Taxation and investment in Azerbaijan

2021 Brochure / report title goes here | Section title goes here

Deloitte in Azerbaijan 03 Business and investment environment 05 1. General rules on investment activity and types of business II. PSA and RSA taxation 21 organization in Azerbaijan 05 1. Profit tax 21 2. Authorized Capital and Contributions of Shareholders 05 2. VAT 21 3. Licensing and compulsory notification of state authorities 06 3. Withholding tax 21 4. Acquisition of real estate in Azerbaijan 06 4. Taxation of employees 22 5. Exchange controls, bank accounts and confidentiality of bank 4.1. Tax residency 22 information in Azerbaijan 06 4.2. Taxable income 22 6. Construction activities 4.3. Tax rates 22 7. Competition rules 4.4. Personal income tax 22 8. Labor migration 07 4.5. Tax reporting 22 9. Customs 08 4.6. Social insurance 22 10. Securities 08 4.7. Unemployment insurance 22 11. Banking issues 09 4.8. Mandatory medical insurance contributions 22 4.9. Customs duties under PSAs/RSAs 22

Taxation system in Azerbaijan 10 III. HGA taxation 23 1. Profit tax 23 I. Statutory taxation 10 2. Other taxes 23 1. Profit tax 10 3. Social insurance 23 1.1. Tax jurisdiction and payers of profit tax 4. Unemployment insurance 23 1.3. Taxation of non-residents in Azerbaijan 11 5. Mandatory medical insurance contributions 23 1.4. Tax exemptions 13 1.5. Taxation of cross-border transactions 13 2. VAT 15 Tax & Legal contacts 24 2.1. Concept of VAT 15 2.2. Payers of VAT 15 2.3. Objects of taxation 15 2.4. VAT rate 15 2.5. Electronic invoice 15 2.6. Time of recognition of VAT liability 15 2.7. VAT administration 16 2.8. VAT refund 16 3. Property tax 16 3.1. Property tax for individuals 16 3.2. Property tax for legal entities 17 4. Personal income tax 17 4.1. Tax residency 17 4.2. Taxable income and exemptions 17 4.3. Tax rates 18 4.4. Payment and reporting of personal income tax 18 4.5. Individual filing 18 5. Social insurance 18 6. Unemployment insurance 19 7. Mandatory medical insurance contributions 19 8. Land tax 19 9. Mining tax 20 10. Excise tax 20 11. Road tax 20 12. Simplified tax 20 13. Transfer Pricing 21

02 Taxation and investment in Azerbaijan

Deloitte in Azerbaijan

Contacts

Deloitte & Touche LLAC Baku White City BC 25E Nobel Ave 8th Floor Baku, AZ1025 Azerbaijan

Tel: +994 (12) 404 12 10 Fax: +994 (12) 404 12 11 Email: [email protected], [email protected], [email protected]; [email protected]

Delivering exceptional client services is a core characteristic of how we operate on the market. We are committed to offering our clients the highest standards of professional advice. With the knowledge and expertise we have on the market, Deloitte professionals help businesses develop solutions that are practical and effective

03 Taxation and investment in Azerbaijan

Deloitte has been active on the Azerbaijani market since 2002 and has since built a reputation as a trustworthy and reliable provider of audit, tax and legal services.

Deloitte places great importance on the Azerbaijani market. We seek long-term relationships with major Azerbaijani companies, financial institutions, and commercial organizations. Deloitte is the preeminent provider of professional accounting, audit, consulting, tax and legal services to various public and private organizations in a wide range of industries in Azerbaijan. All our professionals are committed to the long-term success of our firm and to providing the best service to our strategic clients.

Deloitte Azerbaijan is a fully integrated member of the global Deloitte network, meaning that our office enjoys the same status as all other member firms such as, Deloitte in the US, UK, Germany or Japan, and has full access to the knowledge base, resources, methodologies and business relationships of our global network.

Tax & Legal Services: Nuran Kerimov Audit Services: Jamal Hasanov Advisory Services: Tural Hajiyev Financial Advisory Services: Daniyar Adigamov

04 Taxation and investment in Azerbaijan

Business and investment environment

1. General rules on investment activity • Purchasing enterprises, buildings, equity concerning defense, taxation rules, national and types of business organization in shares in enterprises, other shares, security and public order, environmental Azerbaijan bonds and securities, as well as other protection, credit and finance, and public Azerbaijani legislation defines "foreign property that can be owned by foreign morality and health. investment" as any kind of property and investors by law; proprietary rights, including the right to Foreign companies can establish either • Acquiring rights for the use of land and the results of intellectual activity and other a branch or a representative office other natural resources; and intangible rights contributed by foreign in Azerbaijan. Neither branches nor investors for generating profit. • Concluding agreements with legal entities representative offices constitute legal and citizens of the Republic of Azerbaijan entities and are considered as separate Foreign investors may invest in Azerbaijan providing for other forms of foreign divisions of the foreign legal entity they in the following ways: investment. represent.

• Equity participation in enterprises and Privileges for and state guarantees Although there is no difference between organizations established in collaboration to foreign investors the tax treatment of branches and with Azerbaijani companies and The legal regime offers both foreign representative offices, a branch office individuals; and local investors the same favorable is more appropriate for conducting • Establishing fully foreign investor-owned conditions. Azerbaijani law guarantees commercial operations from a legal enterprises; investors' interests against future adverse point of view. Unlike a representative changes in legislation. However, this office, a branch can perform commercial does not apply to changes in legislation operations that are also conducted by its Business organizations in Azerbaijan head office. Azerbaijani legislation provides for a number of different business types, including the following: Limited liability companies and branches are the most popular ways of doing Type of commercial Main characteristics or requirements business in Azerbaijan among foreign organization investors.

Open or closed joint • Limited liability The Azerbaijani Government has set stock company • One or more founders (an individual and/or a legal entity) up a "one-stop-shop" for all company • Charter and charter capital required registration processes. Foreign companies can register their legal entities, branches Limited liability • Limited liability or representative offices within two days. company • One or more founders (an individual and/or a legal entity) Legal entities with local shareholders • Charter and charter capital required can be registered immediately via fast e-registration process while regular General • Unlimited personal liability e-registration takes one day. partnerships • Charter and share capital required

Limited partnerships • Limited liability for partners and a general partner(s) 2. Authorized Capital and • Charter and shared capital required Contributions of Shareholders According to Azerbaijani civil law, as a Companies with • Founders bear subsidiary as per the charter general rule, a company’s authorized additional liability • Charter and charter capital required capital cannot be less than the company’s liabilities to its creditors. Cooperatives • Established by at least five individuals and/or legal entities The minimum amount of authorized capital (property liability) for closed joint stock companies is AZN • Charter and participation fund required 2,000 and AZN 4,000 for open joint stock companies.

