Azerbaijan’s SOCAR chooses Malta for tax purposes

Malta has been hosting Azerbaijan’s state oil company (SOCAR) since 2007 thanks to its favourable tax regime exempting foreign companies from paying tax on profits generated outside of the island.

It is yet another confirmation of Malta’s status as a euro-denominated tax haven, that Socar Trading Holding Ltd (STHL) can act as the parent company to Socar Trading SA in Geneva, without incurring a 35% corporate tax rate.

An office in Ta’ Xbiex hosts STHL, which acts as a back-office to the real companies where the money is made: subsidiary SOCAR Trading SA, which trades in crude oil from its Geneva offices. It is this company that will source and sell LNG to the ElectroGas consortium and then onto Enemalta, to power the new Delimara plant.

In 2013, STHL and its subsidiaries generated $38.6 billion in sales of crude oil, after purchasing $38.5 billion in crude and fuel products from third party and other companies from the SOCAR group.

After taking into account salaries, administrative expenses, and banking costs, the group’s ‘thin’ gross profit of $135 million was whittled down to $29 million.

STHL however does not incur the corporate 35% rate in Malta. After paying tax in Singapore and Switzerland, and recovering tax benefits from its Dubai subsidiary, the group pays a total of $4.6 million in tax – an effective 16% tax rate, and savings 

In an effort to rebut accusations of secrecy by the Nobel-nominated Global Witness NGO, SOCAR has admitted using Malta as “an investment platform to benefit shareholders of the holding company from tax advantages provided under the Maltese participation exemption system and the EU-Swiss Savings Agreement of 2005.”

In the case of Switzerland, a non-EU country, SOCAR Trading SA benefits from a tax status for an “auxiliary company with predominant activities abroad”.

The set-up also allows an exemption from taxation if the Swiss subsidiary pays dividends to the Maltese parent company.

“It was contemplated that a prospective holding structure should involve jurisdictions with a favourable investment regime, developed legislation and also providing efficiency for investors from a tax perspective,” SOCAR says of its evolution, opting for the incorporation of a holding company in Malta with its subsidiary SOCAR Trading SA established in Geneva, Switzerland.

Since setting up shop in Malta in 2007, STHL holds 100% ownerships in Socar Trading SA (Switzerland), Socar Trading S&I (Dubai, UAE), and Socar Trading Services S.A.M (Monaco).

Additionally, SOCAR in Azerbaijan employs another tax structure in Malta, ostensibly to benefit from a reduction of tax on shareholders’ dividends if it passes on profits to shareholders from Malta.

SOCAR is the owner of two Maltese companies: Socar Oil & Gas International Holding, which in turn is the owner of Socar Oil & Gas International. When dividends are paid by trading companies to their shareholders, these shareholders become entitled to a refund of 85% of the Malta tax paid by the company.

That means that after the Maltese trading company is taxed 35% on its profits, the shareholders receiving those dividends – in this case – the parent companies, can take back 85% of that taxed dividend. This system is employed for overseas branches set up in Malta and often results in an effective tax rate of 5%. 

SOCAR’s evolution

Although owned by the state of Azerbaijan, SOCAR has had two important private interests who raised the necessary finance for its international trading structure of 10 offices worldwide.

Valery Goluvushkin of Lukoil and Azerbaijani entrepreneur Anar Aliyev (later changing his surname to Alizade to avoid association with the ruling Aliyevs of Azerbaijan) were instrumental in setting up the Maltese shareholding structure, dividing ownership of SOCAR Trading SA between SOCAR (50%) and the two businessmen.

With SOCAR Trading finding it hard to raise money due to its Soviet background, it was left to Goluvushkin and Alizade to obtain credit lines that SOCAR Trading would not have been able to secure otherwise. 

In 2012, SOCAR bought back the entire ownership of SOCAR Trading SA, with Alizade retaining a controlling interest in some 10 joint ventures with SOCAR.