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Are dividends from a business not registered for VAT subject to tax?
Article 106.10 of the Tax Code stipulates that dividend income received by legal entities that are founders (shareholders) of a resident enterprise is exempt from taxation, provided that the enterprise maintains records of income and expenses in accordance with the procedures established by the Code, is not registered for VAT purposes, and its transaction volume does not exceed AZN 200,000 in any month or months of a consecutive 12-month period.
It is known that a VAT registration concession applies to catering businesses this year. Even if the actual transaction volume of such a taxpayer exceeds AZN 200,000 over a consecutive 12-month period, payments made through POS terminals are calculated using a coefficient of 0.5. As a result, the turnover calculated for VAT purposes does not exceed AZN 200,000, and the enterprise is not registered for VAT purposes. Are dividends received from such enterprises exempt from taxation? Tax expert Tahmaz Gachayev explains the issue with practical examples.
Under Article 102.1.22-1 of the Tax Code, dividend income received by individuals who are founders (shareholders) of a resident enterprise is exempt from taxation if the enterprise maintains records of income and expenses in accordance with the procedures established by the Code, is not registered for VAT purposes, and its transaction volume does not exceed AZN 200,000 in any month or months of a consecutive 12-month period. Article 106.10 of the Code also provides for the exemption of dividend income received by legal entities that are founders (shareholders) of a resident enterprise whose transaction volume does not exceed AZN 200,000 in any month or months of a consecutive 12-month period.
According to Article 155.1-1 of the Tax Code, when determining the volume of taxable transactions under Article 155.1, the turnover generated from cashless payments made through POS terminals in retail trade and services provided to persons not registered with the tax authorities is taken into account by applying a coefficient of 0.5.
Example: Enterprise “AA” had an actual turnover of AZN 230,000 over 12 months. Of this amount, AZN 150,000 was received through POS terminals, while AZN 80,000 was received in cash. In this case, the turnover received through POS terminals is calculated using a coefficient of 0.5 and is treated as AZN 75,000 for VAT purposes:
150,000 × 0.5 = AZN 75,000.
Accordingly, the turnover of enterprise “AA” taken into account for VAT purposes over the consecutive 12-month period will be AZN 155,000:
80,000 + 75,000 = AZN 155,000.
Let us return to our question. In this case, will the dividend income received from enterprise “AA” be exempt from income tax or subject to taxation?
The application of a coefficient of 0.5 to POS terminal payments when determining the volume of taxable transactions over a consecutive 12-month period is intended to determine whether catering businesses using the simplified tax regime are required to apply the 8% tax rate and whether a taxpayer is eligible to use the simplified tax regime.
However, this rule does not apply to dividend payments. In this case, the taxation of dividend income is determined based on the enterprise's actual turnover. Under Article 122.1 of the Tax Code, dividends paid by a resident enterprise are subject to a 5% withholding tax at source.
Article 106.10 of the Tax Code stipulates that dividend income received by legal entities that are founders (shareholders) of a resident enterprise is exempt from taxation, provided that the enterprise maintains records of income and expenses in accordance with the procedures established by the Code, is not registered for VAT purposes, and its transaction volume does not exceed AZN 200,000 in any month or months of a consecutive 12-month period.
It is known that a VAT registration concession applies to catering businesses this year. Even if the actual transaction volume of such a taxpayer exceeds AZN 200,000 over a consecutive 12-month period, payments made through POS terminals are calculated using a coefficient of 0.5. As a result, the turnover calculated for VAT purposes does not exceed AZN 200,000, and the enterprise is not registered for VAT purposes. Are dividends received from such enterprises exempt from taxation? Tax expert Tahmaz Gachayev explains the issue with practical examples.
Under Article 102.1.22-1 of the Tax Code, dividend income received by individuals who are founders (shareholders) of a resident enterprise is exempt from taxation if the enterprise maintains records of income and expenses in accordance with the procedures established by the Code, is not registered for VAT purposes, and its transaction volume does not exceed AZN 200,000 in any month or months of a consecutive 12-month period. Article 106.10 of the Code also provides for the exemption of dividend income received by legal entities that are founders (shareholders) of a resident enterprise whose transaction volume does not exceed AZN 200,000 in any month or months of a consecutive 12-month period.
According to Article 155.1-1 of the Tax Code, when determining the volume of taxable transactions under Article 155.1, the turnover generated from cashless payments made through POS terminals in retail trade and services provided to persons not registered with the tax authorities is taken into account by applying a coefficient of 0.5.
Example: Enterprise “AA” had an actual turnover of AZN 230,000 over 12 months. Of this amount, AZN 150,000 was received through POS terminals, while AZN 80,000 was received in cash. In this case, the turnover received through POS terminals is calculated using a coefficient of 0.5 and is treated as AZN 75,000 for VAT purposes:
150,000 × 0.5 = AZN 75,000.
Accordingly, the turnover of enterprise “AA” taken into account for VAT purposes over the consecutive 12-month period will be AZN 155,000:
80,000 + 75,000 = AZN 155,000.
Let us return to our question. In this case, will the dividend income received from enterprise “AA” be exempt from income tax or subject to taxation?
The application of a coefficient of 0.5 to POS terminal payments when determining the volume of taxable transactions over a consecutive 12-month period is intended to determine whether catering businesses using the simplified tax regime are required to apply the 8% tax rate and whether a taxpayer is eligible to use the simplified tax regime.
However, this rule does not apply to dividend payments. In this case, the taxation of dividend income is determined based on the enterprise's actual turnover. Under Article 122.1 of the Tax Code, dividends paid by a resident enterprise are subject to a 5% withholding tax at source.