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VAT application on income derived from services provided to non-residents
VAT application on income derived from services provided to non-residents
According to Article 168.1.5 of the Tax Code, if the works or services specified in this article are related to the location or registration of the buyer, or the place of establishment, or directly linked to the buyer's permanent establishment, then the location of the permanent establishment will be considered the place where the work is carried out or the services are provided for VAT purposes.
So, how are the income from services provided to non-residents subject to VAT? Expert Mahmud Abasquliyev clarifies this question:
There are three cases in which income from services provided to non-residents is subject to VAT. Article 159.2 of the Tax Code states that, except for the delivery of goods, performance of works, and provision of services exempted from tax, the delivery of goods, performance of works, and provision of services within the framework of independent entrepreneurship or joint entrepreneurship without creating a legal entity, carried out in Azerbaijan according to Articles 167 or 168 of this Code, will be subject to tax. According to Article 168, services provided or works performed outside the borders of Azerbaijan are not considered taxable operations.
First case: If a resident company provides services to a non-resident within the borders of Azerbaijan, the service fee received by the resident will be reflected in the VAT declaration and subject to VAT at an 18% rate.
Example 1: "AA" LLC provided legal services to a company (non-resident) operating in Italy within Azerbaijan. The company transferred 10,000 AZN as the service fee and an additional 1,800 AZN (total 11,800 AZN) from its bank account in Italy to the LLC's bank account in Azerbaijan. In this case, "AA" LLC will separate the 1,800 AZN in the VAT declaration, and form the obligation to the state budget.
VAT liability to the budget: (11,800 ÷ 118%) x 18% = 1,800 AZN.
Second case: If a resident company provides services online to a non-resident, the amount paid by the non-resident to the resident's bank account is subject to VAT at a 0% rate.
Example 2: "BB" LLC provided online training services to an Italian company via the internet. In this case, the Italian company paid 11,800 AZN to the resident in Azerbaijan for the services. In this case, "BB" LLC will apply a 0% VAT rate to this amount and reflect it in Appendix 4 of the VAT declaration.
VAT liability at 0%: 11,800 x 0% = 0 AZN.
Third case: If a resident of the Republic of Azerbaijan provides services to a non-resident in the non-resident’s own country, the amount received for that service will not be subject to VAT. This is considered a transaction not subject to VAT.
Example 3: "AA" LLC went to Italy and conducted training for employees of an Italian company. In return, the company transferred 11,800 AZN to the LLC's bank account. In this case, the amount will be shown as a non-VAT taxable amount in Section 2 of Appendix 3 of the VAT declaration.
According to Article 168.1.5 of the Tax Code, if the works or services specified in this article are related to the location or registration of the buyer, or the place of establishment, or directly linked to the buyer's permanent establishment, then the location of the permanent establishment will be considered the place where the work is carried out or the services are provided for VAT purposes.
So, how are the income from services provided to non-residents subject to VAT? Expert Mahmud Abasquliyev clarifies this question:
There are three cases in which income from services provided to non-residents is subject to VAT. Article 159.2 of the Tax Code states that, except for the delivery of goods, performance of works, and provision of services exempted from tax, the delivery of goods, performance of works, and provision of services within the framework of independent entrepreneurship or joint entrepreneurship without creating a legal entity, carried out in Azerbaijan according to Articles 167 or 168 of this Code, will be subject to tax. According to Article 168, services provided or works performed outside the borders of Azerbaijan are not considered taxable operations.
First case: If a resident company provides services to a non-resident within the borders of Azerbaijan, the service fee received by the resident will be reflected in the VAT declaration and subject to VAT at an 18% rate.
Example 1: "AA" LLC provided legal services to a company (non-resident) operating in Italy within Azerbaijan. The company transferred 10,000 AZN as the service fee and an additional 1,800 AZN (total 11,800 AZN) from its bank account in Italy to the LLC's bank account in Azerbaijan. In this case, "AA" LLC will separate the 1,800 AZN in the VAT declaration, and form the obligation to the state budget.
VAT liability to the budget: (11,800 ÷ 118%) x 18% = 1,800 AZN.
Second case: If a resident company provides services online to a non-resident, the amount paid by the non-resident to the resident's bank account is subject to VAT at a 0% rate.
Example 2: "BB" LLC provided online training services to an Italian company via the internet. In this case, the Italian company paid 11,800 AZN to the resident in Azerbaijan for the services. In this case, "BB" LLC will apply a 0% VAT rate to this amount and reflect it in Appendix 4 of the VAT declaration.
VAT liability at 0%: 11,800 x 0% = 0 AZN.
Third case: If a resident of the Republic of Azerbaijan provides services to a non-resident in the non-resident’s own country, the amount received for that service will not be subject to VAT. This is considered a transaction not subject to VAT.
Example 3: "AA" LLC went to Italy and conducted training for employees of an Italian company. In return, the company transferred 11,800 AZN to the LLC's bank account. In this case, the amount will be shown as a non-VAT taxable amount in Section 2 of Appendix 3 of the VAT declaration.