Baku

Taxation in Baku, Azerbaijan

What are the tax rates in Baku, Azerbaijan? How are corporations taxed? Here’s Teleports overview of personal, corporate and other taxation topics in Baku, Azerbaijan.

Corporate taxation in Baku

Teleport city rankings for corporate income tax

Corporate taxation puts Baku in position 89 of all Teleport Cities.
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Basis

Residents are taxed on worldwide income; nonresidents are taxed only on Azerbaijan-source income.

Taxation of dividends

Dividends received from Azerbaijan companies and permanent establishments of foreign companies located in Azerbaijan are exempt from profit tax; they are subject only to a 10% withholding tax.

Residence

An entity that is incorporated in Azerbaijan is considered a resident; branch offices and representative offices of foreign legal entities are considered nonresidents.

Losses

Losses may be carried forward for five years. The carryback of losses is not permitted.

Rate

Azerbaijan legal entities are subject to a profit tax of 20% on their worldwide income. Nonresidents are taxed on Azerbaijan-source income at the same rate. PSA contractors that carry out business in Azerbaijan in connection with petroleum operations pay profit tax at

Foreign tax credit

Corporate income taxes paid outside Azerbaijan may be credited against Azerbaijan tax due. Excess foreign tax credits may not be offset against a resident taxpayer’s Azerbaijan tax liabilities on any domestic-source income, nor may they be carried forward or back.

Taxable income

Profit tax is imposed on a company’s operating profits, computed as the difference between total taxable income and deductible expenses. Normal business expenses may be deducted in computing taxable income. Companies operating in the oil and gas sector are governed mainly by PSAs or HGAs. Projects outside PSAs and HGAs are taxed in accordance with the rules in the tax code.

Capital gains

Capital gains are treated as normal income and taxed at the ordinary profit tax rate.

Other taxes on corporations

Real property tax

An annual land tax is levied on the owners and users of land (whether or not resident), with the amount of tax depending on the location of the land and how it is used.

Social security

An employer must make contributions to the state social protection fund on behalf of its employees. The rate is 25%, with 22% paid by the employer on gross payroll and 3% withheld from the gross salary of the employee.

Other

An assets tax is levied on owners of fixed assets, with some exceptions.

Other taxation in Baku

Value added tax

Filing and payment

VAT must be reported on a calendar month basis. VAT payers are required to submit VAT returns no later than the 20th day of the month following the reporting month and must calculate the VAT due to the state budget by reducing their output VAT liability with an input VAT credit.

Rates

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

Taxable transactions

VAT in Azerbaijan is similar to that in most European VAT systems, with tax levied on the supply of most goods and services and on the import of goods. VAT payers are entitled to

Registration

Taxpayers must register for VAT purposes if turnover in a consecutive 12-month period exceeds AZN 120,000. If the total value of one transaction or contract exceeds AZN 120,000, 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 have 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.

Anti-avoidance rules

Transfer pricing

Transactions between related parties must be on arm’s length terms. The tax authorities may adjust the contract price in barter or import-export transactions; transactions between related persons (as defined in the tax code); where the prices in a transaction deviate by 30% or more from transactions involving similar or identical goods, work or services; where the property is insured for a value exceeding its net book value; and where a monthly lease fee is paid for immovable property (other than housing).

Basis

Azerbaijan residents are subject to income tax on taxable income, which is defined as gross income received from all sources, regardless of where the income was earned or paid, less allowable deductions.

Residence

Unless otherwise provided in an applicable tax treaty, an individual generally is considered to be tax resident if he/she is physically present in Azerbaijan for a period of more than 182 cumulative days in a calendar year (regardless of nationality).

Filing status

Each taxpayer must file a tax return; joint returns are not permitted.

Thin capitalization

There is no specific thin capitalization legislation. The actual amount of interest (or accrued interest if the accrual method is used) on loans obtained from abroad and paid to related parties is deductible for profit tax purposes using an interest rate of 125% of the interbank credit auction rate set by the national bank of Azerbaijan.

Filing requirements

The profit tax return is due by 31 March (inclusively) following the end of the tax year. Other tax returns are filed on a periodic basis (monthly, quarterly and annually).

Consolidated returns

A legal entity may file a consolidated return that includes the taxable income and deductible expenses of its branch offices.

Controlled foreign companies

An Azerbaijan resident that holds, directly or indirectly, more than 20% of the charter capital or voting shares of a foreign legal entity that receives income from a low tax jurisdiction must include its proportionate share of that foreign entity’s income in its taxable income. A foreign jurisdiction is considered a low tax jurisdiction if the tax rate is two or more times lower than the rate in Azerbaijan, or if the country has laws on the confidentiality of information about companies or laws that allow secrecy of financial information or information on the actual owner of property or income (property) recipient.

Rates

Rates are progressive up to 25%. Individual entrepreneurs are taxed at a rate of 20%.

Deductions and allowances

Expenses incurred by an entrepreneur may be deducted in computing taxable income.

Taxable income

Taxable income includes income from employment, income from entrepreneurial activities and passive income. Certain income, such as property inherited from family members, alimony, etc., is exempt.

Capital gains

Capital gains are treated as normal income and taxed at the ordinary personal tax rate.

Penalties

Penalties apply for late filing, failure to file or tax avoidance or evasion.

Investment basics

Foreign exchange control

There are no restrictions on the import or export of capital. Supporting documentation, including tax payment documents and bank statements, must be submitted when cash withdrawals exceed amounts previously imported into the country. Repatriation payments may be made in any currency, and both residents and nonresidents can hold bank accounts in any currency.

Accounting principles/financial statements

IFRS is required (except for small entrepreneurs). Contractors operating under production sharing agreements (PSAs) or host government agreements (HGAs) in the oil and gas industry are required to maintain books in US dollars in accordance with the principles of generally accepted international petroleum industry accounting. Financial statements must be prepared annually.

Principal business entities

These are the limited liability company, open/closed joint stock company, general partnership, limited partnership, cooperative and branch and representative office of a foreign company.

Withholding tax

Dividends

Dividends paid to a nonresident are subject to a 10% withholding tax, unless the rate is reduced under a tax treaty.

Branch remittance tax

Net profits remitted to the head office of a branch are subject to a 10% withholding tax.

Technical service fees

Although Azerbaijan tax law does not specifically address technical service fees, such fees generally are subject to a 10% withholding tax.

Interest

Interest paid to a nonresident is subject to a 10% withholding tax, unless the rate is reduced under a tax treaty.

Royalties

Royalties paid to a nonresident are subject to a 14% withholding tax, unless the rate is reduced under a tax treaty.