Income Tax in Turkmenistan
Personal Income Tax:
The residents of Turkmenistan are generally taxed on all of their income whether earned in Turkmenistan or outside including in-kind benefits such as meals, housing, relocation, etc.
Non-residents are taxed only on income derived from Turkmenistan.
Personal income tax (PIT) is generally levied by withholding at source when the payment is made by withholding agents (i.e. resident legal entities, individual entrepreneurs, and permanent establishments [PEs] of non-resident legal entities). This does not apply to business income of individual entrepreneurs, who are required to apply the self-assessment procedure.
Personal income tax rates:
The general PIT rate is 10%, which applies to employment income, business and professional income, interest, royalties, income from immovable property, and capital gains. The tax is generally withheld at source. In the case of business and professional income, the tax is levied on a self-assessment basis.
In accordance with the Turkmen Tax Code, foreign nationals staying in Turkmenistan for 183 days and more in a calendar year become resident of Turkmenistan for PIT purposes.
Under the Tax Code, the remuneration for work performed under an employment agreement (contract) and civil agreements, as well as directors' emoluments and other similar payments receivable by board members of a legal entity, is recognised as income from employment.
An individual taxpayer deriving income from entrepreneurial activities is generally taxed on profit from these activities, which is the difference between revenues from such activities and expenses related thereto.
Income derived from the sale of private property is exempt from taxation. Income derived from the sale of shares, bonds, participation rights, other securities is subject to PIT.
Dividends derived from resident companies are subject to a 10% final withholding tax (WHT). Foreign dividends are taxed on a self-assessment basis, at the same rate.
Interest on bank deposits is exempt from tax, while other types of interest are generally taxed on a withholding basis. If the tax is not withheld at source, it is levied by assessment. In both cases, the rate is 10%.
Deductions from Income:
Personal allowances are generally immaterial in Turkmenistan.
In general, the corporate income tax (CIT) rules apply when determining the deductible expenses for entrepreneurial activities.
Apart from expenses incurred in the course of acquiring business and professional income, personal deductions are granted only in respect of income that is taxable at the rate of 10%. The law requires documentary proof of the expenses incurred.
Corporate Income Tax:
Residents of Turkmenistan are subject to corporate income tax (CIT) on worldwide income; non-residents are subject to CIT only in respect of their Turkmenistan-sourced income. The CIT base is determined as gross income less allowable deductions. Branches of foreign legal entities are subject to a 20% CIT, whereas Turkmen legal entities are subject to an 8% CIT (or 2% CIT in cases where the company qualifies as a small or medium enterprise).
Companies involved in oil and gas operations are subject to a 20% CIT, irrespective of the legal status/ownership structure.
Entities where the government holds more than 50% of shares are subject to CIT at the rate of 20%.
Special purpose duty for improvement of urban and rural territories:
A special duty aimed at improving urban and rural territories is imposed on registered entities (e.g. legal entities and branches). The duty applies at 1% of the taxable base for CIT purposes. Generally, contractors and subcontractors operating under the umbrella of the petroleum law may be exempt from this duty.
Contributions to Agriculture Development and Ashgabat City Development Funds:
The contributions to the Agriculture Development Fund and Ashgabat City Development Fund are outside of the general tax legislation (Tax Code) and are provided for by specific decrees. Permanent establishments (PEs)/branches of foreign legal entities are subject to these contributions on the same terms as local legal entities.
Contribution to the Ashgabat City Development Fund only applies to entities located in Ashgabat City.
The base for the contributions is comprised of the accounting income. The contribution rate for the Agriculture Development Fund is 3%, and the contribution rate for the Ashgabat City Development Fund is 0.5%.
Generally, contractors and subcontractors operating under the umbrella of the petroleum law may be exempt from these contributions.
Inventory is valued at cost, including costs relating to its acquisition. The law permits the use of the weighted average or first in first out (FIFO) methods for tax purposes.
Capital gains are taxable as normal business income in Turkmenistan.
Generally, dividend income received by residents and non-residents from Turkmen taxpayers is subject to taxation at the source of payment at the rate of 15%.
