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Home , Investment in Azerbaijan, Nakhchivan (city), Sumgait, Taxpayer

Doing Business in 3 Doing Business in Azerbaijan Contents

Country overview ...... 2

Economy...... 4

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

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

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

EY Azerbaijan...... 26 Introduction...... 27 Services ...... 27 Assurance...... 27 Tax & Law...... 27 Advisory Services...... 28 Transaction Advisory Services...... 28

Doing Business in Azerbaijan 1 Country 1overview

2 Doing Business in Azerbaijan According to the Constitution adopted General statistics* on 12 November 1995, Azerbaijan is Population Approx. 10 million a democratic, secular, unitary republic based on the rule of law. The country Territory 86,600 square kilometers (approx. 33,400 sq. miles) is governed by the president, who is Neighboring countries , , , , Turkmenistan, , directly elected for a seven-year term by Main ethnic group Azerbaijani (91.6%) popular vote. Ethnic minorities Russian, Lezghi, Talysh, Tatar Currently, the Capital (pop. 2,277,500) is Ilham . The First Vice-President Other populous Gandja (pop. 334,00) of Azerbaijan is appointed by and (pop. 343,100) subordinate to the President. This Autonomous Republic Autonomous Republic (pop. 456,100) position is currently held by Mehriban *Source: https://www.stat.gov.az/ Aliyeva. The Government (Cabinet of Ministers) is subordinate to the President, who appoints the Prime Minister and other ministers subject to the approval of the legislature. The highest legislative body is the 125-member single-chamber parliament, known as Milli Majlis, which is elected for a five-year term by popular vote. Milli Majlis may not be dissolved by the President; however, the President is able to veto its decisions. The Republic of Azerbaijan gained its independence from the Union in 1991. It joined 11 other former Soviet republics to form the Commonwealth of Independent States (CIS) in 1993.

Doing Business in Azerbaijan 3 2Economy

4 Doing Business in Azerbaijan Azerbaijan’s vast oil reserves attract In addition, there are 5 so-called That decree set up a special body foreign investment into the country’s industrial parks and 3 high-tech parks (Commission) tasked with generating economy. Several major oil contracts in Azerbaijan. These provide a 7-year proposals for the establishment of have been signed since 1994. tax holiday for entrepreneurs operating a favorable business environment, within these clusters. developing an appropriate legal According to the 2019 Azerbaijani State and institutional framework and Statistics Committee report, foreign The President of Azerbaijan signed preparing an action plan to achieve investments in the oil & gas sector a decree on additional measures to the goals set. comprised 54% (US$ 4,900.8 m) of all improve the business environment and foreign investments. strengthen the country’s position in international rankings on 13 July 2016. Following the success of oil & gas projects, the Government declared a policy calling for the development of the non-oil sector. Owing to the rapid development of the non-oil sector, the share of oil & gas investments in total foreign investments has gradually decreased compared with earlier years. On 26 May 2000, the President of Azerbaijan signed the Law on the Main Export Pipeline (“MEP”). The MEP, which connects Baku with the Turkish oil terminal in via Georgia, is the main route for the transportation of Azerbaijani crude to the world oil market. On 26 October 2001 Milli Majlis also passed a law ratifying the Agreement on the South Pipeline (“SCP”). The SCP is the main route for the transportation of Azerbaijani gas to the world market. In particular, the SCP pipeline is used to ship natural gas from the offshore - Deniz gas field to Turkey. The country has one state-owned oil refinery. Large petrochemical and metallurgical plants are located in Sumgait, 28 kilometers from Baku.