05 Taxation and investment in Azerbaijan

3. Licensing and compulsory Both residents and non-residents of Under the Construction Code, state notification of state authorities Azerbaijan have the right to open and authorities, municipal bodies, individuals Certain activities in Azerbaijan (for close bank accounts in national or any and legal entities may qualify as customers example, banking, audit, insurance, other foreign currency. Residents and of construction project, while the project construction, etc.) require a license/special non-residents may import and exchange manager and contractor must be permit. Companies that intend to engage in currency in line with the procedures individuals or legal entities registered in activities that require a license should apply established by the Central Bank of Azerbaijan and holding the appropriate to the Azerbaijani Ministry of Economy Azerbaijan. licenses. via the ASAN (Azerbaijan Service and Assessment Network) Service for a license Taxpayers engaged in entrepreneurial Furthermore, the Construction Code after state registration. activity are obliged to notify tax authorities determines professional certification about opening offshore bank accounts. requirements for the following construction 4. Acquisition of real estate activities: in Azerbaijan Foreign investors may repatriate their i. engineering/research Any purchase of immovable property should profits after paying the appropriate taxes in ii. project management be notarized. The title to the property is Azerbaijan. iii. construction/installation considered to have been transferred to the iv. mechanization/transportation buyer as soon as the appropriate records Under current legislation, the disclosure v. production of construction have been made in the State Register of of confidential bank account information materials Immovable Property. is prohibited. Such information can be vi. construction projects expertise disclosed only following a court ruling or in Construction products and materials shall Although foreign investors, including certain limited cases in accordance with the be certified to ensure the compliance with individuals, may own immovable property, law. fire safety regulations. Laboratories of they cannot purchase land in Azerbaijan. enterprises carrying out certification of Foreign nationals and foreign legal entities 6. Construction activities construction materials and products, as may only obtain the rights to land through Construction activities in Azerbaijan are well as test laboratories shall be accredited. lease or use agreements. regulated by the Azerbaijani City Building and Construction Code (the “Construction 5. Exchange controls, bank accounts Code”) and other laws and regulations, and confidentiality of bank technical norms and standards (collectively, information in Azerbaijan the “Construction Standards”, available on Manat, Azerbaijan's official currency, the official website of the State Committee has limited convertibility. on City Planning and Architecture). Construction works require permits and Manat is the only means of payment in licenses, except for certain small-scale Azerbaijan under the country’s constitution. and other specific construction projects specified in the Construction Code. 1 USD buys 1.7000 AZN, according to the exchange rate published by the Central The Construction Code specifies rules Bank of Azerbaijan as at 04 January 2021. with respect to the following parties to construction activity: i. the customer ii. the project manager iii. the contractor

06 Taxation and investment in Azerbaijan

7. Competition rules Furthermore, market participants with Employers (legal entities) who employ Competition on the Azerbaijani market is a dominant position, or with special or expatriates without obtaining work permits regulated by the Law on Antimonopoly exclusive rights or natural monopolies, have risk an administrative penalty ranging from activity (the “Antimonopoly Law”) the to disclose the terms and prices for their AZN 15,000 to AZN 35,000. Law on Natural Monopolies, and the Law goods and services and any modifications on Unfair Competition along with other to them 30 days prior to issuing them. Temporary residence supplementary laws and regulations. A dominant position is defined as an Any expatriate visiting Azerbaijan Notification and authorization from the exceptional position, which allows a market on a visa or visa free regime may apply State Antimonopoly Service is required participant to use its economic potential for a temporary residence permit by the Antimonopoly Law in the following to influence competition, so as to restrict if the applicant: cases: market access to other participants. • has a close relationship with an • Merger/consolidation Azerbaijani citizen (father, mother, Market participants with a market share – Where a merger/consolidation leads to husband/wife, children, sibling, niece/ exceeding 35 percent or any other threshold the creation of entities with a market nephew, grandfather/grandmother, etc.); specified by legislation are considered share of over 35 percent; entities with a dominant position. • invests AZN 500,000 or greater into the – Where a merger/consolidation takes country’s economy; place between market participants with 8. Labor migration a total value of assets of over 75,000 • possesses real estate in Azerbaijan According to the Migration Code every times the minimum wage (minimum of minimal value of AZN 100,000 or able-bodied person over 18 years of any wage amount was AZN 250.00 updated minimum deposit of AZN 100,000 with nationality (or stateless) is entitled to work in September 2019); a bank in Azerbaijan based on a fixed- in Azerbaijan provided that the following term deposit agreement; • Buying shares conditions are met: – Acquiring more than 20 percent of the i. an Azerbaijani citizen with the • is a high-level specialist in an economic, voting shares of a market participant; necessary skills and qualifications industrial, defense, scientific, cultural, – Acquiring main production means has not claimed the job vacancy; sporting or other field; or non-tangible assets of a market ii. the employment services are • is an expert with higher education participant in case such property not able to meet employers’ needs in shipbuilding or vocational training represents more than 10 percent of the from local labor resources. in a relevant field with at least one year seller’s main production means or non- of experience in this area, invited either tangible assets; and Foreigners or stateless persons must by Azerbaijani citizens, contractors of an – Acquiring the rights necessary to define have a work permit in order to work in Azerbaijani legal entity, or the residents the business and perform the functions Azerbaijan, which are issued by the State of Garadagh Industrial Park; of the highest governing management Migration Service. They are issued for body of a market participant; up to one year and may be extended an • is a family member of an expatriate unlimited number of times, each being valid temporarily or permanently residing provided that: for a period of up to one year. in Azerbaijan; Individuals coming to Azerbaijan to • The value of the entity’s total assets • is the head or deputy head of a legal conduct entrepreneurial activity,* or for exceeds 75 thousand times the minimum entity with foreign investment or business trips not exceeding 90 days in wage (minimum wage amount was AZN a foreign legal entity with a branch/ one calendar year in specific industries 250.00 updated in September 2019); or representative office in Azerbaijan; (e.g. mining, processing, electricity, gas, • One of the entity’s market shares utilities, telecoms, finance and insurance, • is involved in entrepreneurial activity exceeds 35 percent; or education, transportation, water supply in Azerbaijan*; and waste treatment), the heads of legal • The entity acquiring shares controls the • is in the process of obtaining a work entities with foreign investment and activities of the entity transferring these permit; branches/representative offices of foreign shares. legal entities and their deputies do not • is a serviceman and specialist invited need to obtain a work permit. to serve or work in the Armed Forces

07 Taxation and investment in Azerbaijan

of the Azerbaijan Republic and other a safe and secure manner and facilitating • full exemption from customs duties for armed formations established in foreign trade. The Code sets the eligibility imports of machinery, technological accordance with the legislation of the criteria for acquiring Authorized Economic equipment and devices by resident legal Azerbaijan Republic; is an employee of Operator status. entities and individuals of industrial and mass media accredited in the Republic technological parks for construction and of Azerbaijan; is a sailor; is a teaching Customs authorities may audit the goods Research & Development purposes (valid staff and a lecturer invited to give lecture that were cleared during checks previously. for seven years from the date of issuance courses in higher education institutions; The Customs Code outlines two types of the investment promotion certificate). is an art worker, a coach and an athlete customs procedure in the customs territory invited to work in sports clubs registered of Azerbaijan (the “Customs Territory”): 10. Securities with the relevant executive authority; The securities market in Azerbaijan is General customs procedures: regulated primarily by the provisions • is in full-time education at an educational i. export of the Civil Code, the Law on Securities institution in Azerbaijan; ii. re-export Market and regulations adopted by the • is considered a victim of human iii. temporary export supervisory authority in Azerbaijan. trafficking; iv. release for free circulation v. re-import Under the Civil Code, security is an • is assisting law enforcement bodies; instrument certifying existence of • is professionally involved in a registered Specific customs procedures: contractual relations between its holder religious institution; i. transit (international/domestic) and issuer and the holder’s rights arising ii. specific use (temporary import/ from the contract. An issuer is a person • is covered by intergovernmental end use) that carried out the issue, placement or agreements of the Republic of Azerbaijan. iii. processing (inward/outward) distribution of securities.

* Entrepreneurial activity does not require a work iv. warehousing (temporary/ permit requirement and can only be used to obtain customs) Securities may be issued as registered or a temporary residence permit if an applicant v. free zone bearer securities. In the case of registered undertakes business activity and has at least five The legislation grants customs exemptions securities, certificates bear the name of full time or 10 part-time employees hired with the appropriate employment agreements. In such for individuals and legal entities that hold the holder, or their ownership is registered cases, at least 80 percent of the employees have to an investment promotion certificate. with a central depository. In the case be Azerbaijani citizens. of bearer securities, the issuer must The customs preferences are listed below: perform obligations to the bearer (person Registration upon arrival possessing security). Foreigners and stateless persons planning • full exemption from customs duties for imports of import of machinery, to stay in Azerbaijan for more than 15 days Depending on method of placement, technological equipment and devices must be registered at the place of stay securities may be of two types: within 15 days of their arrival. (valid for seven years from the date of issuance of the investment promotion • Investment securities, such as shares 9. Customs document; and bonds, which are placed through separate issuances and, regardless of Customs relations are regulated by the • full exemption from customs duties for the time of their acquisition, have equal Azerbaijani Customs Code and other imports of machinery, technological rights thereunder within the respective supplementary laws and regulations issued equipment and devices by the issuances; and by state authorities. management organization or operator of industrial and technological parks • Non-investment securities, which are Under the Customs Code, legal entities for construction and Research & placed otherwise and have different can register as an Authorized Economic Development purposes; rights, such as promissory note, Operator to receive simplified customs depository receipt, investment fund control procedures for delivering goods in share, pledge paper, mortgage paper and real estate certificate.

