A shareholder loan, an intercompany sale or a management service can require two separate assessments in Azerbaijan: one under tax law and another under financial reporting standards. Article 18 of the Azerbaijan Tax Code identifies interdependent persons for tax purposes. IAS 24 Related Party Disclosures addresses related party relationships and disclosures in financial statements prepared under IFRS Accounting Standards.
Are the two definitions interchangeable? No. They overlap, but their purposes, criteria and consequences differ. Businesses should document each assessment separately rather than copy a tax classification into the financial statement notes.
What Does Article 18 of the Azerbaijan Tax Code Cover?
Article 18.1 concerns individuals and legal entities whose relationships can directly affect the economic results of their activities or the activities of the persons they represent. Article 18.2 identifies specific grounds for interdependence:
- Ownership or voting rights: direct or indirect participation meeting the statutory threshold of at least 20% under Article 18.2.1.
- Subordination or control: official subordination or direct or indirect control under Article 18.2.2.
- Common control: both persons being directly or indirectly controlled by a third person under Article 18.2.3.
- Joint control of another person: the circumstances addressed by Article 18.2.4.
- Family relationships: the family members specified through Article 13.2.7, as referenced by Article 18.2.5.
Article 18.3 also requires attention: control concerns the ability to restrict or direct another person’s activities. A review should therefore examine decision-making powers and contractual arrangements, as well as ownership percentages.
For support with the tax analysis, see ACON’s tax services in Azerbaijan.
What Is the Purpose of IAS 24?
IAS 24 helps financial statement users understand how related party relationships, transactions, outstanding balances and commitments may affect an entity. Its definition addresses control, joint control, significant influence, key management personnel, close family members and specified relationships between entities.
The starting point is the reporting entity. Ask who can influence its decisions, which entities are connected through the relevant relationships, and what information users need. This assessment applies when preparing financial statements under the relevant IFRS framework; it does not mean every Azerbaijani company must apply full IFRS.
Article 18 and IAS 24: The Main Differences
| Issue | Tax Code Article 18 | IAS 24 |
|---|---|---|
| Purpose | Classification for tax purposes | Financial reporting transparency |
| Ownership | Includes a specific 20% criterion | Uses the relevant IFRS relationship tests |
| Control | Assessed under the Tax Code | Assessed under the applicable IFRS definitions |
| Consequence | Relevant tax rules must then be applied | Relevant disclosure requirements must then be assessed |
1. Parent Companies, Subsidiaries and Common Control
Example: Company A owns 80% of Company B and controls it. B purchases goods from A. The ownership satisfies the Article 18.2.1 threshold. The parent–subsidiary relationship also falls within the IAS 24 framework.
The practical work differs: the tax team examines the transaction’s tax treatment, while the reporting team considers the appropriate disclosures. The reporting level also matters: separate company accounts and consolidated group accounts should not be treated as identical.
Common-control example: Company C owns and controls 70% of A and 80% of B. A and B have no direct shareholding in each other. Their common controller is nevertheless relevant to both assessments.
2. Why the 20% Threshold Is Not the Same as Significant Influence
Article 18.2.1 contains a statutory ownership or voting-rights criterion. IFRS significant influence is a different assessment. Under IAS 28, holding at least 20% of voting power creates a rebuttable presumption of significant influence; below 20%, significant influence can still be demonstrated.
Example: A person owns 25% of Company B. The tax classification should be assessed against Article 18.2.1. The IFRS assessment must also consider voting rights and actual participation in financial and operating policy decisions. A capital percentage alone should not replace that analysis.
For an investor entity applying IAS 28, relevant evidence may include board representation, participation in policy decisions, material transactions, managerial exchanges and essential technical information. Document the evidence supporting the conclusion rather than rely solely on a percentage.
3. Directors and Key Management Personnel
A person may be key management personnel without owning shares. For example, an executive responsible for directing an entity’s activities may require consideration under IAS 24 even where their ownership interest is zero.
For tax purposes, check the person’s actual authority against Articles 18.2.2 and 18.3. Neither the absence of shares nor a job title alone provides a complete answer. Review appointment documents, delegated powers and restrictions on decision-making.
Does a Common Director Make Two Companies Related Parties?
No, not by itself. IAS 24.11(a) expressly excludes related party status arising merely from a common director or other common member of key management personnel. The individual’s relationship with each company does not automatically establish a related party relationship between the companies.
