1. Profit tax Emil Garayev 2 April 2011

2. I. General aspects  Tax payers and taxable base:  Tax rate and the reporting period  Major exemptions: - income of charity organizations; - grants, membership fees and donations received by non- commercial organizations; - income of state power authorities, budget-funded organizations and local managing authorities; - received insurance payments etc.

3. II. Accounting for income and expenses  Taxpayers are obliged to maintain accurate and timely records of income and expenditures on the basis of documented data and accounting methods provided by the Tax Code (Art.130)  A taxpayer may record income and expenses under cash or accrual method of accounting  A taxpayer must use the same method for both accounting and tax purposes, and be consistent in using the method throughout the tax year

4. Cash method  Article 131-133 of the Tax Code  Using the cash method of accounting a taxpayer is required to record income upon its actual receipt, regardless of when the income was earned  Expenses are recorded when payment is made rather than when the expense was incurred

5. Accrual method  Contrary to the cash method, the general rule under the accrual method of accounting requires a taxpayer to record income when it is earned, regardless of when it is actually received  Expenses are recorded when incurred rather than when the expense is paid. Three criteria described in Article 136.1 must be met  Special rules for interest and rental income and expenses (Article 135.3 and 136.3)

6. III. Deductible expenses  The Tax Code allows expenses incurred in the course of economic activities to be deducted from gross income earned from such activities except for those which are specifically disallowed (Article 108)  Non-deductible expenses mainly includes: - non-commercial expenses; - entertainment and meal expenses as well as housing expense of employees and other expenses of social nature; - amount of business trip costs exceeding the limits set by the law; - profit tax and other taxes on income; - financial sanctions and late payment interest for non-timely payment of tax liabilities

7. Interest, Dividends  Deduction of actual amount of an interest expense on loans received from abroad as well as amount of interest paid by interconnected persons is limited to the amount not exceeding 125 % of the average interest rate on inter-bank credits as published by the Central Bank of Azerbaijan  The Tax Code provides for tax credit with respect to interest income which has already been taxed at the source of payment (Article 123.3)  Tax exemption for dividend income which has already been taxed at the source of payment (Article 122.2)

8. Bad debts  Taxpayers are allowed for deduction of bad debts related to provision of goods, works and services that have been realized where income from them was previously included in the gross income (Article 111)  Loan loss provisions as well as insurance reserves calculated according to the rules set forth by the law, represent deductible expense for profit tax purposes. Reversal of provisions (reserves) should be recognized as taxable income in the current tax year

9. Insurance costs  As a rule insurance expenses incurred by a taxpayer is deductible for profit tax purposes. Exceptions are: - costs incurred in connection with insurance of employee’s assets; - costs incurred in connection with life insurance agreements concluded with foreign insurance companies.

10. Depreciation charges  Depreciation charges calculated in connection with fixed and intangible assets are deductible provided that they are within the limits set by the Tax Code  A fixed asset is an asset useful life of which exceeds one year and value of which is greater than 100 AZN  Article 13.2.9 defines intangible assets

11. Depreciation charges  Land, arts, buildings, facilities representing rare historical or architectural monuments, as well as other wear-proof assets may not be depreciated  Depreciation rates are as follows (Article 114): - premises —up to 7%; - machinery and equipment — up to 25%; - vehicles — up to 25%; - costs on geological exploration and preparation work for production of natural resources - up to 25%; - other fixed assets — up to 20%; - intangible assets — for those with undetermined period of use - up to 10%, for those with determined period of use- at years on amounts pro-rata to period of use.

12. Depreciation charges  Article 114.4 – 114.6 defines rules for calculation of depreciation charges  Any amount paid or incurred for the acquisition, construction or improvement of assets for business use may not be deducted immediately, but should instead be capitalized and depreciated over time

13. Repair expenses  The amount of repair expenses deductible each year is limited to amount defined as certain percentage of the residual value of each group of fixed assets as of the previous year-end  Limits of repair expenses are as follows - Premises - 2% of the residual value; - machinery and equipment as well as vehicles - 5% of the residual value; - other fixed assets - 3% of the residual value - fixed assets that are not depreciated – 0 %

14. Repair expenses  Any amounts in excess of the limits should increase value of the corresponding category of fixed assets by adding such amounts to the residual value at the end of the current year  In the event when the actual amount of repair expenses is less than amount established by this limit then the actual amount of repair expenses is deductible from income. In that case the maximum value of deductible repair expenses in the following tax years is increased by the difference between the amount of actual repair costs and amount calculated on the established limit

15. IV. Loss carry forward  The Tax Code provides the opportunity to taxpayers for loss carry forward. Losses can be carried forward to the next five years and offset against profits of other years without limitation

16. V. Assets and their provision  The Tax Code is silent with respect to definition of assets. Considering this reference should be made to the accounting legislation  Assets are recorded in tax accounting with a value which includes costs for their acquisition, production, construction, assembly and installation as well as other costs that increase their value (Art.143)  Interest expenses incurred in connection with assets purchased on loan is not capitalized and treated as an expense of the current period  Both gain and loss from provision of assets are treated as taxable income and deductible expense respectively

17. VI. Reporting and payment  Companies pay profit tax at a rate of 20% and are required to make quarterly advance tax payments calculated either as 25% of last year tax liability or by multiplying the amount of their income in the current quarter with a weighted tax coefficient of the gross income for the previous year: A – last year’s profit tax B – last year’s gross income C – current quarter’s gross income Advance profit tax = C x (A/B)  The annual profit tax return is due no later than 31 March following the reporting year