08 Taxation and investment in Azerbaijan

Only joint stock companies (open and A set of new regulations was adopted Banks in Azerbaijan must be established closed) can issue shares. in 2012 to increase transparency, the by at least three individuals and/or legal detection and prevention of abuse on entities in the form of an open joint Depending on the physical nature, the Civil the securities market, the protection of stock company. Political parties, social Code distinguishes between two forms of shareholder rights and the monitoring of unions, funds and other non-commercial securities: security transactions, under which the organizations cannot be shareholders in following must be reported to the Central banks. • Documentary (or “certificated”), which are Bank of the Republic of Azerbaijan: printed in a special manner to exclude i. Information on security All banking activities, including the fraud risks and in which the rights of transactions by professional acceptance of deposits, maintenance of holders to securities are established by a participants of the securities market correspondent accounts, cash operations, paper document; and (brokers, dealers, depositaries, money transfers and lending are subject to • Non-documentary (or “non-certificated”), registrars of security owners and licensing. where the rights of holders to securities those performing the functions are evidenced by entries made in of a stock exchange); As of 1 January 2015, the aggregate capital a deposit account held by a central ii. Instances of insider trading; requirement for banks was increased depositary. iii. Annual reports on the activities under the Rules on the Calculation of Bank Placement of investment securities, i.e., of investment securities issuers; Capital and Its Adequacy. Pursuant to their transfer from the issuer to initial iv. Attestation of professional these rules, the minimum aggregate capital holder, may be of two types: participants on the securities requirement for banks is AZN 50 million. market. • “closed,” in which the securities are placed by offering them to less than 50 11. Banking issues persons or by indication of purchasing The banking system in Azerbaijan investors in the resolution on issuance of comprises of the Central Bank of the investment securities; or Republic of Azerbaijan (the "Central Bank"), • “public,” in which the securities are placed and credit institutions. Both banks and by offering them to an indefinite number non-bank credit organizations are classified of people or to more than 50 persons by as credit organizations. However, while publication in the mass media. banks are allowed to conduct all types of banking operations, under the Law on Prospectus or memorandum is required Non-Bank Credit Organizations, non-bank in case of public placement of investment credit organizations may only conduct securities. Public placement is carried out certain types of banking operations, such via a stock exchange. as extending loans, selling and purchasing debt obligations (factoring, forfeiting), There are limitations for Azerbaijani financial leasing, issuing guarantees, companies placing investment securities etc., and are expressly prohibited from outside the country. accepting deposits.

09 Taxation and investment in Azerbaijan

Taxation system in Azerbaijan

The tax system in Azerbaijan consists of 1.2. Taxation of resident entities foreign banks and credit organizations and three taxation regimes: Taxable base debts on bonds traded on foreign stock Legal entities are taxed on profit, which exchanges) are more than double the • The statutory tax regime governed by the is determined as gross income from taxpayer’s net assets (capital), the amount Tax Code; economic activities less allowable of interest accrued on the part of the • The tax regime established by existing deductions at a flat rate of 20 percent. debt exceeding this threshold cannot be Production Sharing Agreements ("PSAs") deducted for profit tax purposes. This rule and Risk Service Agreements (“RSAs”); Deductible expenses does not apply to resident banks and credit The Tax Code allows expenses incurred organizations. • The taxation regime established by the in the course of economic activities to be two Host Government Agreements deducted from the gross income earned Depreciation and amortization ("HGAs"): the main Export Pipeline (Baku- from such activities. Expenses not related allowance Tbilisi-Ceyhan) HGA ("BTC") and South to the income generating activity, personal The Tax Code provides for the group Caucasus Pipeline (Shah Deniz Gas) HGA expenses, and entertainment expenses are depreciation of fixed assets (except ("SPC"). non-deductible (unless entertainment is buildings, which are depreciated separately). A general overview of the taxes applicable considered to be the taxpayer's economic Annual depreciation rates per group under these taxation regimes is presented activity). Deductions are also not allowed of assets are as follows: below. for the acquisition of fixed assets and • buildings, facilities and installations, intangible assets, although these assets I. Statutory taxation structures: up to 7 percent; may be depreciated. The Tax Code sets out the general taxation • machinery, equipment: up to 20 percent; framework in Azerbaijan and establishes The Tax Code also provides rules and the following taxes: • computer equipment as a high tech limitations relating to specific deductions. product: up to 25 percent; • Profit tax Some specific allowable deductions are as follows: interest payments (subject • means of transportation: up to 25 • Value added tax ("VAT") to limitations), provisions for banks and percent, • Property tax insurance companies, bad and doubtful • expenses on geological exploration and debts, expenses related to scientific • Personal income tax preparation for the production of natural research and experimental design, resources: up to 25 percent; • Mining tax depreciation of fixed and intangible assets (subject to limitations), repair • land improvement costs: up to 7 percent • Land tax expenses (subject to limitations), insurance • other fixed assets: up to 20 percent; • Excise tax payments, expenses related to geological exploration and the extraction of natural • intangible assets • Road tax resources. – for those with an undetermined period • Simplified tax of use: up to 10 percent; Deductibility of interest expenses – for those with a determined period of 1. Profit tax Any interest expenses paid or incurred use: at an annual rate, pro-rata to the 1.1. Tax jurisdiction and payers of by the taxpayer in the course of their determined period of use. profit tax business activities is generally deductible. Micro entrepreneurs can deduct Legal entities incorporated in Azerbaijan However, there are some limitations. The depreciation expenses for profit tax are normally treated as residents and deduction of interest on loans received purposes by applying a coefficient of 2 are taxable on their worldwide income. from abroad or related parties cannot to the above depreciation norms. Small Legal entities incorporated abroad are exceed the expense calculated using 125 entrepreneurs are allowed to deduct normally treated as non-residents and are percent of the interbank loan rate set depreciation expense by applying a only taxable on income from sources in forth by the Central Bank of Azerbaijan. coefficient of 1.5 to the existing depreciation Azerbaijan. Both resident and non-resident According to the thin capitalization rule norms on the fixed assets used for enterprises in Azerbaijan pay profit tax. applicable from 2019, if debts received entrepreneurial purposes. State-owned from abroad (excluding loans received from companies can deduct up to 40 percent of the depreciation expense calculated from 10 Taxation and investment in Azerbaijan

