The determination of the source of income is no longer based on the location of payment.The rates of tax on various types of Azerbaijani-source income are the following:

Personal Income Tax

Individuals are subject to tax at graduated rates that reach a maximum rate of 35%. Tax-resident individuals are subject to tax on their worldwide income, while non-residents are subject to tax only on their income from sources in Azerbaijan. An individual is treated as a tax resident of Azerbaijan if present in Azerbaijan more than 182 days in any period of 12 consecutive months ending in the tax year. Most items of compensation received in exchange for employment services constitute taxable employment income. However, food and housing benefits provided by an employer to its employee are not taxable to the employee (and not deductible to the employer).

Social Taxes

Citizens of Azerbaijan are subject to social security taxes. Employers of local nationals must make contributions to the Social Protection Fund at a rate of 30% of gross payroll to citizens and contributions to the Employment Fund at a rate of 2% of gross payroll to citizens. Employers must also withhold 1% of each local national's salary and remit this as an additional contribution to the Social Protection Fund.

Companies must also make contributions to the Invalids Fund for the benefit of handicapped individuals in Azerbaijan. These contributions are measured as 1% of profit. In addition, employers that do not meet established quotas for the employment of disabled employees (one disable person for each 25 employees) must make additional contributions to the fund.

Value Added Tax

Goods and services sold within Azerbaijan or imported into Azerbaijan are subject to VAT at a rate of 18%. A supply of goods or services that is incidental to a primary supply of goods or services will be considered a part of the latter. A provision of services that are supplementary to an import of goods is regarded as a part of the import of goods. VAT that a company pays to its suppliers is creditable and reduces the amount of VAT that the company owes to the Government after it charges VAT to its own customers.

If a non-resident that is not a registered VAT payer renders services in Azerbaijan, any taxpayer making payment to the non-resident must withhold VAT from the payment at the standard rate. VAT payments and reports are due monthly.

VAT exemptions are granted for, among others, the following:

For VAT purposes, a transaction is deemed to occur on the date when an invoice is issued unless the invoice is not issued within five days following a supply of goods or services, in which case the transaction is deemed to occur when supply occurred. If payment precedes the supply of goods or services and an invoice is not issued within five days following the supply, the transaction is deemed to occur on the date of payment.

This provision essentially requires taxpayers to use either the cash method or the accruals method of accounting to account for VAT - whichever results in the earlier VAT liability - if invoices are not promptly issued. The net result is that taxpayers may find themselves facing VAT liabilities to the State Budget before they collect VAT from their customers.

Services are deemed provided at the following locations (with priority given to the item that occurs earliest in the following order):

Any person that conducts commercial activity and has revenues exceeding approximately $22,000 over any period of three consecutive months must register with the tax authorities as a VAT payer. Any other person may voluntarily register as a VAT payer. Taxpayers may not charge VAT and may not claim a credit for input VAT that they pay unless they are registered as VAT payers.

One of the main streets in Baku

If a taxpayer's revenues from good and services that are subject to VAT at a rate of 0% comprise more than 50% of its total revenues, the amount by which any credited input VAT exceeds the amount of VAT charged during the period is to be refunded within 45 days following the taxpayer's request for a refund. Other taxpayers (i.e. taxpayers with zero-rate sales comprising less than 50% of their sales) must carry forward a credit for overpaid input VAT for 5 months for offset against any future VAT liabilities. Any remaining balance after 5 months is to be refunded within 45 days following the taxpayer's request for a refund.

Excise Tax

Various types of goods produced in or imported into Azerbaijan are subject to excise tax, which is then included in the sales price of the goods. Excise goods are tobacco products, petroleum products, and alcohol and spirits. Excise tax rates are set by executive authorities. Excise tax payments are reports are due monthly or in the case of imports, at the time of import.

Customs Duties

Customs duties apply to most goods imported into Azerbaijan and depend on the type of item imported. Some rates are measured as a percentage of the declared customs value of the goods (0%, 5%, 10% or 15%), while others are assessed as a fixed amount per specified volume or quantity of the goods. Assets imported into Azerbaijan by a foreign investor as a contribution to the charter fund of a joint venture or for the establishment of a wholly owned subsidiary and goods in transit through Azerbaijan are exempt from customs duties.

In addition to customs duties, the State customs authorities also levy a customs processing fee on both imports and exports. This fee is based on the type of good or the purpose for which a good is imported, as indicated below:

goods imported and/or exported are subject to a 0.15% customs clearance charge on the customs value (doubling to 0.3% for goods that undergo customs clearance outside of the official place and time established for customs clearance);

goods imported on a consignment are subject to customs clearance charges of 0.25% of the customs value.

