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INNOVATION in the taxation of income from stocks
INNOVATION in the taxation of income from stocks
According to Article 104.6 and Clause 104.6-1 of the Tax Code, the rules for the taxation of income derived from the sale of a company’s shares are defined. Expert Tabriz Mammadli provides commentary on this legal requirement.
According to Article 104.6 of the Tax Code, except for shares that are publicly offered and admitted for trading on a regulated market in the Republic of Azerbaijan or on a stock exchange operating outside the country, if a legal entity’s share or shares in the charter capital are transferred at a price higher than the proportional value of the net assets per share, the taxable profit is the difference between the actual transfer price and the nominal value of the share. If the shares are transferred at a price lower than the proportional value of the net assets (i.e., at a discounted price), the taxable profit is the difference between the proportional value of the net assets at the date of the contract and the nominal value of the share in the charter capital.
If shares or ownership interests were previously acquired at a value higher than nominal, the deductible expenses at the time of transfer shall be based on the actual acquisition cost of those assets. Additionally, other related expenses incurred in the process of obtaining the income are also deductible from the resulting income.
According to Article 1 of the Law "On the Securities Market", a regulated market refers to a system organized and managed by a stock exchange that reflects third parties’ interests in buying and selling securities and derivative financial instruments admitted to trading in accordance with the internal regulations of the stock exchange.
As can be understood from the article, there are two main scenarios for the sale of company shares:
1) The actual transfer price is higher than the proportional value of the shares;
2) The actual transfer price is lower than the proportional value of the shares.
In the first case, the taxable profit is the difference between the actual transfer price and the nominal value of the shares. In the second case, the taxable profit is the difference between the proportional value of the shares and their nominal value.
Let’s first familiarize ourselves with the definitions of capital components (net assets), nominal value of shares, proportional value of shares, and actual sale value of shares.
Capital consists of the charter capital, reserve capital, additional capital, and retained earnings. If we deduct all liabilities from the company’s assets, we get its net assets, i.e., its capital. The nominal value of shares is their original and typically unchanging value. The proportional value of shares is the ratio of net assets to the number of shares. The actual sale value of shares is the price at which they are sold on the open market.
Let us now explain the first scenario mentioned above with an example:
Example 1: The company’s charter capital consists of 10 shares, each with a nominal value of 1,000 AZN. The holding period of these shares is less than 3 years. The company's retained earnings amount to 10,000 AZN. As a result, the company's net assets total 20,000 AZN (10,000 AZN charter capital + 10,000 AZN retained earnings). The company decides to sell 5 shares during the year, each priced at 3,000 AZN (excluding publicly offered and regulated market sales). Let's calculate the tax amount:
- Nominal value of 5 shares: 5 x 1,000 = 5,000 AZN
- Proportional value of 5 shares: (20,000 / 10) x 5 = 10,000 AZN
- Actual sale value: 3,000 x 5 = 15,000 AZN
- Taxable profit: 15,000 – 5,000 = 10,000 AZN
- Tax amount: 10,000 x 20% = 2,000 AZN
As clearly seen, since the actual sale value is higher than the proportional value of the shares, the taxable profit is calculated as the difference between the actual sale price and the nominal value.
Now, let’s explain the second scenario mentioned above with another example.
Example 2: The company’s charter capital consists of 10 shares, each with a nominal value of 1,000 AZN. The holding period of these shares is less than 3 years. The company’s retained earnings amount to 10,000 AZN. Thus, the company's net assets total 20,000 AZN (10,000 AZN charter capital + 10,000 AZN retained earnings). The company decides to sell 5 shares during the year, each at a price of 1,500 AZN (excluding publicly offered and regulated market sales). Let’s calculate the tax amount:
- Nominal value of 5 shares: 5 x 1,000 = 5,000 AZN
- Proportional value of 5 shares: (20,000 / 10) x 5 = 10,000 AZN
- Actual sale value: 1,500 x 5 = 7,500 AZN
- Taxable profit: 10,000 – 5,000 = 5,000 AZN
- Tax amount: 5,000 x 20% = 1,000 AZN
As we can see from the solution, since the actual sale value is lower than the proportional value of the shares, the taxable profit is calculated as the difference between the proportional value and the nominal value.