assets acquired from state financing. Tax accounting rules The annual profit tax return is due no later Any amount paid or incurred for the Taxpayers are required to maintain accurate than 31 March of the following reporting acquisition, construction or improvement and up-to-date records of their income year. of assets for business use cannot be and expenses in accordance with the rules deducted immediately, but should instead provided in the Tax Code. 1.3. Taxation of non-residents be capitalized and depreciated over time. Taxpayer must keep records of both income in Azerbaijan Gains from the revaluation of fixed assets and expenses related to tax-exempt Tax jurisdiction over non-residents are not considered when determining the transactions separately as well as taxable A non-resident enterprise operating in value of assets for taxation purposes. transactions. Azerbaijan via a permanent establishment Land, art, buildings, and facilities that are Taxpayer may record income and expenses pays tax on its profit, i.e. on gross income historical or architectural monuments, and under either the cash or accrual method of generated from Azerbaijani sources other fixtures, may not be depreciated. accounting. However, a taxpayer must use in connection with the permanent the same method for both accounting and establishment, less the amount of expenses Deductibility of repair expenses tax purposes and be consistent in using this incurred with respect to such income as per The amount of deductible repair expenses method throughout the tax year. The tax the Tax Code. each year is limited to a certain percentage year is a calendar year. of the residual value of each group of fixed The tax has a flat rate of 20 percent. assets as of the previous year-end. Those Cash method The gross income of a non-resident rates are defined as follows: Using the cash method of accounting, a enterprise that is not connected with the taxpayer is required to record income upon permanent establishment is taxed at the • buildings, facilities, installations and its receipt, regardless of when the income source of payment without the deduction structures: 2 percent of the residual was earned. Expenses are recorded when of expenses. A non-resident enterprise value; the payment is made rather than when the generating income through the supply of • machinery, equipment, computer expense was incurred. property (sale) not connected with the equipment as a high tech product and permanent establishment pays tax on the transportation means: 5 percent of the Accrual method gross income received in a calendar year residual value; In contrast to the cash method, the general from an Azerbaijani source. The tax is paid rule under the accrual method of accounting after the deduction of expenses relating to • other fixed assets: 3 percent of the requires a taxpayer to record income when the generation of such income. residual value. it is earned, regardless of when it is actually received. Expenses are recorded when they Permanent establishment Any amounts spent in excess of the limits are incurred rather than when they are paid. Under the Azerbaijani Tax Code, a foreign are deemed to increase the residual value of individual's or a legal entity's permanent the asset at the end of the current year. Tax payment and reporting establishment in Azerbaijan is an Companies pay profit tax at a rate of establishment through which a taxpayer's If the actual amount of repair expenses is 20 percent. They are required to make economic activity is either fully or partially less than the amount established by this quarterly advance tax payments calculated conducted for 90 or more days within limit, the repair expenses can be deducted as either 25 percent of the previous year’s a 12-month period, including the activities of from income. In this case, the maximum tax liability or by multiplying their income an authorized representative. value of deductible repair expenses in in the current quarter by the weighted tax the following tax years is increased by the coefficient of gross income for the previous The Tax Code allows for any of the difference between the actual repair costs year. following items to be used as evidence of a and the established limit. The formula below explains this calculation permanent establishment: in more details: Loss carry forward • a place of management, subdivision, A — Last year's profit tax The Tax Code allows taxpayers to carry office branch or agency; B — Last year's gross income (without losses forward. Losses can be carried deduction of expenses) • construction and repair sites; forward for up to five years and offset C — Current quarter's gross income against other years’ profits without • installation and assembly facilities, as well Advance profit tax = C x (A/B) limitations. 11 Taxation and investment in Azerbaijan

as supervisory activities associated with income types are treated as received from them; Azerbaijani sources: Income from Azerbaijani Tax rate sources • platforms, sites, drilling equipment or • Interest income vessels used for the exploration and Other items of income 10% • Dividends income production of natural resources, as well from Azerbaijani sources as supervisory activities associated with • Royalty income them; The Tax Code treats any payments to • Rent income countries or territories with preferential • any fixed base/location where a • Insurance income taxation regimes (tax havens) as Azerbaijani non-resident individual carries out source income and imposes a 10 percent entrepreneurial activity; • Management fees additional withholding tax. • premises used for the provision of • Income from international consulting services; communication and transportation The list of countries and territories with preferential taxation regimes is approved any places of employment in which other • • Other income by the special Decree of the President of types of entrepreneurial activities are the Republic of Azerbaijan and updated if conducted in Azerbaijan; Withholding tax rates such necessity arises. Unless otherwise specified in double • persons carrying out the functions of taxation treaties that Azerbaijan has a permanent establishment for a non- Starting from 2019, legal entities and entered into, the following withholding tax resident enterprise or a non-resident individual entrepreneurs making payments rates normally apply to the following items individual in Azerbaijan, or people acting to physical persons not registered of income from Azerbaijani sources which on their behalf, authorized to make as taxpayers in relation to supply of are payable to non-residents, provided agreements on their behalf and usually agricultural products by their producers as that such income is not attributable to conducting such responsibilities; well as rawhide, non-ferrous and ferrous a non-resident's permanent establishment metal scrap, paper, plastic and glass waste places for the manufacture and sale of • in Azerbaijan: and used tires for recycling are obliged to goods and the execution of works and Income from Azerbaijani Tax rate withhold tax at a rate of 2 percent at the services. sources source of payment. A place is not considered a non-resident enterprise’s permanent establishment in Dividends 10% Moreover, amounts transferred by Azerbaijan if used (regardless of the user) Interest 10% Azerbaijani residents to the digital wallets exclusively to: of non-residents are subject to a 10 – store goods or products owned by the International 6% percent withholding tax. non- resident enterprise; communication and – keep a stock of goods or products transportation services In addition, the provision of assets or cash owned by the non-resident enterprise Royalties 14% generated from a company’s operations for eventual processing and to a shareholder for purposes other than subsequent export from Azerbaijan by Management fees 10% economic activity (except for debt to the a third party; Interest on financial 10% shareholder and the repayment of debt – purchase goods or manufacture leasing received from the shareholder), as well products for a non-resident enterprise as the reimbursement of a shareholder’s for its own needs; Risk insurance and re- 4% debts to other persons, are treated as a – implement any preparatory or support insurance fees dividend payment and are taxed at the activity for a non-resident enterprise Income received from 10% source of the payment at a rate of 10 for its own needs. performing works and percent. rendering services Azerbaijani source income For withholding tax purposes, the following

12 Taxation and investment in Azerbaijan

1.4. Tax exemptions The Tax Code also grants a tax exemption Double taxation treaty relief The Tax Code specifies the following to resident entities of industrial or in Azerbaijan exemptions from profit tax: technology parks for ten years from date Azerbaijan has agreed double taxation – income of charitable organizations, they become residents. Additionally, treaties with 55 countries (53 of them except for that received from the profits used by entities that manage currently valid) that generally follow the entrepreneurial activity; industrial or technology parks to improve OECD Model Income Tax Convention. – grants, membership fees and park infrastructure is exempt from profit donations received by non-commercial tax. Azerbaijani tax legislation sets the rules organizations; on how to claim a refund of taxes withheld – income of international, interstate The Tax Code also stipulates a 50 percent from payments to non-residents who are and intergovernmental organizations, exemption from profit tax for legal covered by double taxation treaties signed except for that received from entities holding an investment promotion with other countries. entrepreneurial activity certificate. The exemption is valid for – income of educational institutions seven years from the date of receiving this According to rules on the administration of (excluding the portion of profit paid as certificate. double taxation treaties, if a non-resident a dividend). submits a claim for a tax exemption or In addition, the Tax Code provides a ten- application of reduced taxation for income Moreover, 50 percent of a taxpayer’s year exemption from profit tax liability for derived from sources in Azerbaijan for income from the disposal of shares and income generated from the production all income types (e.g. business profit, participating interests owned for at least of agricultural products starting from 1 dividends, royalties, and interest) three years and 75 percent of profit from January 2014. generated by a non-resident, then the non- entrepreneurial activities classified as resident may be entitled to the benefits in a “micro entrepreneurship” are exempt advance (before paying tax) as set forth by from profit tax. Small- and medium-sized 1.5. Taxation of cross-border the respective double taxation treaty. enterprise (“SME”) cluster companies transactions are also exempt from profit tax for a Outbound transactions seven-year period from the date they are Since resident entities are taxed on their included in the SME cluster register. Legal worldwide income in Azerbaijan, and may entity startups classified as micro or small also be taxed on their income derived entrepreneurs are exempt from profit tax from sources of foreign countries, the liability for a three-year period from the same income could be subject to double date of receiving the startup certificate. taxation. The profit tax payable by taxpayers In terms of domestic tax law, income engaged in retail trade and public catering or profit tax paid outside Azerbaijan is activities is reduced by 25 percent in credited upon payment of tax in Azerbaijan. accordance with the proportion of non- cash payments received through POS Excess foreign tax credit cannot be offset terminals in total income for a three-year against the resident taxpayer’s tax liabilities period starting from 1 January 2019. in Azerbaijan on any domestic source income or carried forward or backward. 13 Taxation and investment in Azerbaijan