Doing Business in Azerbaijan 5 Business 3overview

6 Doing Business in Azerbaijan Licensing of Furthermore, a foreigner or stateless visas expire (those entering Azerbaijan person has the right to work in the under the non-visa regime must apply entrepreneurial activity Republic of Azerbaijan without obtaining for a residence permit for stays of more The Law on Licenses and Permits, a work permit provided that he/she is than 30 days). Temporary residence adopted on 15 March 2016, stipulates on a business trip in an area of business and work permits are issued under the a “one-stop-shop” principle for issuing specifically permitted by the Cabinet of one-stop-shop principle. State duty for licenses. The Ministry of Economy of Ministers of Azerbaijan and the period a temporary residence permit or for a Azerbaijan maintains the Registry of of the business trip does not exceed a work permit varies depending on the Licenses and Permits. cumulative total of 90 days in a year. period of validity (e.g., AZN 120-160 for a one-year temporary residence permit It should also be noted that licenses to Foreign citizens coming to Azerbaijan and AZN 1,000-1,400 for a one-year conduct business activity are normally for more than fifteen days must register work permit). granted for an indefinite term, save for with the State Migration Service within specific exceptions. fifteen days, based on an application The employer must register the made by the landlord (owner) of the conclusion, amendment and termination premises where the visitor is residing. of employment contracts electronically Labor licensing in the E-government web-based Foreign citizens wishing to live in requirements information system using an enhanced Azerbaijan are required to obtain a electronic signature to authenticate Foreign employees are required to temporary residence permit before their have individual work permits issued entries made. by the State Migration Service of Azerbaijan. The legislation prescribes severe penalties for employers that fail to obtain a work permit: AZN 3,000 to AZN 4,000 for executive officers and AZN 15,000 to AZN 20,000 for legal entities. The penalty increases to AZN 35,000 if the violation is committed in relation to three or more foreign employees. Heads and deputy heads of branches/representative offices of foreign companies and foreign entrepreneurs are exempt from the requirement to obtain work permits. The same rule applies to heads and deputy heads of legal entities established in Azerbaijan that have at least one foreign (corporate or individual) founder.

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

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

Doing Business in Azerbaijan 9 4Taxation

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

Doing Business in Azerbaijan 11 Tax rates Gains arising from the alienation of Type of assets Rate of The general profit tax rate is 20%. An shares or other participating interests depreciation (%) additional branch remittance tax of 10% in resident enterprises are also subject Capitalized land up to 7 applies to profit remittances from the to general profit tax. Such gains are improvements branch to the head office. The taxable calculated as the difference between the and buildings base is net profit after taxes. actual sale price and the nominal value Machinery and up to 20 of sold shares if the shares/participating equipment interests are sold for a price exceeding High technology up to 25 Determination of taxable profit the proportional value of net assets equipment of the company corresponding to Annual income disclosed in a company’s Means of transport up to 25 the alienated shares/participating Azerbaijani statutory accounts is Livestock up to 20 reduced by all business expenses except interest. If the sale price is lower than Intangibles 10 (for those with for those specifically disallowed by the the proportional value of net assets, the gain is calculated as the difference an indeterminate Tax Code. The most significant items period of use) of non-deductible expenditures for tax between the proportional value of net All other assets up to 20 purposes are: assets as at the date of sale and the nominal value of the alienated shares. • Depreciation and repair expenses in Micro-enterprises are entitled to make excess of the established limits (to 50% of a taxpayer’s income from the depreciation deductions for fixed assets be capitalized and expensed through sale of shares/participating interests used in their entrepreneurial activities at depreciation); owned by the taxpayer for at least 3 (three) years is exempt from profit tax. 2x the depreciation rates shown above, • Entertainment, accommodation while small enterprises may make and meal expenses (except for Interest and dividends deductions at 1.5x the rates shown meal expenses for the provision of above. Interest (except for interest on loans “therapeutic nourishment”, milk paid to local banks or non-resident Depreciation rates are applied to the and similar foodstuffs to employees, banks with PEs in Azerbaijan) and net book value of assets. Depreciation which are deductible up to certain dividend income received from may be applied at a lower rate than the limits); Azerbaijani companies and PEs of maximum rate. The balance resulting • Business travel expenses in excess of foreign companies are subject to 10% from using the lower rate may be the statutory limits. withholding tax. claimed in future periods.

Depreciation charges Capital gains All assets with a net book value of more Losses and bad debts There is no separate than AZN 500 and a useful life of more Entities that have deductible expenses in Azerbaijan. Capital gains are subject than one year must be capitalized and in excess of their annual income may to profit tax in Azerbaijan only when an expensed through depreciation. The carry the resulting losses forward for asset is alienated. Gains arising from applicable depreciation rates depend a period of up to five years and offset the disposal of assets are calculated as on the category to which the assets them against profits for those years the difference between the sale price belong. The following are the maximum without any limitation. Bad debts may and the net book value of an asset depreciation rates by category for the be deducted from taxable income only if (excluding VAT). most common groups of assets: they are recognized as having no value

