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Taxation rules for loan transactions between resident and non-resident subsidiary companies
Taxation rules for loan transactions between resident and non-resident subsidiary companies
According to Article 104.1 of the Tax Code, the object of taxation for a resident enterprise is its profit. Profit is defined as the difference between all the taxpayer’s income, including income earned through its permanent establishments outside the Republic of Azerbaijan, as well as dividends, interest, and royalties received outside the Republic of Azerbaijan (excluding tax-exempt income), and the expenses deductible from income as specified in Chapter X of this Code (excluding expenses incurred on tax-exempt income).
According to Article 14.3.2 of the Tax Code, when business transactions are conducted between mutually dependent persons, taxes may be calculated taking into account the market price. Furthermore, under Article 14-1.2.1, taxes on transactions between a resident of the Republic of Azerbaijan and a non-resident who is mutually dependent on the resident may be calculated based on the transfer price.
Accordingly, interest income earned by a resident from a loan provided at interest to its non-resident subsidiary is included in the resident taxpayer’s taxable income, taking into account the market price (or the transfer price if transfer pricing applies). In this case, interest paid by the resident taxpayer on a loan taken from a local bank to lend to the non-resident subsidiary is considered a deductible expense of the resident in accordance with Article 108.1 of the Tax Code.
Regarding the application of Article 135 of the Tax Code, we note that when using the accrual method for tax accounting, the time of recognition of interest income is determined in accordance with Article 135.3. According to this article, the right to receive interest income is considered to arise at the time when the payment period of the debt obligation ends. If the payment period covers several reporting periods, the income is allocated across these periods according to the method of calculation.
Additionally, we advise that, in order to accurately determine the tax liability for the transaction mentioned in the inquiry, you should contact the tax authority where the taxpayer is registered, providing full details of the operations and the relevant supporting documents.
According to Article 104.1 of the Tax Code, the object of taxation for a resident enterprise is its profit. Profit is defined as the difference between all the taxpayer’s income, including income earned through its permanent establishments outside the Republic of Azerbaijan, as well as dividends, interest, and royalties received outside the Republic of Azerbaijan (excluding tax-exempt income), and the expenses deductible from income as specified in Chapter X of this Code (excluding expenses incurred on tax-exempt income).
According to Article 14.3.2 of the Tax Code, when business transactions are conducted between mutually dependent persons, taxes may be calculated taking into account the market price. Furthermore, under Article 14-1.2.1, taxes on transactions between a resident of the Republic of Azerbaijan and a non-resident who is mutually dependent on the resident may be calculated based on the transfer price.
Accordingly, interest income earned by a resident from a loan provided at interest to its non-resident subsidiary is included in the resident taxpayer’s taxable income, taking into account the market price (or the transfer price if transfer pricing applies). In this case, interest paid by the resident taxpayer on a loan taken from a local bank to lend to the non-resident subsidiary is considered a deductible expense of the resident in accordance with Article 108.1 of the Tax Code.
Regarding the application of Article 135 of the Tax Code, we note that when using the accrual method for tax accounting, the time of recognition of interest income is determined in accordance with Article 135.3. According to this article, the right to receive interest income is considered to arise at the time when the payment period of the debt obligation ends. If the payment period covers several reporting periods, the income is allocated across these periods according to the method of calculation.
Additionally, we advise that, in order to accurately determine the tax liability for the transaction mentioned in the inquiry, you should contact the tax authority where the taxpayer is registered, providing full details of the operations and the relevant supporting documents.