Tax legislation updates
An up-to-the-minute guide to developments in the legislation of the Republic of Azerbaijan.
Legal updates – June 2018
On 3 June 2018, the Law on Amendments to the Law on Accounting (hereinafter, the “Amendments”) was published. The Amendments introduce significant changes to accounting practice in Azerbaijan and create a basis for further regulatory framework to be established by competent authorities. We would like to draw your attention to notable provisions established by the Amendments.
It is worth to mention that the Amendments are mainly focused on changes in applicable accounting standards, specifically, gradual transition to application of International Financial Reporting Standards (hereinafter, “IFRS”) by all entities, requirements with respect to certification of accountants and state control over accounting. Besides, the Amendments introduce a number of significant definitions and procedures.
Changes in applicable accounting standards
According to the Amendments, the following accounting standards will be applied:
- IFRS — to be used by public interest entities and public legal entities (mandatory), and large and medium entrepreneurs (optional);
- IFRS for Small and Medium Entrepreneurs — to be used by large and medium entrepreneurs, medical and educational institutions, if their charters enable engaging in entrepreneurial activities (mandatory), as well as by micro and small entrepreneurs (optional);
- IFRS for Public Sector — to be used by medical and educational institutions, if their charters do not enable engaging in entrepreneurial activities, budget organizations and municipals (mandatory).
That said, the Amendments replace National Accounting Standards (hereinafter, “NAS”) and simplified accounting rules for small entrepreneurs with IFRS and/or bookkeeping rules for micro and small entrepreneurs.
International standards envisaged under the Law will be applied from the date of their official publication in Azerbaijani by the Ministry of Finance. Upon first publication of official texts of IFRS in Azerbaijani, the Ministry of Finance will annul NAS and respective accounting rules.
According to the Decree of the President on application of the Amendments, official publication of IFRS for Public Sector in Azerbaijani is expected by 30 December 2018, while IFRS for Small and Medium Entrepreneurs should be published by 30 June 2019.
By that time, entrepreneurs are entitled to continue with previously applicable NAS and accounting rules or may opt to apply IFRS approved by respective international organization.
- Introduction of Certified Accountant concept
The Amendments introduce a new concept of certified accountant, defined as a person who successfully passes state accounting examination, holds a professional accountant certificate and membership in organization of certified accountants.
- Requirement to employ a Certified Accountant
Based on the Amendments, the following entities are required to have certified accountants at their chief accountant position:
- legal entities with the controlling share of the state;
- public interest entities, except for listed legal entities;
- large entrepreneurs;
- budget organizations;
- public legal entities publishing their annual or consolidated accounting reports.
Besides, under the Amendments, external accounting services providers, i.e. consulting firms engaged by the above entities should have at least two certified accountants employed.
- Grant of Certified Accountant Certificate
To obtain a certified accountant certificate, accountants should pass the state exam on accounting arranged by the State Examination Center. The certificate will be valid for the period of 5 years (to be retaken in the last year of its validity period). Upon receipt of the certificate (on the same accounting standard) for two times, the certificate is granted for a lifetime.
Detailed rules on respective examination will be further elaborated in a separate document to be approved by the Cabinet of Ministers.
- State control over accounting
The Amendments also establish rules for state control over accounting.
The state control over accounting procedures, including requirement to employ a certified accountant as a chief accountant will be carried out by the Ministry of Taxes (Ministry of Finance for budget organizations) during the state financial control measures and tax audits.
Meanwhile, the Financial Market Supervisory Authority will be in charge for state control over accounting procedures of credit organizations, insurance companies, investment funds and their managers, as well as licensed participants of securities market.
However, no detailed procedures of such control are determined for now.
- The Law on Alat Free Economic Zone
The Law on Alat Free Economic Zone was published on 5 June 2018 (hereinafter, the “Law”).
The Law governs legal regime for operations, development and management of Alat Free Economic Zone (the “FEZ”). Under the Law, an authorized body entrusted with governance of the FEZ will be established. This authorized body will be in charge for adopting mandatory internal regulations of the FEZ with respect to a number of issues, such as tax, customs, labor, migration as well as operations of legal entities incorporated in the FEZ.
- Tax and customs exemptions
Based on the Law, FEZ resident individuals, legal entities incorporated in the FEZ and their employees will be exempt from all taxes in connection with their FEZ activities.
Moreover, no import customs duties and taxes will be charged with respect to goods, works and services imported to the FEZ.
The Law entered into force on 5 June 2018. However, certain provisions will enter into force once the respective internal regulations of the FEZ are adopted by an authorized body.
- Liability for violation of requirements on unemployment insurance
As we delivered in previous issues, the Law on Unemployment Insurance was published on 9 August 2017. The Law became effective on 1 January 2018 and until recent time there were no sanctions envisaged for violation of the said Law. With that said, on 16 May 2018 the Laws amending the Code of Administrative Offences and the Criminal Code were published.
Amendments to the Code of Administrative Offences
- Prescribing penalties for evasion from payments of unemployment insurance
The liability for evasion from payments of unemployment insurance contributions was incorporated to the Article prescribing penalties for evasion from payments of taxes and mandatory social insurance contributions.
As such, evasion from payment of unemployment insurance in a small amount* is subject to fine from 30% to 70% of the evaded amount.
* Note: The words "in a small amount" mean an amount not exceeding twenty thousand manats.
