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This update appeared at: https://mnetax.com/azerbaijan-amends-tax-laws-relating-to-cfcs-tax-havens-transfer-pricing-46405
The Azerbaijani government has made significant changes to the Tax Code, which will come into force on January 1, 2022. These changes include measures focused on combating tax evasion and broadening the tax base, including new rules on controlled foreign companies (CFCs) and transfer pricing changes.
The updated rules also provide certain tax benefits and exemptions for businesses and individuals, as well as better tax administration.
Measures targeting tax evasion and broadening the tax base
One of the main changes to the Tax Code is the incorporation of the CFC rules, which are intended to prevent the artificial diversion of profits from controlling companies to CFCs.
Benefits of CFCs incorporated into a Fiscal paradise will be taxed in Azerbaijan if certain conditions are met. First, an Azerbaijani resident himself or together with an interdependent resident or non-resident directly or indirectly owns more than 50% of the voting rights or share capital of the foreign company or has the right to obtain more than 50% of the profits of this company. society. Second, the corporate tax actually paid by the CFC is at least two times lower than the Azerbaijani corporate tax (20%). Third, more than 30% of CFC’s annual revenue is made up of the following: interest earned on financial assets; royalties received from intellectual property; income from the alienation of shares and participations; income from a financial lease; income from insurance, banking and other financial transactions; and/or income from businesses that derive income from goods and services that create no economic value.
When the profits of the SEC become subject to tax in Azerbaijan, to avoid double taxation, the company is entitled to tax compensation for the tax paid on this profit.
Certain types of income received from the SEC are not included in taxable income. Dividends received from the CFC are not included. In addition, if the resident company is a subsidiary of the SEC, the taxable profit relating to the resident company from the generalized (consolidated) profit of the SEC is not included. Finally, income received through the permanent establishment of the CFC in Azerbaijan, as well as income received from a company established and taxed in Azerbaijan, are not included.
The other amendment introduced to fight tax evasion and broaden the tax base is the broadening of the definition of Azerbaijani-source income with respect to payments made in tax havens.
Direct and indirect payments made by residents and permanent establishments of non-residents, as well as resident natural persons not registered with the tax authorities, to persons established (registered) in tax havens and their branches or representative offices in other jurisdictions, as well as bank accounts opened in tax havens are considered Azerbaijani-source income and are subject to a 10% withholding tax.
Certain types of payments to tax havens are not considered Azerbaijani source income. These include repayment of the principal amount of a loan (excluding interest); payments to correspondent accounts opened by resident banks; payments for electronic services by individuals who are not registered with the tax authorities; payments related to the acquisition of debt securities; interest and dividend payments related to investments made in Azerbaijan and deposits placed with financial institutions in Azerbaijan; salaries and pensions of residents of tax havens; and payment of fees and other charges to relevant government agencies, as well as payments for obtaining permits and certificates.
Transfer pricing rules have been revised to include, among others, transactions between a resident and a related non-resident, as well as the resident’s branch, representative office and other units in other jurisdictions . The revised rules also include transactions between a resident and a non-resident or the permanent establishment of a resident in Azerbaijan and non-residents, if the non-residents carry out transactions in goods traded on international commodity exchanges and/or the total income of the resident or the permanent establishment of a non-resident in Azerbaijan exceeds 30 million AZN (18 million USD) in the relevant fiscal year and the value of transactions with each non-resident is amounts to more than 30% of total income.
Tax advantages and exemptions
Exemptions mainly concern value added tax. The following VAT exemptions will apply, among others: import and sale of books, as well as import of paper for the production of books; special software used for military purposes; import and sale of hybrid cars with a production life of three years and a cylinder capacity not exceeding 2,500 cubic centimeters (for a period of three years from January 1, 2022); and import of second and third level electric chargers for electric cars (for a period of three years from January 1, 2022).
The changes increased financial penalties for failure to submit reports and other information. The financial penalty for failure to submit a tax declaration, as well as a letter in the form established by the tax authority for the declaration of income tax by related parties for transactions exceeding 500,000 AZN ($294,000), changed from AZN 500 to AZN 2,000 ($294 to $1,176). The same financial penalty applies in the event of communication of inaccurate information.
In the event of non-presentation of information or presentation of inaccurate information on the imported goods, a financial penalty at the rate of two or five percent of the invoice value will apply.
CASH REGISTER AND REIMBURSEMENT OF VAT ON MEDICAL BENEFITS
The state tax service explains the expanded scope of the implementation of cash registers and VAT refunds.
Settlements of services of hotels and similar accommodation establishments, medical establishments, hairdressing salons, beauty salons and cosmetology centers are carried out by means of cash registers connected in real time to the electronic information system of the hotel. ‘FISC administration. The VAT refund will now cover medical services.
Conversely, the reimbursement mechanism is no longer available for purchases of automobiles, alcoholic beverages and tobacco products.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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