Procedure for withholding of taxes at the source of payment

The following persons, i.e. tax agents responsible for calculating, withholding and transferring taxes to the destination are obliged for withholding of income tax at the source of payment:
- legal persons and entrepreneurs  which make payments to physical persons working as employees;
- legal or natural persons paying out pensions to persons, with the exception of paid under the State social security system;
- resident legal persons paying dividends to legal and natural persons;
- legal or natural persons paying interests to legal or physical persons;
- legal or natural persons making payments on rental fees and royalties (with exception of rental fees and royalties paid to the resident enterprises and permanent establishments of non-residents in the Republic of Azerbaijan), on total income of the non-resident defined as derived from the sources in the Republic of Azerbaijan and not connected with the permanent establishment of the non-resident in the Republic of Azerbaijan, as well as on net profit of the permanent establishment of a non-resident in the Republic of Azerbaijan;
-legal persons or individual entrepreneurs making payments to natural persons not registered by tax authorities as a taxpayers or not provided a TIN, for provided services (works),.
Tax agent at the place of employment is obliged to withhold income tax on monthly income of the employee. If the taxpayer has not to submit the tax return, it is considered to be the total amount of income tax.
Withholding of tax from monthly income at the source of payment.
Legal persons and entrepreneurs paying out pensions to persons, with the exception of paid under the State social security system, making payments to physical persons working as employees and making payments to natural persons or individual entrepreneurs not registered by tax authorities as a taxpayers or not provided a TIN should withhold a 14% tax if the monthly income is less than 1000 manats and 140 manats + 35% of the amount above 1000 manats if the monthly income is above 1000 manats and transmit this amount to the state budget.
The monthly income of a physical person is reduced for 30 manats if the monthly income is less than 200 manats.
At the same time several exemptions and reliefs are applied according to the legislation for physical persons of certain categories.
Income tax for physical persons employed at two or more workplaces is calculated separately for each workplace and is paid to the state budget.

Taxation of dividends at the source of payment
Dividends paid by resident enterprises shall be subject to taxation at the source of payment at a rate of 10 percent.
If dividends have been taxed in hands of their beneficial owner at the rate of 10 per cent, then the specified income of natural and legal persons shall not be taxed again.
This income is not taxed again when it is paid as dividends.

Taxation of interest at the source of payment

With exception of interests paid on credits (loans), deposits (accounts) of resident-banks or permanent establishment of non-resident banks  if income in the form of interest paid by a resident or by a permanent establishment of a non-resident in the Republic of Azerbaijan, or on behalf of such a permanent establishment, or in the form of interest on loans paid according to financial leasing operations received from sources in the Republic of Azerbaijan shall be taxed at the source of payment at a rate of 10%.
If the beneficial owner of interest is a natural person, interests from which taxes have been withheld at a rate of 10%, shall not be taxed again after they have been paid to natural person.
If the beneficial owner of interest is a taxable resident enterprise or the permanent establishment of non-resident then the specified enterprise or permanent establishment of non-resident receiving the interest from which taxes at source have been withheld at the rate of 10%, this enterprise or the permanent establishment shall reduce the amount of tax calculated on its profit by an amount equal to tax withheld from it at the source of payment by providing documents confirming the payment of taxes at the source of payment.
Income received as difference between the insurance premiums and payments to insured person shall be taxed at the source of payment at the rate of 10 percent.

Tax reliefs on dividends and interest

According to the Law of the Republic of Azerbaijan on determination of reliefs on withholding of income tax from interest amounts paid on deposits of the population by banks and other credit organizations, as well as from dividends and interest on investment bonds, interest amounts paid on deposits of the population by banks and other credit organizations and dividends and interest on investment bonds are exempted from income tax until January 1, 2010.

Taxation of rental fees and royalties at the source of payment

If the income from the rental fees from movable and immovable property, income from royalty paid by the resident or permanent establishment of non-resident in the Republic of Azerbaijan or paid on his behalf received from sources in Azerbaijan such income shall be taxed at the source of payment at the rate of 14 percent.
If the rental fee is paid by natural person, who is not registered as taxpayer, the leaser shall pay the tax by himself, he is registered at tax authorities and submits the tax return and that income is not taxed again.
If tax is withheld from natural person receiving the rental fee or royalty at the rate of 14% of that income, this income is not taxed again and the tax return is not submitted.
Amounts paid to resident enterprises in the Republic of Azerbaijan and permanent establishments of non-residents as rental fees or royalties shall not be a taxable at the source of payment.

