Who Is Liable For Income Taxes in Afghanistan
Taxation in Afghanistan is based on an individual’s residential status for tax purposes. In general, tax residents of Afghanistan are taxed on their worldwide income, while non-residents are taxed on their Afghan-source income only. However, a nonresident person may be exempt from income tax in Afghanistan if the person is from a foreign country that grants a similar exemption to Afghan residents based in that country.
An individual is considered to be a tax resident of Afghanistan if any of the following three conditions are met:
• The person has his or her principal home in Afghanistan at any time during the tax year.
• The person is present in Afghanistan for a period aggregating 183 days in a tax year (21 March to 20 March).
• The person is an employee or official of the government of Afghanistan and has been assigned to perform services abroad at any time during the tax year.
Income subject to tax
Employment income. Income from salary is Afghan-source income if it is attributable to employment exercised in Afghanistan. No exceptions exist. As a result, all cash and noncash benefits received with respect to employment in Afghanistan may be considered taxable.
Business income. All residents and nonresidents who are engaged in economic, service or business activities are taxed on their business income.
Natural persons who engage in business activities and meet both of the following conditions are subject to fixed tax:
• Their income is neither exempt nor subject to withholding tax.
• Their total gross income is less than Afs 3 million for the tax year.
Natural persons who have total income of less than Afs 60,000 from all sources, including business activities, are exempt from fixed tax.
A person who is required to pay 3% tax on gross income received may elect to pay BRT (see Section B) and annual income tax under the normal tax regime. The election to pay income tax and BRT is irrevocable for a period of three years.
All natural persons who meet the conditions described above are required to file an income tax return.
Investment income. In general, dividend, interest and royalty income derived by nonresident natural persons is subject to a final tax of 20%, which is withheld at source. For resident individuals, this tax is treated as advance tax that may be credited against the eventual tax liability of the taxpayer.
Any gain derived from the sale, exchange, or transfer of assets is treated as taxable income.
Entertainment income. Income derived from entertainment exhibitions such as movies, radio or television, music, sport competitions and other similar activities, is subject to a 10% fixed tax.
Rental income. Income derived from the renting or leasing of tangible property owned by natural persons is subject to income tax that is withheld at source. The tax withheld is treated as advance tax, which may be credited against the taxpayer’s final tax liability calculated using the normal income tax rates.
Payments of rent by natural persons with respect to immovable property used for commercial, industrial and other economic purposes are subject to withholding tax at a rate of 10% or 15%, depending on the amount of the monthly rent.
Other income. Income from prizes, rewards, lotteries, gratuities, bonuses and service charges is subject to a final withholding tax at a rate of 20%.
Exempt income. The following types of income are not subject to tax in Afghanistan:
- Grants, gifts and awards of the state, foreign governments, international organizations or nonprofit organizations, for contribution to science, art, literature, social progress or international understanding
- Scholarships, fellowships, and other grants for professional and technical training
- Health, accident, and unemployment insurance benefits and life insurance paid on death
- Compensation or damages for personal injuries or sickness or restitution of reputation
- Proceeds of borrowing and proceeds from stocks and bonds issued by companies
- Acquisition of assets in connection with mergers of domestic corporations and other legal persons
- Acquisition of movable or immovable property through expropriation of property of debtors
- Payments on principal received from debtors
- Interest on bonds issued by the state or municipalities
- Income representing self-consumption of food, fuel or other goods by the producer or by members of their household
- Pensions of government employees
- Any other receipts according to the provisions of the law
Taxation of employer-provided stock options. Employer-provided stock options are taxed at the time the options are exercised. The taxable amount is the difference between the market value of the shares on the date of issuance and the amount paid by the employee.
Capital gains and losses. Gains derived from the sale of capital assets used in business, including depreciable assets, shares of stock, trades or businesses, are taxed at the normal individual tax rates. However, capital gains derived from the sale, exchange or transfer of such assets held for more than 18 months are subject to tax at special rates. The special rate is calculated based on the average tax rate derived from distributing the gain equally over the holding period with 2% being the lowest rate.
If a natural person transfers an immovable or movable personal asset, the price received or receivable from such transfer is subject to a 1% tax at the time of transfer of ownership of the property. This fixed tax is imposed instead of income tax. This measure does not apply to capital gains derived from the sale or transfer of movable or immovable property acquired by inheritance. Such capital gains are not subject to tax.
Capital losses may offset capital gains only.
Partnerships. General and special partnerships are treated as flow-through entities with partners being taxed on their share of profits at the applicable individual tax rates. However, limited liability companies are taxed as corporations, and their distributions are treated as dividends for tax purposes.
Deductions
Deductible expenses. Expenses of production, collection and preservation of income are allowed as deductions from business income if these expenses have been incurred during the tax year or one of the preceding three years. The following is a list of deductible expenses:
- Rent paid on leased property used for the purposes of the business
- Noncash benefits provided to employees if the providing of the benefits is directly related to the employer’s business
- Losses of property used for the production, collection, or preservation of income, resulting from fires, earthquakes, casualties or any disasters to the extent that such losses are not reimbursed by insurance
- Premiums paid for insurance of property
Nondeductible expenses. The following personal expenses are not deductible:
- Costs and expenses incurred in providing benefits for owners, officers and management that are not necessary for the conduct of business
- Payments made to persons for their own benefit or enjoyment or their family’s benefit and enjoyment
- Costs of maintenance, repair, construction, improvement, furnishing, and other expenses with respect to the taxpayer’s family house or residence or any property devoted to the taxpayer’s own personal or family use
- Interest on personal loans
- Costs of commuting to and from work and cost of travel for personal purposes
- Cost of life, accident, health, and liability insurance for the protection of the taxpayer and his or her family
- Cost of any type of insurance for the protection of property used for personal purposes
Withholding tax. All natural persons who employ two or more employees are required to withhold taxes from salaries and wages paid.
The tax withheld must be deposited together with the Report of Tax Withholding and Bank Deposit Form for Employers into an account determined by the Ministry of Finance (MoF) no later than 10 days after the end of the month in which the amounts are withheld.
For information regarding other withholding, see Income subject to tax.
Relief for losses. Business losses of approved and registered enterprises are entitled to carry forward the net operating loss to offset profits of subsequent years until the losses are fully offset.
Credits. Foreign tax credits are generally available if foreign tax is paid on foreign-source income.
If a resident person derives income from more than one foreign country, he or she may claim a foreign tax credit against the tax on his or her foreign-source income from each country. The foreign tax credit for each country is proportionate to the foreign-source income derived from that country as compared to worldwide income. A foreign tax credit is available in full.
B. Business receipt tax
Natural persons who have business income of Afs 3 million or more per year are subject to a 2% business receipt tax (BRT). BRT is imposed on the total income (gross receipts) received before any deductions. The following exceptions apply:
- Hotels, guest houses and restaurants that have total income of more than Afs 3 million per year are subject to BRT at a rate of 5%.
- All clubs and halls are subject to BRT at a rate of 5%.
- Telecommunication, airline services, hotels and restaurants providing premium services are subject to BRT at a rate of 10%.
BRT paid is deductible in calculating taxable income.
To learn more about the history, culture, economy and other information about the Afghanistan
We have been preparing US income tax returns for US Citizens and permanent residents living in Afghanistan for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Afghanistan and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Afghanistan.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email