International Azerbaijian Highlights In Plain English

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Phone : +1 202 792 6600 www.CastroAndCo.com Investment basics: by PSAs, RSAs or HGAs but projects not covered by such agreements are taxed in Currency – Azerbaijani Manat (AZN) accordance with the rules in the tax code.

Foreign exchange control – There are Taxation of dividends – Dividends received no restrictions on the or from Azerbaijan companies and permanent of capital. Supporting documentation, establishments of foreign companies including tax payment documents and bank located in Azerbaijan are exempt from statements, must be submitted when cash profit tax; they are subject only to a 10% withdrawals exceed amounts previously withholding tax. imported into the country. Amounts may be repatriated in any currency, and both Capital gains – Capital gains are treated as residents and nonresidents can hold bank normal income and taxed at the ordinary accounts in any currency. profit .

Accounting principles/financial statements Losses – Losses may be carried forward for – IFRS are required (except for micro and five years. The carryback of losses is not small enterprises). Contractors operating permitted. under production sharing agreements (PSAs), risk service agreements (RSAs) or Rate – Azerbaijan legal entities are subject host government agreements (HGAs) in to profit tax at 20% on their worldwide the oil and gas industry are required to income. Nonresidents are taxed on maintain books in US dollars in accordance Azerbaijan-source income at the same rate. with the principles of generally accepted PSA and RSA contractors that carry out international petroleum industry accounting. business in Azerbaijan in connection with Financial statements must be prepared petroleum operations pay profit tax at pre- annually. negotiated rates of 20% to 32%. In lieu of profit tax, foreign subcontractors operating Principal business entities – These are the under PSAs and RSAs pay withholding tax at limited liability company, open/closed joint rates ranging from 5% to 10% of the gross stock company, general partnership, limited payments received as consideration for partnership, cooperative, and branch and work or services performed in Azerbaijan. representative office of a foreign company. The tax is deducted by the payer and is a final tax for the foreign subcontractor. Corporate taxation: In accordance with new PSAs and RSAs, Residence – An entity that is incorporated foreign subcontractors who have a in Azerbaijan is considered resident; branch registered presence in Azerbaijan must pay offices and representative offices of foreign profit tax in accordance with the provisions legal entities are considered nonresident. of the tax code. Tax is imposed on the taxable annual profit of each main exporting Basis – Residents are taxed on worldwide pipeline (MEP) participant relating to MEP income; nonresidents are taxed only on project activities at a flat rate of 27%. Azerbaijan-source income. Surtax – No – Profit tax is imposed on a company’s operating profits, computed as the difference between total taxable income Alternative minimum tax – No and deductible expenses. Normal business Foreign – Corporate income expenses are deductible in computing paid outside Azerbaijan may be credited taxable income. Companies operating in against Azerbaijan tax due. Excess foreign the oil and gas sector are governed mainly tax credits may not be offset against a resident taxpayer’s Azerbaijan tax liabilities withholding tax of 10%. on any domestic-source income, nor may they be carried forward or back. Other taxes on corporations:

Participation exemption – No Capital duty – No

Holding company regime – No – No

Incentives – The tax code provides for a Real – An annual land tax is 50% exemption from profit tax for legal levied on the owners and users of land entities holding an investment promotion (whether or not resident), with the amount certificate. The exemption is valid for of tax depending on the location and use of seven years from the date of obtaining the land. the certificate. Certain other incentives Legal entities holding an investment also may be available for legal entities and promotion certificate are exempt from individuals holding an investment promotion land tax for seven years from the date of certificate. As from 1 January 2019, profit obtaining the certificate. tax exemptions also are available for: i) 50% of the income from the disposal of shares Social security – Both employers and and participations held for at least three employees are required to make social years; ii) profits of micro or small enterprise insurance contributions (SIC). For a seven- start- ups for three years after the start-up year period as from 1 January 2019, the SIC certificate is obtained; and iii) 75% of the rates payable by employers on behalf of profits of micro enterprises. private sector employees (other than those working in the oil and gas industry) are 3% Withholding tax: on the first AZN 200 of gross salary and 10% Dividends – Dividends paid to a nonresident on the excess. are subject to a 10% withholding tax, unless An additional 1% unemployment insurance the rate is reduced under a . contribution also is payable - 0.5% paid by Interest – Interest paid to a nonresident is the employer on the gross payroll and 0.5% subject to a 10% withholding tax, unless the withheld by the employer from the gross rate is reduced under a tax treaty. salary of the employee.

