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How much tax is withheld from the rent paid by legal entities for their employees?
How much tax is withheld from the rent paid by legal entities for their employees?
One of the amendments made to the Tax Code for the period after January 2026 concerns the taxation of rental activities of individuals. After this amendment, will a 10% withholding tax be applied at source when legal entities compensate expenses related to the rental of apartments for their employees? In cases where legal entities rent housing for their employees, should 10% or 14% be withheld from the amount paid to the landlord?
Altay Jafarov provides clarification on these and other questions. First, let us review the relevant amendment to the Tax Code.
According to Article 124.1 of the Tax Code, income derived from lease payments for movable and immovable property, as well as royalties paid by a resident or by a permanent establishment of a non-resident in the Republic of Azerbaijan, or paid on their behalf, shall be subject to withholding tax at the rate of 14 percent if such income is considered to be derived from sources in the Republic of Azerbaijan in accordance with Article 13.2.16 of this Code.
Income derived from the rental of residential premises owned by individuals (excluding hotels and accommodation facilities located in hotel-type establishments) to individuals shall be subject to withholding tax at the rate of 10 percent.
If lease (rental) payments are made by an individual who is not registered as a taxpayer, the lessor (landlord) himself or a tax agent appointed by him shall pay the tax in accordance with this article at a rate of 14 percent (in the case of leasing) or 10 percent (in the case of renting), and shall be registered for tax purposes and submit a tax return in accordance with Articles 33 and 149 of this Code.
As can be seen from Article 124 of the Tax Code, withholding tax on rental income is 10 percent, while withholding tax on leasing income is 14 percent. In order to clarify this approach, we must first consider the concepts of renting and leasing.
Article 675 of the Civil Code of the Republic of Azerbaijan states that under a property rental agreement, the landlord undertakes to provide the property for the use of the tenant, and the tenant undertakes to pay rent to the landlord in return.
Article 700.1 of the Civil Code specifies that a lease agreement is a type of property rental agreement. Under this agreement, the lessor (landlord), in addition to granting the right to use the leased property or right, also grants the lessee the right to benefit from it and to derive income. The lessee is obliged to pay the agreed lease payment to the lessor.
According to the requirements of the Civil Code, a lease agreement and leasing activity essentially mean a rental agreement and rental activity. The difference is that under a lease, the lessee may obtain income, benefit, or yield from the use of the leased property, whereas under a rental arrangement, the tenant does not obtain any income or benefit from the property.
From the above-mentioned provisions of the Civil Code, it is clear that both individuals and legal entities may be parties to rental relations. Both movable and immovable property may be the subject of rental relations.
Now let us once again review the amendment made to Article 124 of the Tax Code. According to the amendment, the rental object must be a residential property; non-residential premises are not included. Even if a non-residential premise is rented out as a rental, the income derived from it will be subject to tax at a rate of 14 percent, not 10 percent.
The beneficiary of the residential property under a rental arrangement must be an individual, meaning that the residential property must be used by individuals as tenants. In such cases, a 10 percent tax must be withheld from the amount paid to the landlord. The source from which the income is paid to the landlord is not important. What matters is that income is paid to him from this activity.
We must also consider another article of the Tax Code. Article 119.2 states that the norms and procedures for deducting representation expenses, housing and meal expenses related to employees, as well as expenses related to therapeutic and preventive meals, milk, and other equivalent products and means provided to employees working under harmful, hazardous, or underground working conditions, are determined by the body (institution) designated by the relevant executive authority.
According to Article 119 of the Tax Code, the payment by an employer of employees’ housing expenses within the established norms and in accordance with the rules is classified as deductible expenses from income. By Resolution No. 492 of the Cabinet of Ministers of the Republic of Azerbaijan dated 22 November 2024, the norms and procedures for deducting employees’ housing expenses from income have been established.
According to Clause 3.1 of the Resolution, 50 percent of housing expenses (rental of apartments and individual residential houses) incurred during the tax year in relation to employees, but not exceeding 1 (one) percent of the annual income earned, shall be deductible from income for tax purposes.
