Taxation in Azerbaijan is regulated by the Tax Code and other relevant legislative acts. Tax Code establishes the statutory tax regime and defines taxation in the industrial and technological parks. In addition, Tax Code recognizes the existence of special tax regimes.
Such special tax regimes are existent predominantly in the oil & gas sector under Production Sharing Agreements (PSAs) and under Host Government Agreements (HGAs).
This review concentrates on the corporate taxation under the statutory tax regime and that in the industrial and technological parks).
Legal entities are taxed on profit, which is determined as gross income from economic activities less allowable deductions at a flat rate of 20%. Both resident and non-resident entities (through their permanent establishment) pay profit tax in Azerbaijan.
The gross income of a non-resident enterprise that is not connected with the permanent establishment is taxed at the source of payment without the deduction of expenses. Unless otherwise specified in the double taxation treaties that Azerbaijan has entered to foreign legal entities with no permanent establishment in Azerbaijan are subject to the following withholding tax rates on items of income from Azerbaijani sources:
Tax Code establishes following taxes:
- Dividends ………………………………….10%
- Interest ……………………………………10%
- Rent and royalties ……………………….14%
- International communication and transport services ………………………6%
- Risk insurance and re-insurance fees …………………………….4%
- Interest on financial leasing ………….10%
- Income received from performing works and rendering services ……………………10%
Supply of goods and rendering of services in Azerbaijan, as well as import of goods are subject to VAT. The VAT rate is 18%. Separate VAT registration is required under the Tax Code. Companies with taxable transactions exceeding a certain threshold (currently AZN 120,000 during the previous 12 months) must register as VAT payers. Other companies doing business in Azerbaijan may voluntarily register. Only registered VAT payers may charge VAT or claim a credit for the input VAT that they pay.
Legal entities are levied with 1% property tax on average annual value of fixed assets on the enterprise’s balance sheet. Non-resident legal entities with permanent representation in Azerbaijan pay property tax on the average annual value of fixed assets connected with the permanent representation.
Personal Income Tax
Residents of Azerbaijan are subject to income tax. Taxable income is defined as gross income received from all sources worldwide during the tax year, regardless where the income was earned or paid, less allowable deductions. Non-residents are subject to Azerbaijani income tax only on income received from Azerbaijani sources. The effective progressive tax rate ranges from 14% up to 25%.
Legal entities and individuals extracting mineral resources in Azerbaijan pay mining tax at rates from 3% to 26%.
A land tax is imposed on owners and users of land plots, the amount of which depends on the use and location of the land.
All physical and legal persons producing excisable goods in or importing them to Azerbaijan are subject to excise tax, the rate of which differs among the products.
Non-residents owning passenger and cargo vehicles entering or transiting Azerbaijan, as well as the persons producing or importing petrol, diesel and liquefied gas in Azerbaijan shall pay road tax.
The simplified tax is charged at the following rates on taxpayers’ gross revenue:
- 4% for taxpayers operating in Baku
- 2% for taxpayers operating in other regions
In order to quality for this tax, the total revenue of the legal entity should not exceed AZN 120,000 for the previous 12-month period and not registered for VAT. The payers of simplified tax are exempt from paying VAT, profit tax and property tax.
Industrial and Technology Parks
Residents of industrial and technology parks enjoy certain tax holidays and exemptions:
- no income tax on any income (other than income from employment) generated from the activity in the industrial and technology parks by individual entrepreneurs that are residents of such parks within seven years starting from the year of registration in the park;
- no profit tax on any income generated from activities in the industrial and technology parks by legal persons that are residents of such parks within seven years from the year of registration in the park;
- no VAT on imports of machinery, technological equipment and plant by legal persons and individual entrepreneurs that are residents of the industrial and technology parks with the purpose of construction of the production facilities in the parks and the research and development works within seven years from the year of registration in the park;
- no property tax for legal persons and individual entrepreneurs that are residents of industrial and technology parks on property in the parks for seven years from the year of registration in the park;
- no land tax for legal persons and individual entrepreneurs that are residents of industrial and technology
- parks on land in the parks for seven years from the year of registration in the park.