Royalties – Royalties paid to a nonresident – No are subject to a 14% withholding tax, unless – No the rate is reduced under a tax treaty. Other – An assets tax is levied on owners of Technical service fees – Although Azerbaijan fixed assets, with some exceptions. does not specifically address technical service fees, such fees generally A seven-year exemption from assets tax are subject to a 10% withholding tax. on relevant fixed assets is granted for: i) legal entities (from the date of obtaining Branch remittance tax –Net profits an investment promotion certificate) and remitted to the foreign head office of a ii) small and medium enterprises that branch are subject to a 10% withholding tax. are part of an SME cluster (from the date Other – Direct or indirect payments of their registration). Legal entities and made by Azerbaijan residents to persons individual entrepreneurs classified as micro registered in one of the 40 listed countries enterprises also are exempt from assets tax. and territories deemed to have low- Anti-avoidance rules: tax regimes are subject to an additional – Transactions between Tax year – Calendar year related parties must be on arm’s length terms. The tax authorities may adjust the Consolidated returns – A legal entity may contract price: i) in barter or import-export file a consolidated return that includes the transactions; ii) in transactions between taxable income and deductible expenses of related persons (as defined in the tax code); its branch offices. iii) where the price deviates by 30% or Filing requirements – The profit tax return more from transactions involving similar or is due by 31 March (inclusive) following the identical goods, work or services, taking into end of the tax year. Other tax returns are account conditions that would affect market filed on a periodic basis (monthly, quarterly price; iv) where the property is insured for and annually). a value exceeding its net book value; and v) where a monthly lease fee is paid for Legal entities and entrepreneurs that are immovable property (other than housing). registered for VAT purposes and simplified taxpayers paying employment income to Transfer pricing rules apply to cross-border individuals must submit tax declarations to controlled transactions with associated the tax authorities before 31 January of the parties. Controlled transactions exceeding year following the reporting year. AZN 500,000 per counterparty per calendar year must be reported to the tax authorities Penalties – Penalties apply for late filing, by 31 March of the year following the failure to file or or evasion. reporting year. Rulings – A taxpayer may apply for an Thin capitalization – Thin capitalization advance tax ruling for each transaction rules are introduced as from 1 January 2019 (separately) exceeding a value of AZN 10 where the foreign borrowing of a company million. is at least twice its net asset value (the foreign leverage ratio). The interest paid Personal taxation: attributable to the portion of the debt Basis – Azerbaijan residents are subject exceeding the ratio is not tax-deductible. to on taxable income, which Controlled foreign companies – An is defined as gross income received Azerbaijan resident that holds, directly or from all sources, regardless of where the indirectly, more than 20% of the charter income was earned or paid, less allowable capital or voting shares of a foreign legal deductions. entity that receives income from a low-tax A 50% exemption from personal income jurisdiction must include its proportionate tax is granted to individuals who hold share of that foreign entity’s income in an investment promotion certificate for its taxable income. A foreign jurisdiction seven years from the date of obtaining the is considered a low-tax jurisdiction if the certificate. tax rate is 50% or less than the rate in Azerbaijan, or if the country has laws on As from 1 January 2019, a 75% exemption the confidentiality of information about is granted for income of entrepreneurs companies or laws that allow secrecy of classified as micro enterprises and income financial information or information on from innovative activities of micro or small the actual owner of property or income enterprises will be exempt from taxation (property) recipient. for three years upon receipt of the start-up certificate. Disclosure requirements – No Nonresidents are subject to Azerbaijan Compliance for corporations: income tax on Azerbaijan-source income. Residence – Unless otherwise provided Net wealth/net worth tax – No in an applicable tax treaty, an individual generally is considered to be tax resident if Social security – SIC for employed he/she is physically present in Azerbaijan for individuals are withheld by the employer; a period of more than 182 cumulative days self-employed individuals must register and in a calendar year (regardless of nationality). pay their own contributions. For a seven- year period as from 1 January 2019, the SIC Filing status – Each taxpayer must file an rates payable by private sector employees individual tax return; joint returns are not (other than those working in the oil and gas permitted. industry) are 22% on the first AZN 200 of gross salary and 15% on the excess. Taxable income – Taxable income includes income from employment, income from An additional 1% unemployment insurance entrepreneurial activities and passive contribution also is payable. The employee income. Certain income, such as property contribution of 0.5% of gross salary is inherited from family members, alimony, withheld by the employer. etc., is exempt. Foreign nationals working under PSAs, RSAs Capital gains – Capital gains are treated as and HGAs are exempt from SIC. normal income and taxed at the ordinary personal tax rate. Other – An assets tax is levied on all owners of fixed assets, with some exceptions. For Deductions and allowances – Expenses individuals, the rate depends on the type of incurred by an entrepreneur may be asset. deducted in computing taxable income. Individuals holding an investment promotion Rates – Rates are progressive up to 25%. certificate are fully exempt from assets tax Employment income of up to AZN 8,000 for relevant fixed assets for seven years per month is exempt from personal income from the date of obtaining the certificate. tax for seven years as from 1 January 2019 for private sector employees (other than Legal entities and individuals engaged those working in the oil and gas industry). in entrepreneurial activities with taxable The excess and any investment income are supplies up to AZN 200,000 in any taxed at 14%. Individual entrepreneurs are consecutive 12-month period and that are taxed at a 20% rate. not registered as VAT payers may pay a simplified tax. The simplified tax is 2% of Other taxes on individuals: gross revenue.

