All expenses connected with generating income, except for non-deductible expenses and expenses with limited deductibility, specifically defined by the law, are deductible from income.
Depreciation can be calculated up to the following annual rates:
- Capitalised costs of land improvement and buildings and premises: up to 7%.
- Buildings and premises: up to 7%.
- Machines and equipment: up to 20%.
- Computing technology (high tech): up to 25%.
- Means of transportation: up to 25%.
- Working cattle: up to 20%.
- Expenses incurred for geological and exploration works, as well as for preparatory works for the production of natural resources: 25%.
- Intangible assets with an undetermined period of use: up to 10%. For those with a determined period of use: pro-rata amount as per the useful life, in years.
- Other fixed assets: up to 20%.
Azerbaijani tax legislation does not specify the definition of goodwill.
Tax basis of assets
The tax basis of assets includes expenses for their acquisition, production, construction, assembly, and installation, as well as other expenses that increase their value, with the exception of expenses for which the taxpayer is entitled to a deduction.
Interest on loans received from overseas and/or from related parties may be deducted, limited to the interest rate on loans with similar currency and maturity at the interbank credit auction. In absence of such an auction, deductions for interest may not exceed rates of 125% of the interbank auction credit rates published by the Central Bank of Azerbaijan.
Beginning from 1 January 2019, thin capitalisation rules were introduced. Accrual interests on foreign borrowings exceeding two times equity will not be deductible for profit tax purposes (note that it is not applicable to banks and credit institutions).
A taxpayer shall be entitled to a deduction for doubtful debts connected with goods, work, and services that have been realised where income from them was previously included in the gross income received from entrepreneurial activity. Doubtful debt deduction shall be allowed only if the debt is written off as worthless in the taxpayer’s books.
Beginning from January 1, 2021, contributions not exceeding 10% of the profit of the reporting year, transferred to the funds created for public and social purposes shall be exempt from tax for a period of 8 years.
Fines and penalties
No deduction is allowed for financial sanctions or interest calculated for delayed payment of taxes.
Property, land, and mining taxes are deductible.
Other expenses deductible within certain limits
- The amount of repair expenses deductible each year is limited to the amount of the tax written down value of each category of fixed assets as of the end of the previous year. For buildings and premises, the limit is 2%; for machinery and equipment, the limit is 5%; and for other fixed assets, the limit is 3%. An amount exceeding these limits shall be taken as an increase of the residual balance value of the fixed assets in the appropriate category.
- Actual business trip expenses are deductible from income within the limits established by the Cabinet of Ministers.
- A legal entity engaged in insurance activities is entitled to deduct allocations to reserve insurance funds within the standards established by the legislation of Azerbaijan.
- Banks and credit entities engaged in certain types of banking activities shall be entitled to deduct from income the amounts assigned for establishment of special reserve funds, depending on the classification of assets in compliance with legislation and in accordance with procedures established by the relevant executive authority.
- Deductions from income related to natural losses will be possible only within the norms approved by the relevant executive authority.
The following expenses are non-deductible:
- Capital expenses (not directly deducted, but only through depreciation).
- Expenses connected with non-commercial activity.
- Entertainment and meal expenses, accommodation, and other expenses of a social nature incurred for employees.
Net operating losses
Taxable losses incurred by legal entities may be carried forward for five years to offset future taxable profit, without limitations. Carryback of losses is not possible.
Payments to foreign affiliates
Under the Tax Code, the transactions between related parties should comply with:
- Transfer pricing rules (applicable to the cross-border transactions between related parties).
- Market price (applicable to the in-country transactions between related parties, but also to some other transactions, e.g. export-import operations).
The Azerbaijan transfer pricing legislation requires that cross-border 'controlled' transactions between related parties be carried out at arm’s-length prices. In case transfer prices are not set at arm’s length, the Azerbaijani tax authorities have the right to adjust the taxpayers’ revenues and expenses so as to reflect the market value.
The substance of the market price is very similar to the transfer pricing.