Clause 3.2 of the Resolution states that housing expenses incurred in relation to employees shall be considered deductible expenses under the following conditions:
- the rent is paid on the basis of a contract concluded between the landlord and the tenant (employee or employer) and notarized;
- the rent is paid by the employer to the employee or directly to the landlord in a non-cash manner.
Resolution No. 492 of the Cabinet of Ministers was adopted on the basis of Article 119 of the Tax Code. It is clear from the Resolution that housing expenses related to employees refer to rental payments. Rental payments are formalized either by a direct contract between the employee and the landlord, or by a contract concluded between the employer and the landlord, with the employee being the person who uses the rented property.
Thus, even if the rental contract is concluded with a legal entity, the actual beneficiary of the rental will be an individual (the employee). Using a rented residential property by a legal entity as a legal entity is considered absurd, since a legal entity is not a tangible asset. Therefore, a legal entity may rent residential property only for an individual (its employee).
Accordingly, residential property rented by legal entities from landlords is deemed to have been rented out by the landlord to individuals (employees). In this case, the employer acts as an agent between the landlord and the individual (employee).
In other words, in this arrangement, the first party is the landlord (an individual), the second party is the individual (employee) who benefits from the rental, and the third party is the employer, a legal entity that pays the rent and performs the role of an intermediary agent.
By analyzing all of the above, the following conclusions may be drawn:
- When an individual rents out his or her residential property directly to another individual, a 10 percent tax is withheld and paid on the income earned.
- The source of payment of the rent is not important. That is, the tenant who is an individual may pay the rent directly himself or it may be paid by any other person. This is because the 10 percent tax applies to the income of the individual landlord, and the source of payment of that income may differ.
- In the rental of residential property by legal entities, the legal entity cannot use the property as a tenant, since it is not a tangible asset.
- Residential property rented by legal entities may be used by individuals, namely employees. Therefore, since the use of residential property rented by legal entities for their employees is carried out by individuals (employees), a 10 percent tax rate applies under the new provision added to Article 124 of the Tax Code.
- The rental of residential property by an individual landlord is, in substance, considered to be the rental of the property to an individual and is treated as income derived from the transaction.
One of the amendments made to the Tax Code for the period after January 2026 concerns the taxation of rental activities of individuals. After this amendment, will a 10% withholding tax be applied at source when legal entities compensate expenses related to the rental of apartments for their employees? In cases where legal entities rent housing for their employees, should 10% or 14% be withheld from the amount paid to the landlord?
Altay Jafarov provides clarification on these and other questions. First, let us review the relevant amendment to the Tax Code.
According to Article 124.1 of the Tax Code, income derived from lease payments for movable and immovable property, as well as royalties paid by a resident or by a permanent establishment of a non-resident in the Republic of Azerbaijan, or paid on their behalf, shall be subject to withholding tax at the rate of 14 percent if such income is considered to be derived from sources in the Republic of Azerbaijan in accordance with Article 13.2.16 of this Code.
Income derived from the rental of residential premises owned by individuals (excluding hotels and accommodation facilities located in hotel-type establishments) to individuals shall be subject to withholding tax at the rate of 10 percent.
If lease (rental) payments are made by an individual who is not registered as a taxpayer, the lessor (landlord) himself or a tax agent appointed by him shall pay the tax in accordance with this article at a rate of 14 percent (in the case of leasing) or 10 percent (in the case of renting), and shall be registered for tax purposes and submit a tax return in accordance with Articles 33 and 149 of this Code.
As can be seen from Article 124 of the Tax Code, withholding tax on rental income is 10 percent, while withholding tax on leasing income is 14 percent. In order to clarify this approach, we must first consider the concepts of renting and leasing.
Article 675 of the Civil Code of the Republic of Azerbaijan states that under a property rental agreement, the landlord undertakes to provide the property for the use of the tenant, and the tenant undertakes to pay rent to the landlord in return.
Article 700.1 of the Civil Code specifies that a lease agreement is a type of property rental agreement. Under this agreement, the lessor (landlord), in addition to granting the right to use the leased property or right, also grants the lessee the right to benefit from it and to derive income. The lessee is obliged to pay the agreed lease payment to the lessor.
