Corporate Income Tax in Azerbaijan
In this article, we summarize the main important rules regarding corporate income tax in Azerbaijan, rates of CIT, exemptions, tax filing, payment method, and other issues such as thin capitalization and loss carry-forward rules in Azerbaijan.
The difference between a corporate legal entity’s income and expenses deducted from income is the corporate profit. Under the Tax Code, corporate income tax is called as “profit tax” of corporate legal entities. Sometimes, it is also referred to us the corporate profit tax. It shall be made clear that all these terms denote the same tax – which is the tax over the income of enterprises.
Azerbaijani corporate tax rate is 20%. It must be noted that this 20% corporate income tax is imposed upon the net profit of the taxpayer entity.
Corporate Income Taxpayers
Resident and non-resident enterprises in the Republic of Azerbaijan shall be payers of profit tax. CIT is imposed on the following operations:
- Profit shall be defined as the difference between all income, including income received through its permanent establishments outside the Republic of Azerbaijan, dividends, interests, royalties received outside the Republic of Azerbaijan, and expenses for the income as stipulated in the Tax Code of the Republic of Azerbaijan. The profit of a resident enterprise calculated in accordance with the above definition is the subject to corproate taxation.
- A non-resident enterprise operating in the Republic of Azerbaijan through its permanent establishment shall pay tax on its profit, i.e. on gross income generated from Azerbaijan sources in relationship with the permanent establishment less the amount of expenses incurred with respect to such income as outlined in the Tax Code.
- The gross income of a non-resident enterprise not connected with the permanent establishment shall, if so provided in Article 125 of the Tax Code, be taxed at the source of payment without expenses being deducted. You can learn more about withholding taxes in this article.
- A non-resident enterprise generating income through the transfer of property not connected with the permanent establishment shall pay tax on said gross income received during a calendar year from an Azerbaijani source.
Corporate Tax Rates in Azerbaijan
The corporate income tax rate in Azerbaijan is 20%. An enterprise's profit shall be taxed at the rate of 20 percent from net profits, after deducting expenses. Although the general Corporate Income Tax rate is 20%, the Tax Code has specified certain discounts for small businesses. According to the concessions made due to the encouragement of micro-businesses, micro-businesses are taxed at a rate of 5% of net profits. Companies with up to 10 employees and turnover below 200 000 AZN annually qualify as a micro-business entity.
The income not attributable to the permanent establishment of a non-resident company in Azerbaijan shall be subject to taxation at the source of payment in the form of withholding tax, without deducting costs at the source of payment.
Exemptions from Corporate Income Tax
The income operations are exempt from CIT:
- The income of charitable organizations;
- The grants, membership fees and donations received by non-commercial organizations;
- The income of international, interstate and intergovernmental organizations;
- Received insurance payments (with exception of amounts of losses connected with each insurance case);
- Educational institutions, including special educational entities for children with disabilities, are exempt from corporate tax with the exception of the profit distributed as dividends;
- Deemed income due to the abolition of taxes to the government shall be exempt from taxation;
- Operations on the provision in any form of fixed assets, movable property and other assets, in accordance with the agreements on exploration, development and production sharing of oil and gas resources, export pipelines and other similar agreements to the party representing the Republic of Azerbaijan in the production sharing agreements;
- A part of the income of management companies or operators of industrial or technological parks which they intended to build and maintain the infrastructure of industrial and technology parks;
- The income derived from activities in the industrial or technological parks by legal entities, being the residents in industrial and technological parks - within 7 years from the reporting year of registration in the industrial or technological park in accordance with the law;
- Income received from the production of agricultural goods is exempt from corporate tax until 1 January 2024 for legal entities;
- The income of preschool educational institutions and orphanages received from this activity - 10-year period beginning from January 1, 2014;
- Compensation payable to legal entities under the Law of the Republic of Azerbaijan "On land acquisition for municipal needs";
- 50% of the profit of the legal entity, received the investment promotion certificate, from the receipt of this document - 7-year period;
- 50% of the income received from transferring shares that has been owned for more than 3 years is released from taxation for private entrepreneurs and legal entities;
- 75% of the income of micro-businesses of private entrepreneurs and legal entities;
- Profit of SME cluster company is exempt from corporate tax for 7 years commencing from the date of entry into the SME cluster company registry;
- A part of the income of SME cluster participants (both) private entrepreneurs and legal entities), received under the contract with SME cluster company, spent on capital expenses is exempt from taxation for 7 years;
- The income of micro-businesses and small-businesses (private entrepreneurs and legal entities) for 3 years from the date of obtaining “Start-up” Certificate.