The minimum amount for monthly rental fees from immovable property (except for dwelling funds) is determined by the Cabinet of Ministers.

Withholding of tax on income of non-residents at the source of payment

Gross income of a non-resident from the sources in the Republic of Azerbaijan and not attributable to the permanent establishment of the non-resident located in the territory of the Republic of Azerbaijan shall be subject to taxation at the source of payment without deduction of costs at the source of payment at the following rates:

• dividends – 10 percent;
• interests – 10 percent;
• insurance payments under risk insurance or reinsurance agreements – 4percent;
• payments by a resident enterprise or by an individual for telecommunication or transport services during international communications or transportation between the Republic of Azerbaijan and other states - 6 percent;
• income from provision of work or services by the resident entity or entrepreneur (except for income from labour, royalties from property kept or used in Azerbaijan Republic and income from rent of immovable property) and other payments on income from Azerbaijani source – 10 percent;
• income in the form of wages paid by a resident enterprise or by an individual - at the rates specified for the monthly income;
• rental fees and royalty – 14 percent.

Payments made by or on behalf of the permanent establishment of a non-resident in the Republic of Azerbaijan of on his behalf, shall be considered to be made by a resident enterprise.
In case if in the international treaties on avoidance of double taxation to which the Republic of Azerbaijan is a party stipulates lower tax rate or full exemption from taxes, then tax amount which was overcharged at the source of payment will be refunded in an order stipulated by the Cabinet of Ministers.

Taxation of the net profit of non-resident’s permanent establishment at the source of payment

In addition to the profit tax of non-resident’s permanent establishment, any amount which is transferred (issued) by such permanent establishment from its net-profit to such non-resident shall be taxed at source at the rate of 10 percent.

Transmission of the income tax withheld at source to the state budget and submission of tax return

Accounting period for income tax withheld at source is a quarter.
Legal persons and individuals withholding taxes at the source of payment are obliged:

• while making payments to employees to calculate income tax from the monthly income of employees and transmit the calculated tax to the budget not later than 20th day of the next month;
• to transmit the tax to the budget not later than 20th day of the month following the quarter in which the non-governmental pensions and other payments (with exception of rental fees and royalties paid to resident enterprises and to permanent establishments of non-residents in the Republic of Azerbaijan);
• to submit the return on withholding taxes to the tax authorities not later than 20th day of the first month following the ended quarter.

Taxation of non-resident’s at the source of payment, transmission of the income to the state budget and submission of tax return

If a non-resident who has not registered for VAT purposes in the Republic of Azerbaijan performs work or provides a service in the territory of the Republic of Azerbaijan for a tax agent, the performance of work or provision of services for the purposes are taxed on VAT.
The tax agent shall charge and pay VAT from the amount (excluding VAT) to be paid to non-resident.
If the tax agent has been registered for VAT, the tax withheld shall be payable not later than 20th day of the month following that in which the operation took place. The payment document verifying the payment of the calculated tax is the tax invoice giving the tax agent the right to a VAT credit.
If the tax agent has not been registered for the VAT purposes, he shall pay upon payment of calculated tax to non-resident in accordance with this Article within 7 days and before the 20th day of following month submit the VAT return. This operation is not assigned to the operations of the taxpayer which are determined for the registration of the taxpayer and paying the tax on behalf of non-resident does not give basis to the tax agent for crediting VAT.

Financial sanctions and interests

Legal persons and individuals are responsible for withholding of taxes and for their transmission to the budget. If the tax amount have not been withheld or the withheld amount has not been transmitted to the budget, legal persons and individuals paying the income are obliged to pay the amount of non-withheld or non-transmitted tax amount, as well as relevant interests and sanctions to the budget.
A financial sanction is imposed on a taxpayer for late submission of tax return and certificate on tax obligation without valid reasons based on the decision of the head (deputy) of the tax authority at the value of 40 manats.
In case the amount of tax indicated on tax report for withholding taxes is less than the amount to be indicated on the report and if taxpayer fails to submit tax report and evades to pay the required tax amount to the budget, the financial sanction shall be imposed on the taxpayer at the rate of 25 percent of understated or evaded tax amount.
For failure to pay the withholding taxes within the specified period, the interest at the rate of 0,1% of the amount of the tax is imposed on the taxpayer or tax agent for each day of delay.