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An additional 10% tax is not applied to foreign subcontractors within PSA frameworks
An additional 10% tax is not applied to foreign subcontractors within PSA frameworks
The State Tax Service has clarified the issue of taxation of payments made by companies operating under Production Sharing Agreements (PSAs) to foreign subcontractors. The authority stated that the special tax regime applied under PSAs has superior legal force over general tax legislation, and therefore the specific rules provided in these agreements must be applied.
According to the statement, Article 2.7 of the Tax Code provides that if Production Sharing Agreements approved by law contain provisions differing from the Tax Code and other normative legal acts, the provisions of those agreements shall apply. This means that tax rules established by special protocols related to hydrocarbon activities take precedence over general tax regulations.
The authority particularly highlighted the provisions of the “Protocol on the Taxation of Foreign Subcontractors” under the ACG project. It was noted that under Clause 1.1 of the protocol, a certain portion of payments received by foreign subcontractors performing works and services in Azerbaijan in connection with hydrocarbon activities is treated as profit, and the 25 percent profit tax applied to that amount effectively corresponds to a 5 percent withholding tax.
At the same time, under Clause 1.2 of the protocol, foreign subcontractors are exempt from all other taxes and payments related to hydrocarbon activities, except for the mentioned 5 percent tax. Therefore, regardless of whether the foreign subcontractor is registered in a low-tax jurisdiction or territory, there is no requirement to apply an additional 10 percent withholding tax.
The State Tax Service emphasized that in cases falling within the scope of the “Protocol on the Taxation of Foreign Subcontractors,” only a 5 percent withholding tax should be applied to payments made to foreign subcontractors, and no additional tax liability arises.
The State Tax Service has clarified the issue of taxation of payments made by companies operating under Production Sharing Agreements (PSAs) to foreign subcontractors. The authority stated that the special tax regime applied under PSAs has superior legal force over general tax legislation, and therefore the specific rules provided in these agreements must be applied.
According to the statement, Article 2.7 of the Tax Code provides that if Production Sharing Agreements approved by law contain provisions differing from the Tax Code and other normative legal acts, the provisions of those agreements shall apply. This means that tax rules established by special protocols related to hydrocarbon activities take precedence over general tax regulations.
The authority particularly highlighted the provisions of the “Protocol on the Taxation of Foreign Subcontractors” under the ACG project. It was noted that under Clause 1.1 of the protocol, a certain portion of payments received by foreign subcontractors performing works and services in Azerbaijan in connection with hydrocarbon activities is treated as profit, and the 25 percent profit tax applied to that amount effectively corresponds to a 5 percent withholding tax.
At the same time, under Clause 1.2 of the protocol, foreign subcontractors are exempt from all other taxes and payments related to hydrocarbon activities, except for the mentioned 5 percent tax. Therefore, regardless of whether the foreign subcontractor is registered in a low-tax jurisdiction or territory, there is no requirement to apply an additional 10 percent withholding tax.
The State Tax Service emphasized that in cases falling within the scope of the “Protocol on the Taxation of Foreign Subcontractors,” only a 5 percent withholding tax should be applied to payments made to foreign subcontractors, and no additional tax liability arises.