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

Transfer pricing rules The Regulations on the Calculation and Application of Transfer Prices (“Regulations”) were adopted by the Ministry of Taxes in 2017. They are used for profit tax purposes. Transfer prices calculated under the Regulations may be used to recalculate profit tax in respect of controlled transactions between the following persons: • A resident of Azerbaijan and a related non-resident; • A PE of a non-resident in Azerbaijan and the non-resident itself or any of its representative offices, branches or divisions located in other countries or any other person located in another country that is a related person of the non-resident; • A resident of Azerbaijan and/or a PE of a non-resident in Azerbaijan and entities incorporated (registered) in jurisdictions identified as having preferential tax regimes. As a rule, where the prices or margins in controlled transactions involving supplies of goods (works, services) are not consistent with those of comparable transactions carried out between unrelated parties under the same or similar conditions at arm’s length, the tax base of the transaction may be recalculated based on transfer prices.

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

14 Doing Business in Azerbaijan Determination of taxable income In addition, effective from 1 January 50% of a taxpayer’s income from the sale Virtually all forms of compensation to an 2018, employers must withhold 0.5% of shares/participating interests owned employee are taxable, including hardship from the employee’s monthly wage by the taxpayer for at least 3 (three) and cost of living allowances, payments and contribute it to the years is exempt from income tax. Fund as an unemployment insurance by an employer for the education of an Interest on deposits of individuals premium. employee’s child and payment of taxes and dividends received by individual on behalf of an employee, unless they shareholders of JSCs are exempt from are specifically exempted. One such taxes until 1 February 2023. exemption is accommodation and meal Capital gains and investment expenses incurred by an employer on income Declarations and payments behalf of employees, provided that Sales of movable assets are not Both residents and non-residents must no tax deduction is made for these generally subject to income tax unless expenses on the profit tax return. complete and file their income tax the disposal relates to business or other declarations no later than 31 March entrepreneurial activities. The sale of an of the following tax year. Tax must be immovable asset is not subject to tax if paid before the filing deadline. Where Social Insurance Fund contributions it has been the place of residence of the a taxpayer only has Azerbaijani source payable by employees seller for at least five years. Except for income, which is subject to withholding Subject to the exception below, both these two exemptions, all other gains tax at source, the individual is not Azerbaijani and foreign nationals resulting from the sale of property are required to submit an income tax earning employment income in taxable based on the annual income tax declaration. Azerbaijan must contribute 3% of their rates for individuals and the profit tax gross salary to the Social Insurance Fund rate for legal entities. The deadline for filing declarations may of Azerbaijan (“Fund”). be extended by three months provided Gains arising from the alienation of that tax is paid in full by the original due For individuals engaged in employment shares or other participating interests date. Failure to comply may result in activities in neither the oil and gas in resident enterprises are also subject penalties (for details of these, see the sector nor the public sector, the to general income tax. Such gains Interest and penalties section below). following amounts must be withheld must be calculated as the difference from the employee for a period of 7 between the actual sale price and the years starting from 1 January 2019: nominal value of the sold shares if the shares/participating interests are sold Value added tax (VAT) Gross taxable monthly income of: for a price exceeding the proportional Scope • below AZN 200 – 3% of the amount; value of net assets of the company corresponding to the alienated shares/ All companies that do business and/ • above AZN 200 – 10% of the amount participating interest. If the sale price or import into exceeding AZN 200 plus AZN 6. is lower than the proportional value of Azerbaijan are subject to VAT. Effective from 1 January 2017, the trade-markup Contributions are to be withheld net assets, the gain is calculated as the applied to retail sales of agricultural at source and remitted to the Fund by difference between the proportional produce is also subject to VAT. the employer. Fund contributions are value of net assets as at the date of sale not applicable to foreign employees and the nominal value of the alienated who are employed under PSA-related shares. Rate contracts. The standard VAT rate is 18%.

