Ministry of Taxes of the Republic of Azerbaijan 

PROFIT TAX 

The profit of a taxpayer is a difference between the income (except for the income that is exempt from tax) and expense deducted from income.
The tax paid from profit is defined as profit tax.

Taxpayers

Resident and non-resident enterprises in the Republic of Azerbaijan are payers of profit tax.
Any foreign person who is not a physical person is treated as an enterprise that shall pay a profit tax, unless it proves that it is a joint ownership pursuant.
Branch-offices, structural divisions and other separate units of the legal entity established in accordance with the legislation of the Republic of Azerbaijan owning net balance, current or other accounts are not considered as profit taxpayers.

Taxable base

The profit of a resident-enterprise received both in the Republic of Azerbaijan and outside is a taxable base.
The taxable base for non-resident enterprise is a profit generated only from the sources in the Republic of Azerbaijan.
A non-resident enterprise operating in the Republic of Azerbaijan through its permanent establishment pays taxes on its profit connected with permanent establishment.
A non-resident enterprise operating in the Republic of Azerbaijan through its permanent establishment shall pay tax on its profit, i.e. on gross income generated from Azeri sources in relationship with the permanent establishment minus the amount of expenses incurred with respect to such income.
The gross income of a non-resident enterprise not connected with the permanent establishment is taxed at the source of payment without expenses being deducted.
Gross income of a non-resident enterprise received during a calendar year from an Azerbaijani source, not connected with the permanent establishment and generated through the transfer of property is taxed after the deduction of the expenses which relate to such income.

Tax rate

The profit of an enterprise is taxed at the rate of 22 percent.
The gross income (with deduction of VAT and excises) of non-resident legal entity, not connected with the activity of his permanent establishment but received from Azerbaijani source is taxed at the following rates:

• dividends paid by resident-enterprise - 10%;
• interests paid by a resident enterprise or by permanent establishment of the non resident or on behalf of such permanent establishment on the income generated from Azeri sources, with exception of interests paid on loans and deposits to resident banks, resident persons performing financial leasing or non-resident to non-resident banks or to permanent establishment of the non-resident performing financial leasing in the Republic of Azerbaijan – 10%                      

• insurance payments of the resident enterprise under risk insurance or reinsurance agreements - 4%;
• payments by a resident enterprise for telecommunication or transport services during international communications or shipments between the Republic of Azerbaijan and other states - 6%;
• income of a resident legal entity received from the fulfilment of works or provision of services, as well as other incomes received from the Azeri source with exception of income derived from employment - 10%;
• rental fees and royalty - 14%;
• income in the form of wages paid by a resident enterprise - according to the rates of monthly income tax.

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.

Exemptions and relieves

The followings are exempt from tax:

• income of charitable organizations - except for the income from entrepreneurial activity;
• grants, membership fees and donations received by non-commercial organizations;
• income of international, interstate and intergovernmental organizations - except for the income received from the entrepreneurial activity;
• income of state power authorities, budget-funded organizations and local-governing authorities (except for the income from entrepreneurial activity);
• income of the National Bank of the Republic of Azerbaijan, its structures and State Oil Fund of the Azerbaijan Republic (with exception of profits made from allocation of its funds);
• received insurance payments (with exception of amounts of losses connected with each insurance case);
• income of special educational institutions established for education of persons with poor health – except for income, gained as a result of business activity;
• income generated from writing off tax debts to the state budget according to the legislation of Azerbaijan Republic;
• income tax rate of production enterprises owned by public organizations of disabled people is reduced by 50 percent if at least 50 percent of employees at such enterprises are disabled people.

When establishing the right for the privilege the average number in the list of employees shall not include disable people who work on contract terms at two jobs, as contractors and other agreements civil legislation.

Expenses connected with the generation of profit

All expenses connected with obtaining income, as well as mandatory payments stipulated under the legislation are deducted from such income, except for non-deductible expenses.

Non-deductible expenses

The following expenses are not deducted from income:

• expenses incurred on the acquisition and installation of fixed assets as well as other expenses that are characterized as expenses incurred on capital;
• expenses connected with non-commercial activity;
• food and entertainment expenses, as well as housing and other social expenses of employees.

If the expenses of an enterprise whose entrepreneurial activity is of entertainment nature are incurred within the framework of such activity, expenses incurred on entertainment shall be deducted from the income.
No deduction is allowed with respect to the profit tax or any other tax calculated on profit which has been paid in the territory of the Republic of Azerbaijan or other countries, paid financial sanctions, as well as the actual travel expenses exceeding the limit.