According to Article 106.1.19 of the Tax Code, 50% of the income from the transfer of a share or stock held by the taxpayer for at least 3 years is exempt from taxation. In both examples above, if the company had held the shares for more than 3 years, the profit would be reduced by 50% when calculating the tax.
Let’s explain one more case mentioned in the article through an example.
Example 3:The company purchased 1 share with a nominal value of 1,000 AZN for 1,500 AZN (this results in goodwill for the company). The transaction-related expenses amounted to 200 AZN, and the company sold the share for 2,000 AZN. In this case, from which amount is the tax calculated?
- Nominal value: 1,000 AZN
- Purchase price: 1,500 AZN
- Transaction expenses: 200 AZN
- Sale price: 2,000 AZN
- Taxable amount: 2,000 – (1,500 + 200) = 300 AZN
It should be noted that, starting from 2025, Article 104.6-1 has been added to the Tax Code. According to this article, in cases where shares that have been publicly offered and listed on a regulated market are sold either within the territory of the Republic of Azerbaijan or on a foreign stock exchange, the difference between the sale price and the purchase price, including associated expenses, is subject to taxation.
Example 4: In 2025, the company purchased 10 shares at a cost of 1,200 AZN, with an additional 300 AZN in purchase-related expenses. The nominal value of each share was 500 AZN. That same year, the company decided to sell 1 share on the stock exchange for 2,000 AZN. Let's calculate the tax:
- Share purchase price: 1,200 AZN
- Other expenses: 300 AZN
- Share sale price: 2,000 AZN
- Profit: 2,000 – (1,200 + 300) = 500 AZN
- Tax amount: 500 x 20% = 100 AZN
As seen, since the shares were sold on the stock exchange, the taxable profit is calculated by subtracting the purchase price and related expenses from the sale price — the nominal value does not play a role in this case.
According to Article 104.6 and Clause 104.6-1 of the Tax Code, the rules for the taxation of income derived from the sale of a company’s shares are defined. Expert Tabriz Mammadli provides commentary on this legal requirement.
According to Article 104.6 of the Tax Code, except for shares that are publicly offered and admitted for trading on a regulated market in the Republic of Azerbaijan or on a stock exchange operating outside the country, if a legal entity’s share or shares in the charter capital are transferred at a price higher than the proportional value of the net assets per share, the taxable profit is the difference between the actual transfer price and the nominal value of the share. If the shares are transferred at a price lower than the proportional value of the net assets (i.e., at a discounted price), the taxable profit is the difference between the proportional value of the net assets at the date of the contract and the nominal value of the share in the charter capital.
If shares or ownership interests were previously acquired at a value higher than nominal, the deductible expenses at the time of transfer shall be based on the actual acquisition cost of those assets. Additionally, other related expenses incurred in the process of obtaining the income are also deductible from the resulting income.
According to Article 1 of the Law "On the Securities Market", a regulated market refers to a system organized and managed by a stock exchange that reflects third parties’ interests in buying and selling securities and derivative financial instruments admitted to trading in accordance with the internal regulations of the stock exchange.
As can be understood from the article, there are two main scenarios for the sale of company shares:
1) The actual transfer price is higher than the proportional value of the shares;
2) The actual transfer price is lower than the proportional value of the shares.
In the first case, the taxable profit is the difference between the actual transfer price and the nominal value of the shares. In the second case, the taxable profit is the difference between the proportional value of the shares and their nominal value.
Let’s first familiarize ourselves with the definitions of capital components (net assets), nominal value of shares, proportional value of shares, and actual sale value of shares.
Capital consists of the charter capital, reserve capital, additional capital, and retained earnings. If we deduct all liabilities from the company’s assets, we get its net assets, i.e., its capital. The nominal value of shares is their original and typically unchanging value. The proportional value of shares is the ratio of net assets to the number of shares. The actual sale value of shares is the price at which they are sold on the open market.