Doing Business in Azerbaijan 15 VAT registration Determination of the taxable base for with foreign financial donations. There are detailed requirements for VAT is levied on turnover from supplies Exempted goods and services include: VAT registration and accounting, with of all goods and services, including • Financial services; set penalties for non-compliance. Legal imports, unless they are zero rated or entities and individuals with taxable specifically exempt. Barter and free • Currency and securities transactions; turnover exceeding AZN 200,000 over supplies of goods and services are • Publications. twelve consecutive months, excluding specifically included in the taxable base. those involved in trade and public All excise taxes and customs duties paid Generally, goods are deemed to be catering services, must register as VAT are also included in the taxable base for imported or exported if they undergo payers. VAT purposes. customs clearance. Other companies doing business Zero-rated goods and services include There are detailed place of supply rules in Azerbaijan may register voluntarily. exports, transit and international for determining the treatment of exported Only registered VAT payers may charge transportation, purchases of goods and imported services. Azerbaijani tax VAT or claim credit for input VAT that and services for projects funded by legislation generally allows credit for input they pay. international loans, and imports paid VAT on commercial goods or services.

16 Doing Business in Azerbaijan However, credit is allowed only if VAT is Declarations and payments • In the case of accounts receivable — paid to suppliers through a designated Declarations must be filed and VAT the date of the expiration of the VAT deposit account (see below for must be remitted monthly by the 20th recovery period; additional information). Credit is not of the following month. Whereas before • In the case of in-kind and barter allowed for input VAT in relation to VAT 1 January 2020, output VAT was transactions — the date of the exempt goods or services (such input generally accounted for on both accrual alienation of assets; VAT can only be claimed as a deduction and cash bases and input VAT was for profit tax purposes). If input VAT accounted for on a cash basis, starting • In the case of alienation without exceeds output VAT, the excess input from 1 January 2020 both output and consideration — the actual date of VAT may be carried forward or offset input VAT is accounted for on a cash such alienation; against certain VAT or other tax basis. VAT on imported goods is paid • In the case of the assignment of liabilities. Taxpayers may also apply to separately at the point of customs a claim — the actual date of such the tax authorities for a refund of excess clearance. assignment. input VAT. VAT on purchases of fixed and intangible assets is not capitalized Where a purchaser does not pay as part of the asset’s cost, but offset Timing of transactions for VAT for goods or services received from against output VAT. a supplier, but grants a loan to the purposes supplier, a taxable transaction is deemed In accordance with amendments made to have occurred: to the Tax Code which are effective from Reverse charge of VAT 1 January 2020, for VAT purposes • On the date of the supply if the loan Foreign companies that provide services transactions are recognized based on was granted before the supply was in Azerbaijan without establishing a the date of payment. “Payment” in made; PE must pay VAT on taxable sales in this context means the receipt of the Azerbaijan. In such cases, VAT is applied • On the date of the loan if the loan was principal amount due (exclusive of VAT) granted after the supply was made. through the reverse charge mechanism. for goods (works, services) supplied. In other words, it is self-assessed by the Where payment for goods or services recipient of the services and remitted to Provisions have been introduced to supplied is made in installments, each the state budget. clarify the concept of payment in installment is considered as a separate specific cases. Specifically, the date of taxable transaction. payment is defined as: VAT deposit accounts • The date on which money is received All VAT payers are required to remit by the taxpayer in cash or as a Electronic Delivery Notes VAT amounts through designated transfer to an account held by or Effective from 1 January 2017, an bank accounts known as VAT deposit otherwise at the disposal of the electronic delivery note is defined as a accounts. Only VAT payments made taxpayer; primary accounting document prepared through these accounts may be credited • In the case of mutual settlements — in electronic format that is issued by against output VAT. The VAT is then the date of the discharge or a person supplying goods, services or claimed by the payer. settlement of an obligation; works to individual entrepreneurs and legal entities. As from 1 January 2020, electronic VAT invoices have been abolished and electronic delivery notes

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

18 Doing Business in Azerbaijan Social Insurance Fund employer contributions Employers in the oil and gas sector and the public sector are required to make contributions to the Fund amounting to 22% of the gross payroll for both local and foreign employees. Effective from 1 January 2019, employers other than those operating in the oil and gas and public sectors are required to make Fund contributions amounting to 22% of the gross taxable monthly income of both local and foreign employees if their gross taxable monthly income is below AZN 200, and 15% of the amount exceeding AZN 200 plus AZN 44 if their gross taxable monthly income is above AZN 200, for a period of 7 years.

These contributions are made at the expense of the employer and are deductible for profit tax purposes. Relevant reports must be filed quarterly by the 20th of the following month. Fund contributions do not have to be made in relation to foreign employees employed under PSA-related contracts. In addition, effective from 1 January 2018, employers contribute 0.5% to the Unemployment Fund as an unemployment insurance premium.