- Introduction of a new article on violation of the Law on Unemployment Insurance
Violation of the legislation on unemployment insurance by an insurer (the employer), i.e.:
- Not registering as an insurer;
- Not insuring employees from unemployment;
- Not paying insurance contributions to the state insurer in the manner, amount and timeframe provided by the Law on Unemployment Insurance;
- Not informing the state insurer on employee’s profession, occupation and salary within 5 days from the date of notifying the employee on termination of employment agreement due to redundancy;
- Failure to submit information (either electronically or hard copy) being basis for calculation and payment of insurance contributions and determining of insurance payment;
- Not informing the state insurer on reorganization or liquidation of the insurer in cases specified by the Civil Code of the Republic of Azerbaijan;
- Failure to properly record and report to the state insurer the procedures on calculation and payment of insurance contributions and failure to maintain the documents and information being basis for insurance payments.
results in the following penalties:
- individuals – in the amount of one hundred manats;
- officials – in the amount of two hundred manats;
- legal entities – in the amount of four hundred manats.
Moreover, failure to inform the state insurer about certain circumstances which caused the change or termination of insurance payments by the insured will trigger fine in the amount of damage (income) caused as a result of this administrative violation.
Amendments to the Criminal Code
The liability for evasion from payments of unemployment insurance contributions was incorporated to the Article prescribing penalties for evasion from payments of taxes and mandatory social insurance contributions.
As such, evasion from payment of unemployment insurance contributions in significant amount** will be subject to fine from twice to four times of the amount of damage, caused as a result of the crime or correctional works for up to two years or imprisonment for up to three years, with deprivation of right to hold certain positions or engage in certain activities for up to three years or without it.
**Note: The words “significant amount” mean an amount exceeding twenty thousand manats, but not more than one hundred thousand manats.
EY Flash news: Unemployment insurance issues – May 2018
As we delivered in our September Business Brief issue, the Law “On unemployment insurance” (the “Law”) was published on 9 August 2017. The Law became effective on 1 January 2018 and until recent time there were no sanctions envisaged for violation of the Law. With that said, on 16 May the Laws amending the Code of Administrative Offences and the Criminal Code were published.
To start with, liability for violation of the Law has been established in the Code of Administrative Offences. The discussed amendments to the Code of Administrative Offences envisage sanctions not only for evasion from payment of unemployment insurance but also a number of other violations arising from procedural/reporting issues related to unemployment insurance.
In the meantime, it was established that evasion from payment of unemployment insurance contributions will be subject to criminal liability. It is worth to note that liability for evasion from payment of unemployment insurance contributions was added into the Article of the Criminal Code envisaging liability for evasion from payment of taxes and social insurance contributions. That is, the rules applicable to criminal liability for the mentioned crimes also apply to evasion from payment of unemployment insurance contributions as well.
We will provide you with further details in our upcoming issue of Business Brief.
Legal updates – April 2018
Amendments to the Civil Code
On 25 April 2018, the Law on Amendments to the Civil Code (hereinafter – the “Law”) was published. We would like to draw your attention to notable provisions established by the Law.
It is worth to mention that the amendments introduced by the Law are mainly associated with liability of persons acting on behalf of a legal entity, as well as any person represented in the governing bodies of a legal entity (supervisory board (board of directors), executive body) (hereinafter – the “Persons”).
The Law presents the threshold for minimum amount of participation interests (shares) of participants entitled to request compensation of damages by the Persons in case of breach of their duties and the list of cases, for which the Persons might be held liable.
In accordance with the above, the Law states that the Persons might be held liable to compensate damages in case of breach of their duties at the request of participants holding at least 5 % of the participation interests (shares) of the legal entity.
List of cases
The Law determines the bases for the liability of Persons, who do not fulfill or improperly perform the duties set forth in the Civil Code for the benefit of a legal entity. As such, the Persons are held liable for damages incurred by a legal entity or a shareholder (participant) in the following cases:
- payment of bonuses disproportionate to the profit of legal entity to members of governing bodies of a legal entity or their payment in case a legal entity is in loss;
- disposal or provision for use of property of a legal entity at significantly lower terms and prices than market conditions;
- conclusion of agreements with the parties related to the legal entity by violating the requirements of law or threatening the interests of a legal entity;
- purchase of goods (works, services) at a significantly higher price than their actual value on the basis of concluded contracts;
- appropriation or waste of property of a legal entity for the benefit of himself/herself, for persons related to a legal entity or for other persons;
- concluding agreements unfair to shareholders (participants).
Furthermore, under the Law, validity of the above-noted agreements can be disputed by suffering party and accordingly might be considered invalid by the court upon suffering party’s claim.
Preemptive rights of participants of Limited Liability Company
Another amendment presented by the Law is related to preemptive rights of participants of Limited Liability Company (hereinafter – the “LLC”) for transfer of participating interest in its charter capital.
As such, when a participant of an LLC wishes to dispose of his/her participating interest (a part thereof), he/she must first offer the acquisition of that participating interest (a part thereof) to other members of an LLC. Previously, the participants could agree to determine different rules in this regard or ignore such rights in the Charter of an LLC.
Membership of audit committee
Besides, according to the Law, now the members of board of directors (supervisory board) in LLC and Joint Stock Companies can be members of the audit committee. Under the previous wording of the said provision, such membership was prohibited.
- New regulatory bodies
According to latest amendments to the Laws on Patent, on Trademarks and geographical signs, on Accreditation in the field of conformity assessment, on Ensuring unity of measurements, on Gas supply; new regulatory bodies, most of which were established in the form of public legal entities were introduced and vested with the responsibilities as determined by relevant executive authorities in charge for respective fields.
Under the said amendments, several powers, e.g. provision of patents, register of trademarks and geographical signs, conducting accreditation on conformity assessment, supervision over examination of measuring tools previously vested in relevant executive authorities are now attributed to the aforementioned new regulatory bodies. Meanwhile, relevant executive authorities are mainly responsible for adoption of regulations and fulfillment of government functions in respective fields.
