Withholding taxes in Azerbaijan

 Classification of withholding taxes (WHT) in Azerbaijan

 

Withholding taxes are not listed as type of taxes by the Tax Code of Azerbaijan, it is rather a form of paying a tax due to income. The income of non-resident legal entities and private individuals obtained from a source in Azerbaijan shall be withheld, i.e. deducted at source and paid to the state treasury by the resident taxpayer. Moreover, the Tax Code specifies certain cases where the resident taxpayer is required to deduct the income of private individuals at the source while processing the payment within Azerbaijan.

Withholding taxes in Azerbaijan may be classified as follows:

1. Withholding taxes of non-residents (foreign companies): to be deducted by resident taxpayers from the income of non-residents deriving from Azerbaijani sources;
2. Withholding taxes within Azerbaijan: to be deducted by resident taxpayers from the income of non-taxpayers (persons without tax registration) in Azerbaijan.

 

Withholding tax rates of non-residents are as follows:

1. Dividends – 10%. The resident legal entity shall deduct 10% of dividends at the source while distributing among shareholders. Private individual shareholders of joint-stock companies are exempt from dividend tax until 1 February 2023;
2. Payments from permanent establishments to non-resident head offices – 10%. Similar to dividend tax, payments by the permanent establishment of a non-resident in Azerbaijan from net profit to the non-resident (head office) are subject to 10% withholding tax. 
3. Interests – 10%. The resident legal entity or permanent establishment in Azerbaijan shall deduct 10% of the interests over loans or financial leasing payments, with the exception of interests paid to resident credit institutions and resident financial leasing entities, as well as, Azerbaijani permanent establishments of non-resident credit institutions and financial leasing entities.
4. Insurance premiums – 4%. Resident legal entities and private entrepreneurs shall deduct 4% of insurance premiums for insurance or re-insurance of risk.
5. International transportation and telecommunication - 6%. Resident legal entities and private entrepreneurs shall deduct 6% of payments made for international transportation and international telecommunication services.
6. Income from Azerbaijani source – 10%. The income of non-resident legal entities and private entrepreneurs from providing services or performing works and other income from sources in Azerbaijan shall be subject to 10% withholding tax. In practice, most of the withholding taxes for services are in Azerbaijan are subject to this clause, even where the services are provided outside of Azerbaijan – since the source of income or profit is Azerbaijan, withholding tax for services are deducted.
7. Rental fees – 14%. Rental fees received due to movable property used in Azerbaijan and immovable property located in Azerbaijan would be subject to 14% withholding tax.
8. Royalty – 14%. Payments received from royalties is subject to 14% withholding tax.
9. Payments to electronic money accounts – 10%. Banks shall deduct 10% of funds transferred to electronic money accounts provided by non-residents.
10. Payments to bank accounts in low-tax jurisdictions – 10%. Payments from residents and permanent establishment of non-residents in Azerbaijan to bank accounts, including legal entities registered in low-tax jurisdictions or branches and representative offices of such legal entities in third countries shall be subject to additional 10% withholding tax. The list of low-tax jurisdictions is annual approved by the President of Azerbaijan.

 

 

Withholding tax rates applicable within Azerbaijan are as follows:

 

• Dividends – 10%. Azerbaijan Tax Code does not prescribe any differing regulation in this regard and the provision explained above are applicable here as well.
• Interests– 10%. Azerbaijan Tax Code does not prescribe any differing regulation in this regard and the provision explained above is applicable here as well.
• Salary of Employees:/income of non-taxpayers The Employer shall deduct 14% or 25% of payments made to employees as wages, awards and any other similar income. For details about income tax of employees, please refer to our article here.
• Rental fee – 14%. The registered taxpayer shall deduct 14% from the rental fee if the recipient of such fee has no tax registration in Azerbaijan. Where the lessee is not registered for tax purposes (is neither legal entity, nor private entrepreneur), 14% tax shall be paid by the lessor (landlord) in case (s)he is individual person. Legal entities pay ordinary 20% corporate profit tax from the rental income.
• Royalty – 14%. Payments received from royalties is subject to 14% withholding tax.