Let us now explain the first scenario mentioned above with an example:
Example 1: The company’s charter capital consists of 10 shares, each with a nominal value of 1,000 AZN. The holding period of these shares is less than 3 years. The company's retained earnings amount to 10,000 AZN. As a result, the company's net assets total 20,000 AZN (10,000 AZN charter capital + 10,000 AZN retained earnings). The company decides to sell 5 shares during the year, each priced at 3,000 AZN (excluding publicly offered and regulated market sales). Let's calculate the tax amount:
- Nominal value of 5 shares: 5 x 1,000 = 5,000 AZN
- Proportional value of 5 shares: (20,000 / 10) x 5 = 10,000 AZN
- Actual sale value: 3,000 x 5 = 15,000 AZN
- Taxable profit: 15,000 – 5,000 = 10,000 AZN
- Tax amount: 10,000 x 20% = 2,000 AZN
As clearly seen, since the actual sale value is higher than the proportional value of the shares, the taxable profit is calculated as the difference between the actual sale price and the nominal value.
Now, let’s explain the second scenario mentioned above with another example.
Example 2: The company’s charter capital consists of 10 shares, each with a nominal value of 1,000 AZN. The holding period of these shares is less than 3 years. The company’s retained earnings amount to 10,000 AZN. Thus, the company's net assets total 20,000 AZN (10,000 AZN charter capital + 10,000 AZN retained earnings). The company decides to sell 5 shares during the year, each at a price of 1,500 AZN (excluding publicly offered and regulated market sales). Let’s calculate the tax amount:
- Nominal value of 5 shares: 5 x 1,000 = 5,000 AZN
- Proportional value of 5 shares: (20,000 / 10) x 5 = 10,000 AZN
- Actual sale value: 1,500 x 5 = 7,500 AZN
- Taxable profit: 10,000 – 5,000 = 5,000 AZN
- Tax amount: 5,000 x 20% = 1,000 AZN
As we can see from the solution, since the actual sale value is lower than the proportional value of the shares, the taxable profit is calculated as the difference between the proportional value and the nominal value.
According to Article 106.1.19 of the Tax Code, 50% of the income from the transfer of a share or stock held by the taxpayer for at least 3 years is exempt from taxation. In both examples above, if the company had held the shares for more than 3 years, the profit would be reduced by 50% when calculating the tax.
Let’s explain one more case mentioned in the article through an example.
Example 3:The company purchased 1 share with a nominal value of 1,000 AZN for 1,500 AZN (this results in goodwill for the company). The transaction-related expenses amounted to 200 AZN, and the company sold the share for 2,000 AZN. In this case, from which amount is the tax calculated?
- Nominal value: 1,000 AZN
- Purchase price: 1,500 AZN
- Transaction expenses: 200 AZN
- Sale price: 2,000 AZN
- Taxable amount: 2,000 – (1,500 + 200) = 300 AZN
It should be noted that, starting from 2025, Article 104.6-1 has been added to the Tax Code. According to this article, in cases where shares that have been publicly offered and listed on a regulated market are sold either within the territory of the Republic of Azerbaijan or on a foreign stock exchange, the difference between the sale price and the purchase price, including associated expenses, is subject to taxation.
Example 4: In 2025, the company purchased 10 shares at a cost of 1,200 AZN, with an additional 300 AZN in purchase-related expenses. The nominal value of each share was 500 AZN. That same year, the company decided to sell 1 share on the stock exchange for 2,000 AZN. Let's calculate the tax:
- Share purchase price: 1,200 AZN
- Other expenses: 300 AZN
- Share sale price: 2,000 AZN
- Profit: 2,000 – (1,200 + 300) = 500 AZN
- Tax amount: 500 x 20% = 100 AZN
As seen, since the shares were sold on the stock exchange, the taxable profit is calculated by subtracting the purchase price and related expenses from the sale price — the nominal value does not play a role in this case.