On 16 November 2021, Azerbaijan has modified its Tax Code including three main changes regarding Transfer Pricing (TP), country by country (CbC) reports, and controlled foreign company (CFC) rules. The changes will be implemented from 1 January 2022.

Transfer Pricing

The scope of controlled transactions has been changed for transfer pricing purposes. The changes are:

• Transactions between a resident of Azerbaijan and non-resident related parties, including their branches or representative offices located in abroad;
• Transactions between a permanent establishment located in Azerbaijan of a non-resident with such type of non-resident or any representative office, branch office, or other unit of such non-resident located in abroad;
• Transactions between a resident taxpayer and/or a permanent establishment located in Azerbaijan of a non-resident and persons in a country with a special tax regime; and
• Transaction between a resident of the Azerbaijan Republic or a permanent establishment of a non-resident in the Azerbaijan and a non-resident person, except for the cases specified:
  • persons have carried out operations on products traded on international commodity exchanges and (or);
  • The total income of a resident or non-resident permanent establishment of Azerbaijan during the tax year shall exceed AZN 30 million and the share of transactions with each non-resident in total income shall exceed 30%.

CbC Report

Penalties for failure to file CbC reports or to comply with other CbC related obligations have been increased from AZN 500 to AZN 2000.

Changes in CFC

A foreign company will be considered as a CFC of an Azerbaijan resident company if the Company meets the following conditions:

• have the right to vote directly or indirectly in a foreign enterprise for more than 50% or more than 50% of its authorized capital or more than 50% of the profits of that foreign enterprise, either directly or indirectly has the right to receive;
• if the tax actually paid on the profit of the controlled foreign enterprise is 2 times or less than the profit tax payable on that profit in accordance with this Code;
• if more than 30% of the annual income of a foreign enterprise consists of the following income:
  • interest on financial assets;
  • royalties from intellectual property;
  • income from the sale of shares and stakes;
  • income from financial leasing;
  • income from insurance, banking and other financial operations;
  • income from enterprises that receive income from goods and services that do not create any economic value.

The following income received from a controlled foreign entity shall not be included in the taxable income of that entity:

• dividends received from a controlled foreign enterprise;
• if the resident enterprise is a subsidiary of the controlled foreign enterprise, the taxable profit related to the resident enterprise from the generalized (consolidated) profit of the controlled foreign enterprise; and
• income received through the permanent establishment of a controlled foreign enterprise in Azerbaijan, as well as income received from an enterprise established in the Azerbaijan and taxed in the Azerbaijan Republic.

Furthermore, CFC must be reported by the deadline set for the submission of the corporate income tax return for the relevant year.