Investment income tax exemptions extended

A new set of amendments to the Tax Code was adopted in May 2022. Passive investment income is further extended from income taxation, provided that they are traded at stock exchanges. i.e. the traded market. The most noteworthy aspect is that the effective date of the amendments in regards to taxes deducted from interests at the source of payment is made retroactive, i.e. the amendments enter into force from January 1, 2022. The amendments are as follows:

Income tax exemptions and privileges

According to the amendments, dividends, discounts (which is the difference resulting from placement of bonds below the nominal value), and interest incomes stemming from shares and bonds offered and traded at the regulated market are further exempted for 5 (five) years from February 1, 2023. According to the Law of the Republic of Azerbaijan “On Securities Market”, the regulated market concept refers to the system of purchase and sale of securities and derivative financial instruments issued in accordance with the internal rules of the Baku Stock Exchange, mainly organized and managed by the stock exchange.

Taxes deducted from interests at the source of payment

Pursuant to amendments, the range of entities subject to taxes deducted from interests at the source of payment has changed. Thus, from the interest paid to a resident individual, a permanent representative office of a non-resident individual in the Republic of Azerbaijan (except for individuals carrying out financial leasing) and a non-resident who does not have a permanent representative office in the Republic of Azerbaijan, will be taxed at the rate of 10%, taking into account the exemption provided for in Articles 102.1.22 and 102.1.22-2 of Tax Code.

In addition, the provisions of Article 123.3, which provide for a reduction in the amount of taxes deducted from interests at the source of payment, have been replaced by a new provision providing for a mechanism for calculating the discount and interest income paid on bonds. Thus, the tax at the source of payment on the discount and interest income paid on the bond will be calculated in proportion to the number of days the bondholder owns the bond.