- Amendments to the Law on Bankruptcy
On 28 April 2018, the Law on Amendments to the Law on Bankruptcy (hereinafter – the “Amendments”) was published. According to the Amendments, definition for the recovery plan from bankruptcy, as well as its approval procedure and legal consequences of recovery process initiation were introduced.
Legal updates – March 2018 – Issue 2
Law “On the regulation of the debts related to mandatory state social insurance”
On 6 March 2018 Milli Majlis adopted the Law “On the regulation of the debts related to mandatory state social insurance (hereinafter - the “Law”). The Law determines conditions on writing off the debts of insurers* related to mandatory state social insurance (hereinafter- “social insurance”). In accordance with the Law, the following debts of insurers will be written off:
- Full amount of debts of insurers on social insurance contributions generated by 1 January 2006 and being outstanding till 1 April 2018
- Full amount of debts of insurers on financial sanctions (calculated penalty) for violation of rules on social insurance generated by 1 January 2015 and being outstanding till 1 April 2018
- Debts of insurers on financial sanctions (calculated penalty) for violation of rules on social insurance generated from 1 January 2015 till 1 April 2018:
- 90% of outstanding financial sanctions (calculated penalty) – if 10% of the sanctions are paid by insurers during April-May 2018
- 70% of outstanding financial sanctions (calculated penalty) – if 30 % of the sanctions are paid by insurers during April-July 2018
- 50% of outstanding financial sanctions (calculated penalty) – if 50% of the sanctions are paid by insurers during April-September 2018.
Please note that the above-mentioned provisions shall be also applied to the debts to be paid based on the court decision and being outstanding till 1 April 2018.
The Law comes into force on 1 April 2018.
* Insurers - enterprises, institutions and organizations incorporated under the laws of Azerbaijan or foreign countries and operating in Azerbaijan regardless of their ownership and organizational-legal form,
their branches and representative offices, elected bodies, as well as persons self-insuring or insuring others.
Legal updates – March 2018
Amendments to the Rules on foreign currency transactions of residents and non-residents of the Republic of Azerbaijan
On 26 February the Central Bank of the Republic of Azerbaijan amended the Rules on foreign currency transactions of residents and nonresidents of the Republic of Azerbaijan (hereinafter – the “Amendments”). We would like to draw your attention to notable provisions established by the Amendments:
- In case of advance payment for goods or services the payer is required to present documents confirming import of goods and services to the bank within 270 days from the date of payment. It should be noted that previously, the designated term was 180 days;
- Documents confirming import of goods as part of re-export procedure should be presented to the bank within 270 days if transfer of funds took place prior to import of such goods;
- Transfers made mistakenly to Branches and Representative Offices by their Head Offices can be retrieved/transferred back;
- Remaining part of funds transferred in accordance with a special purpose to Branches and Representative Offices by their Head Offices can be retrieved/transferred back. The same rule applies to fully unutilized funds transferred in accordance with a special purpose;
- Non-resident employees are entitled to transfer their salaries from local bank accounts to foreign bank accounts.
- Funds previously brought by non-resident legal entities to Azerbaijan in cash or transferred to Azerbaijan can now be repatriated;
- Provisions governing transfers pertaining to intermediary services provided in connection with shipment of goods to third countries without being brought to customs territory of Azerbaijan have also been established.
By way of background information it should be noted that for the purposes of currency regulation residents and non-residents are understood as follows:
a) Individuals permanently residing in Azerbaijan, including those temporary living outside of Azerbaijan;
b) Legal entities established in accordance with legislation of Azerbaijan;
c) Enterprises and organizations located in the territory of Azerbaijan and established under legislation of Azerbaijan, but not having status of a legal entity;
d) Diplomatic and other official representative offices of the Republic of Azerbaijan located outside Azerbaijan;
e) Branches and representative offices of resident entities indicated in paragraphs “b” and “c” located outside Azerbaijan.
a) Individuals permanently residing outside Azerbaijan, including those temporary living in Azerbaijan;
b) Legal entities; enterprises and organizations having no legal entity status established in accordance with foreign legislation and located outside Azerbaijan;
c) Foreign diplomatic and other official representative offices, as well as international organizations, their branches and representative offices located in Azerbaijan;
d) Branches and representative offices (bureaus and agencies) of non-residents indicated in paragraph “b” above located in Azerbaijan.
The Amendments entered into force on 8 March 2018.
Legal updates – February 2018
Amendments to the Civil Code
On 9 February 2018, the Law on Amendments to the Civil Code (hereinafter, the “Law”) was published. Among other amendments, the Law provides for the obligation of notaries to submit the agreements on disposal of immovable property immediately upon their notary certification in electronic form via information systems and via registered mail to the state registry of immovable property.
In accordance with the above, respective notarized agreements provided to the state registry are considered as application forms for registration of proprietary rights arising therefrom, and the registration of the said rights is conducted based on respective agreements.
Another significant change introduced by the Law is related to disposal of the constituent parts of uncompleted buildings. Please note that this amendment relates to the uncompleted buildings which were not accepted for operational use and therefore were not registered accordingly.
Pursuant to the Law, the land-owner is entitled to divide the uncompleted building into several parts based on the division plan (a document newly introduced by the Law) and request registration of possession right to each part emerged by such division. Moreover, the land-owner is entitled to dispose the constituent parts of the uncompleted building only upon registration of those parts.
