Azerbaijan

Corporate - Group taxation

Last reviewed - 14 July 2022

Each taxpayer is liable to fulfil one's own tax liabilities. Azerbaijani tax legislation does not have the concept of 'group taxation'.

Transfer pricing

The Tax Code provides that relations between associated (interrelated) entities must be based on the arm's-length principle.

Interrelated persons, for the purposes of taxation, are natural and/or legal persons, relations between which might have direct effect on economic results of their activities or the activities of persons they represent.

According to the regulations approved by the Ministry of Taxes, transfer pricing is only applied for the purposes of corporate/personal income tax.

The following transactions are controlled:

  • A resident and a non-resident in a related-party relationship.
  • A PE of a non-resident and such non-resident or any representative office, branch office, or other unit of such non-resident in other countries.
  • A resident and/or a PE of a non-resident and persons established (registered) in a country with a favourable tax regime.
  • If the persons have carried out operations on products traded on international commodity exchanges.
  • If the total income of the resident during the tax year is exceeded AZN 30 million and the share of the volume of transactions with a non-resident in total income (expenses) exceeds 30%.

For the purposes of comparability analysis, transfer price is determined based on one of the three transactional transfer pricing methods and two profit methods:

  • Comparable uncontrolled price method.
  • Resale price method.
  • Cost plus method.
  • Transactional Net Margin Method.
  • Profit split method.

Where the value of the transactions per controlled party does not exceed AZN 500,000 and no filing requirement is applicable, the taxpayer is still required to follow the regulations in computing tax liability.

In determining transfer prices, the following databases may be used:

  • International or local exchange quotations.
  • Foreign trade statistics of the customs authorities.
  • Reports placed in reliable sources.
  • Databases of specialised agencies to which the tax office is subscribed, etc.

The regulations also set out provisions on transfer pricing dispute resolution and avoidance of double taxation, as well as provide relevant examples of each of the transfer pricing methods.

Country-by-country (CbC) reporting

The concept of a multinational corporations has been recently introduced, and a corresponding reporting obligation has been established for these companies, which is effective from 1 January 2020.

Multinational corporations refer to the group of companies that are resident in two or more countries or a group of companies operating through their PEs. Multinational corporations include subsidiaries and affiliates of the enterprise, as well as branches and representative offices.

If the total income of such group of companies for the fiscal year exceeds the manat equivalent of 750 million euros (EUR), an enterprise, as well as a resident of Azerbaijan belonging to that group, is required to report using an appropriate template. This threshold is in reference to the information in the financial statements of that group.

Thin capitalisation

The concept of thin capitalisation was newly introduced and became effective from 1 January 2019.

Accrual interests on foreign borrowings exceeding two times equity will not be deductible for profit tax purposes (note that this is not applicable to banks and credit institutions).

Additionally, the Tax Code provides that 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.

Controlled foreign companies (CFCs)

An enterprise registered in countries (territories) are subject to preferential taxation and that are not  residents of the Republic of Azerbaijan is considered a “Controlled Foreign Company” (CFC) in the following conditions and its income are taxed in the Republic of Azerbaijan:

  • A person who is considered a resident of the Republic of Azerbaijan, together with a interrelated resident or non-resident directly or indirectly has the right to vote more than 50% in a foreign enterprise or more than 50% of its authorized capital or has the right to receive more than 50% of the profits that foreign enterprise and;
  • if the actual tax paid on the profit of a Controlled Foreign Company is 2 times or more lower than the corporate income tax payable on that profit in accordance with the tax legislation of the Republic of Azerbaijan;
  • If more than 30% of the annual income of a foreign enterprise consists of passive (non-entrepreneurial) income, i.e. royalties, interest income, income from financial leasing, etc.

The notification on the controlled foreign enterprise must be submitted to the tax authority within the period specified for the income tax return.