Withholding taxes are not listed as a 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. For corporate taxes in Azerbaijan, you can check this article.
2.Withholding taxes within Azerbaijan: to be deducted by resident taxpayers from the income of non-taxpayers (persons without tax registration) in Azerbaijan.
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.
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.