Law of the Azerbaijan Republic

About tax on profits of enterprises and organizations

 Article 1. Tax payers 1. The following pay tax on profits: a) enterprises and organizations - legal entities according to legislation of the Azerbaijan Republic including enterprises established on the territory of the Azerbaijan Republic with participation of foreign capital, international associations and organizations carrying out business activity, banks, credit agencies and insurance organizations;

b) branch companies and other subsidiaries of enterprises and organizations (except branches and subsidiaries of banks and credit organizations), having their own balance and settlement (current) account, including those established by foreign legal entities.

 2. List of entities paying tax on profit in centralized order is defined by relevant Executive Power body of the Azerbaijan Republic.

3. Among those who pay tax on profits are also companies, firms, all other organizations established in accordance with legislation of foreign states (hereinafter - foreign legal entities) carrying out business activity on the territory of the Azerbaijan Republic through permanent representation.

For the purpose of taxation, under representation of foreign legal entities we shall mean bureau, office, agency, any other place of activity (related to exploration or development of natural resources, implementation of construction, installation, assembling, hook-up, adjustment, maintenance of equipment and other similar operations), and also organizations and citizens authorized by foreign legal entities to carry out representative functions.

4. According to this Law the following do not pay tax on profit:

a) enterprises paying tax on profit which obtained patent in accordance with legislation of the Azerbaijan Republic - regarding the profit obtained as a result of those kinds of activity which patent was issued for;

b) all enterprises irrespective of organization-legal form - on profits resulted from sale of agricultural products produced by themselves, and also from sale of agricultural products produced by themselves and processed at this enterprise (except poultry plants and pig-raising farms, greenhouses, farms for breeding fur-bearing animals, other industrial enterprises).

In line with the present Law said enterprises pay tax on profits resulted from other kinds of activity;

c) National Bank of the Azerbaijan Republic and its organizations;

d) enterprises financed from state budget.

 Article 2. Objects of taxation and procedure of estimation of taxable profits 1. Cross profit of the enterprise decreased (increased) in accordance with provisions of this Article.

2. Gross profit of the enterprise is sum of profits (losses) of the enterprise resulted from sale of products (work, services), fixed assets (including land site), other property and its profits from non-commercial operations less sum of expenditures and losses on these operations.

3. Profits (losses) resulted from sale of products (work, services) is defined as difference between sum obtained from sale of products (work, services) and expenditures on production and sale included into product cost (work, service cost) less value added tax and excises.

When estimating profits of enterprises carrying out foreign economic activity sums of export duties paid on profits from sale of products (work, services) are deducted.

4. When estimating profits resulted from sale of fixed assets and other property of the enterprise for the purpose of taxation, difference between selling price and initial or residual cost of these assets and property is taken into account. Concerning fixed assets, immaterial assets, articles of low value and non-durable articles which are paid for by estimating depreciation, estimate is done based on residual cost of these assets and property.

If fixed assets and incomplete construction objects which enjoy tax privileges are sold or transferred free within two years from the date of their purchase or installation, taxable profit will be increased by a sum of residual cost of said fixed assets and expenses as per incomplete construction objects (within the limits of earlier granted privileges). Said procedure shall apply to objects which enjoy privileges in taxation of profit (income) used for investments in the period after 1 January, 1992.

5. The following pertains to profits (expenses) from non-commercial operations: profits obtained as a result of share participation in operations of other enterprises, from lease of property, profits (dividends, interest) on shares, bonds and other securities belonging to the enterprise, and also other profits (expenses) from operations that are not directly related to production and sale of products (work, services) including sums received and paid as penalties and compensation of losses.

According to legislation of the Azerbaijan Republic sums paid to the budget as sanctions are not included in expenses on non-commercial operations and are apportioned to decrease of profit remaining at the enterprise disposal.

6. Profits obtained in foreign currency are subject to taxation like profits in manats. Sums of profits obtained in foreign currency are converted by the enterprise into manats at exchange rate of National Bank of the Azerbaijan Republic on a date of obtaining profits from sale of products (work, services).

7. For the purpose of taxation gross profit is decreased by:

 8. Taxable profit (income) of enterprises paying tax on profit in the form of obtaining patent as specified by legislation of the Azerbaijan Republic is decreased (increased) by a sum of difference between profits resulted from patented activity and expenditures.

9. Finances remaining at the enterprises’ disposal after payment of taxes and other property pooled together in order to carry out joint activity, and also donations and allocations of citizens are not subject to taxation. Profits obtained as a result of use of above resources is subject to taxation.

