Simple Tax Guide for Americans in Azerbaijan

US Expat Taxes - Azerbaijan

At Taxes for Expats we have been preparing U.S. tax returns for U.S. Citizens and green card holders working in Azerbaijan for over 3 years. Our clients mainly live in Baku and work in the oil industry.

As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already pay taxes in your residence country.

We offer professional tax services. That means we figure out the best and most optimal way to file your U.S. tax return and avail you of all possible exclusions and deductions. But just as importantly - avoid the errors that would allow IRS to disallow your return and levy fines & penalties on top. You can also do them yourself - not that we recommend it. For more information please see IRS.

The expatriate Foreign Earned Income Exclusion can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost.

We have many clients living in Azerbaijan and know how to integrate your U.S. taxes into the local income taxes you pay. Any Azerbaijani income tax you already pay can be claimed as against the tax liability on your U.S. return on the same income.

As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the calendar year as is standard in Azerbaijan for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.

There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these form or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.

We have helped hundreds of expats around the world catch up with their past U.S. taxes because they have failed to file U.S. tax returns for many years. This is, in fact, our specialty and we offer a 10% discount to clients to wish to file multiple tax returns at once and get in full compliance with the IRS.

Work with a recognized expert to help you prepare your American tax return. We can also provide tax planning and advice with other expatriate tax and legal concerns; we look forward to working with you.

Below we include information on the Azerbaijani Tax System for the American Expatriates.

Azerbaijan personal income tax rates for 2010 are progressive up to 30%.

Basis - Azerbaijani residents are subject to income tax on taxable income, which is defined as gross income received from all sources during the tax year, regardless of where the income was earned or paid, less allowable deductions. Nonresidents are subject to Azerbaijani income tax on income derived from Azerbaijani sources.

Residence - Unless otherwise provided for in an applicable tax treaty, an individual is generally considered to be tax resident if he/she is physically present in Azerbaijan for a period of more than 182 cumulative days in a calendar year (regardless of nationality).

Filing status - Each individual must file a tax return; joint returns are not permitted.

Taxable income - Taxable income includes income from employment, income from entrepreneurial activities and passive income. Certain income, such as property inherited from family members, alimony, etc., is exempt.

Capital gains - Capital gains are treated as normal income and taxed at the ordinary personal tax rate.

Deductions and allowances - Expenses incurred by an entrepreneur may be deducted in computing taxable income.

Tax Rates - Rates are progressive up to 30%.

Individual entrepreneurs are taxed at a rate of 20%.

Other taxes on individuals:

Simplified tax - Legal entities and individuals engaged in entrepreneurial activities with taxable supplies up to AZN 22,500 in a 3-month period and which are not registered as VAT payers may pay a simplified tax. The simplified tax is 4% and 2% of gross revenue for Baku, the capital, and the surrounding regions, respectively. Individual entrepreneurs that pay the simplified tax are exempt from profit tax, VAT, assets tax and personal income tax.

Capital duty - No

Stamp duty - No

Capital acquisitions tax - No

Real property tax - An annual land tax is levied on the owners and users of land (whether or not resident), with the amount of tax depending on where the land is located and how it is used.

Inheritance/estate tax - No

Net wealth/net worth tax - No

Social security - Social insurance contributions for employed individuals are withheld by the employer; the self-employed must register and pay their own social insurance contributions. Foreign nationals working under PSAs and HGAs are exempt from social insurance contributions.

Tax Year: Azerbaijan tax year is the calendar year.


Azerbaijan Corporate Tax Rate

Azerbaijan corporate tax rate for 2010 is a flat 20%.

Residence - Legal entities incorporated in Azerbaijan are resident, while branch offices and representative offices of foreign legal entities are considered to be nonresident.

Basis - Residents are taxed on worldwide income; nonresidents are taxed only on Azerbaijan-source income.