It also should be noted that the Law imposes an obligation on the landowner to include a warranty note (ensuring the rights thereof) in favor of the persons acquiring constituent parts of uncompleted buildings (hereinafter, the “investors”) in the relevant disposal agreements. In their turn, by informing the land-owner in a written form via registered mail, the investors are entitled to transfer their rights and obligations related to the respective parts to third parties based on a duly notarized agreement. It is worthwhile to note that the warranty becomes effective upon its registration in the state registry. Such procedure substitutes pre-registration of proprietary rights to immovable property previously envisaged by the Civil Code.
In addition to the above, under the Law, the relationship between the land-owner (the seller) and the investor (the buyer) is regarded as the one that arises from the works contract. Besides, the Law prohibits obliging the buyer to make total payment for uncompleted buildings before completion of construction and sets thresholds for payments of the purchase price (charge) in installments by the buyer at various stages of construction.
As for the effective date of the Law, it should be noted that subject to certain exceptions (e.g., amendments related to the notary offices), the provisions of the Law becomes effective on 1 July 2018.
However, please note that the pre-registration of the buildings and their constituent parts conducted by 1 July 2018, and the legal consequences thereof shall remain in force even after the entry into force of the said amendments. Meanwhile, the Law remains silent with regard to the uncompleted buildings, which were not pre-registered and accordingly sold in breach of legislation by 1 July 2018.
New classification of entrepreneurship subjects
We notify that the subjects engaged in entrepreneurship activity are now classified as micro, small, medium and large entrepreneurship subjects by the Law on Amendments to the Law on Entrepreneurship activity (hereinafter, the “Amendments”) dated 9 February 2018. That said, micro entrepreneurship is introduced by the Amendments.
Please note that the Cabinet of Ministers should approve the identifying criteria for the aforementioned classification agreed with the President of the Azerbaijan Republic within 3 months. Pursuant to the Amendments, government support and privileges granted to micro, small and medium entrepreneurs will be provided based on the identifying criteria to be approved by the Cabinet of Ministers.
Reduction of refinancing rate
On 12 February 2018, the Management Board of the Central Bank of the Republic of Azerbaijan decided to reduce the refinancing rate from 15% to 13%, the ceiling of the interest rate corridor from 18% to 16% and the floor from 10% to 8%.
EY Flash news: Unemployment insurance issues – February 2018
As we delivered in our September Business Brief issue, the Law “On unemployment insurance” (hereinafter – the “Law”) was published on 9 August 2017. The Law became effective on 1 January 2018 and in this regard, we would like to draw your attention to certain aspects concerning calculation, reporting and collection of unemployment insurance contributions:
- Form of unemployment insurance report has been made available on the website of the Ministry of Labor and Social Protection of Population
- Budget classification code for unemployment insurance contributions was approved by Decree #41 of Cabinet of Ministers of the Republic of Azerbaijan adopted 9 February 2018
- Penalties for non-compliance with the requirements of the Law will be determined and reflected in respective legal acts.
Based on analysis of the Law and comments received from the Ministry of Labor and Social Protection of Population, it should be noted that there are essential differences in determining of calculation base and persons subject to unemployment insurance contributions compared to principles envisaged for social insurance contributions.
Legal updates – January 2018
Administrative and criminal liability for violation of the rules on internal and external borrowing by state-owned legal entities
On 16 and 17 December 2017, the amendments to the Criminal Code and the Code of Administrative Offences (the “Amendments”) were published. The Amendments establish administrative and criminal liability for violation of the rules on internal and external borrowing by state-owned legal entities. To be more precise, internal and external borrowing by state-owned legal entities without prior approval from Ministry of Finance is now subject to administrative and criminal liability depending on the amount of damage caused by a particular violation.
For this purpose, it is worth to clarify, that under the Amendments, borrowing of state-owned legal entities without prior approval from the Ministry of Finance resulting in minor damage (e.g. up to AZN 20,000) is subject to administrative liability, while the damage starting from AZN 20,000 constitutes criminal liability.
By way of background information, it should be noted, that the Amendments refer to the Rules on external and internal borrowing by state-owned legal entities (hereinafter in this section - the “Rules”) establishing an approval procedure of borrowing by such entities. Pursuant to the Rules, the concept of state-owned legal entities encompasses the following legal entities:
- Joint-Stock Companies, Limited Liability Companies in which state, either directly or indirectly owns 51% or more percent of the shares
- Non-commercial legal entities and public legal entities established by the state
- Commercial legal entities, non-commercial legal entities and public legal entities that are established by any of the legal entities listed above, provided that the latter owns 51 or more percent of the shares in the established entities
Amendments to the Criminal Penalties Execution Code
On 21 December 2017, the Law on Amendments to the Criminal Penalties Execution Code (hereinafter – the “Law”) were published. Among other amendments the Law introduces probation control which serves as a measure of control over specified category of people as well as a measure to ensure rehabilitation and social adaptation of these people. Probation control is exercised in relation to the persons including below:
- Persons who have been sentenced to penalties other than imprisonment
- Persons who have been conditionally sentenced
- Persons who have been conditionally released from penalty or with suspended sentence
Apart from above, the Law establishes provisions governing execution of restriction of liberty such as application of electronic control devices and procedure of serving this penalty. And with that, the recent amendments to the Criminal Code establishing restriction of liberty entered into force together with the amendments established by the Law i.e. on 21 December 2017.
New regulations on outdoor advertising
On 19 December 2017, the President signed the Decree approving the following acts:
- The Rules on issuance of permit for outdoor advertising and supervision over this area
These rules establish general procedure on application for obtainment of the permit for outdoor advertising (the “Permit”), bodies entitled to issue the Permit and rules for supervision over the outdoor advertising. It should be noted that recently established State Advertisement Agency is a competent body (except for Icherisheher and Qala).
