Taxation
Chapter 6
WITHHOLDING TAX
(WHT)
Withholding Tax (WHT)
A withholding tax, is a requirement for the payer of income to
withhold or deduct tax from the payment, and pay that tax to the
state budget.
A withholding tax is analogue of Profit Tax. However, the
deductible costs are not considered for calculation of taxable
base. The main purpose is taxation of earning income at source.
Taxable base is the payment amount of income.
Note: If no amount is paid then no taxable income is recognized
for WHT purposes.
Withholding Tax (WHT)
► The withholding of tax is a method of collecting income
tax upon payment of income by the tax agent.
(2) US$100,000 - US$10,000 = US$90,000
Company A (funds received by Company A, while the income is gross
)
Service Payment
(1) US$100,000 * 10% (WHT) = US$10,000
Company B (WHT payable by Company B)
Who is liable to withhold tax?
All legal entities registered and/ or having a PE in Azerbaijan are
obliged to withhold taxes from various payments made to other
resident/non-resident legal entities, as well as
branch/representative offices of non-resident legal entities in
some cases, to physical individuals as defined in the TCA and
perform as a tax agent.
Reminder
Tax agent (Article 17):
Is liable for calculating, withholding and paying WHT
Tax agents are (Article 150):
Entity, a resident or a PE of a non-resident legal entity, paying income
Legal entity, individual entrepreneur
Who is considered a tax agent for
WHT purposes?
The following persons (tax agents) should withhold tax at the source of payment (Article
150):
Legal Entities making payments to individuals for employment;
Entrepreneurs making payments to individuals for employment;
legal entities or entrepreneurs that pay out pensions, with the exception of pensions
paid under the State social security system
resident legal entities paying dividends to legal entities or physical persons
legal entities or entrepreneurs paying interest to non-residents or natural persons
legal entities or entrepreneurs making payments of rent and royalties to physical
persons and to non-residents (Article 124, 125, 126)
legal entities or entrepreneurs making payments to individuals, not registered with
the tax authorities as taxpayers and not presenting TINs, for the services provided by
these individuals (Article 150.1.7)
General rules on WHT
application
The Tax Code provides the specific rules on application of WHT in respect of
various payments such as dividends, royalties, interest, insurance premiums and
others. Nevertheless, it is Article 13.2.16 of the Tax Code which provides the full list
of income types considered as derived from Azerbaijani source.
Summary of Azerbaijani Source discussion
Basically, definition of income from Azerbaijani source catches any income earned by
non-resident entities for the provision of goods or performance of works/ services in the
territory of Azerbaijan.
However, it should be also noted that certain services performed by non-residents,
irrespective of the actual place of their provision (i.e. whether they are rendered in or
outside Azerbaijan), would still fall under this definition thereby triggering withholding tax
application. Examples of such services include insurance, financial services,
international transportation, lease payments, management and telecommunication
services.
Taxable Base
Dividend distributed to resident legal entity is also subject to
WHT
Tax rates
The below stated income types of Azeri residents’ are subject
to withholding tax at source of payment:
[Link] – 5%;
[Link] income – 10%;
[Link] income – 14%;
[Link] – 14%;
[Link] for providing services without tax registration –
14%, 25%;
[Link] derived from employment (PIT) – 14%, 25%;
Ch. 4-8
Taxable Base
Dividends paid by resident enterprises are subject to
taxation at the source of payment at a rate of 5%. (122.1)
If dividends are taxed (WHT) from natural and legal entities,
then the specified income of natural and legal entities shall
not be taxed again (122.2).
Interest paid by a resident of the AR or by PE of a non-
resident will be taxed at the source of payment at a rate of
10%. (123.1).
Individual’s interest income calculated by a local bank and branch of a foreign bank in the
Republic of Azerbaijan for their deposits in local currency in each bank is exempted from
WHT in the following way:
up to 200 manats of monthly interest income;
full interest income when the deposits are placed for a period of 18 months or more, and
the deposit amount is paid no earlier than 18 months.