Capital duty – No Individual entrepreneurs that pay the simplified tax are exempt from profit tax, VAT, assets tax and personal income tax. Stamp duty – No Compliance for individuals:

Capital acquisitions tax – No Tax year – Calendar year

Real property tax – An annual land tax is Filing and payment – Tax returns are due by levied on the owners and users of land 31 March following the tax year. However, a (whether or not resident), with the amount tax return for employment income withheld of tax depending on the location of the land at source is filed by the employer on a and how it is used. quarterly basis by the 20th day of the month following the end of the reporting quarter. /estate tax – No Payers of the simplified tax and VAT must submit the tax return annually, no later Filing and payment – VAT must be reported than 31 January of the year following the on a calendar-month basis. VAT payers are reporting year. Personal income taxes, which required to submit VAT returns no later than generally are withheld by the employer, the 20th day of the month following the must be remitted to the state budget within reporting month, and must calculate the 20 days of the following month. VAT due to the state budget by reducing their output VAT liability by any input VAT Penalties – Penalties apply for late filing, credit. failure to file or tax avoidance or evasion. Source of tax law: Tax Code of Azerbaijan, Value added tax: PSAs, RSAs, HGAs and other statutory acts

Taxable transactions – VAT in Azerbaijan Tax treaties: Azerbaijan has signed 51 tax is similar to that in most European VAT treaties. systems, with tax levied on the supply of most goods and services and on the import Tax authorities: Ministry of Taxes of goods. VAT payers are entitled to recover the amount of VAT paid on purchases (input VAT) that exceeds the VAT received from their taxable supplies (output VAT). Electronic invoicing is required.

Rates – The standard VAT rate is 18%, although some transactions are exempt (e.g. financial services) or zero- rated.

Registration – Taxpayers must register for VAT purposes if turnover in a consecutive 12-month period exceeds AZN 200,000. If the total value of one transaction or contract exceeds AZN 200,000, the taxpayer must register for VAT purposes before commencing activities. The tax code also permits voluntary registration for VAT purposes. Where services are provided by nonresident entities that are not registered for VAT purposes in Azerbaijan, the local entity must self-assess a reverse-charge VAT and remit the tax to the state budget.

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