The Convention between the Government of the Republic of Azerbaijan and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, or shortly UK Azerbaijan Double Tax Treaty entered into force on 3 October 1995 and effective from respective tax year of 1996 in the UK and Azerbaijan.
The covered taxes under the United Kingdom Azerbaijan Double Taxation Treaty are as follows:
In the United Kingdom:
In the Republic of Azerbaijan:
The provisions of the UK-Azerbaijan DTA applies to the residents of the United Kingdom and the Azerbaijan Republic and residents of both countries at the same time.
According to the article 4 of the Convention between the United Kingdom and the Republic of Azerbaijan, the term “resident” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation or any other criterion of a similar nature; the term does not include any person who is liable to tax in the country of residence only if he derives income or capital gains from sources therein.
Where a person is considered as resident in both countries, the residency is determined in the following order:
(a) He shall be deemed to be a resident of one state in which he has a permanent home available to him; if he has a permanent home available to him in both countries, he shall be deemed to be a resident of the country with which his personal and economic relations are closer (center of vital interests);
(b) If the country in which he has his center of vital interests cannot be determined, or if he has no permanent home available to resident of the country in which he has a habitual abode;
(c) If he has a habitual abode in both country or in neither of them, he shall be deemed to be a resident of the country of which he is a national;
(d) If he is a national of both countries or of neither of them, the competent authorities of the states shall settle the question by mutual agreement.
Despite all the above, if it is still not possible to determine the country of residence, a person cannot claim any relief or exemption from tax for the purposes of this treaty.
It is important to differentiate permanent establishment from residents, where although a permanent establishment is not a separate entity or independent resident, income of the permanent establishment is taxed where it is located. A permanent establishment is a fixed place of business through which the business of an enterprise is wholly or partly carried on.
The furnishing of services, including consultancy services, in the country of residence by an enterprise through its employees or other personnel engaged by the enterprise for such purpose, constitutes a permanent establishment, but only where the activities of that nature continue (for the same or a connected project) within that State for more than six months.
Business income of entities and income of independent personal services shall be taxable in the country of residence, unless these derive from, respectively, the permanent establishment or fixed base of independent personal services.
For the purposes of profit tax / corporation tax, the taxable base is considered permanent establishment`s profit and it is taxable only in the country where permanent establishment is situated. For example, let`s consider that Company A is situated in UK and a has permanent establishment in Azerbaijan. In this case, profits from UK will be taxed in the United Kingdom and profits belonging to the permanent establishment will be considered taxable base in Azerbaijan. But, if Company A is situated in UK and has no permanent establishment in Azerbaijan Republic, all profits of A will be taxed in the United Kingdom.
First, the country of residence of the person receiving the dividend must be clarified for the purposes of dividends, interests and royalties and must be taxed in that country. However, it can be taxable in the country where the company paying these dividends, interests and royalties is situated, as well as these may be taxed in the other country. There are a number of conditions for the payment of dividend taxes (also, interest and royalties) in the country of residence of the person receiving the dividends, interests and royalties. The charged tax shall not exceed the following:
Dividends: 10% of the gross amount of the dividends if the beneficial owner is a company which controls, directly or indirectly, at least 30 percent of the voting power in the company paying the dividends or a company which has invested at least 100,000 US dollars in the share capital of the company paying the dividends at the date of payment of the dividends;15% of the gross amount of the dividends in all other cases.
Interests: 10% of the gross amount of interest.
Royalties: 5% of the gross amount of the royalties paid in respect of any copyright of literary or artistic work (including cinematograph films, and films or tapes for radio or television broadcasting); 10% percent of the gross amount of all other royalties.
It must be noted that Azerbaijani Tax Code currently provides 10% withholding tax for dividends/interests and 14% withholding tax for royalties in lieu of income from Azerbaijani sources.
Depending on the source of income, tax relief is available for the taxes paid in the other country.
There are 5 DTA forms specified for the implementation and administration for avoiding double taxation and preventing evasion of taxation in line with double taxation agreements of Azerbaijan. Depending on the type of tax and available relief, the following forms must be filled in and submitted to the Azerbaijani tax authorities alongside with supportive documentary evidences for benefitting from the UK-Azerbaijani Double Tax Treaty, as well as other double taxation agreements of Azerbaijan.
DTA- 01: A certificate of residence is required to claim tax relief in another country if the company pays tax on its foreign income in the country.
DTA-02: This form is submitted when legal and physical persons paid taxes in the United Kingdom and willing to obtain tax relief by deducting these paid taxes from the taxes calculated in the Republic of Azerbaijan. The DTA-02 Form shall be submitted by resident individuals and resident legal entities, by enclosing the documents certifying the tax payment in the other state, together with income tax return and corporate tax return, respectively.
DTA-03: Applying withholding tax exemption or lower tax rate under international agreements with respect to income derived by non-resident in the Republic of Azerbaijan. Where the international agreement provides for tax exemption of non-resident from any income derived from a source in Azerbaijan or imposition of a lower tax rate, the non-resident may benefit from this by submitting the DTA-03 form. This form is submitted by the date of income payment and the form shall be accompanied, along with certificate of residency which supports tax residency of non-resident in other contracting state, by the copies of all supporting documents (contracts, invoices, shareholding, debentures, copyrights, etc.). If entities could not send this form in time, they can submit DTA-05 form.
DTA-04: This form is issued by the State Tax Service of the Republic of Azerbaijan for approval of taxes paid in the Republic of Azerbaijan. When non-resident is willing to obtain tax credit in the United Kingdom for the purpose of consideration of taxes paid in the Republic of Azerbaijan, the non-resident may apply for confirmation of tax amounts paid in the Republic of Azerbaijan.
DTA-05: Notwithstanding the fact that the international agreement provides for the tax exemption of non-resident's any income derived from the source in the Republic of Azerbaijan or non-resident's taxation at a lower rate, when the DTA-03 form is not submitted or not submitted in a timely manner or when, for any other reasons, the tax paid by the non-resident exceeds that of stipulated in the international agreement, the non-resident may claim the refund of overpaid (overcharged) tax amounts via submitting this form.
Received forms are reviewed by tax authorities within 20 business days.
E.g.: United Kingdom resident company “F” provides services to the Azerbaijani resident company “B” and has no permanent establishment in Azerbaijan. In this case, the income of the company F shall be taxed in UK only. But, in order to apply this provision, company F shall submit DTA-03 form before the date of income payment and the form shall be accompanied, along with certificate of residency (DTA-01) which supports residency of company F in the UK. Let`s assume that, company F did not complete DTA-03 form on time and the cost of services provided was paid by B. There will be withholding tax on payment to company F. After this, if company F intends to obtain refund of overpaid taxes, then DTA-05 form must be submitted.
The above is a summary of the United Kingdom – Azerbaijan Double Taxation Agreement system and we have specified few points basing on the questions we are frequently asked. Nothing in this article shall be considered as tax advice and for any consultancy requests, including tax optimization structures and legal planning issues or questions, you are asked to contact us via: [email protected] or 00994 50 289 89 73.