Under Article 732 of the Civil Code, a contract for gratuitous use provides for property to be transferred free of charge for use by another person for a certain period of time.

Under this article, a contract for gratuitous use may be concluded between subjects of civil law. However, since the Tax Code does not regulate gratuitous-use relations between taxpayers, the tax authorities may treat such relations as lease relations. Under tax legislation, where property transferred for gratuitous use is used to generate income, the transaction is treated not as a transfer for gratuitous use but as a lease.

Under Article 14 of the Tax Code, where no rent has been set for leased property, the rent is determined on the basis of current market prices. If income from the rent of movable or immovable property is derived from an Azerbaijani source and the person transferring the property for gratuitous use is not registered for tax purposes, the lessee, acting as a tax agent, withholds tax at source at a rate of 14% of the rent (Tax Code, Article 124).

Applying these provisions to a contract for gratuitous use, we can conclude that rent for property transferred for gratuitous use may be determined on the basis of its current market price, and the rent so determined may be taxed at 14% under Article 124 of the Tax Code. As a result, a party transferring movable or immovable property — whether for gratuitous use or under a lease — will be obliged to pay tax at source in the amount of 14% of the determined rent.

Thus, where a contract for gratuitous use is concluded between taxpayers, the tax authority may treat it as a lease agreement and subject it to profit tax at a rate of 14%.