Tax Headline Data / Stock Option Plan / Azerbaijan

Grant

• There are no income or social security taxes.

Exercise

• Income Tax is payable up to a maximum rate of 25%, withheld by the Local Company.

• Employee State Social Insurance is payable up to a maximum rate of 3%, withheld by the Local Company (uncapped).

• Employer State Social Insurance is payable up to a maximum rate of 22%, payable by the Local Company (uncapped).

• The taxable amount is the amount by which the market value of the shares on exercise exceeds the exercise price.

Sale

• Income Tax is payable on the growth in value of the shares up to a maximum rate of 20%, payable by the Participant.

Other / Notes

Additional Issues - Sector Specific Taxation

Employees working in sectors outside the oil and gas sectors and public sectors are subject to a reduced rate of tax for 7 years from January 2019 such that Participants are subject to income tax at 14% on amounts over 8,000 AZN. In addition, Employee State Social Insurance contributions are capped at 3% up to 200 manats, and amounts exceeding 200 manats are subject to a 10% rate. Employer State Social Insurance contributions are capped at 22% up to 200 manats, and amounts exceeding 200 manats are subject to a rate of 15%. 

Tax Advantaged Arrangements

There are no specific tax advantaged arrangements available beyond the treatment stated above. It may be the case that a more tax beneficial approach is available using an alternative structure. Please speak to the ShareReporter team for further advice.

Dividends

Once a Participant has acquired shares in the Company, they will pay Income Tax on dividends received at a maximum rate of 14%.  The Income Tax is payable by the Participant and there are no withholding or reporting obligations for the Local Company.  

Corporate Tax Deduction

The availability of a corporate tax deduction for share based awards is unclear, even where a recharge arrangement is in place. Local advice is recommended. 

Reporting

The Local Company must file a report with the State Tax Service by the 20th day of the month following the quarter in which the tax event arises.

Non-Employees

If the Participant is engaged as an employee through a Professional Employer Organisation (PEO) or other Employer of Record (EoR) then the above tax treatment will typically apply save that the PEO or EoR will be responsible for accounting to the tax authorities for any withheld taxes.  The terms of the engagement between the Company and the PEO or EoR should provide for how these taxes will be accounted for.

If the Participant is engaged as a consultant then, typically, all taxes arising in connection with the Award should ordinarily be for the account of the Participant and there should be no withholding obligation. The Participant should be encouraged to seek independent advice on their own tax position. Before adopting this tax treatment, however, the Company should carefully consider the correct status of the Participant: it is a question of fact whether the Participant is engaged as an employee or a consultant and the tax authorities may seek unpaid withholding taxes if the Company gets this wrong.

Special employee tax advantaged arrangements are not generally available either to consultants or to employees engaged via a PEO or EoR.