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

Austria 5% –10%–15% 10% 5%–10% Moldova 8%–15% 10% 10%

Belarus 15% 10% 10% Montenegro 10% 10% 10%

Belgium 5%–15% 10% 5%–10% The Netherlands 5%–10% 10% 5%–10%

Bosnia and 10% 10% 10% Norway 10%–15% 10% 10% Herzegovina Pakistan 10% 10% 10% Bulgaria 8% 7% 5%–10% Poland 10% 10% 10% Canada 10%–15% 10% 5%–10% Qatar 7% 7% 5% China 10% 10% 10% Romania 5%–10% 8% 10% Croatia 5%–10% 10% 10% Russia 10% 10% 10% Czech Republic 8% 10% 10% San Marino 5%–10% 10% 5%–10% Denmark 5%-15% 8% 5%-10% Saudi Arabia 5%–7% 7% 10% Estonia 5%–10% 10% 10% Serbia 10% 10% 10% Finland 5%–10% 10% 5%–10% Slovenia 8% 8% 5%–10% France 10% 10% 5%–10% Sweden 5%-15% 8% 5%-10% Georgia 10% 10% 10% Switzerland 5%–15% 10% 5%–10% Germany 5%–15% 10% 5%–10% Tajikistan 10% 10% 10% Greece 8% 8% 8% Turkey 12% 10% 10% Hungary 8% 8% 8% Turkmenistan 10% 10% 10% Iran 10% 10% 10% UK 15% 10% 5%–10% Israel 15% 10% 5%-10% Ukraine 10% 10% 10% Italy 10% 10% 5% United Arab 5%–10% 7% 5%–10% Japan 15% 10% 0%–10% Emirates

Jordan 8% 8% 10% Uzbekistan 10% 10% 10%

Kazakhstan 10% 10% 10% Vietnam 10% 10% 10%

Republic of Korea 7% 10% 5%–10%

Kuwait 5%–10% 7% 10%

Latvia 5%–10% 10% 5%–10%

Lithuania 5%–10% 10% 10%

Luxembourg 5%–10% 10% 5%–10%

Macedonia 8% 8% 8%

Malta 8% 8% 8%

14 Taxation and investment in Azerbaijan

Non-residents operating in Azerbaijan However, VAT applies to payments made by persons without tax registration to without creating a permanent non-residents who are not registered for VAT purposes in Azerbaijan for works and establishment can apply for an advanced services supplied via e-commerce (with the exception of purchasing airline tickets and exemption or reduced taxation for all booking hotel accommodation services outside of Azerbaijan). income types, including business profits, VAT amount to be paid to non-resident dividends, interest, and royalty income. must be calculated and paid by the tax agent. The timing of the taxable transaction is considered the time when the payment is made. When a payment is made before a transaction, the taxable transaction will be To do this, a non-resident must first obtain 2. VAT considered to have been made at the time a certificate of residency from the tax 2.1. Concept of VAT of payment. authorities of their country of residence The concept of VAT according to Azerbaijani to confirm their residence in that country. tax legislation is similar to the principles 2.4. VAT rate According to the administration rules for used in most European countries. Under The current VAT rate is 18 percent. double taxation treaties, copies of the Azerbaijani law, VAT payers are entitled to contracts confirming that income is to recover VAT paid on purchases (input VAT) 2.5. Electronic invoice be paid to the non-resident, and other even if this exceeds the VAT generated by Any taxpayer who carries out a taxable relevant documents (such as invoices, the sale of goods or services (output VAT). transaction is required to issue an contract addendums, etc.), must be electronic invoice to the person receiving submitted to the Azerbaijani tax authorities 2.2. Payers of VAT the goods or services. for confirmation. An individual or legal entity whose taxable sales amount to more than AZN 200,000 The taxpayer must draw up and issue The rules also allow non-residents in a consecutive 12-month period must an electronic invoice to the purchaser of operating in Azerbaijan to use double register for VAT. Taxpayers must register the goods either at the shipping time of taxation treaties to apply for a tax for VAT in advance of carrying out a taxable goods or within five days from the date refund without creating a permanent transaction worth more than AZN 200,000. of issuance of the document confirming establishment. To do this, the non- resident delivery of goods. must complete a DTA-05 form and submit The Tax Code also allows for voluntary VAT it to the tax department where the payee is registration. The taxpayer must draw up and issue registered. an electronic invoice to the purchaser of A taxpayer that has registered, but whose works/ services within five days from the According to the administration rules, total taxable sales over a 12-month period date of performance of works/services. It is applications should be reviewed and do not exceed AZN 100,000 may apply not allowed to issue electronic invoice for responded to by tax authorities within to cancel their registration at any time advance payments. 20 working days of the submission of the after a one year period from their last VAT application (e.g. DTA-05). registration, subject to some exceptions The registration and administration of indicated in the Tax Code. electronic invoices is carried out online by A tax refund must be made within 45 days the tax authorities. of the submission of the application if 2.3. Objects of taxation approved by the tax authorities. Under the Tax Code, the supply of goods/ 2.6. Time of recognition of VAT liability provision of services and imports of goods Output VAT must be recognized at the time are subject to VAT. Taxable transactions when the payment for goods (services/ do not include services provided or work works) is made. completed outside Azerbaijan. 15 Taxation and investment in Azerbaijan

In case the payment is made before the penalties. If input VAT is not fully offset, delivery of the goods (works, services), the the remaining amount must be refunded timing of the taxable transaction shall be to the taxpayer within four months of the the date of the payment. taxpayer’s submission of an application to the tax authorities. If two or more payments are made for a taxable transaction, each payment is Daily interest of 0.1 percent is payable by treated as a separate transaction. the tax authorities if the amount of tax due to the taxpayer is not repaid within four 2.7. VAT administration months. VAT on domestic supplies and service The taxpayer can recover input VAT up to imports is administered by the tax three years after it becomes due. authorities. VAT on the import of goods is administered by the customs authorities. The right of a taxpayer to claim overpaid Registered VAT payers should assess the taxes is limited to five years from the end of amount of VAT to be remitted to the budget the tax reporting period. by subtracting input VAT credit from its output VAT liability. It should be noted that the VAT refund process in Azerbaijan is extremely difficult. All input VAT must be paid through a Azerbaijan tax authorities and Ministry of VAT Deposit Account ("VDA"), a type of Finance are always reluctant to approve escrow bank account administered by the VAT refund applications. government. The purpose of introducing VDAs, according to official sources, is to 3. Property tax combat VAT fraud. 3.1. Property tax for individuals Payers of property tax are resident and Regulations require every VAT payer to non-resident individuals who personally have a VAT sub-account ("VSA"). VSAs are own buildings and parts of buildings, as part of a VDA. Only VAT paid to the supplier well as water and air transport facilities. via VDAs is recoverable. Individuals pay property tax in the following Registered VAT payers must submit VAT order and at the following rates: returns and pay VAT due on a monthly basis by the 20th day of the following For the building in their ownership: month. • Property tax is calculated by multiplying the building’s total area in square meters 2.8. VAT refund by the relevant tax rate, which varies The VAT reporting period is a calendar between AZN 0.1 to AZN 0.4 depending month. The amount of input VAT on the building’s location remaining after offsetting it against a For water and air transport vessels: taxpayer's output VAT in any given month is automatically carried over and can be • AZN 0.02 per cubic cm of a water offset against the other tax liabilities. transport vessel’s engine AZN 0.02 per cubic cm of an air transport Taxpayers have the right to offset VAT • vessel’s engine receivables against liabilities for other taxes, interest charges for late tax payment, • One percent of the market value of water financial sanctions and administrative and air transport equipment without engines