Example: A manages Companies X and Y but holds no shares in either. Before classifying X and Y, investigate other relationships. For Article 18, examine whether A actually controls both companies under the tax definition; for IAS 24, test the relevant criteria rather than infer the result from the shared appointment.
4. Family Relationships Require a Separate Review
The Tax Code’s family reference and IAS 24’s close-family concept should be checked separately. A family connection is a reason to investigate the ownership and decision-making structure, rather than a substitute for applying the relevant definition.
Example: Ali owns 60% of Company A and his spouse manages Company B. Before classifying an A–B transaction, establish the parties’ voting rights, control and management roles. Record the conclusion for each reporting entity and for tax purposes instead of assuming the same result under both systems.
5. Interest-Free Shareholder Loans
Example: A shareholder owns and controls 80% of Company B and lends it AZN 100,000 without interest. The ownership meets the tax interdependence criterion, and the control relationship is relevant under IAS 24.
The absence of contractual interest does not end the review. State Tax Service guidance has addressed market-based interest calculations and withholding tax in founder-loan cases. The terms, relevant period, residency and applicable current rules should be examined before determining the treatment of a particular loan.
Prepare a written agreement covering repayment, currency, security and any interest terms. Keep the agreement, bank records and accounting entries consistent. IAS 24 disclosure work should also be distinguished from the separate accounting assessment of recognition and measurement.
ACON’s corporate and commercial legal services can assist with reviewing the contractual arrangements.
What If the Lender Has No Other Connection?
If an individual lends AZN 100,000 but has no ownership, control, management, family or other qualifying connection, the loan alone does not establish either classification. Verify those assumptions before concluding that the parties are independent. Other tax and accounting questions may remain even if neither relationship definition is satisfied.
6. No Payment or No Transaction: Why the Distinction Matters
IAS 24 transactions can include transfers of resources, services or obligations without a price. Parent–subsidiary relationships also require disclosure even where no transactions occur.
Practical examples: free management support should not disappear from the review merely because no invoice was issued. Likewise, a dormant parent–subsidiary trading relationship should not be omitted solely because there were no sales during the year.
For tax purposes, identifying a relationship does not by itself calculate a tax liability. The relevant transaction, charging provision and valuation rules must be considered.
Market Prices and Transfer Pricing: What Should Businesses Check?
Article 18 identifies interdependence; it should not be used as a standalone formula for an adjustment. Review the market-price provisions of Article 14 and, where relevant, the separate scope of Article 14-1 on transfer pricing. Not every domestic related-party transaction automatically falls within the same transfer pricing requirements.
For cross-border sales, services and financing, record the counterparty’s residency and the reasons the relevant pricing rules apply. Our transfer pricing advisory services in Azerbaijan can support that review.
A Practical Checklist for Finance and Legal Teams
- Prepare an ownership chart showing direct and indirect interests and voting rights.
- Review shareholder agreements, management appointments and actual decision-making powers.
- Maintain separate Article 18 and IAS 24 classification columns in the counterparty register.
- Record loans, services, guarantees and unpaid balances, including arrangements without a price.
- Document pricing assumptions and the basis for any tax adjustment.
- Reconcile transaction records with financial statement disclosure schedules.
- Update the assessment when ownership, family circumstances or management authority changes.
Avoid stating that terms are equivalent to independent-party terms without supporting evidence. Keep the classification memo and the pricing analysis as distinct, cross-referenced documents.
How ACON Can Assist
ACON can coordinate the legal, tax and accounting work needed to review shareholder and intercompany arrangements. Depending on the agreed scope, assistance may include ownership mapping, Article 18 analysis, contract review, pricing support and preparation of information for financial reporting.
For ongoing records, see our accounting services in Azerbaijan. For reporting context, read our financial statements and IFRS reporting guide.
To discuss a shareholder loan or an intercompany arrangement, contact ACON with the ownership structure, relevant agreements and transaction details.
📞 +994 50 990 15 99 | ✉️ [email protected]
Sources: Azerbaijan Tax Code, Articles 14, 14-1 and 18; IAS 24, particularly paragraphs 9, 11 and 13; IAS 28, paragraphs 5–6; and State Tax Service founder-loan guidance dated 10 November 2021.
This article provides general information. Classification, tax treatment and reporting obligations depend on the applicable rules, reporting framework and facts of the arrangement.