Mining tax All companies and individuals engaged in extracting mineral resources are subject to mining tax at the appropriate rate in addition to any land tax due.

Doing Business in Azerbaijan 19 Mining tax is deductible for profit tax • Alienation of land — taxation depends • Persons who provide services other purposes. The tax is applied to the on the location and purpose of use. than services rendered to persons wholesale price of oil, natural gas and Agricultural land is subject to tax not registered as taxpayers (except all types of metals at rates ranging from calculated at AZN 0.5 per square for persons who pay fixed amounts of 3% to 26%. For all other taxable mineral meter, while for other types of land simplified tax); resources, the rates range from AZN 1 tax is calculated at AZN 0.5 per • Persons engaged in the production of to AZN 10 per cubic meter. Taxpayers square meter and multiplied by the goods that are excisable and subject are required to submit their declarations appropriate location coefficient to mandatory labeling; monthly by the 20th of the following specified in the Tax Code. month. The tax is payable monthly by Legal entities operating under the • Persons engaged in production the 20th of the following month. simplified tax regime do not pay VAT or activities that have more than 10 profit tax. employees; Any taxpayer whose business is • Persons engaged in the provision Simplified taxation system transporting passengers or cargo of their own residential and non- Legal entities and individual (except for international transportation) residential premises – AZN 15 entrepreneurs that are not required to is liable to pay a fixed amount of multiplied by the location zone rate, register for VAT purposes in Azerbaijan simplified tax and is required to obtain varying from 1.2 to 4.0 per square are eligible to be registered as payers of what is referred to as a “distinguishing meter; simplified tax, which is generally levied license plate”. Taxpayers who are • Persons engaged in wholesale at 2%. The taxable base is gross income not involved in a local transportation activities; received from sales of goods, works and business and own vehicles for the services, except for income subject to transportation of their own cargo and • Credit organizations, professional withholding tax. employees must obtain a “special participants in the insurance market Persons engaged in public catering distinguishing license plate” to (other than insurance agents activities with a taxable turnover differentiate themselves from simplified providing services relating to exceeding AZN 200,000 in any taxpayers. Both distinguishing license compulsory insurance agreements), month(s) over a period of 12 plates and special distinguishing license investment funds and managers of consecutive months are also entitled to plates are issued by the Ministry of such funds, persons licensed in the register as payers of simplified tax. The Transport of Azerbaijan at no cost within securities market, and pawnshops. two and five days respectively. tax rate in such cases is 8%. Import tax Taxpayers under the simplified tax Special simplified tax rates are regime must submit their declarations The maximum rate of import tax is established for taxpayers engaged in quarterly by the 20th of the following currently 15%. There are certain import certain activities (the list below is non- month. The tax is payable quarterly by tax exemptions. exhaustive): the 20th of the following month. Customs processing fees are payable • Persons engaged in the provision Persons who do not have the right to on imported goods in amounts ranging of their own residential and non- become simplified taxpayers include: from AZN 10 to AZN 550 (depending residential premises — AZN 15 • Persons engaged in trading activities on the value of the goods declared multiplied by the location zone rate, for whom the volume of taxable and whether customs clearance takes varying from 1.2 to 4.0 per square transactions in any month (months) place within or outside regular working meter; during a period of 12 consecutive hours and within or outside the customs months exceeds AZN 200,000; territory).

20 Doing Business in Azerbaijan Export tax Nature of payment Rate of withholding Most goods are exempt from export tax. tax (%) Insurance premiums 4% Fees for international communication and freight services 6% Interest and penalties Dividends and interest, including the interest element of financial lease 10% Interest and penalties are applied for payments non-compliance with tax legislation. Management fees and fees for other services performed or deemed to 10% For example, interest is charged on be performed in the territory of Azerbaijan but not connected with an outstanding tax liabilities at the rate of Azerbaijani PE 0.1% per day. Rents and royalties 14% The following is a non-exhaustive list of Branch remittance tax — for the remittance of profit derived from a 10% penalties that may be applied for non- permanent establishment in Azerbaijan to the head office compliance with tax legislation: Payments to countries with a favorable tax regime* 10%