Taxable income - Profit tax is imposed on a company's operating profits, computed as the difference between total taxable income and deductible expenses. Normal business expenses may be deducted in computing taxable income. Companies operating in the oil and gas sector are mainly governed by PSAs or HGAs. Projects outside PSAs and HGAs are taxed in accordance with the rules in the Tax Code.

Taxation of dividends - Dividends received from Azerbaijani companies and permanent establishments of foreign companies located in Azerbaijan are subject to tax at source at a rate of 10%.

Capital gains - Capital gains are treated as normal income and taxed at the ordinary profit tax rate.

Losses - Losses may be carried forward 5 years. Loss carryback is not permitted.

Rate - As from 1 January 2010, Azerbaijani legal entities are subject to a profit tax of 20% on their worldwide income. Nonresidents are taxed on Azerbaijan-source income at the 20% rate. PSA contractors that carry out business in Azerbaijan in connection with petroleum operations pay profit tax at prenegotiated rates of 25% to 32%. In lieu of profit tax, foreign subcontractors in a PSA can pay withholding tax at rates ranging from 5% to 8% of the gross payments received as consideration for work or services performed in Azerbaijan. The tax, which is a final tax for the foreign subcontractor, is withheld by the payor with the proceeds remitted to the Azerbaijani budget. Tax is imposed on the taxable profits of each main exporting pipeline (MEP) participant for a year relating to project (MEP project) activities at a flat rate of 27%.

Surtax - No

Alternative minimum tax - No

Foreign tax credit - Corporate income taxes paid outside Azerbaijan may be credited against Azerbaijan tax due. Excess foreign tax credits may not be offset against a resident taxpayer's Azerbaijan tax liabilities on any domestic-source income, nor may it be carried forward or back.

Participation exemption - No

Holding company regime - No

Incentives - No


Withholding tax:

Dividends - Dividends are subject to a 10% withholding tax, unless the rate is reduced under a tax treaty.

Interest - Interest paid to a nonresident is subject to a 10% withholding tax, unless the rate is reduced under a tax treaty.

Royalties - Royalties paid to a nonresident are subject to a 14% withholding tax, unless the rate is reduced under a tax treaty.

Branch remittance tax - Net profits remitted to the head office of a branch are subject to a 10% withholding tax.

Other taxes on corporations:

Capital duty - No

Payroll tax - No

Real property tax - An annual land tax is levied on the owners and users of land (whether or not resident), with the amount of tax depending on where the land is located and how it is used.

Social security - Employers are required to make contributions to the state social protection fund on behalf of their employees. The rate is 25%, with 22% paid by the employer on gross payroll and 3% withheld from the employee's gross salary.

Stamp duty - No

Transfer tax - No

Other - An assets tax is levied on all owners of fixed assets, with some exceptions. The rate depends on the type of asset.


Azerbaijan Value Added Tax (VAT) Rates

The standard rate of VAT (?lav? D?y?r Vergisi - ?DV) in Azerbaijan is 18%.

VAT in Azerbaijan is similar to most European VAT systems, with tax levied on the supply of most goods and services, and the import of goods. VAT payers are entitled to recover the amount of VAT paid on purchases (input VAT) that exceeds the VAT received from their taxable supplies (output VAT).

Rates - The standard rate is 18%, although some transactions are exempt (e.g. financial services) or zero-rated.

Registration - Taxpayers must register for VAT purposes if turnover in a consecutive 12-month period exceeds AZN 150,000 (for legal entities) and AZN 90,000 (for individuals).

Where services are provided by nonresident entities with no VAT registration in Azerbaijan, the local entity must self-assess a reverse charge VAT and remit it to the state budget.

Administration - As from 1 January 2010, paper tax invoices are replaced with electronic invoices, which will be registered and administered by the tax authorities via the internet.

Filing and payment - VAT must be reported on a calendar month basis. VAT payers are required to submit VAT reports no later than the 20th of the month following the reporting month and should calculate the VAT amount to be remitted to the state budget by reducing its output VAT liability with input VAT credit.