 Article 3. Estimation of profits of foreign legal entities When estimating profits of foreign legal entities the following is taken into account: a) only that part of profits of foreign legal entity which is related to its activity on the territory of the Azerbaijan Republic is subject to taxation. Profit of foreign legal entity is not accounted for the purpose of taxation if it pertains only to foreign economic operations undertaken on behalf of this foreign legal entity and is related to purchase of products (work, services) in the Azerbaijan Republic, to exchange of commodities implemented by legal entity - owner of products (work, services) - in accordance with legislation of the Azerbaijan Republic before passing through the state border of the Azerbaijan Republic and also to operations on export of products (work, services) to the Azerbaijan Republic;

b) if foreign legal entity carries out its activity both on the territory of the Azerbaijan Republic and outside it, and there is no separate registration allowing to estimate profits obtained from activity carried out by means of permanent representation, tax payer can be defined as a result of settlements approved by relevant tax authorities;

c) if there is no possibility to estimate directly profits obtained by foreign legal entity in connection with its activity in the Azerbaijan Republic, tax authorities have the right to determine profits based on gross revenue or borne expenses assuming 25% profitability rate.

 Article 4. Expenditures included into product cost (cost of work, services) Expenditures included into product cost (cost of work, services) are determined in accordance with Provisions on composition of expenditures on production and sale included into product cost (cost of work, services) and procedure of formation of financial results approved by the Cabinet of Ministers of the Azerbaijan Republic. Article 5. Tax rate Rate of tax on profit is established 32 percent. Article 6. Tax privileges 1. When estimating tax on profit of the enterprise taxable profit is decreased by: a) sum of financing capital investments on production, and also repayment of bank credits obtained and used for these aims.

Under capital investments on production taken into account when said privilege is granted, we shall mean capital construction in the form of new objects, reconstruction, expansion and modernization of existing enterprises, and also purchase of premises, structures, equipment, transportation means and other objects (or parts) of fixed assets.

Whereas, expenses in connection with purchase of land sites and objects of nature use, and also with purchase and formation of intangible assets are not accounted for.

Privilege for tax on profit envisaged for long-term investments is granted to enterprises developing their own production base in the amount of actual expenditures during report period less sum of depreciation deductions for complete restoration of fixed assets estimated in the report period and apportioned to expenditures on production.

This privilege is also granted to enterprises which use profits, as share participation, to capital investments of productive and non-productive character - in the amount of expenses approved by the executor. Whereas, sum of depreciation deductions for complete restoration of fixed assets is accounted for as specified above;

b) sum of deductions to charitable, ecological and recreation funds registered in an established order, religious organizations, public organizations) of disabled persons, their enterprises, agencies and associations, and also sums transferred to public health organizations, educational organizations, social protection and sport, associations and organizations of culture and arts, cinema, artists’ unions and other artistic associations, however, not more that 1 percent of taxable profit.

Funds of enterprises, organizations and agencies receiving said money, at the end of year present to relevant tax authorities financial report on funds transferred to them during report period and about their use. Money from these sources which have not been used as specified shall be confiscated in an established order in favor of state budget;

c) sum of profits intended for establishment of reserve in banks and other credit agencies; this reserve fund is established for the case of delay with credit repayment, in the amount of 20% of this credit.

 2. For the enterprises where at least 50% of total number of personnel are disabled persons, tax rate is decreased by 50%.

When establishing the right for such privilege disabled persons working part-time (combining jobs), on contracts as subcontractors and other agreements of civil-legal character are not included into an average staff number.

3. Part of the enterprise profits which, within five years, after losses have been revealed (based on annual accounting report) which is used for their compensation (on condition that all money from reserve fund and similar funds created in accordance with legislation have been fully used for these objectives) shall be exempted from tax.

When establishing the right for such privilege losses suffered by the enterprise as a result of sale of products (work, services) during the year (financial results of main activity) are accounted for in settlements. Losses formed as a result of concealment or diminution of profits.

4. For leaseholding enterprises established on the basis of state enterprises and their structural subdivisions tax on profit estimated at specified rates is diminished by the amount of rent to be transferred to the budget (less relevant depreciation deductions).

 Article 7. Procedure of estimation and term of tax payment 1. According to the present Law, sum of tax is estimated by tax payers themselves, based on accounting and reports.

2. During the quarter tax payers pay tax to the budget in advance, based on sum of profit and tax rate expected in the period of taxation. Procedure of estimation and advance payments is established by respective Executive Power body of the Azerbaijan Republic.

3. Tax on profits is paid against quarter settlements, within 5 days from a day specified for presentation of quarterly accounting reports, as for annual settlements - within 10 days from a day specified for presentation of annual accounting reports.

4. Overpaid sums of tax are counted towards future payments or returned to the tax payer based on his (its) written request within ten days from the date of request.

5. Tax on profits of foreign legal entities is estimated every year by tax authorities at a place of location of permanent representation.

Sum of tax is determined based on amount of taxable profit, taking into account granted privileges and tax rates.

Payment order is sent to tax payer with indication of estimated sum of tax; format of payment order shall be as approved by Main State Tax Inspection of the Azerbaijan Republic. Tax shall be paid in term specified in the payment order.

6. Not later than on 15 March of the year following report year, foreign legal entities must present report about their activity in the Azerbaijan Republic and declaration of income in compliance with format approved by Main State Tax Inspection of the Azerbaijan Republic to tax authorities at a place of location of permanent representation.

Commencement or termination of activity of foreign legal entity in the Azerbaijan Republic shall be registered with tax authorities within one month after commencement, or one month before termination.