It should be also noted that the Permit is given for a period not exceeding one year.
- Amount of state duty for obtainment of the Permit
The Decree establishes amount of state duty to be paid in order to obtain the Permit. It should be noted that this amount varies depending on a particular advertisement carrier and a region of placement of advertisement.
- Amount of payment for the placement of outdoor advertising
Outdoor advertising is also subject to monthly fee to be paid to the competent authority depending on a particular advertisement carrier and a region where the advertisement is placed.
Increasing the minimum monthly salary
According to the Order of the President on “Increasing the minimum monthly salary” signed on 25 December 2017, starting from 1 January 2018, the minimum monthly salary is set at AZN 130 (previously AZN 116).
Regulations on functioning and supervision over credit bureaus
On 28 December 2017 the Financial Markets Supervisory Authority of the Republic of Azerbaijan adopted the Rules on functioning and supervision over credit bureaus (hereinafter in this section - the “Rules”) that entered into force on 5 January 2018. Among others, the Rules govern the following:
- Minimum charter capital required for a credit bureau (2 million AZN)
- Requirements to the executive body of credit bureau
- Supervision over the credit bureau
Legal updates – December 2017
Amendments to the Criminal Code
The Law on Amendments to the Criminal Code was published on 9 November 2017 (the “Amendments”).
To start with, it should be noted that the Amendments establish a new penalty – restriction of liberty under which a sentenced person not fully isolated from society is kept under control at his/her place of residence. Such control is exercised by prohibition to leave a sentenced person’s place of residence or certain area completely or at some designated time of the day. The Amendments determine obligations of a person sentenced to restriction of liberty (such as carrying electronic means of control), the term of restriction of liberty (from 6 months to 5 years), the list of persons who cannot be sentenced to restriction of liberty (e.g. foreigners and stateless persons).
In accordance with the above, sanctions for a number of crimes have been revised. As such, restriction of liberty has been envisaged as one of the alternative penalties inter alia for the following crimes:
- Illegal entrepreneurship
- False entrepreneurship
- Illegal use of trademarks
- Deceit of consumers or manufacture and selling of lower-quality production
- Deliberate bankruptcy.
It should be noted that in a number of the above-mentioned crimes restriction of liberty has substituted corrective works or other penalties.
The Amendments also establish a new concept of “especially large amount” of damage caused or income gained as a result of violation. For instance, large amount of damage caused or income gained as a result of evasion from customs duties, taxes and state social insurance contributions will now vary from AZN 100,000 to AZN 500,000 while the amount of damage caused or income gained as a result of violation exceeding AZN 500,000 should be considered “especially large amount” and entail harsher penalty.
The article concerning release from criminal liability for committing economic crimes has been adopted. In contrast to previous provisions, application of the mentioned release is not limited to crimes committed for the first time. Thus, from now on the only condition for release from criminal liability will be:
- payment of the damage or income gained as a result of a crime in full (e.g. for evasion from customs duties, taxes and state social insurance contributions) or
- payment of the damage or income gained as a result of a crime in full and additional amount equal to the said damage or income for particular crimes (e.g. for evasion from payment of customs duties committed repeatedly or resulting in causing damage or gaining income in especially large amount).
Among others it is worth to mention that under the Amendments, an employer may be released from criminal liability for engaging employees to work without effective employment agreement if employer duly concludes employment agreement with the engaged employees and fully pays required taxes and state social insurance contributions that have been evaded as a result of the mentioned crime. However, such release from criminal liability can be applied only once. By way of background information, it is worth to remind that criminal liability for engaging employees to work without effective employment agreement is applicable when the number of employees equals to or exceeds ten persons.
As for the effective date of the Amendments, it should be noted that amendments concerning application of restriction of liberty shall become effective once the corresponding amendments regarding restriction of liberty and application of the electronic means of control are enacted to the Criminal Penalties Execution Code. In the meantime, other mentioned amendments came into effect on 1 December 2017.
Commodity nomenclature of foreign economic activity of Azerbaijan, rates of import customs duties and rates of export customs duties
On 17 November 2017 the Cabinet of Ministers issued the Decree approving “Commodity nomenclature of foreign economic activity of Azerbaijan, rates of import and export customs duties” (the “Decree”) for the following purposes:
- increasing efficiency of foreign economic activity by improving the customs tariffs mechanism
- producing competitive goods
- protecting domestic market
- strengthening state support for sustainable development of non-oil sector
- simplifying the customs duties system
- bringing the codes of commodity nomenclature of foreign economic activity in line with the new version of the International Harmonized System.
Previously, rates were envisaged by the “Rates of customs duties on goods imported to Azerbaijan” and the "List of goods subject to export customs duty and rates of export customs duties”. Accordingly, the above two documents were revoked on the basis of the Decree.
Living wage minimum for 2018
According to the Law “On living wage for 2018” (in this section, the “Law”), the minimum living wage will be determined for main socialdemographic groups as follows:
- AZN 173 countrywide average
- AZN 183 for working-age population
- AZN 144 for pensioners
- AZN 154 for children.
The Law will come into force on 1 January 2018.
Please note that this amendment will affect calculation of personal income tax. Thus, individuals whose monthly income gained at the principal place of work is less than AZN 2500 are exempt from personal income tax in the amount of living wage minimum within country, which is AZN 173. Meanwhile, individuals, whose annual income is less than AZN 30000 are exempt from personal income tax in the amount of 12 living minimums within country, i.e. AZN 2076.
