Israel – Azerbaijan Tax Treaty

Business Activity in Azerbaijan

The Azerbaijani government has made efforts to attract foreign investments and has implemented reforms to diversify its economy. Despite the economy still being heavily dependent on oil and gas production, contributing to 92% of the export revenue and more than half of the state budget. the country is recently focusing on green energy as well.

Oil and gas sector is a traditional sector that has received most foreign investments in Azerbaijan. Nevertheless, the government of Azerbaijan is now working on the diversification of the economy by focusing on four non-oil sectors such as agriculture, tourism, information and communication technology, and transportation/logistics. Another core function the country is expected to perform is the furthering of its central role in the east-west Middle Corridor.

Bilateral Agreements Between Azerbaijan and Israel

The following agreements were signed between Israel and Azerbaijan:

1. International Investment Agreement
2. Double Taxation Agreement

Reciprocal Promotion and Protection of Investments

The International Investment Agreement was signed between Israel and Azerbaijan on December 31, 2007. This agreement is designed to protect and promote foreign investments, encouraging economic cooperation between both countries.

Convention on the Prevention of Double Taxation

The agreement between the Governments of Israel and Azerbaijan regarding the avoidance of double taxation was signed in December 12, 2016 and entered into force on December 31, 2017.

To read the agreement in English click here.

Applicability of the MLI

Both Azerbaijan and Israel have signed the “Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting” (MLI). Israel signed the agreement on June 7, 2017, and ratified it on September 13, 2018. In contrast, Azerbaijan signed the MLI on November 20, 2023, and is currently in the process of ratification.

Residency for Tax Purposes in Azerbaijan

Residence of an Individual

An individual is considered a tax resident in Azerbaijan if they spend more than 182 days there in a calendar year. For those whose stay does not exceed 182 days either in Azerbaijan or any foreign country, residency is determined based on their permanent residence, place of vital interests, usual place of residence, or Azerbaijani citizenship.

To read about how an individual is considered a resident of Israel, click here.

Residency of a Company

In Azerbaijan, a legal entity is considered a tax resident if it is established under Azerbaijani law and engages in entrepreneurial activities, or if its management is located within Azerbaijan.

To learn about how a company is considered a resident of Israel, click here.

The Tax System in Azerbaijan

The Azerbaijan Tax Authority is called State Tax Service.

Income taxation: 0%, 14%, 25%

Taxation of companies: 20%

VAT: 0%, 18%

Capital gains tax: 20%

Withholding Tax

Inheritance Tax and Estate Tax in Azerbaijan

Azerbaijan does not impose an inheritance tax received from immediate family members. However, inheritance from non-immediate family members is subject to a 25% tax rate.

Relocation to Azerbaijan

Doing business in Azerbaijan can provide with advantages because the country provides with favorable investment climate and has built a legal framework that supports foreign investments. Some of the main benefits of doing business in Azerbaijan include:

Rich Oil Country and Bustling Industries: Azerbaijan, known for its rich oil and gas reserves, has a developed heavy industry infrastructure focused on aluminum mining, metallurgy and oil production. However, recently, the country is refining as well light industries such as textiles and food processing.

Supportive Investment Climate: While Azerbaijan is focused into economic diversification and attraction of foreign investments, it has developed policies to support its aims. For example, the country offers low-interest loans by the Entrepreneurship Development Fund aiming investments in the agricultural sector and non-oil industries.

Favorable Conditions for Foreign Investment: The law of Azerbaijan enables foreign investors to be involved with a variety of effective investment activities, taking various forms including the establishment of wholly-owned enterprises, the purchase of local enterprises, and obtaining rights to use land and natural resources.

Tax and Customs Incentives: Azerbaijan provides foreign investors with several tax and customs incentives, in addition to favorable taxation rates. For example, income tax is reduced by 50%, while as property and land assets are 100% exempted.

Real Estate Taxation in Azerbaijan

Property tax in Azerbaijan is applied to both legal entities and individuals. Legal entities are taxed 1% on real estates, based on the average annual book value of their taxable property. In the residential area, tax is only applied to the property area with more than 30 square meters. Taxable persons are the resident companies and those that are conducting business through a Permanent Establishment in Azerbaijan. Joint owners are responsible for the tax according to the interest they have in the property. Exemptions can be claimed by agricultural producers, residents and operators of industrial parks, micro enterprises with assets under AZN 1 million.

