Azerbaijan Amends Tax Laws Relating To CFCs, Tax Havens, Transfer Pricing

• Published date: 23 February 2022
• Subject Matter: Tax, Income Tax, Transfer Pricing, Sales Taxes: VAT, GST, Tax Authorities
• Law Firm: BM Morrison Partners LLC
• Author: Mr BM Morrison Partners

This update appeared at: https://mnetax.com/azerbaijan-amends-tax-laws-relating-to-cfcs-tax-havens-transfer-pricing-46405

The Government of Azerbaijan has introduced significant changes to the Tax Code, which will become effective 1 January 2022. The changes include measures focused on tackling tax evasion and broadening the tax base, including new controlled foreign corporation (CFC) rules and transfer pricing amendments.

The updated rules also provide for certain business and individual tax benefits and exemptions, as well as improved tax administration.

Measures Aimed at Tax Evasion and Broadening Tax Base

One of the prominent changes made to the Tax Code is the incorporation of the CFC rules, which are intended to prevent the artificial diversion of profits from controlling companies to CFCs.

Profits of CFCs incorporated in a tax haven will be taxed in Azerbaijan if certain conditions are met. First, an Azerbaijani resident itself or along with an interdependent resident or non-resident possesses directly or indirectly more than 50 percent of the voting rights or charter capital of the foreign corporation or has the right to obtain more than 50 percent of the profits of that corporation. Second, the corporate income tax actually paid by the CFC is two or more times less than the Azerbaijani corporate income tax (20 percent). Third, more than 30 percent of the annual income of the CFC is comprised of: interest received from financial assets; royalties received from intellectual property; income from the alienation of shares and participatory interests; income from a financial lease; income from insurance, banking, and other financial operations; and/or income from enterprises that receive income from goods and services that do not create any economic value.

When the profits of the CFC become subject to tax in Azerbaijan, to avoid double taxation, the corporation is entitled to a tax offset for the tax paid on that profit.

Certain types of income received from the CFC shall not be included in the taxable income. Dividends received from the CFC are not included. In addition, if the resident enterprise is a subsidiary of the CFC, the taxable profit related to the resident enterprise from the generalized (consolidated) profit of the CFC is not included. Finally, income received through the permanent establishment of the CFC in Azerbaijan, as well as income received from an enterprise established and taxed in Azerbaijan, are not included.

The other...