State support to entrepreneurs for expansion of access to the financial resources
Please note that based on the Presidential Decree on “Certain measures with regard to state support to entrepreneurs for expansion of access to the financial resources” dated 15 September 2017 Credit Guarantee Fund of the Republic of Azerbaijan (the “Fund”) has been established. The main purposes of the Fund are to expand access of entrepreneurs to the financial resources and to stimulate the entrepreneurship activity, as well as to develop the credit system based on risk allocation in financial sphere. Meanwhile, it should be noted that the Fund guarantees the loans received by entrepreneurs from authorized banks in AZN.
Please note that for the purposes of regulating and ensuring the activity of the Fund, the President signed the Decree on ensuring of activity of the Fund on 29 November 2017 approving inter alia the following:
- Charter of the Fund
- Rule on provision of guarantee on loans received by entrepreneurs in AZN regulating requirements on provision of guarantee by the Fund, respective application procedure, guarantee payment conditions, as well as other issues related to guarantee
- Rule on application of credit rating system and other risk management tools within the Fund envisaging rules on determination of credit rating system and other risk management tools for the purposes of reducing the risks in Fund’s activities
- Rule on provision of subsidies for interest rates on loans received by entrepreneurs in AZN stipulating grounds for provision of subsidies, respective application procedure, payment of subsidies. Please note that based on the Decree subsidies are provided for the interest accrued on loans received by entrepreneurs in AZN during 1 January - 31 December 2018.
At the high level, the following are the main requirements for the envisaged guarantee:
- Entrepreneurship should be carried out in Azerbaijan
- Entrepreneur (resident legal entity or individual) should be engaged in non-oil sector
- The loan should be taken for financing entrepreneurship needs
- Entrepreneur should request a loan at the authorized bank.
Each particular loan falling under the above-mentioned criteria should meet the following requirements:
- The loan should not be less than AZN 30,000
- Aggregate amount of the guaranteed loans of the borrower (or the group of related borrowers) should not exceed AZN 3,000,000 in all of the authorized banks
- Loan maturity should not exceed 7 years (2 years if loan is taken for financing of working capital)
- Line of credit period should not exceed 12 months
- Grace period should not exceed 2 years.
Accession to the Vienna Convention on the Law of Treaties
Please note that the Law on Accession to the Vienna Convention on the Law of Treaties ( “Convention”) dated 23 May 1966 (in this section, the “Law”) was published on 22 November 2017. For your information, the Convention regulates international treaties concluded between states in written form and governed by international law. As such, the Convention does not apply to international agreements concluded between states and other subjects of international law or between such other subjects of international law (e.g. business agreements), or to international agreements not in written form.
Furthermore, it should be noted that based on the Presidential Order on application of the Law dated 21 November 2017, preparation of draft law on “International Treaties” considering the provisions of the Convention was assigned to the Cabinet of Ministers.
Legal updates – November 2017
Prolongation of suspended inspections related to entrepreneurial activities
As we delivered in our previous issues of the Legislative alert, according to the Law “On suspension of inspections related to entrepreneurial activity” (“Law”), all inspections related to entrepreneurial activity, were suspended for the period of 2 years starting from 1 November 2015. The Law did not cover tax inspections, inspections of the quality and safety of medical preparations, safety of food products, as well as inspections on cases causing potential threats to human lives and health, state security and economic interests.
On 4 November 2017, amendments to the Law prescribing prolongation of the suspension came into force. According to these amendments, respective inspections are further suspended until 1 January 2021.
Electronic registration of a limited liability company with a foreign investment
Amendments to the Law “On state registration and state registry of legal entities” (“Amendments”) came into force on 21 October 2017. The Amendments introduced definitions of a limited liability company (“LLC”) with a foreign investment and electronic state registration of an LLC with a foreign investment. According to the Amendments, LLC with a foreign investment is defined as an LLC established by a foreigner or stateless person or a legal entity registered in a foreign country.
Based on the Amendments, LLCs with a foreign investment will be able to be registered electronically. Prior to the Amendments, electronic state registration was available only for LLCs with local investments.
Protocol on Amendments to the Double Tax Treaty with Kazakhstan
On 2 October 2017, Parliament of the Republic of Azerbaijan ratified Protocol on Amendments (“Protocol”) to the Double Tax Treaty (“DTT”) concluded on 16 September 1996 between Azerbaijan and Kazakhstan.
Apart from editorial and technical changes of clarifying nature, major changes made to the DTT by virtue of the Protocol include:
- Change of scope of covered taxes (capital taxes excluded, DTT becomes applicable only to income and profit taxes)
- Changes to the thresholds and conditions of constitution of permanent establishment
- Clarification of the list of entities eligible to the exemption from withholding taxes on interests on government loan
- Extension of the scope of exchange of information between competent authorities
- Introduction of a “Limitation of Benefits” clause allowing the contracting states to implement their domestic antiavoidance measures notwithstanding the treaty provisions.
The Protocol will enter into force after official announcement on finalization of internal procedures necessary in Kazakhstan and the date of effectiveness is subject to further notification.
Renewal of the ACG PSA
Renewed and restated Agreement on the Joint Development and Production Sharing for the Azeri and Chirag Fields and the Deep Water Portion of the Gunashli Field in the Azerbaijan Sector of the Caspian Sea (“ACG PSA”) was approved by the Parliament. Please note that the renewed PSA becomes effective on 1 January 2018.
List of raw materials and materials exempted from import VAT
On 2 November 2017, the President of the Republic of Azerbaijan signed the Decree “On approval of the list of raw materials and materials exempted from import VAT” (“Decree”).
