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Penalties not deductible from income
Penalties not deductible from income
Interests, financial sanctions, and administrative penalties calculated in accordance with the Tax Code and other laws (excluding interest under civil law contracts related to income generation, late payment penalties, compensation for damages caused by delay in execution, and other similar penalties) are considered business expenses. But can these expenses be deducted from income? In response to this question, expert Ramil Teymurov states:
When we speak of non-deductible amounts from income, the first thing that comes to mind is the financial sanction of 40 AZN imposed for the late submission of tax reports (declarations). In addition, daily penalties (0.1% per day) calculated for delays are also classified as non-deductible from income.
Example 1: "AA" LLC is a VAT payer and must submit a report for each month by the 20th of the following month (subject to change if it falls on a holiday or non-working day). If there is a tax liability to the state budget, it must also be paid. However, the report was not submitted on time, and as a result, the State Tax Service imposed a fine of 40 AZN. This amount is considered a non-deductible tax expense.
Example 2: "BB" LLC was charged a penalty of 50 AZN because it failed to pay the amount stated in its tax report to the state budget on time. In this case, the 50 AZN is treated as a non-deductible penalty.
Additionally, as stated in Article 119 of the Tax Code, a penalty paid as compensation for damage caused to another person is also included in the list of non-deductible penalties.
Example 3: While providing services to "BB" LLC, "AA" LLC caused damage to its property. "BB" LLC informed "AA" LLC to compensate for the damage. However, since "AA" LLC did not fulfill this demand, "BB" LLC took the matter to court. Based on the court's decision, "AA" LLC was required to pay a penalty of 5,000 AZN. This penalty amount is also classified as a non-deductible expense.
In general, such situations are frequently encountered in practice. Many companies are sued by clients and are fined certain amounts as a result. As noted above, these penalty amounts are not deductible from income. Non-deductible expenses must be indicated in the expense section of the corporate income tax declaration under line 235, titled "Expenses not deductible from gross income." Additionally, they should be recorded in Annex 1, in the "net profit of the reporting period" section, under the part titled "written off."
Interests, financial sanctions, and administrative penalties calculated in accordance with the Tax Code and other laws (excluding interest under civil law contracts related to income generation, late payment penalties, compensation for damages caused by delay in execution, and other similar penalties) are considered business expenses. But can these expenses be deducted from income? In response to this question, expert Ramil Teymurov states:
When we speak of non-deductible amounts from income, the first thing that comes to mind is the financial sanction of 40 AZN imposed for the late submission of tax reports (declarations). In addition, daily penalties (0.1% per day) calculated for delays are also classified as non-deductible from income.
Example 1: "AA" LLC is a VAT payer and must submit a report for each month by the 20th of the following month (subject to change if it falls on a holiday or non-working day). If there is a tax liability to the state budget, it must also be paid. However, the report was not submitted on time, and as a result, the State Tax Service imposed a fine of 40 AZN. This amount is considered a non-deductible tax expense.
Example 2: "BB" LLC was charged a penalty of 50 AZN because it failed to pay the amount stated in its tax report to the state budget on time. In this case, the 50 AZN is treated as a non-deductible penalty.
Additionally, as stated in Article 119 of the Tax Code, a penalty paid as compensation for damage caused to another person is also included in the list of non-deductible penalties.
Example 3: While providing services to "BB" LLC, "AA" LLC caused damage to its property. "BB" LLC informed "AA" LLC to compensate for the damage. However, since "AA" LLC did not fulfill this demand, "BB" LLC took the matter to court. Based on the court's decision, "AA" LLC was required to pay a penalty of 5,000 AZN. This penalty amount is also classified as a non-deductible expense.
In general, such situations are frequently encountered in practice. Many companies are sued by clients and are fined certain amounts as a result. As noted above, these penalty amounts are not deductible from income. Non-deductible expenses must be indicated in the expense section of the corporate income tax declaration under line 235, titled "Expenses not deductible from gross income." Additionally, they should be recorded in Annex 1, in the "net profit of the reporting period" section, under the part titled "written off."