Dividend income received by residents from non-Turkmen taxpayers is subject to CIT.
The Tax Code provides for relief from economic double taxation of inter-company dividends.
The WHT rate on dividends payable by Turkmen legal entities to their foreign shareholders may be reduced under applicable DTTs.
Technically, Turkmen branches of foreign legal entities may also be subject to 15% WHT on repatriation of income to their head offices. However, if the head office collects the income from its clients directly to its bank account abroad, the mechanism of collecting the dividend tax is unclear.
Turkmenistan-sourced interest income received by non-residents that do not have PEs in Turkmenistan is subject to WHT of 15%. The above rate may be reduced under the applicable DTTs.
Interest income received by residents is subject to CIT.
Turkmenistan-sourced royalty income received by non-residents that do not have PEs in Turkmenistan is subject to WHT of 15%. The above rate may be reduced under the applicable DTTs.
Royalty income received by residents is included in the taxable income and is generally subject to 10% CIT rate.
A resident company is subject to tax on its worldwide income (including capital gains). There are no provisions for tax deferrals in Turkmenistan tax legislation.
Deductions from Income:
In general, taxpayers may deduct expenses paid or accrued during the year in connection with their business and aimed at income generation. All expenses must be substantiated by documentary proof.
The deduction of certain expenses is subject to specific ceilings. Such expenses include representation expenses, which are deductible at up to 1% of gross income. Furthermore, deductible norms for business travel expenses are established periodically by the government.
Tax depreciation is based on accounting depreciation. Depreciation is accrued based on the straight-line method. Accelerated depreciation is also allowed based on specific consent of the Ministry of Finance. A Presidential Decree establishes the maximum depreciation rates, ranging from 5% to 25%, for five different groups of assets.
Generally, for the purposes of CIT, depreciation accrued is deductible. Fixed assets acquired free of charge, as well as assets of non-commercial legal entities, budget organisations, and public associations, should be excluded from depreciable assets for CIT purposes, even if they are used for generating income.
Fixed assets provided under operational lease shall be depreciated by the lessor. Fixed assets provided under financial lease shall be depreciated by the lessee.
There are no provisions for goodwill in Turkmenistan tax legislation.
Pre-incorporation costs are generally non-deductible.
Interest expense occurring from debt instruments of any kind should be deductible for CIT purposes, provided that the purpose of the underlying debt relates to the entrepreneurial activity of the taxpayer.
Interest expense incurred by a foreign legal entity abroad and recharged to its branch in Turkmenistan is generally not deductible unless specifically addressed by applicable DTTs.
The Tax Code permits a taxpayer to include provisions for uncollectable debts as well as losses incurred as a result of expiration of the collection period for accounts receivable.
There are no specific restrictions on deductibility of charitable contributions. However, they may be disallowed under the general restriction of non-business-related deductions.
Repair and maintenance expenses:
Deductible expenditures for the repair of fixed assets shall be comprised of the cost of spare parts and consumable materials used for repair, remuneration of employees carrying out the repairs, and other expenditures associated with such repairs, including payments to third parties for the purpose of such repairs.
Research and development (R&D) expenses:
R&D costs (including those that produced no positive result) shall be subject to deduction from gross revenue, except for costs associated with the purchase of fixed assets, their installation, and other costs of a capital nature.
Fines and penalties:
Fines, penalties, and other financial sanctions (except for tax-related ones) are deductible for CIT purposes.
For CIT purposes, the following taxes are deductible: property tax; subsurface-use tax; levies established by the Tax Code (except the special-purpose duty for the improvement of urban and rural territories); accrued amounts of VAT in selling goods, performing work, and rendering of services; and amounts of excise tax included in the price of sold excisable goods by manufacturers of such goods.
Net operating losses:
Loss is defined as excess of allowable deductions over gross revenue. Losses shall be carried forward and deducted in subsequent tax (reporting) periods, but not for more than three years. Losses cannot be carried back.
Payments to foreign affiliates:
Administrative and management expenses incurred by the head office of a branch in Turkmenistan are not deductible at the branch level.
Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.