Personal income tax

(the conceptual basis of personal income tax,

classification of income,
tax rates)
 Taxpayers

General information: The most significant tax on physical persons is the income
tax, which is levied at progressive rates.

Taxpayers: Resident and non-resident physical persons are payers of income tax.

Tax residency: Individuals who are present in Azerbaijan for more than 182 days
during a calendar year, or those with a place of permanent residence, a center of
vital interests or a residential adobe in Azerbaijan, or who have Azerbaijani
citizenship, are considered tax residents

Note: Personal income tax is paid to the state budget.

Taxable income and exemptions
 Taxable income
• Residents of Azerbaijan are subject to income tax on taxable income, which is defined
as gross income received from all sources (both Azerbaijani and non-Azerbaijani)
during a tax year, regardless of where the income was earned or paid, less allowable
deductions.
• Non-residents are only subject to Azerbaijani income tax on income received from
Azerbaijani sources.
• The taxable base for personal income tax is determined as the difference between gross
income for the tax year and expenses (or deductions) stipulated by the Tax Code for this
period.
• Virtually all forms of employee compensation are taxable, including hardship and taxes
paid on behalf of the employee.
İncome – clasification
Income shall cover:

• income received as the result of employment;

• income from activity which is not (connected with) employment;

• all other kinds of income except for tax-exempt income and

acceleration arising from the revaluation of fixed assets (funds).
 Income received as the result of employment

Income received as the result of employment by physical persons:

salaries and wages;

Any payments or benefits received by a physical person from
employment;
Any payments from the former workplace, or income received by such
physical person from future employment.
Income received as the result of employment (Article 98)
The amount of income shall be equal to the amount indicated below less any expenses of
employee incurred with respect to such income (Art. 98.2):
1. in the event of loans granted to the natural person at an interest rate that is lower
than the inter-bank credit market interest rate — (the difference between the amount
to be paid at the market rate of inter-bank credit trade for such loans, and the amount
to be paid in accordance with lower rates);
2. in the event of the sale of goods, works, services or gratuitous transfer thereof by an
employer to his employee - the fair market value of these goods, works, services;
3. in the event of reimbursement of expenses to an employee - the amount of
reimbursement;
4. in the event of writing off the employee’s debt or obligation to his employer - the
amount of such debt or obligation;
5. Insurance premiums paid by Employer;
6. in any other cases.
 Example 1
Legislative requirement:
In the event of loans granted to the natural person at an interest rate that is lower than the inter-
bank credit market interest rate — (the difference between the amount to be paid at the market
rate of inter-bank credit trade for such loans, and the amount to be paid in accordance with
lower rates)
Terms of credit:
• Credit amount - 10.000 manats
• inter-bank credit market interest rate – 20%
• Loan with reduced rate – 15%
Calculation:
• 20%-15% = 5% (year)
• 500 manats (benefit) for a year/12 = 42 manats (month)
• Amount of employye`s salary = 800 manats (month) + 42 manats = 842 manats.
• Taxable base – 842 manats – 200 manats = 642 *14%= 90 manats
• Net income – 800 - 90 = 710 manats
 Example 2
Legislative requirement:
In the event of the sale of goods, works, services, or gratuitous transfer
thereof by an employer to his employee - the fair market value of these
goods, works, services;
Terms of transaction:
• Worker works at the Furniture factory:
• Worker gets Sofa Furniture for free at the end of the year;
• The fair market value of Sofa Furniture is 15.000 manats.

Calculation
• 15.000 manats / 12 months = 1250 manats – for the month
 Example 3
1st Scenario:

Legislative requirement:
In the event of reimbursement of expenses to an employee - the amount of reimbursement

• 5.000 manats debt (loan) to company X.

• Company A. expenses would be increased.
• At the end of the year - 5.000 manats as a benefit. Taxable income – 5.000 manats.

2nd Scenario:
Legislative requirement:
in the event of writing off the employee’s debt or obligation to his employer - the amount of such
debt or obligation

• Borrowed 2000 manats from your own company.

• 2000 manats as a benefit. It should be added to your salary and will be taxed as well.
 Income from activity that is not connected
with employment
Income from an activity that is not connected with
employment shall consist of:
• income from entrepreneurial activity;

• income from non-entrepreneurial activity.

 Income from entrepreneurial activity
• Income from entrepreneurial activity, includes (Art. 99.2.1):
• income from the realization of assets used for the purposes of
entrepreneurial activity;
• income received due to the restriction of entrepreneurial activity or
agreement to its closing;
• amounts that are received from the realization of fixed assets and which
are included in income pursuant to Article 114.7. of the Tax Code;
• expenses reimbursed, deducted from income according to Article 141 of
the Tax Code or from the decrease of resources;
 Example 4
Income received due to the restriction of entrepreneurial activity or
agreement to its closing
1st Scenario:
Agreement to close entrepreneurial activity:
• You have a Toy Shop in a village.
• Company A has a new and big toy shop in the same village.
Due to closing the toy shop 30. 000 manats will be paid to the entrepreneur.
• 30. 000 manats will be considered as income and will be taxed.

