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6.5. Deduction of Cross-Border Payments and Non-Deductible Expenses

All expenses connected with generating income are deductible, except non-deductible expenses and expenses with limited deductibility as defined under the law.

Cross border payments for creating an affiliate in a foreign country is not tax deductible and are instead treated as investment in the subsidiary. Further, under local transfer pricing rules, payment for goods and services to foreign affiliates is deductible up to the fair market price of such supplies.

The following expenses are not deductible or have limited deductibility for Azerbaijan tax purposes:

  • Capital expenses are not deductible;
  • Expenses connected with the non-commercial activity are not deductible;
  • Entertainment and meal expenses, accommodation, and other expenses of a social nature incurred for employees are not deductible;
  • Charitable contributions are not deductible;
  • Interest on delayed payment of tax is not deductible;
  • Interest on loans received from overseas are not deductible in excess of thin capitalization rules (see Sec. 13.2.);
  • Expenses for meals and entertainment as well as for the providing of food and housing to employees are disallowed except for companies providing therapeutic nourishment items, milk, and similar products to their employees
  • The deduction of repair expenses is limited to the amount of tax written down value of each category of fixed assets as of the end of the previous year. It is capped at 2% for buildings and premises, 5% for machinery and equipment and at 3% for other fixed assets;
  • Actual business trip expenses are deductible from income within limits established by the Cabinet of Ministers;
  • Effective 1 January 2019, non-cash payments in excess of 10% of profits made by an enterprise towards education, health, sports, and cultural organizations  are not deductible, subject to certain conditions and this provision applies for a period of 10 years; and
  • Effective 1 January 2022, the difference amount between the market value and the actual price paid for the goods, works, and services in the retail sector is limited to a deduction of up to 10% (reduced from 30%) and 20% for construction and production sectors.