According to the Decree, import of the below items is exempt from VAT:
- Burned pyrite
- Aluminum ores and concentrates
- Aluminum oxide, different from artificial corundum
- Direct reduction products of iron ore
- Wastes and scraps of ferrous metals, ingots (shingle ingots) of ferrous metals for recycling
- Electrodes used in ovens – others
- Electrodes for electrolysis installations
Amendments to the Migration Code of the Republic of Azerbaijan
According to the amendments made to the Migration Code of the Republic of Azerbaijan, effective from 4 November 2017, foreigners and stateless persons are not required anymore to submit the below documents for obtainment of a permanent residence permit ( or extension of its term) in the territory of the Republic of Azerbaijan:
- Reference letter on family members (indicating their name, surname, patronymic, occupation, place of residence or location)
- Notarized copy of the marriage certificate
- Notarized copies of the documents confirming the professional qualification (if they have any) of foreigners and stateless persons.
Moreover, under the discussed amendments, employers are not required anymore to submit a copy of the document authorizing to stay in Azerbaijan foreigners and stateless persons, who are currently in Azerbaijan on the grounds other than work, for obtainment of a work permit for such persons.
Legal updates – September 2017
Law "On unemployment insurance"
The new Law on “Unemployment insurance” (hereinafter, the “Law”) was approved, which will become effective on 1 January 2018. The Law is aimed to improve the social protection of population and determines legal basis of unemployment insurance. The Law applies to the persons, whose employment has been terminated due to liquidation of a state body or legal entity or redundancy.
The unemployment insurance is mandatory and insurance contributions should be calculated monthly and paid at the time of salary payment, but not later than 15th of the following month by the insurant (i.e. employer).
The mandatory contributions will be as follows:
- 0.5% of the calculated salary fund of the insurant (payable by the employer); and,
- 0.5% of the insured person’s salary (payable by the employee through withholding by the employer).
To receive unemployment compensation, the person should be registered as unemployed with the State Employment Service under the Ministry of Labor and Social Protection of Population of Azerbaijan. The amount of compensation will depend on the length of the relevant insurance record, work experience and lost average monthly salary.
The List of goods exempt from import customs duties
The Cabinet of Ministers of Azerbaijan approved the “List of foreign economic activity goods nomenclature exempt from import customs duties as to promote production in non-oil sector” (hereinafter, the “List”). The List provides for import exemption of certain types of livestock, seeds, fertilizers, chemicals and equipment used in agriculture and food industry. It should be noted that the similar list existed before, but lost its force earlier this year. In comparison with the previous list, the new one provides for more nomenclature of goods exempt from import customs duties.
The List comes into force on 24 September 2017 and will be in force for the period of 3 years.
The Rules on payment of additional funds to special accounts of insured persons
The President of Azerbaijan approved the “Rules on payment of additional funds to special accounts of insured persons” (hereinafter, the “Rules”). The Rules are intended to implement the amendment made to the “Law on Labor pensions” earlier this year related to introduction of a special account, which is used to form the labor pension of a compulsory state social insured person (hereinafter, an “insured person”) by means of additional funds.
In accordance with the Rules in order to transfer funds to a special account, an insured person should submit an electronic application via the information system of the Ministry of Labor and Social Protection of Population of Azerbaijan. The funds transferred to the special account are used in determination of pension of an insured person. It should be noted that transfer of funds to a special account is not permitted once the pension is determined.
Amendments to the electronic services provided by the state authorities
The Cabinet of Ministers of Azerbaijan amended the Decree on “Approving the list of electronic services provided by the state authorities” (hereinafter in this section, the “Amendments”). Under the Amendments the followings have been added to the list of electronic services provided by the State Customs Committee of Azerbaijan:
- Payments for customs procedures and operations
- Provision of information on goods registered at the customs border checkpoints
- Issuance of certificates on exemption from import-export taxes determined under the international agreements concluded by the Republic of Azerbaijan.
Amendments to the "Volume and Procedure for provision of information on financial operations carried out by individuals and legal entities of foreign states in Azerbaijan to the competent authorities of those states"
On 12 September the Cabinet of Ministers approved the Decree on amendments to the "Volume and Procedure for provision of information on financial operations carried out by individuals and legal entities of Legislative alert | September 2017 foreign states in Azerbaijan to the competent authorities of those states" (hereinafter, “Procedure”).
Apart from the editorial amendments, the main amendment is alignment of the definition of “financial institution” with the one defined under Article 13.66 of the Tax Code of Azerbaijan. After respective amendments the definition now includes the institutions carrying out the following activities:
- Banking activity
- Endowment life insurance and/or annuity insurance activity
- Depositary activity
- Management of investors’ portfolio
- Trading with securities, derivatives, foreign currencies etc. for or on behalf of clients
- Activity of any legal entity controlled by a person engaged in any of the above listed activities.
Above-mentioned Procedure was approved in 2015 as an instrument to facilitate the automatic exchange of information under international agreements concluded by Azerbaijan with foreign states and providing for the exchange of information on foreign persons’ reportable financial accounts held at reporting financial institutions of Azerbaijan. Among such international agreements concluded by Azerbaijan are the Intergovernmental Agreement with the USA to implement FATCA and the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information under Common Reporting Standard developed by the OECD and G20 countries and based on the Joint OECD/Council of Europe Multilateral Convention on Mutual Administrative Assistance.
Amendments to the Rules on e-VAT invoices
The Cabinet of Ministers approved the amendments to the “Rules on payment of VAT for goods (works, services) purchased under the e-VAT invoices, register on a VAT deposit account, VAT amounts movement, VAT recovery and transfer to the state budget” (hereinafter in this section, the “Amendments”). According to the Amendments, retail sellers of agricultural products produced in Azerbaijan are obliged to provide details of their VAT deposit account in an electronic tax invoice, receipt, check, regular and electronic e-delivery note provided to the buyer for the purposes of VAT payment.
