In this article, we will explore the concept of tax residency in Azerbaijan, both individual tax residency and corporate tax residency, highlighting the criteria and requirements specified by the Tax Code of Azerbaijan.
At the outset, it is worth to summary the general concept of tax residency. Tax residency refers to the status of an individual or entity being subject to the tax laws of a particular country. Since Azerbaijan applies “worldwide income” principle, tax residents of Azerbaijan are obligated to pay taxes on their worldwide income in Azerbaijan. Understanding tax residency is important, as it determines the extent of an individual's or a legal entity’s tax obligations.
Azerbaijan applies “physical presence” method (“mechanical” test) for determining tax residency of individuals in Azerbaijan as the primary method. In order to be considered as a tax resident in Azerbaijan, an individual must spend at least 183 days within a tax year (i.e. from 1st of January until 31st of December) in Azerbaijan. Tax residency criteria would be met regardless of the purpose of stay (or type of visa) or the nationality of the individual, by mere being physically present in Azerbaijan at least 183 days in a year.
If an individual person’s (natural person’s) period of stay on the territories of Azerbaijan is less than 183 days, then this person shall be deemed as the resident of the Republic of Azerbaijan based on criteria set in the following order:
· permanent place of abode;
· center of vital interests;
· habitual place of residence;
· citizenship of the Republic of Azerbaijan.
Under the above order of tax residency criteria, where a person has a permanent place of abode in Azerbaijan, that person will be considered as a tax resident of Azerbaijan, even where he stays less than 183 days in Azerbaijan. Ownership or rental of a permanent place of residence, such as a house or apartment, within Azerbaijan is a crucial criterion for tax residency. If a person either stays 183 days or more abroad, or has a permanent abode abroad, then that person will not be considered as tax resident in Azerbaijan.
The order of tax residency test follows with the “center of vital interests” criterion. “Center of vital interests” refers to the primary location where an individual conducts their personal and economic activities. If Azerbaijan serves as the principal country for an individual's business, employment, or investments, it strengthens Azerbaijan’s claim for tax residency. In other words, where an individual person stays less than 183 days in Azerbaijan or abroad, nor has a “permanent place of abode” in Azerbaijan or abroad, if that person’s “center of vital interests” is in Azerbaijan, then the person would be tax resident of Azerbaijan. If no center of vital interests falls within the territories of Azerbaijan, but there is a foreign state which may be qualified as the center of vital interests, then Azerbaijan will not consider that person as its tax resident.
Next criterion, “habitual place of residence”, unlike the previous criteria, is slightly looser, and mere regular, customary or usual place of living would suffice for qualifying (no permanent living is required). Again, here this criterion would play a significant role for determining tax residency in Azerbaijan, where no above listed criteria (“183 days” rule, “permanent place of abode”, “center of vital interests”) is applicable anywhere.
The order of the tax residency criteria ends with the nationality, i.e. having Azerbaijani citizenship would be sufficient to qualify for tax residency where none of the above listed criteria applies anywhere.
As can be seen form the above explanation, tax residency criteria require testing and subjective assessment of facts where “183 days” requirement is not met. Where more than one country considers an individual person as its tax resident, it is possible to have a double residence situation. With regard to countries with which Azerbaijan has concluded bilateral conventions (agreements) for the avoidance of double taxation (double tax treaties), standard OECD Tax Treaty provision for the elimination of double tax residency situation would be applied. The above order of residency specified under the Tax Code of Azerbaijan mirrors the applicable OECD provision, and this is reflected in relevant bilateral double tax treaties.
The more difficult and burdensome situation for the tax resident would arise where a double tax residency situation arises and no relevant double tax treaty exists. Such situations shall be settled in line with domestic laws with regard to issues arising in each of such tax jurisdictions.
Some treaties specify that in situations of “double citizenship” or “no citizenship” in any of two countries in question, both of the countries shall settle double tax residency issue by mutual agreement. Where no such agreement is reached, the person would not be considered as resident in any of the countries for the purposes of the treaty, and thereby would lose treaty benefits.
Corporate tax residency implies tax residency of entities, i.e. any taxpayer other than individual persons, primarily tax residency of legal entities.
The primary rule for determining corporate tax residency in Azerbaijan is the registration criterion. If a legal entity has registration in Azerbaijan, it is considered as tax resident in Azerbaijan.
As found in several other jurisdictions, a second criterion is the “place of management”. Notwithstanding the country of registration or the place of main supervisory bodies, if a legal entity is managed from Azerbaijan, that entity would be considered as tax resident in Azerbaijan. The “place of management” implies the primary place where the commercial decisions necessary for the management of the company are made and daily practical management conducted.
As in the case of individual tax residency, double tax treaties would play a significant role for settling situations where double corporate tax residency arises. “Place of effective management” would be applicable for determining corporate tax residency in situations of double residency, where this is specified in the relevant double tax treaty (not all treaties enshrine such provision).
Note: No part of this article shall be considered as tax advice or legal opinion. Determination of tax residency in Azerbaijan requires detailed analysis of facts and circumstances alongside with applicable laws and double tax treaty (if any). In specific cases (e.g. oil-gas), different rules might apply. We strongly suggest obtaining professional support for determining tax status and tax liabilities, particularly for foreign individuals, expats living or working in Azerbaijan, having some ties with Azerbaijan or having income from Azerbaijani sources. You may contact us via: [email protected] or +994 50 289 89 73.