General Information
Country Name: Azerbaijan
Currency: Azerbaijani Manat (AZN)
Primary Tax Authority: State Tax Service of Azerbaijan
Key Legislation:
- The Constitution of Azerbaijan: Establishes the fundamental legal principles for taxation.
- Tax Code of Azerbaijan: The primary law regulating taxes, including income tax, VAT, and excise duties.
- Law on Local Taxes: Governs local taxation.
Tax Authority and Collection Competence
Fiscal Authority Allocation:
Azerbaijan operates under a centralized tax system, with most taxes collected by the central government. Local authorities have the power to collect property taxes and certain local fees.
Taxes Collected by Federal Authorities:
- Corporate income tax
- Personal income tax
- Value-added tax (VAT)
- Excise tax
- Customs duties
Taxes Collected by Local Authorities:
- Property tax
- Land tax
Corporate Income Tax (CIT)
Standard CIT Rate: 20%
Taxable Income Definition: Corporate income tax is levied on profits derived from worldwide income for residents, and on Azerbaijan-sourced income for non-residents.
Deductible Expenses: Business expenses are deductible, including salaries, depreciation, and certain operational costs, subject to restrictions on non-business-related expenses.
Loss Carryforwards/Carrybacks: Losses can be carried forward for 5 years; loss carryback is not allowed.
Tax Incentives: Special tax exemptions are provided to companies in industries such as oil and gas, and businesses operating in designated economic zones.
Value-Added Tax (VAT)
Standard VAT Rate: 18%
Scope of VAT: VAT is imposed on the supply of goods and services in Azerbaijan and on imports.
Exemptions: Certain financial services, healthcare, education, and small-scale agricultural activities are exempt from VAT.
International VAT Treatment: Exports are zero-rated, and VAT applies to imports.
Personal Income Tax (PIT)
PIT Rate:
- Progressive rates: 14% for income up to AZN 2,500 per month; 25% on income exceeding this amount.
Taxable Income Thresholds: Azerbaijan applies a progressive income tax regime with the 25% rate applicable to high earners.
Deductions and Exemptions: Limited deductions are available for pension contributions, charitable donations, and some personal expenses.
Treatment of Foreign Income: Residents are taxed on their worldwide income, but double taxation relief is available through treaties.
Additional Mandatory Contributions
Social Security Contributions:
Employers contribute 22% of an employee’s gross salary, while employees contribute 3%. Contributions fund social security and healthcare.
Withholding Taxes
Dividends: 10% withholding tax.
Interest: 10% withholding tax.
Royalties: 14% withholding tax.
Payments to Non-Residents: Treaty rates may reduce withholding tax rates for non-residents.
Transfer Pricing Rules
Documentation Requirements: Transfer pricing regulations follow the arm’s length principle, and documentation must be maintained.
Penalties for Non-Compliance: Penalties apply for underreporting or non-compliance with transfer pricing rules.
Special Tax Regimes
Oil and Gas Sector: Azerbaijan provides specific tax incentives and exemptions for companies involved in oil and gas extraction, including a simplified CIT regime and reduced tax rates on certain operations.
Free Economic Zones (FEZ): Businesses in free economic zones are entitled to tax exemptions on VAT, property tax, and import duties.
Other Taxes
- Property Tax: Levied on real estate, with rates varying based on the type and value of the property.
- Excise Tax: Applied to alcohol, tobacco, fuel, and luxury goods.
- Capital Gains Tax: Taxed as ordinary income under the CIT or PIT regime.
- Inheritance and Gift Tax: Azerbaijan does not impose inheritance or gift taxes.
Double Taxation Agreements (DTAs)
Key Partner Countries: Azerbaijan has signed DTAs with over 50 countries, including Russia, Turkey, and Germany.
Reduced Withholding Tax Rates under DTAs: DTAs may reduce withholding tax rates on dividends, interest, and royalties.
Tax Treaty Benefits Application Process: To claim treaty benefits, taxpayers must provide a certificate of residency and relevant supporting documentation.
Local Taxes
Property Tax: Imposed by local governments, property tax rates depend on the type and location of the property.
Land Tax: Landowners are subject to land tax, which is based on the size and usage of the land.
Compliance and Reporting
Corporate Tax Filing Deadlines: Corporate tax returns are due annually by March 31 of the following year.
VAT Filing Requirements: VAT returns are filed monthly, with payments due by the 20th of the following month.
Penalties for Late Filing/Non-Compliance: Fines and interest charges apply for late filings, incorrect returns, and non-payment of taxes.
Recent Developments
Recent Tax Law Changes: Azerbaijan has introduced reforms to modernize its tax system, including new digital tax reporting requirements for businesses and the simplification of tax procedures for small enterprises.
Upcoming Reforms: Further efforts to align with international tax standards, including transfer pricing updates and anti-avoidance measures, are in progress.
Global Tax Initiatives: Azerbaijan is increasingly participating in global tax initiatives, including joining efforts under the OECD’s Base Erosion and Profit Shifting (BEPS) framework to combat tax evasion and avoidance.
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