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Can an entrepreneur pay independent dividends for each sector?
Can an entrepreneur pay independent dividends for each sector?
As we know, some business entities operate in different sectors under a single TIN. In this case, one sector may result in profit while another may result in a loss. So how should dividends be paid in such cases? Can dividends be paid separately for each sector? Altay Jafarov provides clarity on this issue:
Let’s assume an entrepreneur is involved in both passenger transportation and trade. According to the Tax Code, passenger transportation is an operation subject to simplified tax. In other words, businesses engage in this activity by obtaining a special sign. According to Article 221.4.5 of the Tax Code, taxpayers engaged in passenger transportation by motor vehicles are not required to submit a declaration to the tax authorities unless otherwise stipulated by the Code.
Additionally, Article 219.5 of the Tax Code states that a legal entity paying simplified tax is not liable for VAT or profit tax, and a physical person (including a physical person engaging in business without creating a legal entity) is not liable for income tax or VAT. This article clarifies that although simplified tax payers are not liable for VAT or profit tax, they are still not exempt from withholding tax when paying dividends to shareholders (except for micro-entrepreneurs).
Moreover, according to Article 221.6 of the Tax Code, individuals mentioned in Article 218.4 must maintain separate accounts of income and expenses for each type of activity. Profit (or loss) from one activity cannot be attributed to profit (or loss) from another. The key requirement is to maintain separate accounts for income and expenses for each activity. As per this article, profits from passenger transportation and profits (or losses) from other activities are recorded separately and not mixed. Therefore, it seems that profits or losses from each activity can be distributed separately.
According to tax legislation, if there is profit from passenger transportation and a loss from other activities, the net profit from passenger transportation can be distributed. However, from an accounting perspective, this is incorrect, as the net profit formed from the overall results of all activities is being distributed. In other words, the total results of all activities are considered. Therefore, it is recommended that if net profit is formed from the overall activity, dividends should be paid based on that total result to avoid additional questions or discrepancies.
- As mentioned, tax accounting allows for separate distribution.
- Income or expenses from passenger transportation are not considered in the profit tax declaration.
- However, the net profit or loss from this activity is shown in Appendix 1.
Example: Suppose an LLC incurred a loss of 100,000 AZN from its main activity in 2023 but made a net profit of 50,000 AZN from passenger transportation. The company decides to pay 50,000 AZN as dividends to its shareholders. In this case, the company must pay 2,500 AZN in dividend tax and reflect it in the tax declaration for the period:
50,000 x 5% = 2,500 AZN.
In the profit tax declaration, Appendix 1 must show the net profit of 50,000 AZN from passenger transportation in the "included" column, and the 50,000 AZN paid as dividends should be shown in the "deleted" column of the same row.
The 100,000 AZN loss will be written in the "other assets" section of the assets.
As a result, the net profit at the end of the year will still be 0.00 AZN. Typically, there will be no discrepancies during a tax authority review, as the 50,000 AZN dividend has been shown in the withholding tax declaration and the tax amount has been paid. If any discrepancies arise, they can be clarified and resolved.
Alternatively, if the LLC had losses in both areas—50,000 AZN from passenger transportation and 100,000 AZN from its main activity—both losses will be combined and written in the "other assets" section of Appendix 1.
As we know, some business entities operate in different sectors under a single TIN. In this case, one sector may result in profit while another may result in a loss. So how should dividends be paid in such cases? Can dividends be paid separately for each sector? Altay Jafarov provides clarity on this issue:
Let’s assume an entrepreneur is involved in both passenger transportation and trade. According to the Tax Code, passenger transportation is an operation subject to simplified tax. In other words, businesses engage in this activity by obtaining a special sign. According to Article 221.4.5 of the Tax Code, taxpayers engaged in passenger transportation by motor vehicles are not required to submit a declaration to the tax authorities unless otherwise stipulated by the Code.
Additionally, Article 219.5 of the Tax Code states that a legal entity paying simplified tax is not liable for VAT or profit tax, and a physical person (including a physical person engaging in business without creating a legal entity) is not liable for income tax or VAT. This article clarifies that although simplified tax payers are not liable for VAT or profit tax, they are still not exempt from withholding tax when paying dividends to shareholders (except for micro-entrepreneurs).
Moreover, according to Article 221.6 of the Tax Code, individuals mentioned in Article 218.4 must maintain separate accounts of income and expenses for each type of activity. Profit (or loss) from one activity cannot be attributed to profit (or loss) from another. The key requirement is to maintain separate accounts for income and expenses for each activity. As per this article, profits from passenger transportation and profits (or losses) from other activities are recorded separately and not mixed. Therefore, it seems that profits or losses from each activity can be distributed separately.
According to tax legislation, if there is profit from passenger transportation and a loss from other activities, the net profit from passenger transportation can be distributed. However, from an accounting perspective, this is incorrect, as the net profit formed from the overall results of all activities is being distributed. In other words, the total results of all activities are considered. Therefore, it is recommended that if net profit is formed from the overall activity, dividends should be paid based on that total result to avoid additional questions or discrepancies.
- As mentioned, tax accounting allows for separate distribution.
- Income or expenses from passenger transportation are not considered in the profit tax declaration.
- However, the net profit or loss from this activity is shown in Appendix 1.
Example: Suppose an LLC incurred a loss of 100,000 AZN from its main activity in 2023 but made a net profit of 50,000 AZN from passenger transportation. The company decides to pay 50,000 AZN as dividends to its shareholders. In this case, the company must pay 2,500 AZN in dividend tax and reflect it in the tax declaration for the period:
50,000 x 5% = 2,500 AZN.
In the profit tax declaration, Appendix 1 must show the net profit of 50,000 AZN from passenger transportation in the "included" column, and the 50,000 AZN paid as dividends should be shown in the "deleted" column of the same row.
The 100,000 AZN loss will be written in the "other assets" section of the assets.
As a result, the net profit at the end of the year will still be 0.00 AZN. Typically, there will be no discrepancies during a tax authority review, as the 50,000 AZN dividend has been shown in the withholding tax declaration and the tax amount has been paid. If any discrepancies arise, they can be clarified and resolved.
Alternatively, if the LLC had losses in both areas—50,000 AZN from passenger transportation and 100,000 AZN from its main activity—both losses will be combined and written in the "other assets" section of Appendix 1.