Deductible expenses

• Actual amount of interest on debts obtained from abroad, and also paid to each other by interconnected persons (when applying accrual method – amount of interest on payment), is deducted from the profit within the period for which interests are applied, at the same currency and at the amount not exceeding 125 percent of the average interest on inter-bank trade on credits with similar periods, or, if no trade was conducted - on inter-bank credits published by the National Bank of the Azerbaijan Republic;
• doubtful debts connected with goods, works and services that have been realized where income from them was previously included in the gross income received from entrepreneurial activity;
• amounts assigned by the banks and credit unions engaged in certain types of banking activities for establishment of special reserve funds in accordance with legislation depending on classification of assets;
• amounts assigned by a legal entity engaged in insurance activity for establishment of reserve insurance funds within the norms established by the legislation of the Republic of Azerbaijan;
• expenditures on research, project-research and experimental-design work conducted with the purpose of making profit (except for the expenditures on the acquisition of fixed assets, their installation and other expenses of a capital nature);
• amortization charges for fixed assets;
• insurance payments that are paid by insured parties under insurance agreements with the exception of insurance payments on property damage insurance to employees’ favor, as well as life insurance made by foreign insurance organizations.

The amount of repair expenses to be deducted for each year is limited to the balance value as of the previous year-end for each category of fixed assets - 2 percent of remaining value of buildings, facilities and installations, 5 percent of remaining value of machinery, equipment, calculation technology and transport means, 3 percent of the remaining value of other assets at the year end, and
zero (0) percent on main assets to which the depreciation is not accounted.
In the event when the actual amount of repair expenses is less than the amount established by this limit then the actual amount of repair expenses shall be deductible from income.

Loss-Carry Forward

Part of enterprise costs exceeding incomes, the deduction of which from incomes is allowed, is carried forward for up to 3 years and compensated by the profit of those years without any limitations.
Foreign tax credit

Amounts of profit tax of resident enterprise paid outside the Republic of Azerbaijan from the incomes of not Azerbaijani source is credited upon the payment of tax in the Republic of Azerbaijan.
Amounts of profit tax paid outside the Republic of Azerbaijan must not exceed the amount of tax charged on that profit in the Republic of Azerbaijan at the rates in effect in the Republic of Azerbaijan.

Procedure for recording income and expenditures

In order to reflect taxable income (or profit) clearly, the taxpayer is obliged to maintain accurate and timely records of income and expenditures on the basis of documented data.
Taxpayer may use cash method or accrual method of tax accounting, provided the same method is applied by taxpayer during the tax year.
Taxpayer using cash method must account for income at the moment that it actually receives such income or such income is transferred to its disposal and for expenses - at the moment that these expenses are actually incurred.
The moment that cash monies are received or the moment that said monies are transferred to taxpayer’s bank account in case of non-cash payments is considered the moment of receipt of income and the moment of carrying out expenses is the moment that these expenses are actually incurred.
Taxpayer maintaining records using the accrual method must record income and expenditures on the moment when appropriate liability is created regardless of the moment that the income is received or the expenditures are incurred.
If the term of payment, when paying interest on debt obligation or rent on a leased property, covers few reporting periods, expenses shall be allocated over these reporting periods in accordance with the procedure for their calculation.

Tax return

Accounting period for profit tax is a calendar year. The taxpayers must submit a tax return to the tax authorities not later than March 31 of the year following the accounting year. Taxpayers must carry out final calculations and pay taxes before the date established for the submission of tax returns.
In case the enterprise ceases its entrepreneurial activity in the Republic of Azerbaijan, it must submit the return to tax authorities within 30 days. If this is the case, the accounting period shall cover the timeframe from the beginning of tax year until the day of entrepreneurial activity cessation by the enterprise.
If the legal entity or the permanent establishment of a non-resident is liquidated, the liquidation commission or taxpayer must immediately notify the state tax authorities of such liquidation in the manner established by the legislation.
Legal entities are obliged to make current payments to the state budget no later than the 15th day of the month following each quarter. Enterprises and organizations owned by municipalities pay taxes to local budget.
There are 2 methods to determine the amount of current tax payments:
1. The amount of each payment shall be 1/4 of the tax amount calculated in previous tax year.
2. The taxpayer may determine the amounts of current tax payments by multiplying the volume of his income in relevant quarter to coefficient of tax weight in the gross income for previous year (with no consideration of amounts to be deducted from income).
The taxpayer selects annually by April 15 one of the two methods for calculation of the amount of payable taxes within the year and informs the tax authority. In case if the taxpayer chooses the 2nd method, he should submit the certificate on current tax amounts calculated from income or profit within 15 days after the end of each quarter. Otherwise, the tax authority applies the 1st method.  In case, when the taxpayer does not inform about the method applied for calculation of the amount of current tax payments, the tax authority applies the first method.
Current tax payments are included in the amount of tax withheld from the taxpayer within the tax year.

Financial sanctions and interests

A financial sanction is imposed on the taxpayer who fails to submit the tax report in timely manner without valid reasons at the value of 40 manats following the decision of tax authority.
In case the amount of tax (including withholding tax) indicated on tax report 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 tax or current tax payment in period stipulated by the legislation, the interest at the rate of 0,1 % of the amount of tax or current tax payment is withheld from the taxpayer or tax agent for each day of delay. This interest is applied in respect to current tax payments for the whole period of delay but not more than for 1 year.