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Why was the approach to non-goods (sham) transactions changed?
Why was the approach to non-goods (sham) transactions changed?
Until the latest amendment, under Article 13.2.81 of the Tax Code of Azerbaijan, a “non-goods (sham) transaction” was understood as a transaction identified during a tax control measure, carried out either to conceal another transaction or without such purpose, and formalized for the purpose of obtaining profit (income) without the actual supply of goods, performance of works, or provision of services. As a result of the new amendment, transactions conducted within the framework of fictitious and/or sham agreements will also be considered non-goods transactions. The issue is commented on by expert Anar Bayramov.
Article 340 of the Civil Code of Azerbaijan, titled “Invalidity of Fictitious and Sham Agreements,” explains these concepts. According to Article 340.1, a fictitious agreement is an agreement concluded merely for appearance, without the intention of creating corresponding legal consequences, and it is void. Under Article 340.2, a sham agreement is one concluded for the purpose of concealing another agreement. Like a fictitious agreement, a sham agreement is also void. The article further states that, considering its substance, the rules applicable to the agreement that the parties actually intended to conclude shall apply to the sham agreement.
Examples related to the supply of goods:
Example 1: A taxpayer formalizes the supply of goods worth 300,000 manats to a counterparty, but in reality, no actual delivery takes place. The purpose of the fictitious agreement is to artificially reduce the taxpayer’s assets. In fact, the goods remain in the taxpayer’s possession.
Example 2: A taxpayer formalizes the supply of goods worth 300,000 manats to a counterparty; however, instead of a sales contract, a storage or lease agreement is actually concluded. The purpose is to prevent the arising of tax liability on the sale of those goods by entering into a sham agreement.
It should be noted that pursuant to Resolution No. 265 dated 28 July 2020 of the Cabinet of Ministers of the Republic of Azerbaijan and Article 13.2.81 of the Tax Code, taxpayers conducting non-goods transactions are considered risky taxpayers.
Until the latest amendment, under Article 13.2.81 of the Tax Code of Azerbaijan, a “non-goods (sham) transaction” was understood as a transaction identified during a tax control measure, carried out either to conceal another transaction or without such purpose, and formalized for the purpose of obtaining profit (income) without the actual supply of goods, performance of works, or provision of services. As a result of the new amendment, transactions conducted within the framework of fictitious and/or sham agreements will also be considered non-goods transactions. The issue is commented on by expert Anar Bayramov.
Article 340 of the Civil Code of Azerbaijan, titled “Invalidity of Fictitious and Sham Agreements,” explains these concepts. According to Article 340.1, a fictitious agreement is an agreement concluded merely for appearance, without the intention of creating corresponding legal consequences, and it is void. Under Article 340.2, a sham agreement is one concluded for the purpose of concealing another agreement. Like a fictitious agreement, a sham agreement is also void. The article further states that, considering its substance, the rules applicable to the agreement that the parties actually intended to conclude shall apply to the sham agreement.
Examples related to the supply of goods:
Example 1: A taxpayer formalizes the supply of goods worth 300,000 manats to a counterparty, but in reality, no actual delivery takes place. The purpose of the fictitious agreement is to artificially reduce the taxpayer’s assets. In fact, the goods remain in the taxpayer’s possession.
Example 2: A taxpayer formalizes the supply of goods worth 300,000 manats to a counterparty; however, instead of a sales contract, a storage or lease agreement is actually concluded. The purpose is to prevent the arising of tax liability on the sale of those goods by entering into a sham agreement.
It should be noted that pursuant to Resolution No. 265 dated 28 July 2020 of the Cabinet of Ministers of the Republic of Azerbaijan and Article 13.2.81 of the Tax Code, taxpayers conducting non-goods transactions are considered risky taxpayers.