Ch. 4-9
Taxable Base
Amounts paid for rent and royalty to resident enterprises in the
Republic of Azerbaijan and permanent establishments of non-
residents shall not be a taxable base for WHT purposes.
How they are taxed then?
If tax is withheld from individual receiving the rent payment or
royalty, or they paid it themselves, then such income is not
subject to taxes anymore.
Ch. 4-10
Taxable Base
Tax rates
The below stated income types of Azerbaijani non-residents’
are subject to withholding tax at source of payment:
[Link] - 5%;
[Link] income -10%;
[Link] income -14%;
[Link] - 14%;
[Link] and re-insurance payments - 4%;
[Link] for international telecommunication and
international transportation - 6%;
[Link] derived from employment - 14%, 25%;
[Link] for providing services - 10% (other services).
WHT calculation
Gross income case:
WHT = GV * R
Net income case:
By applying the following gross-up formula, WHT can be determined:
WHT = [ NV / (100% – R) ] * R
WHT – Withholding Tax;
GV – Gross Value of payment subject to WHT;
NV – Net Value of payment subject to WHT;
R – Tax Rate (according to the nature of payment).
Example 1 - payment to physical person in respect of rent
services
Company A receives a monthly invoice from a physical person in connection with the apartment rents
of its employee at the amount of AZN 1,720 (net fee). The physical person is not registered for tax
purposes. Total WHT liability in respect of the quarter?
WHT rate in
respect of
rent payment
– 14%
WHT=((AZN 1,720 / (100% – 14%)) * 14 %)*3 = 720
Example 2 - payment to non-resident person
Company A received the invoice at the amount of $ 83,000 from a non-resident
company and paid it accordingly. Based on the below indicated details of the
invoice, calculate total payable WHT. All amounts are net payable amounts to
non-resident.
WHT CALCULATION
INVOICE DETAILS NOT APPLICABLE
Sale of spare parts $ 40,000
WHT = ($ 27k / (100%-
Repair services $ 27,000 10%))*10%= $ 3k
Freight services $ 9,400 WHT = ($ 9.4k / (100%-6%))*6%=
$ 0.6k
Customs clearance $ 6,600
NOT APPLICABLE
TOTAL $ 83,000
TOTAL PAYABLE WHT $ 3,600
Example 2 - payment to non-resident person
Branch remittance tax
Branch remittance tax
or net profit distribution tax
In addition to profit tax of non-resident’s permanent
establishment from any amount of net income of
this PE transferred to the such non-resident is
subject to withholding tax at the rate of 10 % at the
source of payment.
Considering tax paid in a foreign country
Consideration of tax paid in a foreign country (A 127)
Amounts of income tax or profit tax of resident enterprise
paid outside the Republic of Azerbaijan from the incomes of
not Azerbaijani source shall be credited upon the payment
of tax in the Republic of Azerbaijan.
The amounts of the credit shall not exceed the amount of
tax charged on that income or profit in the Republic of
Azerbaijan at the rates in effect in the Republic of
Azerbaijan.
Payments to offshores
Additionally, payments to the countries with preferential tax regime (offshores) are subject
to extra 10% WHT at the source of payment (with consideration of exemption list).
Countries (territories) with preferential tax regime means the following
countries or territories:
Countries or territories with tax rate lower than 75% of the tax rate assigned by the
TCA;
Countries or territories which do not exchange information as per required standards
with Azerbaijan Republic within the scope of international agreements;
The countries or territories which has the law concealing the commercial information
of the companies, identification of owners of property or the income (profit).
The list of countries with the preferential tax regime is confirmed by the relevant
authority.
List of countries with preferential tax regime: [Link]
Submission of the WHT report
The WHT tax return is submitted to tax authorities
within 20 days following each quarter (20 April, 20
July, 20 October, 20 January).
The payment deadline of WHT tax is the 20 th of
next month following reporting period (quarter).