Fact of non-registration of foreign legal entity carrying out its activity in the Azerbaijan Republic through permanent representation will be regarded as concealment of taxable profit.

Foreign legal entity having permanent representation in the Azerbaijan Republic must be registered with tax authorities at a place of location of permanent representation irrespective of taxation of its activity in the Azerbaijan Republic in future.

7. Within specified term tax payers present calculations of tax on profit and other taxes, accounting reports and balance reports to tax authorities at a place of their location, in format specified by Main State Tax Inspection of the Azerbaijan Republic.

8. To transfer tax to the budget enterprises must present payment instructions to relevant bank organizations before specified date of payment. Such instructions shall have priority.

 Article 8. Taxation of some kinds of enterprises’ profits 1. Besides tax on profit, enterprises pay tax on the following kinds of profits: a) dividends and interest obtained from shares, bonds and other securities issued in the Azerbaijan Republic and belonging to the enterprise. Except profits obtained from state bonds and other state securities;

b) profits from share participation in other enterprises established on the territory of the Azerbaijan Republic;

c) profits (gains) from operations in retail trade, catering and social amenities. For the purpose of taxation these profits are diminished by a sum of value added tax.

 2. Sums of profits of enterprises listed in subclauses «a» and «b» of Clause 1 of this Article are subject to taxation at a rate of 15 percent, for those listed in subclause «c» - at a rate of 3 percent.

3. Taxes on profits received from shares, bonds and other securities belonging to the enterprise and also on profits resulted from share participation in other enterprises are withdrawn from the source of such profits. Enterprises paying profits shall be responsible for withdrawal and transfer of sums due to the budget.

Enterprises paying taxes present calculations of taxes on profits specified in subclauses «a» and «b» of Clause 1 of this Article to tax authorities at a place of their location within 5 days from estimation of profits, but not later than 10 days from the date of distribution of such profits.

4. Enterprises present calculation of taxes on profits resulted from operations in retail trade, small-scale wholesale trade, catering and provision of social amenities within term specified for presentation of accounting reports.

5. Procedure of taxation of profits received from casino, totalizators, slot-machines is established by respective Executive Power Body of the Azerbaijan Republic.

 Article 9. Taxation of profits of foreign legal entities not related to activity in the Azerbaijan Republic 1. Foreign legal entities pay tax on profits from dividends, interest and share participation in enterprises with foreign investments at a rate of 15 percent, on profits resulted from the use of copyright, licenses, rental payments and other profits, their source being on the territory of the Azerbaijan Republic (except profits from freight) - at a rate of 20 percent.

Sums of profits resulted from freight are liable to taxation at a rate of 6 percent.

2. Foreign legal entity having, in accordance with international agreements, right for tax privileges regarding profits from the sources in the Azerbaijan Republic, within one year from the day of receiving the profit, shall send application about tax reduction or exemption in an order established by Main State Tax Inspection. Applications presented after expiration of said term will not be accepted.

3. Tax on profit of foreign legal entities from the sources in the Azerbaijan Republic is withdrawn by the enterprise, organization and any other person paying tax and each payment is transferred to state budget.

If profits resulted from share participation of foreign participants in enterprises with foreign investments are paid in the form of shares, bonds, commodities or otherwise, then monetary equivalent of part of net profit due to foreign partner after distribution of profits, shall be transferred to the budget. Tax on all other kinds of profits obtained from the sources in the Azerbaijan Republic is withdrawn and must be transferred in the same order.

 Article 10. Special provisions 1. If provisions of international agreement of the Azerbaijan Republic differ from provisions of this Law provisions of international agreement shall apply.

Provisions of the present Law do not affect tax privileges established by international legislation practice, special agreements of the Azerbaijan Republic with other countries.

2. It is prohibited to include into contracts and agreements special provisions concerning taxation, following which enterprises and foreign legal entities undertake to pay taxes for other tax payers.

 Article 11. Avoidance of double taxation Sums of taxes on profit (income) received outside the Azerbaijan Republic, paid by enterprises abroad in compliance with legislation of foreign countries are accounted for when they pay taxes in the Azerbaijan Republic. Whereas, amount of accounted sums shall not exceed sum of tax on profit (income) to be paid in the Azerbaijan Republic on profit (income) received abroad. Article 12. Responsibility of tax payers and control of tax authorities Control of tax authorities over implementation of provisions of the present Law and responsibility of tax payers are governed by the Law of the Azerbaijan Republic «On state tax inspection» and other legislative acts. Article 13. Appeal of activity of tax bodies and its officials Activity of tax bodies and its officials may be appealed in an order envisaged by the legislation of the Azerbaijan Republic. Article 14. Instructions on application of the present Law Instruction on application of the present Law are issued by respective Executive Power bodies of the Azerbaijan Republic. Article 15. Coming into force of the present Law The present Law comes into force from 1 January, 1997.

President of the Azerbaijan Republic

Heydar Aliev.

Baku, December 24 1996.

Nº 221-1G.
A to Z of Azerbaijan
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