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

Withholding tax Offence Penalty Failure to file declarations AZN 40 Scope Understatement of tax liability 50% of understated tax Withholding tax is applicable to the Payments from petty cash while bank accounts are 50% of expenses paid from petty repatriation of profit and other cross- under tax sanctions or penalties imposed by the cash border payments to foreign companies tax authorities not related to a PE in Azerbaijan. The Failure to register a foreign bank account with the tax 100% of the revenue collected tax is payable at the following rates: authorities on such accounts Delay in paying VAT on supplier/service provider 50% of VAT paid in violation of invoices in accordance with the rules on the payment the special rules Double tax treaties of VAT using a designated bank account The rate of withholding tax under Carrying out cash settlements in violation of the rules 1st time in a calendar year — 10% existing double tax treaties varies on cases where cash settlements are prohibited of the total transaction amount; depending on the content of a 2nd time — 20%; particular treaty. The maximum rates 3rd time or more — 40%. of withholding tax under current double Purchasing goods without receiving a delivery note, 1st time in a calendar year — 10% tax treaties are shown in the table electronic delivery note or e-VAT invoice of the value of the goods purchased; below. 2nd time — 20%; 3rd time or more — 40%. Supplying goods without issuing an electronic delivery 1st time in a calendar year — 10% note or an electronic tax invoice required to be issued of the value of the goods supplied; under the Tax Code 2nd time — 20%; 3rd time or more — 40%.

The statute of limitations for a tax violation is three years.

Doing Business in Azerbaijan 21 22 Doing Business in Azerbaijan Payee resident in Dividends Interest Royalties Payee resident in Dividends Interest Royalties (%) (%) (%) (%) (%) (%)

Austria 5/10/15 0/10 5/10 Macedonia 8 0/8 8

Belarus 15 0/10 10 Malta 8 0/8 8

Belgium 5/10/15 0/10 5/10 8/15 0/10 10

Bosnia and Herzegovina 10 0/10 10 10 0/10 10

Bulgaria 8 0/7 5/10 Netherlands 5/10 0/10 5/10

Canada 10/15 0/10 5/10 10/15 0/10 10

China 10 0/10 10 10 10 10

Croatia 5/10 0/10 10 10 0/10 10

Czech Republic 8 0/5/10 10 7 0/7 5

Denmark 5/15 0/8 5/10 5/10 0/8 10

Estonia 5/10 0/10 10 Russian Federation 10 0/10 10

Finland 5/10 0/10 5/10 San Marino 5/10 0/10 5/10

France 10 0/10 5/10 5/7 0/7 10

Georgia 10 0/10 10 10 0/10 10

Germany 5/15 0/10 5/10 Slovenia 8 0/8 5/10

Greece 8 0/8 8 South 7 0/10 5/10

Hungary 8 0/8 8 Sweden 5/15 0/8 5/10

Iran 10 0/10 10 5/15 0/5/10 5/10

Israel 15 0/10 5/10 10 0/10 10

Italy 10 0/10 5/10 Turkey 12 0/10 10

Japan 15 0/10 10 Turkmenistan 10 0/10 10

Jordan 8 0/8 10 UAE 5/10 0/7 5/10

Kazakhstan 10 0/10 10 10 0/10 10

Kuwait 5/10 0/7 10 10/15 0/10 5/10

Latvia 5/10 0/10 5/10 10 0/10 10

Lithuania 5/10 0/10 10 Vietnam 10 0/10 10

Luxembourg 5/10 0/10 5/10 Notreaty country 10 10 14

Doing Business in Azerbaijan 23 Accounting 5and reporting

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

Doing Business in Azerbaijan 25 6EY Azerbaijan

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

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

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

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

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

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

Turgay Teymurov Transaction Advisory Services Partner Ruslan Rzayev +994 12 490 70 20 Head of TAS [email protected] +994 12 490 70 20 [email protected]

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

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

Doing Business in Azerbaijan 29 EY | Assurance | Tax | Transactions | Advisory

About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY works together with companies across the CIS and assists them in realizing their business goals. 5,500 professionals work at 19 CIS offices (in , Ekaterinburg, , Krasnodar, Novosibirsk, Rostov-on-Don, St. Petersburg, Togliatti, Vladivostok, Almaty, Atyrau, Nur-Sultan, Baku, Bishkek, , , Tashkent, Tbilisi, ). EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

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