The following enterprises shall be exempt from income tax:
- The income tax rate for production enterprises owned by public organizations of disabled people, or children with health limitations shall be reduced by 50 percent if not less than 50 percent of employees at such enterprises are disabled people or persons under the age of 18 with health limitations.
- Starting from 1 January 2019, income received by cashless means via POS Terminal at retail trade and public catering is reduced by 25% for 3 years, considering the proportion of cashless income in general income, i.e. considering expenses proportionately
- Dividends of shareholders (both private entrepreneurs and legal entities) received from their legal entities, which keep official records of income and expenses, not registered as VAT payer and whose income does not exceed 200 000 AZN within any given 12 consecutive months, is exempt from taxation.
According to the Tax Code of the Azerbaijan Republic, the following expenses are deducted from income:
- Except for non-deductible expenses, all expenses, including mandatory payments which are regulated with legislation;
- Bad debts;
- Deductions for reserve insurance funds;
- Expenses for research, project investigation and experiment-construction works;
- Deductible amortization amounts;
- Expenses on geological surveying and preparatory work for the production of natural resources;
- Expenses for intangible assets;
- Amortization charges for assets using entrepreneurial and non-entrepreneurial activities;
- Expenses for insurance payments that are paid by insurant under insurance agreements are deducted from income, with the exception of property damage insurance payments to employees’ favor, and life insurance agreements with foreign insurers.
- Bank commissions and other expenses for buying salary cards for the employees;
- Expenses of legal and physical persons on intangible objects which are used for more than a year in business activity are deducted as amortization charges.
- Repair expenses are deducted from income at the rates which are shown in Article 115 of the Tax Code of Azerbaijan Republic.
Deductions of interest on loans (Thin Capitalisation Rules in Azerbaijan)
The Azerbaijani tax code specifies certain rules regarding thin capitalization applicable in cases of loans.
- Interests paid on loans obtained from foreign parties and interests paid to the related parties are deducted from income with the same currency not exceeding 125 percent of the average interest on inter-bank trade on credits with similar periods, or, if no trade was conducted - on inter-bank credits published by the Central Bank of the Azerbaijan Republic, applicable at the period to which the interest applies;
- Where loan obtained from foreign parties exceeds the two-fold of the taxpayer`s capital (net assets), the interest paid over such excess amount of the loan is not allowed to be deducted from the income. Provisions of this article are not applicable to the loans obtained from foreign banks and credit organizations, and loans from bonds traded on foreign stock exchanges and neither the resident banks and credit organizations.
Loss Carry – Forward
- If a company`s deductible expenses are larger than its profit in a given year, this exceeding amount shall be forwarded to the next period for up to five years and is compensated against such five years’ income with no limitation;
- Private individual’s deductible expenses from business operations exceeding its profit may not be deducted from her/his other profits, but can be forwarded to the future tax periods continuing for up to three years for compensating against profits.
Filling of tax returns
The tax reporting year for corporate income tax is the calendar year (fiscal year). Taxpayers shall submit filled tax returns no later than 31st March of the year following the previous fiscal year. All calculations shall be made and the calculated final income tax shall be paid to the state treasury the same deadline.
CIT interim reports shall be submitted quarterly for the current year. Corporate legal entities shall make interim tax payments to the budget no later than the fifteenth day of the month following each quarter, not less than 75% of the accrued taxes. All these interim quarterly income tax payments are calculated annually and during annual CIT tax filing final set-off is made, and the remaining amount of taxes is paid.
The Simplified Tax system in Azerbaijan
In the following cases, taxpayers pay 2 percent simplified tax from total turnover (without deducting expenses):
- Taxpayers who are not registered for VAT purposes and their turnover do not exceed 200 000 manats during any month consecutive 12-months period.
It must be noted that when taxpayers are engaged in sales to commercial entities and private entrepreneurs (buyers for commercial use) alongside with individual customers (buyers for personal use), where income from buyers for commercial use is less than 30 percent of total sales, they would also be entitled to pay simplified tax.
In the following cases, taxpayers may opt to pay 8% simplified tax from total turnover (without deducting expenses) and not be subject to CIT tax and VAT:
- Public Catering entities with turnover exceeding 200 000 manats during any consecutive 12-months period.
Simplified taxpayers are exempt from adding VAT to their sales. Therefore, it is usually an attractive taxation system for businesses primarily working with individual customers.
For questions and services requests regarding corporate income tax, and taxation in Azerbaijan please contact us ([email protected] or 00994502898973). Our internationally ranked professional Tax and Accounting Practice would be glad to support.