas of expertise include in Baku opened in 1994. Currently we Tax & Law international tax planning, transaction have a team of over 200 professionals, EY is recognized as the leading tax structuring, expatriate tax affairs, local led by Assurance Partner Ilgar Veliyev, and legal advisor in Azerbaijan. The tax compliance, currency and foreign a member of the American Institute of Tax and Law service line is headed by exchange planning and legal advisory CPAs. Partner Arzu Hajiyeva. Through its and due diligence, as well as litigation team of tax and legal consultants, EY support, representing clients in disputes, Services advises on all aspects of corporate and including in proceedings before courts personal tax planning and compliance and other adjudicatory bodies. EY Azerbaijan, in conjunction with and licensing, corporate, insurance, partners and staff in other EY offices, provides Assurance, Tax & Law, Advisory and Strategy and Transactions services to both international and local clients.

We have undertaken a number of major assignments in the country relating to inbound investment, enterprise and sector restructuring, and public policy.

Assurance EY has been licensed to conduct audits in Azerbaijan since 1994. We have gained unprecedented experience in that time. Many of the auditors at our Baku office are certified public accountants (US) and/or ACCA members. We provide audit services to numerous companies operating in Azerbaijan under PSAs. We audit the cost recovery reports and profit tax returns of all PSAs and perform profit tax return audits for numerous contracting parties owning interests in various PSAs.

Doing Business in Azerbaijan 27 Our impressive client base speaks for Our clients in Baku are major private We provide a full range of hands- itself. The firm has established good holdings and state-owned entities. As on, operationally focused support working relationships with key state part of a global network, we are able to and advice across the transaction bodies and government agencies and team up with professionals from all over life cycle, on both buy-side and sell- is in a position to facilitate negotiations the world to help our clients overcome side. We also put together the most between potential investors and the market challenges and address unique effective restructuring plans, improving authorities. business risks. We combine our transactions to achieve clients’ strategic international perspective and experience goals. This continues to be a key service with knowledge of the local market in a legislative environment that Our services include assistance in and realities to provide unsurpassed is constantly evolving and open to valuing clients’ businesses, financial consulting services, ensuring our clients’ interpretation. interests, assets and liabilities, utilizing businesses grow. our proven experience in legal taxation The firm’s tax practice receives technical Our major services include: and financial due diligence to provide support and a wider perspective on tax clients with valuation advice for a affairs in the CIS through its links with • Performance Improvement multitude of purposes. With more than the rest of the EY network. • Financial Services Advisory 10 years of local expertise, we provide the following Strategy and Transactions Advisory Services Strategy and Transactions services: EY’s Advisory practice comprises EY’s Strategy and Transactions • Lead Advisory professionals with extensive experience team provides assistance in finance • Operational Transaction Services in addressing a broad spectrum of raising (including project finance, business goals. We are experts in infrastructure financing and public- • Real Estate Advisory Services delivering performance improvements private partnerships), mergers and • Restructuring and business value to our clients, acquisitions, infrastructure and real reducing costs, managing risks, estate transactions. We are experienced • Transaction Support operating efficient IT systems, and independent financial advisors who have • Transaction Tax successfully accomplishing operational participated in numerous transactions and strategic objectives. regionally and locally. • Valuation & Business Modeling A dedicated team develops each project based on the specific features of the industry and the client.

28 Doing Business in Azerbaijan Ernst & Young Holdings (CIS) B.V. Baku office

Assurance Services Tax & Law Services Ilgar Veliyev Arzu Hajiyeva Country Managing Partner Partner, Head of Tax and Law +994 12 490 70 20 +994 12 490 70 20 [email protected] [email protected]

Azer Babayev Hidayat Azimov Partner Head of Law +994 12 490 70 20 +994 12 490 70 20 [email protected] [email protected]

Turgay Teymurov Strategy and Transactions Partner Ruslan Rzayev +994 12 490 70 20 Head of SaT [email protected] +994 12 490 70 20 [email protected]

Advisory Services Nargiz Karimova Head of Advisory Services, Assurance Partner +994 12 490 70 20 [email protected]

Address Communications Port Baku Towers Inara Akhundova Business Centre, Head of Brand, Marketing South Tower 9th floor and Internal Communications 153 Neftchilar avenue Tel.: +994 12 490 70 20 Baku, AZ1010, Azerbaijan [email protected]

Doing Business in Azerbaijan 29 EY | Building a better working world

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