2nd Scenario:
Due to the restriction of entrepreneurial activity:
• Repair services center: All cars (before)
• Repair services center: All cars (except cars made in Germany – Now).
50.000 manats will be paid to the entrepreneur as compensation for restriction activity.
• Restriction payments will be considered as income and will be taxed.
 Income from non-entrepreneurial activity
• interest income;
• dividends;
• income from the lease of property;
• royalty;
• amount of taxpayer’s written-off debt, except those included in article 98.2.4. of the Tax Code;
• gains received from the sale of assets not used for entrepreneurial activity;
• amount of presents and heritage received in a calendar year, with exception of those specified
in article 98.2.2. of the Tax Code;
• any other income that indicates the increase of the net price of taxpayer’s assets (in the event of
submission or calculation of amortization for the taxation purposes) - other than salaries and
wages;
• difference between insurance premiums paid for life insurance and insurance payments;
1st
• Rent your flat – 10.000 manats – Company A (tax agent)
• 14% from the source of payment – 8 600 manats
• 1400 manats – budget
• 8600 manats paid to Mr. James.

• 2 nd.
• Mr. James signs an agreement with Mr. Black. Mr. Black agreed to pay 10.000
manats.
Mr. James will be registered at the Tax office and will declare 10.000 manats
and pay taxes as well. (Art. 124)
Determination of the taxable base (taxable
income)
 Taxation of income gained from selling participating interest or shares

If a participating interest or shares in charter capital are sold at a price that exceeds
the proportionate value of net assets, then the taxable income is the difference
between the actual sale price and the nominal value of the participating interest or
shares.
Where the participating interest or shares are sold at a price lower than the
proportionate value of net assets or shares, the difference between the proportionate
value of net assets and the nominal value of the shares at the sale agreement date will
constitute the tax base for individuals.

If participating interests or shares are bought at a price exceeding its nominal price,
then expenses deducted when providing these participating interests or shares, are
recorded at the actual purchase price of these assets.
 Tax exemptions for enterpruners
• The income of sole entrepreneurs operating in industrial parks is exempt from taxation.
• Moreover, a 50 percent exemption from personal income tax is granted to individuals who
hold an investment promotion certificate for seven years from the date of receiving the
certificate.
• In addition to the above, new income tax exemptions have been stipulated in tax
legislation, starting from 2019:
a 50 percent income tax exemption on a taxpayer’s income from the sale or disposal of
shares and participating interests owned at least for three years;
 a 75 percent income tax exemption on an individual entrepreneur’s income from
entrepreneurial activities classified as “micro entrepreneur”;
the “startups that function as individual entrepreneurs and are classified as micro- or small
business are income tax exempt for three years from the date of receiving the startup
certificate
the part of income earned by an individual entrepreneur who is a member of a SME
cluster for the provision of goods and/or services under a contract concluded with an SME
company intended for capital expenditures is income tax exempt for seven years.
Tax exemptions for enterpruners (cont.)
• The income tax amount payable by entrepreneurs engaging in retail trade
and/ or public catering activities is reduced by 25 percent of the tax
amount generated from POS terminals for three years starting from
January 1 2019.
• The amount of payments made by taxpayers via POS terminals is not
taken into account when determining the right to receive this redemption.
• Moreover, individuals’ annual interest income paid by a local bank or
branch of a foreign bank in Azerbaijan for term deposits, as well as
dividends, discounts (the difference as a result of placing bonds below
face value) and interest paid by an issuer for investment securities
are exempted from personal income tax for seven years beginning from 1
February 2016
Tax rates
 Individuals engaged in entrepreneurial and
nonentrepreneurial activity
• Individuals engaged in an entrepreneurial activity are taxed at a fixed rate
of 20 percent.
• Taxable income from nonentrepreneurial activities is taxed at a rate of 14
percent.
• Moreover, domestic sport betting, lottery winnings (with the exception of
cash winnings on sports betting, winnings from lotteries, and other types
of competitions and contests outside of Azerbaijan) are subject to a 10
percent withholding tax at the source of payment, which should be
withheld and paid to the State Budget on a monthly basis. The tax base for
this type of income is the difference between the winnings and the amount
paid to place a bet or buy a lottery ticket.
 Example about taxation of income from
entrepreneurial activity
Financial indicators of the physical person who engages in
entrepreneurial activity not creating a legal entity (individual
entrepreneur) for the calendar year were as follows:
Gross income 30.000 AZN;
Expenditures with regard to gained income is 24.000 AZN.

In this case, taxation subject will be 6.000 AZN:

30.000 - 24.000 = 6.000
 Taxation of income from employment
• The worldwide income of tax residents and Azerbaijani source income of
nonresidents received from employment are subject to the following progressive
income tax rates:

• AZN 200 of a salary below AZN 2,500 is not taxable

 Reform on personal income tax
• One of the main changes brought about by the 2018 tax reforms was a
reduction in income tax for private non-oil and gas industry taxpayers.
• The following preferential tax rates will remain in force for seven years
from 1 January 2019.
Payment and reporting of personal
income tax
Payment and reporting of personal income
tax from employment
• Personal income tax from employment income must be withheld by the
employer at the source.
• Withheld taxes are to be remitted by the employer to the budget by the 20th
of the following month.
• A tax return for employment income withheld at source is filed by the
employer on a quarterly basis together with social insurance, unemployment
insurance, and mandatory medical insurance contributions by the 20th of
the month following the end of the reporting quarter.
 Individual filing
• Residents and non-residents must complete and file their income tax
returns no later than 31 March of the following tax year.

Useful link:
https://www.taxes.gov.az/az/page/beyanname-erize-formalari-arayis-
hesabat-ve-qerarlar
Thanks for your attention!