Transfer of Funds from Israel to Azerbaijan

According to section 170(a) of the Israeli income tax ordinance, any transfer of payment to a non-Israeli resident is subject to 25% of withholding tax. The tax authority can allow, under certain circumstances, to reduce or dismiss the withholding tax. Our firm handles withholding tax matters with the Israeli Tax Authority.

Due to the fact that both countries have a tax treaty with each other, one can submit a declaration form (2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax), and under certain circumstances, there is a possibility to transfer the payment without the withholding tax and the approval of the Tax Authority.

In providing advice regarding the transfer of money abroad, in addition to the issue of withholding tax, our office handles the requirements of the foreign banks, such as an accountant’s approval regarding the payment of taxes and examines additional actions required in light of the uniform standard of CRS between the countries – automatic exchange of information between countries which is carried out first through the banks and then between the tax authorities of each two countries.

The banks raise many difficulties and charge high fees for converting shekels into other currencies, so it is important to consult before transferring the funds – Contact us.

For more information on money transfers abroad, click here.

Types of Business Entities in Azerbaijan

Limited Liability Company

A Limited Liability Company, is formed by one or more individuals or legal entities. The company’s legal capital is divided into authorized shares outlined in its charter. Shareholders have limited liability based on their investment in the capital of the company

General Partnership

A general partnership is a business established by two or more individuals or legal entities. The owners of a General Partnership are personally responsible for all the obligations and debts of the partnership, and their liability is not limited.

Joint-Stock Companies

This form of legal entities can be set up by an individual or an organization. Shareholders are only responsible for the value of their shares. There are two forms of JSCs: closed and open. In a closed JSC, shares are restricted from public trading, with a minimum capital requirement of AZN 2,000. In an open JSC, shares are freely traded, and the minimum capital is AZN 4,000.

Subsidiary Company

A subsidiary in Azerbaijan, owned by foreign nationals, can be registered as a limited liability or joint-stock company. It is treated as an Azerbaijani legal entity for tax, accounting, and regulatory purposes, and must comply with all relevant laws in Azerbaijan.

Branch

A Branch performs some or all functions of the Head Office, along with those of a Representative Office. Both Branches and Representative Offices are generally subject to the same legal, tax, currency, and reporting regulations. Branches are not required to have a charter fund and may transfer income to overseas accounts, as long as these accounts are properly registered with Azerbaijani authorities.

Incentive Laws in Azerbaijan

Azerbaijan offers many incentives to attract foreign investors and boost the local businesses. We provide following the analysis of some of these incentives that might be of interest for those who seek to invest in the country:

Agriculture – Producers enjoy tax exemptions for ten years starting from January 1, 2014. Furthermore, starting January 1, 2022, VAT applies to mark-ups on wholesale and retail sales of agricultural products. Recent amendments to the Tax Code provide VAT exemptions for certain periods on products like wheat, flour, bread, animal and poultry meat, bran, and feed.

Liberated Territories – Entities and individuals operating in liberated territories enjoy a ten-year exemption from profit and simplified taxes, property tax, land tax, and VAT on imported raw materials. This does not apply to financial services, cargo transportation, or services funded by the state budget.

Oil and Gas Industry – The law provides tax incentives for local companies to choose between a 20% profit tax rate or a 5% withholding tax on gross revenues. Foreign subcontractors are subject only to a 5% withholding tax. Additionally, there’s a 0% VAT rate, exemptions from dividend WHT, customs duties, property tax, and land tax.

Special Economic Zones – Companies in Special Economic Zones benefit from a 0.5% tax on turnover, 0% VAT rate, and customs exemptions. However, certain businesses like oil and gas, alcoholic beverages, tobacco, and broadcasting companies are ineligible for Special Economic Zones certificates.

Incentives for Civil Aviation – Rent or lease payments for aircraft and aircraft engines from non-resident entities without a presence in Azerbaijan are exempt from VAT and withholding tax for these activities.

Azerbaijan Double Tax Treaties