Property Tax

Companies owning fixed assets in Azerbaijan are subject to property tax on those assets. The property tax rate is 1%. The property tax base is an arithmetic average of the net book value of fixed assets at the start and end of the accounting period. The tax on vehicles, watercraft and aircraft is based on engine capacity rather than net book value.

Advance payments of property tax are due quarterly in an amount equal to one-fourth of the taxpayer's total property tax liability for the prior year. Property tax returns and final tax settlements are due by 1 April of the year following the reporting year.

Land Tax

Persons owning or using land in Azerbaijan are subject to a tax on the land use. The tax applies irrespective of the financial results of the economic activity of the owners or users of the land. Land tax rates depend on quality scores that take into account the size, geographical location and use of the land.

Road Use Tax

Non-residents that own motor vehicles and bring them into Azerbaijan for passenger and cargo transport within Azerbaijan are subject to a tax on the use of roads in Azerbaijan. The tax rates depend on the type and cargo capacity of the vehicle, total weight of the vehicle and cargo, degree of danger involved in cargo, number of seats, and distance to be traveled within Azerbaijan. The tax is collected at the border by the State customs authorities.

Mining Tax

Personas extracting commercial minerals in Azerbaijan are subject to a mining tax. The following are the mining tax rates for select mineral resources:

Crude oil - 26%

Natural gas - 20%

Precious metals - 8%

Gems - 5%

Mineral waters - 8%

Simplified Tax System

Entities with revenues below a certain threshold (aggregate revenues not exceeding an amount equal to approximately US$21,000 during any period of three consecutive months) are not required to register as VAT payers and are permitted to report their taxes under a simplified tax system. Enterprises that qualify for taxation under this system are subject to only a single unified tax that takes the place of profit tax, property tax, land tax and VAT. The tax is assessed as 2% of gross revenues. This one tax is reported on a quarterly basis. Thus, enterprises taxed under this system face a dramatically reduced tax compliance burden in Azerbaijan, though they remain subject to all payroll tax requirements and must report personal income taxes on a monthly basis.

Profit Taxation under New Tax Law

The following is a brief discussion of various aspects of profit taxation and tax compliance under the newly implemented Tax Code.

Transfer Price

Market price determined by supply and demand forces is presumed except in cases of barter, transactions between related parties (parties where one owns more than 20% of the other or one is under the control of the other, parties that under the control of the same third party, and family members) or price fluctuations of 30% or more within a period of 30 days. In these latter cases, the tax code permits the tax authorities to adjust transfer prices in cases where transaction prices do not match market prices.

Permanent Establishment

A permanent establishment is defined to be any place where commercial activity is conducted for more than 90 days in any period of 12 consecutive months. Commercial activity includes rendering services but does not include activity of a preparatory or auxiliary nature.

Capital Asset Costs

An immediate deduction is granted for the cost of capital assets used in production for at least two years following acquisition of the assets.

Interest Expense Deductions

Interest is deductible for profit tax purposes, but the maximum rate of interest that may be deducted is limited to 150% of the inter-bank credit auction rate. The maximum total interest deduction on a loan from a related party is limited to the amount of any interest income that the company reports plus 50% of the company's gross income less deductions other than interest.

Depreciation

Assets other than buildings are subject to depreciation by a group method under which fixed assets are divided into groups, or categories, and depreciated in aggregate. All assets of a particular category specified by tax law are grouped together, their costs are aggregated, and the depreciation rate specified by law for that category is applied to the aggregate book value of the group. The balance for the group is then reduced by the depreciation accrued for the year for that group. If any assets of a particular group are sold during the year, the balance for the group is reduced by the proceeds of the sale, and no gain is recognized unless the proceeds exceed the basis of the group. Disposals of a single asset do not entail tax consequences unless the disposal proceeds exceed the entire basis of the asset category.

Repair Expenses

The profit tax deduction for repair expenses is limited to the year-end balance sheet value of the asset category to which the repair expenses relate. Excess repair expenses must be capitalized into the balance sheet value of that asset category.

Loss Carryforwards

The time period for carrying losses forward is limited to five years.

Branch Profit Tax

A tax on net profits of branches of foreign legal entities is implemented at the rate of 10%. The tax applies only to actual remittances of profit. The introduction of this new tax equalizes the tax treatment of the net profits of Azerbaijani legal entities with foreign participation and the net profits of branches of foreign legal entities.

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