By Leyla Safarova, Senior Partner, BM Morrison Partners, Azerbaijan
The Azerbaijani government has made significant changes to the tax code, which will come into force on January 1, 2022. The changes include measures focused on combating tax evasion and broadening the tax base, including new ones rules on controlled foreign companies (SEC) and transfer pricing changes.
The updated rules also provide for certain tax benefits and exemptions for businesses and individuals, as well as improved tax administration.
Measures aimed at tax avoidance and broadening the tax base
One of the main changes to the tax code is the incorporation of controlled foreign company rules, which aim to prevent the artificial diversion of profits from controlling companies to controlled foreign companies.
Profits of controlled foreign companies incorporated in a tax haven will be taxed in Azerbaijan if certain conditions are met. First, an Azerbaijani resident himself or with an interdependent resident or non-resident directly or indirectly owns more than 50 percent of the voting rights or share capital of the foreign company or has the right to obtain more than 50 per cent. percent of that company’s profits. company. Second, the corporate tax actually paid by the controlled foreign company is at least twice lower than the Azerbaijani corporate tax (20%) Third, more than 30% of the annual income of the controlled foreign company includes: interest earned from financial assets; royalties received from intellectual property; income from the alienation of shares and participating interests; income from leasing; income from insurance, banking and other financial transactions; and / or income from businesses that earn income from goods and services that do not create any economic value.
When the profits of the controlled foreign company become taxable in Azerbaijan, to avoid double taxation, the company is entitled to a tax deduction for the tax paid on these profits.
Certain types of income received from the controlled foreign corporation should not be included in taxable income. Dividends received from the controlled foreign company are not included. In addition, if the resident enterprise is a subsidiary of the controlled foreign corporation, the taxable profit related to the resident enterprise on the generalized (consolidated) profit of the controlled foreign corporation is not included. Finally, the income received through the permanent establishment of the controlled foreign company in Azerbaijan, as well as the 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 regard to payments made to 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 administration, 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 the repayment of the principal of a loan (excluding interest); payments to correspondent accounts opened by resident banks; payments for e-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 made with financial institutions in Azerbaijan; salaries and pensions of residents of tax havens; and the payment of royalties and other fees to relevant government agencies, as well as payments for obtaining permits and certificates.
the transfert price the 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 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 over 30 percent of total income.
Tax benefits and exemptions
The exemptions mainly concern value added tax. The following exemptions from value added tax will apply, inter alia: the import and sale of books, as well as the import of paper for the production of books; special software used for military purposes; importation and sale of hybrid cars with a production period 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 have 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 administration for the declaration of income tax by related parties for transactions exceeding 500,000 AZN (294 000 USD), is increased from 500 AZN to 2,000 AZN (294 USD to 1,176 USD). The same financial penalty applies for submitting inaccurate information.
In the event of failure to submit information or to submit inaccurate information on imported goods, a financial penalty at the rate of two or five percent of the invoice value will apply.