16 Taxation and investment in Azerbaijan

3.2. Property tax for legal entities fixed assets, which is determined by adding interest or shares. Where the participating Taxable objects for legal entities include: up the residual value of the enterprise's interest or shares are sold at a price lower property (excluding vehicles) as of the than the proportionate value of net assets • average annual value of fixed assets on beginning and the end of the reporting or shares, the difference between the the enterprise’s balance sheet year, and dividing the total by two. proportionate value of net assets and the • for non-resident enterprises carrying nominal value of the shares at the sale out business activity in Azerbaijan Entities should make quarterly advance agreement date will constitute the tax base through a permanent establishment, payments of property tax at 20 percent of for individuals. only the average annual value of fixed the previous year’s property tax no later If participating interests or shares are assets connected with the permanent than the 15th day of the second month bought at a price exceeding its nominal establishment. of each quarter. An annual property tax return should be submitted no later than price, then expenses deducted when providing these participating interests or Legal entities and individual entrepreneurs 31 March of the next reporting year. shares, are recorded at the actual purchase holding an investment promotion price of these assets. certificate are exempt from property tax on 4. Personal income tax property obtained (purchased, imported, 4.1. Tax residency The income of sole entrepreneurs produced, built or constructed) using Individuals who are present in Azerbaijan operating in industrial parks is exempt the funds granted within the framework for more than 182 days during a calendar from taxation. Moreover, a 50 percent of the respective investment project for year, or those with a place of permanent exemption from personal income tax seven years from the date of receiving residence, a center of vital interests or a is granted to individuals who hold an this certificate. This exemption does not residential adobe in Azerbaijan, or who investment promotion certificate for apply to property acquired by legal entities have Azerbaijani citizenship, are considered seven years from the date of receiving the or individual entrepreneurs and used tax residents. certificate. for entrepreneurial purposes before the In addition to the above, new income tax investment promotion certificate was 4.2. Taxable income and exemptions exemptions have been stipulated in tax issued. However, this exemption applies to Residents of Azerbaijan are subject to legislation, starting from 2019: buildings used for entrepreneurial activities income tax on taxable income, which is within the framework of an investment defined as gross income received from • the dividend income of an individual who project, but that were not employed by the all sources (both Azerbaijani and non- is the founder (shareholder) of a resident taxpayer for its entrepreneurial activities Azerbaijani) during a tax year, regardless of entity is exempt from income tax if the before. where the income was earned or paid, less resident entity is not registered for VAT allowable deductions. purposes, and the taxable turnover of Micro entrepreneurship businesses (with Non-residents are only subject to this entity’s activities is less than AZN the exception of ones whose assets total Azerbaijani income tax on income received 200,000 within a month(s)of a 12-month book value exceeds AZN 1,000,000) are from Azerbaijani sources. period; exempt from property tax. The taxable base for personal income tax • a 50 percent income tax exemption on a In addition, the Tax Code exempts property is determined as the difference between taxpayer’s income from sale or disposal tax on properties owned by legal entities gross income for the tax year and expenses of shares and participating interests and individuals engaged in the production (or deductions) stipulated by the Tax Code owned at least for three years; of agricultural products for 10 years for this period. • a 75 percent income tax exemption on starting from 1 January 2014. Virtually all forms of employee an individual entrepreneur’s income from SME cluster companies are exempt from compensation are taxable, including entrepreneurial activities classified as property tax on property used for SME hardship and taxes paid on behalf of the “micro entrepreneur”; cluster activity for seven years from the employee. If a participating interest or • the “startups that function as individual date of their inclusion on the SME cluster shares in charter capital are sold at a price entrepreneurs and are classified as register. that exceeds the proportionate value of micro- or small business are income tax net assets, then the taxable income is the exempt for three years from the date Entities pay tax at a rate of one percent of difference between the actual sale price of receiving the startup certificate the average annual residual value of the and the nominal value of the participating 17 Taxation and investment in Azerbaijan

• the part of income earned by an One of the main changes brought about A tax return for employment income individual entrepreneur who is a member by the 2018 tax reforms was a reduction withheld at source is filed by the employer of a SME cluster for the provision of in income tax for private non-oil and on a quarterly basis together with social goods and/or services under a contract gas industry taxpayers. The following insurance, unemployment insurance concluded with an SME company preferential tax rates will remain in force for and mandatory medical insurance intended for capital expenditures seven years from 1 January 2019. contributions by the 20th of the month is income tax exempt for seven years. following the end of the reporting quarter.

Monthly taxable Tax rate The income tax amount payable by 4.5. Individual filing income entrepreneurs engaging in retail trade and/ Residents and non-residents must or public catering activities is reduced by 25 Up to AZN 8,000 0% complete and file their income tax returns percent of the tax amount generated from no later than 31 March of the following tax Over AZN 8,000 14% of the POS terminals for three years starting from year. amount January 1 2019. The amount of payments exceeding AZN made by taxpayers via POS terminals is not 5. Social insurance 8,000 taken into account when determining the According to Azerbaijani law, social right to receive this redemption. insurance contributions are paid by Individuals engaged in entrepreneurial both Azerbaijani nationals and foreign Moreover, individuals’ annual interest activity are taxed at a fixed rate of 20 individuals. income paid by a local bank or branch percent. Taxable income from non- of a foreign bank in Azerbaijan for term entrepreneurial activities are taxed at a Employers are liable for paying social deposits, as well as dividends, discounts rate of 14 percent. insurance contributions at a rate of (the difference as a result of placing 22 percent of the employee’s gross bonds below face value) and interest paid Moreover, domestic sport betting, lottery salary, while 3 percent is deducted by an issuer for investment securities winnings (with the exception of cash from the employee’s gross salary as the are exempted from personal income tax winnings on sports betting, winnings from employee’s portion of the social insurance for seven years beginning from 1 February lotteries and other types of competitions contribution. 2016. and contests outside of Azerbaijan) are subject to a 10 percent withholding tax at The income of insured employees who 4.3. Tax rates the source of payment, which should be are not employed in the oil and gas or The worldwide income of tax residents withheld and paid to the State Budget on public sectors is subject to social insurance and Azerbaijani source income of non- a monthly basis. The tax base for this type contributions at the following rates for residents received from employment are of income is the difference between the seven years starting from 1 January, 2019: subject to the following progressive income winnings and the amount paid to place a tax rates: bet or buy a lottery ticket. Employers are also responsible for submitting quarterly reports to the Monthly taxable Tax rate 4.4. Payment and reporting of personal tax authorities on social insurance income income tax contributions calculated and paid for local Personal income tax from employment Up to AZN 2,500 14% and foreign employees on the local payroll income must be withheld by the employer by the 20th of the month following the Over AZN 2,500 AZN 350 + 25% at source. reporting calendar quarter. of the amount exceeding AZN Withheld taxes are to be remitted by the The Agreement on Cooperation in the Area 2,500 employer to the budget by the 20th of the following month. AZN 200 of a salary below AZN 2,500 is not taxable

18 Taxation and investment in Azerbaijan

Insurance premium for individual Social insurance contribution rate entrepreneurs:

Monthly taxable Tax rate Deduction from the income Paid at the expense • 4% of the minimum monthly salary (AZN income of the insured person of the insurer 250). Up to AZN 200 25% 3% 22% Please note that a 50 percent exemption Over AZN 200 25% AZN 6 + 10% of the amount AZN 44 + 15% of the from MMIC is granted to the income up exceeding AZN 200 amount exceeding AZN to AZN 8,000 of insured persons from 200 employment in non-public sector and non- oil and gas industry until 1 January 2022. of Social Insurance was signed between the 7. Mandatory medical insurance governments of Turkey and Azerbaijan on contributions Payments must be processed at the same 17 July 1998. According to Article 7.1 of the As a part of the State Social Insurance time with payments of employees’ salaries Agreement, Turkish citizens employed by Program, Mandatory Medical Insurance but not later than the 15th day of the Turkish companies operating in Azerbaijan Contributions (“MMIC”) are applied from month following the month when salaries for less than 24 months are exempt 1 January 2021. According to the Law “On are calculated. from paying Azerbaijani social insurance Medical Insurance” citizens of the Republic Employers are also responsible for contributions. However, Article 7.5 of the of Azerbaijan as well as foreigners and submitting quarterly reports to tax Agreement states that this exemption will people without citizenship who have authorities about the contributions by the not apply if Turkish citizens are employed obtained a refugee status in the Republic 20th of the month following the reporting by a division or a permanent establishment of Azerbaijan are considered as insured calendar quarter. of a Turkish company in Azerbaijan. persons. Expatriate employees do not fall under any of the mentioned categories 8. Land tax 6. Unemployment insurance described in the law, thus the MMIC shall A land tax is imposed on land owners and According to the Law “On unemployment not be applied to the expatriate employees. users. The amount depends on the use, insurance” dated 30 June 2017, employees However, it is worth mentioning that the location and total area of the land. For and employers are required to make position of local tax authorities is different instance, in Baku, the tax rate on industrial unemployment insurance contributions as in this regard. Based on tax officials, land under 10,000 square meters is AZN insured parties and insurers respectively. income of expatriate employees who have 10, while any area over 10,000 squares Employers are liable for paying a local employment agreement is subject meters is taxed at AZN 20 per 100 square unemployment insurance contributions to MMIC. meters. at a rate of 0.5 percent of the employee’s gross salary, and 0.5 percent is deducted Employment income is subject to MMIC at Legal entities holding an investment from the employee’s gross salaries the the following rates: promotion certificate are exempt from employee’s portion of the social insurance • Employee’s portion (deducted from land tax for seven years from the date contribution. Contributions must be salary): of receiving an investment promotion paid no later than the 15th of the month – gross salary up to AZN 8,000 – 2%; certificate. for which unemployment insurance – gross salary over AZN 8,000 – AZN contributions are due. 160+ 0.5% of amount exceeding AZN Legal entities calculate land tax annually 8,000. based on the total land area and the Employers are also responsible for respective land tax rates, and then submit submitting quarterly reports to tax • Employer’s portion: their calculation to tax authorities no later authorities about the unemployment – Gross salary up to AZN 8,000 – 2%; than 15 May each year. calculated and paid for local and foreign – Gross salary over AZN 8,000 – AZN 160 employees on the local payroll by the + 0,5% of amount exceeding AZN 8,000. Land tax is paid twice per annum in equal 20th of the month following the reporting installments no later than 15 August and 15 calendar quarter. November.

19 Taxation and investment in Azerbaijan

9. Mining tax and individuals entering Azerbaijan is • for all cities and regions – 2 percent Legal entities and individuals extracting collected by the customs authorities at • revenue of sports betting operators – 6 mineral resources in Azerbaijan and on different rates depending on the type of percent the Caspian shelf pay a mining tax at rates vehicle, distance driven within Azerbaijan, ranging from 3 to 26 percent. and the length of time spent in the country. • income of sports betting commissioners The tax is paid after the extraction of – 4 percent minerals on a monthly basis by the 20th The road tax for motor petrol, diesel fuel, of the month following the reporting and liquid gas produced in Azerbaijan Persons engaged in public catering month. Mining tax is deductible for profit and allocated for domestic consumption activities whose taxable turnover exceeds tax purposes. Mining taxpayers submit is calculated by adding AZN 0.02 to the AZN 200,000 in any month within a 12– tax returns on a monthly basis no later wholesale price of each liter. month period are entitled to register as than the 20th of the month following the simplified tax payers and pay taxes at a rate reporting month. The road tax for imported motor petrol, of 8 percent. diesel fuel, and liquid gas is calculated by 10. Excise tax adding AZN 0.02 to the customs value of The following types of the provision of All individuals and legal entities producing each liter, which must not be lower than the residential and non-residential areas are or importing excisable goods in Azerbaijan wholesale price. tax-exempt: pay excise taxes. – Provision of residential area where an 12. Simplified tax individual is registered for at least three Tobacco products, alcoholic beverages, Individuals and legal entities involved calendar years; energy drinks and petroleum products are in entrepreneurial activity that are not – The full amount of gift, financial aid and subject to excise tax at fixed rates, e.g. AZN registered as VAT payers have the right inheritance received from the family 3.2 per liter of spirits or AZN 35 per 1,000 to pay simplified tax. However, producers members of the taxpayer; cigarettes produced in Azerbaijan. of excised goods, credit and insurance – Compensation paid to individuals organizations, investment funds, in accordance with the Law of the Imports of passenger cars, buses, leisure professional securities market participants, Republic of Azerbaijan “On Acquisition and sport yachts are subject to excise tax non-governmental pension funds, and of Land for State Needs”; at different rates depending on the size of certain other persons cannot become – 30 square meters of living space of the their engines. simplified taxpayers. Also, as per the private property of individuals. limits on simplified tax, persons carrying Imported platinum, gold and jewelry and out production activities with more Persons providing transportation services other products made of them, processed, than ten employees, persons providing (except for international transportation) are graded, framed and hardened diamonds goods in wholesale trading activities, and simplified tax payers. Simplified tax rates are exempt from excise tax for 3 years persons providing services other than for transportation service providers vary starting from 1 January 2021. those provided to non-taxpayers (except from AZN 1 to AZN 9 per month depending from services provided by fixed simplified on factors such as the number of seats, Imported fur/leather products are subject taxpayers) do not have the right to become cars, and tonnage. to excise tax at a rate of 10 percent of its simplified taxpayers. This limitation also wholesale price. The export of excisable applies to persons engaged in building Furthermore, income from the sale of goods is taxed at a zero percent rate. construction activities, persons engaged in residential and non-residential property is the sale of jewelry, fur and leather and to subject to simplified tax at a rate of AZN 15 11. Road tax activities requiring a license. per square meter multiplied by the location Road tax is paid by non-resident entities zone rate, which varies from 0.5 to 4.0. and individuals entering Azerbaijan, as well Simplified tax is calculated from the The rate for non-residential buildings is 1.5 as persons engaged in the production or revenue obtained from the provision of regardless of location. import of motor petrol, diesel fuel, and goods, completion of works, rendering liquid gas in Azerbaijan. of services, and non-sale income at the Legal entities’ and sole entrepreneurs’ following rates: cash withdrawals from their bank accounts The tax payable by non-resident entities are subject to 1 percent simplified tax,

20 Taxation and investment in Azerbaijan

which shall be withheld by local banks and According to Azerbaijani tax law, the 2. VAT branches of foreign banks in Azerbaijan, relevant authorities must be notified about Contractors and foreign sub-contractors and national operators of postal services. transactions over the threshold of AZN are exempt from VAT with a zero percent 500,000 (approximately EUR 250,000) rate on their activities in the sector. This Income from the sale of land plots is calculated based on the transfer price. includes the following: subject to simplified tax at a rate that Failure to comply with the filing • goods, work, and services supplied to or depends on the use, location, and total requirements will result in a financial by them; area of the land. For instance, in Baku, sanction of AZN 500 (approximately EUR the tax rate is AZN 0.5 per square meter 250). • export of petroleum and all products multiplied by the location zone rate, which processed and refined from such varies from 1.2 to 4.0. Moreover, Azerbaijani residents belonging Petroleum; to the multi-national enterprises with • import and acquisition of goods, work, Simplified tax payers must make simplified annual consolidated group revenue and services. tax payments and file tax returns no later exceeding the amount of € 750 million, Contractors and foreign subcontractors than the 20th of the month following each are required to submit a report to the tax should obtain a VAT exemption certificate calendar quarter. authorities for the purpose of ensuring to confirm VAT exemption status issued by automated information exchange with the the tax authorities. The public notary approving the contract of competent authorities of the states in the the sale of residential and non-residential framework of international agreements VAT exemption certificates are issued to property is responsible for calculating, signed by Azerbaijan. contractors, operating companies, and withholding, and remitting the simplified direct local and foreign subcontractors tax amount to the State Budget within one II. PSA and RSA taxation registered in Azerbaijan. banking day. The notary is also responsible More than 20 PSAs and 2 RSAs have been for filing a monthly tax return with the tax now signed and ratified in Azerbaijan. 3. Withholding tax authorities no later than the 20th of the PSAs/RSAs contain provisions governing In lieu of profit tax, foreign subcontractors following month. certain taxation rules. pay withholding tax at rates varying from 5 to 10 percent, calculated from gross 13. Transfer Pricing In addition, detailed taxation procedures payments received from work or services Transfer Pricing rules in Azerbaijan are set out in PSA/RSA tax protocols. performed in Azerbaijan. Under the PSAs/ are generally in line with the OECD TP PSAs/RSAs stipulate taxation rules for RSAs, a foreign subcontractor is defined guidelines, and transactions between foreign sub-contractors performing work as a legal entity incorporated outside of the parties listed below are considered or providing services in connection with Azerbaijan and providing goods, work controlled transactions: PSAs/RSAs. or services directly or indirectly to the • between an Azerbaijani resident and contractor who is a party to the PSA/RSA. 1. Profit tax mutually dependent non-resident Under PSAs/RSAs, contractors carrying persons; Income tax must be withheld by anyone out business in Azerbaijan relating to making payments to a foreign sub- • between a non-resident’s permanent Hydrocarbon Activities should pay profit contractor and remitted to the Azerbaijani establishment in Azerbaijan and the tax at rates varying from 20 to 32 percent. state budget. This is a foreign sub- non-resident themselves, or any contractor’s only profit tax liability. representative, branch or other division Contractors should submit their financial of such non-resident located in other statements and profit tax returns (drawn According to the newly signed PSAs/RSAs countries; up exclusively in USD) for each calendar (e.g. SWAP PSA, Karabagh RSA, ADUA PSA, year, along with an appropriate report from • between a resident of Azerbaijan or etc.), a foreign subcontractor that has a an auditor to the tax authorities by the the permanent establishment of a non- legal presence in Azerbaijan must pay profit dates set out in the PSAs/RSAs. resident in Azerbaijan, and subjects tax in accordance with the Tax Code. established (registered) in countries with preferential taxation.