According to the requirements of the Civil Code, a lease agreement and leasing activity essentially mean a rental agreement and rental activity. The difference is that under a lease, the lessee may obtain income, benefit, or yield from the use of the leased property, whereas under a rental arrangement, the tenant does not obtain any income or benefit from the property.
From the above-mentioned provisions of the Civil Code, it is clear that both individuals and legal entities may be parties to rental relations. Both movable and immovable property may be the subject of rental relations.
Now let us once again review the amendment made to Article 124 of the Tax Code. According to the amendment, the rental object must be a residential property; non-residential premises are not included. Even if a non-residential premise is rented out as a rental, the income derived from it will be subject to tax at a rate of 14 percent, not 10 percent.
The beneficiary of the residential property under a rental arrangement must be an individual, meaning that the residential property must be used by individuals as tenants. In such cases, a 10 percent tax must be withheld from the amount paid to the landlord. The source from which the income is paid to the landlord is not important. What matters is that income is paid to him from this activity.
We must also consider another article of the Tax Code. Article 119.2 states that the norms and procedures for deducting representation expenses, housing and meal expenses related to employees, as well as expenses related to therapeutic and preventive meals, milk, and other equivalent products and means provided to employees working under harmful, hazardous, or underground working conditions, are determined by the body (institution) designated by the relevant executive authority.
According to Article 119 of the Tax Code, the payment by an employer of employees’ housing expenses within the established norms and in accordance with the rules is classified as deductible expenses from income. By Resolution No. 492 of the Cabinet of Ministers of the Republic of Azerbaijan dated 22 November 2024, the norms and procedures for deducting employees’ housing expenses from income have been established.
According to Clause 3.1 of the Resolution, 50 percent of housing expenses (rental of apartments and individual residential houses) incurred during the tax year in relation to employees, but not exceeding 1 (one) percent of the annual income earned, shall be deductible from income for tax purposes.
Clause 3.2 of the Resolution states that housing expenses incurred in relation to employees shall be considered deductible expenses under the following conditions:
- the rent is paid on the basis of a contract concluded between the landlord and the tenant (employee or employer) and notarized;
- the rent is paid by the employer to the employee or directly to the landlord in a non-cash manner.
Resolution No. 492 of the Cabinet of Ministers was adopted on the basis of Article 119 of the Tax Code. It is clear from the Resolution that housing expenses related to employees refer to rental payments. Rental payments are formalized either by a direct contract between the employee and the landlord, or by a contract concluded between the employer and the landlord, with the employee being the person who uses the rented property.
Thus, even if the rental contract is concluded with a legal entity, the actual beneficiary of the rental will be an individual (the employee). Using a rented residential property by a legal entity as a legal entity is considered absurd, since a legal entity is not a tangible asset. Therefore, a legal entity may rent residential property only for an individual (its employee).
Accordingly, residential property rented by legal entities from landlords is deemed to have been rented out by the landlord to individuals (employees). In this case, the employer acts as an agent between the landlord and the individual (employee).
In other words, in this arrangement, the first party is the landlord (an individual), the second party is the individual (employee) who benefits from the rental, and the third party is the employer, a legal entity that pays the rent and performs the role of an intermediary agent.
By analyzing all of the above, the following conclusions may be drawn:
- When an individual rents out his or her residential property directly to another individual, a 10 percent tax is withheld and paid on the income earned.
- The source of payment of the rent is not important. That is, the tenant who is an individual may pay the rent directly himself or it may be paid by any other person. This is because the 10 percent tax applies to the income of the individual landlord, and the source of payment of that income may differ.
- In the rental of residential property by legal entities, the legal entity cannot use the property as a tenant, since it is not a tangible asset.
- Residential property rented by legal entities may be used by individuals, namely employees. Therefore, since the use of residential property rented by legal entities for their employees is carried out by individuals (employees), a 10 percent tax rate applies under the new provision added to Article 124 of the Tax Code.
- The rental of residential property by an individual landlord is, in substance, considered to be the rental of the property to an individual and is treated as income derived from the transaction.