The said Amendments are intended to implement changes made to the Tax Code of Azerbaijan entered into force on 1 January 2017, wherein the commercial surplus applied at retail sale of the agricultural products was recognized as VAT taxable.
EY Flash news: Tax favorable/preferential jurisdictions – July 2017
As we have informed you before, the list of countries and territories with preferential taxation is to be approved on an annual basis by the President of Azerbaijan in accordance with the Law on “Amendments to the Tax Code” (“Law”) dated 16 December 2016. Please note that for the purpose of implementation of the Law, the abovementioned list has been approved by Presidential Decree on 11 July 2017. The Decree establishes the list of countries and territories subject to preferential taxation during 2017 and is effective as of 11 July 2017. It should be noted that in accordance with Article 14-1.2.3 of the Tax Code, transactions carried out between residents of Azerbaijan or PEs of a non-residents in Azerbaijan and entities incorporated (registered) in countries with preferential taxation are considered controlled transactions and taxes from such transactions may be subject to calculation based on transfer prices determined as per Article 14-1 of the Tax Code and “Regulations on determination and application of Transfer Prices” approved by the Ministry of Taxes on 27 January 2017.
Furthermore, please note that the same list will be used for the purposes of the Article 125.1.9 which provides for withholding of 10 per cent tax from the gross amount of the payments stipulated in Article 18.104.22.168-1, i.e. payments made by residents of Azerbaijan or PEs of nonresidents in Azerbaijan to entities incorporated (registered) in countries with preferential taxation as defined in the list.
For your reference the said list of countries/jurisdictions you may find below.
List of countries and territories with preferential taxation
Antigua and Barbuda
British Virgin Islands
Saint Vincent and the Grenadines
St. Kitts and Nevis
Turks and Caicos Islands
Hong Kong (China)
Virgin Islands (US)
Rules on determination and application of Transfer Price – April 2017
In this issue, we would like to elaborate on set of legislative changes on determination and application of Transfer Price introduced in the Tax Code of Azerbaijan as of 1 January 2017, and followed with adoption of the Rules “On determination and application of transfer price” (“Rules”) by the Ministry of Taxes. The Rules became effective on 8 February 2017.
What transactions could be subject to Transfer Price?
Transfer Price could be applied with respect to the transactions between the following parties (“Controlled Transactions”) and could be considered solely for determination of Profit Tax:
- Transaction between a resident of the Republic of Azerbaijan and related non-resident party of such Azerbaijani resident;
- Transaction between a permanent establishment of a non-resident in the Republic of Azerbaijan and such non-resident itself or any representative office, branch and other division of such non-resident located in other countries;
- Transaction between a resident of the Republic of Azerbaijan and (or) permanent establishment of a non-resident in the Republic of Azerbaijan and persons established (registered) in the countries with preferential tax regime.
Note: The list of countries with preferential tax regime is yet to be announced.
Transactions that are not covered with the above relations are considered as uncontrolled transactions in the Rules.
What are the Reporting and Documentation requirements?
With respect to transactions between the above parties, a taxpayer should submit a Notification in the form approved by the Ministry of Taxes, if the total turnover of a taxpayer with any such separate party exceeds 500,000 AZN during the calendar year.
The Notification should be submitted not later than 31 March following any reporting year.
In order to determine whether for Profit Tax purposes the Controlled Transaction should be assessed based on actual or Transfer Price, the taxpayers should apply a process of Compatibility Analysis. The documentation on such analysis could be provided to the tax office to justify applied pricing during the on-site tax audits or desk audits of Profit Tax Return.
Responsibility for application and reporting of Transfer Price
The penalty for non-submission of the Notification is AZN 500.
The financial sanction for additional accrual of Profit Tax due to correction of Transfer Price during the on-site tax audits is 50% of additional tax accrual.
How is the Transfer Price determined? What are the Transfer Pricing Methods?
The taxpayer should conduct a Comparability Analysis in respect of its Controlled Transactions to identify if the price applied in such transaction could be considered similar to that applied in the comparable uncontrolled transactions, or if otherwise calculate and apply Transfer Price for the purposes of determination of Profit Tax.
For the purposes of Comparability Analysis, the taxpayer should determine Transfer Pricing method that would determine and allow comparison of the result of the transaction. For the purposes of Comparability Analysis, the Rules stipulate five common Transfer Pricing Methods:
- Comparable Uncontrolled Price method (“CUP”)
- Resale Price method
- Cost Plus method
- Transactional Net Margin method
- Profit Split method
The CUP method is considered priority method in all circumstances there is valid reason and option to apply such method.
For the purpose of Comparability Analysis, a taxpayer could consider internal or external comparable uncontrolled transactions concluded
As with any new regulations, there are certain areas in the still open for discussion and requiring additional clarification from the Tax Office.
EY is the leader in transfer pricing services both in the CIS market and globally. EY has been serving the clients in various industries across the globe and the CIS to support the companies in the first and following years of Transfer Pricing regulations adoption.
If your operations in Azerbaijan involve Controlled Transactions EY can assist you with the following actions for 2017 and onwards to comply with the Rules:
- Diagnostics of the Controlled Transactions
- Functional Analysis to establish comparable search criteria
- Identification of Transfer Pricing methodology
- Economic Analysis to identify comparable market information
- Preparation of documentation package on the results of the studies conducted
- Preparation and Submission of Notification on Controlled Transactions
EY has developed approach and integrated team of Transfer Pricing, Tax and Legal specialists to assist you with all steps of your first year Transfer Pricing compliance and help to establish consistent approach for future periods.