21 Taxation and investment in Azerbaijan

Taxation of activities under PSAs and 4.7. Unemployment insurance All foreign employees employed by RSAs are very distinct as compared to tax companies engaged in the petroleum sector under PSAs/RSAs are exempt from regulations provided by the domestic tax unemployment insurance. legislation governed by the Tax Code. Employers must pay unemployment insurance contributions of 0.5 percent of local employee’s gross salary, and 0.5 percent is deducted from local employee’s 4. Taxation of employees 4.2. Taxable income The personal income tax of local Almost all payments to foreign employees gross salary as the employee’s portion of employees is calculated in accordance in Azerbaijan, including wages, salaries, the unemployment insurance contribution. with the statutory tax legislation. The bonuses, personal travel costs, education personal income tax of foreign tax costs of an expatriate's family members, 4.8. Mandatory medical insurance resident employees is only calculated on etc. are considered taxable income. contributions their income earned as a direct result of All foreign employees employed by their employment in Azerbaijan. Foreign 4.3. Tax rates companies engaged in the petroleum employees who do not become tax The rates of personal income tax are the sector under PSAs/RSAs are exempt from residents should not pay Azerbaijani same as the statutory rates set out above. MMIC. However, employment income of personal income tax. local employees is subject to the MMIC. 4.4. Personal income tax Each employer must withhold personal 4.1. Tax residency 4.9. Customs duties under PSAs/RSAs There are three tax residency rules under income tax from payments made to local All imports made in connection with a PSA/ PSAs/RSAs: and foreign employees. RSA are exempt from customs duties and import VAT. • An expatriate employee, who is present Foreign employees are entitled to receive a in Azerbaijan for ordinary business tax receipt from the tax authorities for the Contractors and foreign sub-contractors purposes, becomes a tax resident if he/ amount of income tax paid. may obtain a certificate granting exemption she spends more than 30 consecutive from import/export duties. Certificates days in Azerbaijan in a calendar year. 4.5. Tax reporting are issued by the Azerbaijani State Income earned after the 30th day is Employers are responsible for reporting all Customs Committee. An import and export taxable in Azerbaijan. Azerbaijani personal income tax payments exemption certificate can only be issued to made for their local and foreign tax • Individuals spending less than 30 contractors and foreign sub-contractors consecutive days, but more than 90 resident employees to the tax authorities. who are registered in Azerbaijan. cumulative days in Azerbaijan in a calendar year are also treated as tax 4.6. Social insurance A contractor or a foreign sub-contractor residents, and income earned after the All foreign employees employed by importing goods under the PSA/RSA 90th day becomes taxable. companies engaged in the petroleum should submit copies of their VAT and sector under PSAs/RSAs are exempt from import and export exemption certificates • Rotating employees and foreign mandatory social insurance. to customs authorities during the import employees who have their primary place process. of employment in Azerbaijan qualify as Employers are required to pay social tax residents if they spend more than insurance contributions of 22 percent 90 cumulative days in Azerbaijan in a of the local employee's gross income. calendar year, and they are taxable from Employers must also withhold social the first day of their stay in Azerbaijan. insurance contributions from local employee's income at a rate of 3 percent and pay them to the same authority.

22 Taxation and investment in Azerbaijan

III. HGA taxation However, the re-sale of any such imported 5. Mandatory medical insurance 1. Profit tax goods to any other person is taxable, and, contributions Profit tax is imposed on the taxable in the case of the sale of automobiles, Although not specifically indicated in profit from the project activities of each furniture and professional tools and the Law of the Republic of Azerbaijan on participant in an Host Government instruments, will result in customs duties Medical Insurance, as per the Protocol Agreement (HGA) is set at a fixed rate of 27 liability, in accordance with Azerbaijani law. Concerning Taxation of Employees and percent. Physical Persons, all foreign employees The personal income tax of foreign employed by companies engaged in the HGA participants should submit their profit employees is only calculated on their petroleum sector under HGAs are exempt tax return (drawn up exclusively in USD) to income earned as a direct result of their from mandatory medical insurance tax authorities for each calendar year, no employment in Azerbaijan and only if the contributions. later than 15 April (under BTC HGA) and employees spend more than 182 days in 1 April (under SCP HGA) of the following Azerbaijan per calendar year. However, employment income of local calendar year. employees are subject to the MMIC. 3. Social insurance 2. Other taxes Foreign nationals employed in connection Under HGAs, no taxes are imposed with HGAs are exempt from mandatory on or withheld from payments to any social insurance. contractor in connection with HGA activities. Contractors also do not have tax The employment income of Azerbaijani compliance or filing obligations for HGA nationals working under HGAs is subject to activities. mandatory social insurance.

HGA participants are entitled to import into Employers must pay social insurance or export/re-export from Azerbaijan free contributions of 22 percent of an of taxes and restrictions, whether in their employee's gross salary, and 3 percent of own name or on their behalf, all equipment, the employee's gross salary is deducted as materials, machinery, tools, vehicles, the employee's share of social insurance spare parts, supplies, petroleum, fuels contributions. and lubricants to be used in connection with HGAs and all other goods (other than The employer is responsible for making natural gas), work, services or technology a monthly payment of social insurance necessary or appropriate for use in contributions on the day that the connection with the HGA. employees' salary is paid, but no later than the 15th day of the month following the Foreign employees of HGA participants, month when the income was earned. contractors, and each family member of such foreign employees, have special rights 4. Unemployment insurance with regard to the import and export of Foreign nationals employed in connection goods and services. They may import or with HGAs are exempt from unemployment export/re-export all goods, work, services insurance. or technology for their own use and personal consumption. They may do this Employers must pay unemployment personally or arrange for a third party to insurance contributions of 0.5 percent provide import/export services on their of local employee’s gross salary, and 0.5 behalf. percent is deducted from local employee’s gross salary as the employee’s portion of the social insurance contribution.

23 Taxation and investment in Azerbaijan

Tax & Legal contacts

Office location Azerbaijan Baku Baku White City Office Building 25E Nobel Avenue Baku, AZ1025 Tel.: +994 (12) 404 12 10

Nuran Kerimov Partner Tax & Legal [email protected]

24 Taxation and investment in Azerbaijan

25 deloitte.az Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.

Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500® companies through a globally connected network of member firms in more than 150 countries bringing world-class capabilities, insights, and high-quality service to address clients’ most complex business challenges. To learn more about how Deloitte’s approximately 330,000 professionals make an impact that matters, please connect with us on Facebook, LinkedIn, or Twitter.

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.

© 2021 Deloitte & Touche LLC. All rights reserved.