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Tax withheld from rental payments: legal regulation
Tax withheld from rental payments: legal regulation
Rental relations in the Republic of Azerbaijan remain consistently relevant in terms of tax obligations and frequently raise practical questions. One of the main focal points within these relations is the tax withheld from rental payments and the method of calculating this tax. The topic is explained by accountant Farid Zalov.
Rental relations are governed by a lease agreement concluded between the parties. Whether the rental amount is indicated as tax-inclusive or tax-exclusive in the agreement directly affects the calculation of the tax amount. Therefore, the agreement between the parties and the clear indication of this aspect in the contract carries significant financial and legal importance.
According to Articles 13.2.16.11 and 13.2.16.12 of the Tax Code, income derived from the leasing of movable property used within the Republic of Azerbaijan, and income derived from immovable property located in Azerbaijan — including income from the transfer of a share in such property — is recognized as income from an Azerbaijani source.
According to Article 99.3.3 of the Tax Code, income from the leasing of property is considered income derived from non-entrepreneurial activity. The Code states that withholding tax at the source means calculating and paying the tax before the income or profit is received.
Under the law, any legal or physical person leasing property from an individual must withhold income tax from the rental amount at the source of payment. In this case, the lessee calculates the tax amount, pays it to the state budget, and pays only the remaining amount to the individual lessor.
Article 124 of the Tax Code stipulates that if the rental payment for movable or immovable property, as well as royalties paid by or on behalf of a resident or a non-resident's permanent establishment in the Republic of Azerbaijan, is recognized as income from an Azerbaijani source in accordance with Article 13.2.16 of the Code, tax is withheld at the source of payment at a rate of 14%.
When the rental fee is paid by an individual not registered as a taxpayer, the lessor themselves or their designated tax agent must pay the 14% tax in accordance with this article, and must be registered for tax purposes and file a declaration in accordance with Articles 33 and 149 of the Code.
Let’s look at two different contract examples to better explain this process:
Example 1: The lease agreement specifies that the rental amount is AZN 1,000, including taxes. In this case, the lessee withholds AZN 140 in tax at the source and pays only AZN 860 to the individual lessor (according to Article 124 – Withholding tax from rental payments at the source):
1,000 × 14% = 140 AZN;
Amount paid to the individual:
1,000 - 140 = 860 AZN.
Example 2: The lease agreement specifies that the rental amount is AZN 1,000, excluding taxes. In this case, the full AZN 1,000 is paid to the individual, and the lessee additionally calculates and pays AZN 162.79 in tax. Here, the gross rental amount (including tax) is calculated first:
1,000 ÷ 0.86 = 1,162.79 AZN;
1,162.79 × 14% = 162.79 AZN.
Amount paid to the individual:
1,162.79 - 162.79 = 1,000 AZN.
Rental relations in the Republic of Azerbaijan remain consistently relevant in terms of tax obligations and frequently raise practical questions. One of the main focal points within these relations is the tax withheld from rental payments and the method of calculating this tax. The topic is explained by accountant Farid Zalov.
Rental relations are governed by a lease agreement concluded between the parties. Whether the rental amount is indicated as tax-inclusive or tax-exclusive in the agreement directly affects the calculation of the tax amount. Therefore, the agreement between the parties and the clear indication of this aspect in the contract carries significant financial and legal importance.
According to Articles 13.2.16.11 and 13.2.16.12 of the Tax Code, income derived from the leasing of movable property used within the Republic of Azerbaijan, and income derived from immovable property located in Azerbaijan — including income from the transfer of a share in such property — is recognized as income from an Azerbaijani source.
According to Article 99.3.3 of the Tax Code, income from the leasing of property is considered income derived from non-entrepreneurial activity. The Code states that withholding tax at the source means calculating and paying the tax before the income or profit is received.
Under the law, any legal or physical person leasing property from an individual must withhold income tax from the rental amount at the source of payment. In this case, the lessee calculates the tax amount, pays it to the state budget, and pays only the remaining amount to the individual lessor.
Article 124 of the Tax Code stipulates that if the rental payment for movable or immovable property, as well as royalties paid by or on behalf of a resident or a non-resident's permanent establishment in the Republic of Azerbaijan, is recognized as income from an Azerbaijani source in accordance with Article 13.2.16 of the Code, tax is withheld at the source of payment at a rate of 14%.
When the rental fee is paid by an individual not registered as a taxpayer, the lessor themselves or their designated tax agent must pay the 14% tax in accordance with this article, and must be registered for tax purposes and file a declaration in accordance with Articles 33 and 149 of the Code.
Let’s look at two different contract examples to better explain this process:
Example 1: The lease agreement specifies that the rental amount is AZN 1,000, including taxes. In this case, the lessee withholds AZN 140 in tax at the source and pays only AZN 860 to the individual lessor (according to Article 124 – Withholding tax from rental payments at the source):
1,000 × 14% = 140 AZN;
Amount paid to the individual:
1,000 - 140 = 860 AZN.
Example 2: The lease agreement specifies that the rental amount is AZN 1,000, excluding taxes. In this case, the full AZN 1,000 is paid to the individual, and the lessee additionally calculates and pays AZN 162.79 in tax. Here, the gross rental amount (including tax) is calculated first:
1,000 ÷ 0.86 = 1,162.79 AZN;
1,162.79 × 14% = 162.79 AZN.
Amount paid to the individual:
1,162.79 - 162.79 = 1,000 AZN.