Tax remissions in Azerbaijan to allow banks and insurers capitalize profit without losses

Azerbaijan, Baku, Feb.1 / Trend N.Ismayilova /

Benefits for banks, insurance and reinsurance companies in Azerbaijan ended in 2011. According to them, profit directed at increase in authorized capital during three years was exempted from taxation. However during the action of these benefits shareholders of banks, insurance and reinsurance companies continued to pay taxes from dividends.

Decision of the Constitutional Court dated Dec.7, 2011 also didn't cancel taxation of dividends but gave interpretation of 13.2.15 article of the Tax code of Azerbaijan. At the same time senior manager on taxes of the PricewaterhouseCoopers Azerbaijan Baku Office Arif Guliyev said the decision of the Constitutional Court allows during the action of the benefit on profit tax to capitalize profit in full size, i.e. without tax losses.

"I.e. if from the amount of the profit directed at capitalization tax on dividends was withheld, real investment in the authorized capital would amount to 90 per cent of this profit. Thus, increase in capitalization of banks and insurance companies even by 10 per cent tax should positively affect development of the country's financial sector," Mr Guliyev told Trend on Monday.

He noted decision of the Constitutional Court dated Dec.7, 2011 doesn't cancel taxation of dividends. Dividends, if they are really distributed, were recognized and recognized as taxable income of shareholders and participants. The decision doesn't suggest new rules or regulations but only gives interpretation of existing regulations of the law.

In particular, according to interpretation of the plenum of the Constitutional Court, investment of non-distributed between the shareholders income in the authorized capital of this enterprise without changing per cent ratio of shares is not considered payment of dividends. Accordingly, when meeting mentioned requirements, withholding of 10-per cent tax, withheld from the source of payments (i.e. banks and insurance companies) is not applied.

Increase of capital (which in case of normal economy may include received benefit of shareholders from increase of nominal cost of shares resulting from investment of profit in the authorized capital) is considered taxable income of shareholders however date of taxation is date when these shares were alienated.

Thus, in accordance with this interpretation, only category of shareholders' income may change. I.e. this income shouldn't be considered dividend but may be recognized as part of increase of capital with alienation of share (of course provided that market cost of shares after alienation will not be equal or lower than nominal cost before its increase, related to investment of profit in authorized capital). Apart from this, if such thing happens, not counting benefit from delaying time of actual payment of tax then tax burden of shareholders may be more burdensome than under taxation of dividends.

Thus, in accordance with existing version of the Tax Code, if 10-per cent rate is applied to dividends then according to increase of capital the rate will be 14-30 per cent for individuals-shareholders and for legal entities - 20 per cent. As for period of application, interpretation should be applied for the period of action of mentioned regulations of the Tax Code," Mr Guliyev said.

He said dividends tax, as well financial sanctions, use by tax body in contradiction with interpretation of the decision of the plenum of the Constitutional Court, should be cancelled.

If as a result of cancellation of this tax and financial sanction overpayment of tax liabilities to the state budget emerges, then this overpayment should be reckoned toward other tax debts of the taxpayer. The rest of sum may be used with the agreement of taxpayer for next tax payments or may be returned to taxpayer.

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