• Income tax from the sale of real estate: Here, special calculation applies. Notaries and auction organizers registering the sale of real estate shall deduct income from such sale as per the rates specified by the Tax Code.
• 1% cash withdrawal tax: banks shall deduct 1% from cash withdrawals by legal entities and private entrepreneurs.
• Specific withholding taxes: income from lotteries and gambling, cash payments to non-taxpayers as per the Law on Cash payments etc.

• The above-explained withholding taxes and rates fall under general tax regime in Azerbaijan. Specific tax regimes apply in certain cases, such as international agreements which prevail over local tax legislation.

 

 

 

Withholding taxes under international treaties

 

 

Withholding Taxes under Product Sharing Agreements (oil-gas industry)

 

PSAs and HGAs– Product Sharing Agreements and Host Government Agreements, respectively regarding the production of oil-gas and transportation thereof, specify different tax regimes. Withholding taxes in the oil-gas industry, the income of foreign (non-resident) taxpayers is subject to 5-10% withholding tax as substitute of profit tax. Different agreements specify varying withholding tax rates in Azerbaijan, e.g. Azeri Chiraq Gunashli PSA -5%, Shahdeniz PSA-6.25%, to be deducted from the gross payments to foreign subcontractors, excluding reimbursable expenditure. 

 

Withholding taxes under double taxation treaties in Azerbaijan

 

 

Differing withholding tax rates prescribed under the avoidance of double taxation treaties signed by foreign countries. Azerbaijan has signed double taxation treaties with 55 countries, with 53 of these the treaty is effective and 2 are have not entered into force. Where the DTA prescribes increased withholding tax rates in Azerbaijan, the reduced rate under local Tax Code is applied. For example, withholding taxes in dividends are set as 15% with under several DTAs, such as those with the United Kingdom, Switzerland, Canada, Belgium, Germany, Japan, Moldova, Norway etc. This shall be deemed as the maximum allowed rate and local 10% withholding tax for dividends shall be applied. Where the DTA prescribes a reduced rate, this reduced rate is applied and rates under local Tax Code are disregarded. For example, withholding taxes for interests is set as 8% under the DTAs with Romania, Sweden, Slovenia, Denmark, Hungary (certain cases), Jordan, Greece, Malta and Macedonia (certain cases). In transactions with such countries, 8% shall be withheld from the interests and standard rate under the Tax Code (10%) will not be applied.       

Under the Regulations on the Administration of treaties regarding avoidance of double taxation in signed between the Republic of Azerbaijan and another country, approved by the Ministry of Taxes on 12 June 2017, if a non-resident is willing to obtain exemption or benefit from reduced rates of withholding taxes in Azerbaijan as per relevant agreement, a relevant DTA-03 application shall be applied to the Ministry of Taxes in hard copy or electronic formats. Such an application shall be lodged until receiving income from Azerbaijani sources, together with relevant contracts, invoices and the residency certificate of the non-resident. Until receiving approval letter from the tax authority and the original copies of the documents submitted to the tax authority from the non-residents, the paying entity (tax resident in Azerbaijan who is acting as a tax agent withholds and paying taxes) shall withhold taxes as per domestic procedures. Once these requirements are met, the paying tax agent is authorized to apply exemption or reduced rates for withholding taxes as per the DTAs.

Where taxes are deducted at the source in Azerbaijan, in order to obtain a tax credit in the country of registration, a non-resident taxpayer shall submit a DTA-04 application and obtain a relevant approval letter from the tax authority in Azerbaijan.

Where the relevant double taxation treaty allows for exemption or applies reduced withholding tax for the income received from Azerbaijani source and where such application is not lodged until obtaining such income, a non-resident is entitled to submit a DTA-05 application and obtain approval letter for the refund of the paid taxes. The relevant documents on the transaction, contracts, invoices, acts, as well as the evidence of paying taxes in Azerbaijan shall be attached to the application form. After receiving approval letter from the tax authority, non-resident would be refunded with the paid taxes which are deducted by the Azerbaijani resident while making payments to the non-resident.

 

Please contact us for any question, support, tax planning or tax optimization consultancy regarding withholding taxes in Azerbaijan, its rates, procedures, as well as obtaining prior exemptions, tax credits or refund of paid taxes in accordance with the double taxation treaties.