AZERBAIJAN - Recent tax changes
On 20 December 2018 the President of the Republic of Azerbaijan approved the Law “On Amendments to the Tax Code of the Republic of Azerbaijan” dated 30 November 2018 (the “Law”). As the Law introduces a plethora of changes in the Azerbaijani taxation landscape, it is now more than ever necessary for businesses to remain abreast of tax developments.
The amendments focus on promoting entrepreneurship, scaling down tax evasion and the shadow economy, broadening the taxable base, improving tax administration and increasing the efficiency of tax deductions.
This article summarises the main corporate income tax (CIT) changes with effect from 1 January 2019. Changes to transfer pricing rules and Value Added Tax will be covered in our upcoming Transfer Pricing News and Indirect Tax News publications.
Corporate income tax (CIT)
Payers of corporate income tax
Non-governmental organisations receiving income from entrepreneurial activities are now also considered as payers of corporate income tax.
Disposals of shares
Changes have been made in respect of capital gains from the disposal of shares held by legal entities for CIT purposes. A legal entity’s taxable income is the difference between the actual sale value and the nominal value of the shares, provided the sale value exceeds the value of net assets proportionate to the value of the shares owned by that legal entity in the other legal entity’s share capital. If sold at a value lower (a discounted price) than the proportionately owned value of net asset, the taxable income will be the difference between the proportionate value of net assets on the date of share sale and purchase agreement and the nominal value of the shares owned by the legal entity.
If the shares are bought at a value exceeding their nominal value, the actual cost on acquisition will be taken into account for taxation purposes on a subsequent disposal.
Certain CIT exemptions have been amended and new exemptions have been added. The noteworthy ones are as follows:
- Income of public legal entities established to operate in the name of the government (except for entrepreneurial income);
- Income of the Mortgage and Loan Guarantee Fund of the Republic of Azerbaijan;
- Profits of educational institutions, including educational institutions established for education of persons with physical challenges, except for the amount of profits allocated for distribution of dividends;
- The tax exemption period on income of legal entities qualifying as manufacturers of agricultural products has been further extended from five years to 10 years commencing from 1 January 2014;
- With the exception of legal entities, the value of 51% or more of shares which are directly or indirectly owned by the state, and public legal entities, representing up to 10% of a taxpayer's profit for the reporting year, that are transferred as a cashless transfer to enterprises, institutions and organisations, that operate in the field of science, education, health, sports and culture and meet criteria established by the Cabinet of Ministers, is exempt from CIT for 10 years starting from 1 January 2019. The criteria are yet to be approved by the Cabinet of Ministers;
- A 50% exemption on the capital gains on share/s held by the taxpayer for at least three years;
- A 75% exemption on entrepreneurial profits of legal entities that are subjects of micro-entrepreneurship (micro businesses);
- Full exemption on profits of SME cluster companies – for 7 years from the date of being included in the SME cluster companies register;
- Part of the profits received by an SME cluster participant legal entity for goods (work, services) supplied on the basis of an agreement entered into with a SME cluster company, directed to capital expenditures is exempt for seven years;
- Profits of micro- and small business start-up entities from innovation activities are exempt from tax for three years commencing from the date of receipt of the “Start-up” certificate;
- CIT payable by legal entities engaged in goods retail and/or catering business will be reduced by 25% for a three-year period starting from 1 January 2019 on the ratio of cashless payments that the entity receives via POS terminals envisaged in the Law of the Republic of Azerbaijan “On protection of consumers’ rights”, to the entity’s total income. The amount of payments received via POS terminals by such legal entities will not be considered.
- Full exemption on dividend income will apply to dividend income of legal entities that are founders (participatory interest holders) or shareholders of a resident enterprise which keeps records of income and expenses in the manner specified in the tax law, is not registered for VAT purposes and has a volume of transactions below AZN 200,000 in any month (months) of a consecutive twelve-month period.
Thin capitalisation rules
New thin capitalisation rules will apply specifically to borrowing transactions between the Covered Persons. Deductibility of related interest expenses will be based on a taxpayer’s leverage ratio:
- If loans received from abroad (except for loans issued by foreign banks and credit organisations, as well as loans on bonds traded in foreign stock exchanges) are more than twice the amount of a taxpayer’s net assets (the capital), the interest expenses attributable to the principal amount of loans that exceed at least twice the taxpayer’s net assets will not be deductible for CIT purposes. However, these provisions will not apply to resident banks and credit organisations.
Additional incentives have been given to micro entrepreneurial and small entrepreneurial businesses in respect of deduction of depreciation expenses for CIT purposes:
- Micro entrepreneurial businesses are entitled to multiply their fixed assets annual depreciation expenses by two.
- Small entrepreneurial businesses will be entitled to multiply their fixed assets annual depreciation expenses by 1.5.
Loss carry forward
Under a newly introduced clarifying provision, losses incurred and amounts carried forward due to the application of a lower rate of depreciation and repair expenses by taxpayers before they have become payers of PIT or CIT are not deductible. This provision will not apply if a taxpayer is registered retrospectively (not exceeding three years back) for VAT purposes.
Assets tax - Exemptions
A major exemption provision was introduced in respect of the asset tax on privatised property. The assets tax paid from 1 January 2019 to 1 January 2022 in respect of state-owned property, the privatisation of which was completed, is refunded based on a taxpayer's application under the following conditions, or upon its consent is carried forward to be offset against its subsequent tax obligations:
- The amount of other taxes calculated and paid in the reporting year should not be less than the amount of assets tax paid to the State Budget for the reporting year in respect of property privatisation of which has been completed;
- On the assets tax refund application date a taxpayer does not have any liability for taxes, interest thereon and financial sanctions.
Micro entrepreneurial businesses are exempt from assets tax.
SME cluster companies are exempt for seven years, commencing from the date of entry into the SME cluster companies register, from assets tax in respect of property they are using in SME cluster activities.
 The same exemption period applies for assets tax
 Those falling under the scope of transfer pricing regulations