Islamic Republic of Afghanistan
Ministry of Finance
Afghanistan Revenue Department
Summary of Significant Changes with the 2005 Income Tax Law
The new Income Tax Law contains some significant new changes but most provisions are
a re-enactment of the provisions of the Income Tax Law 1965, as amended from time to
time. The following is a summary of the changes that are new to income tax law in
I. Tax Administration Enforcement Powe rs:
Income Tax Assessments
1. Amended Assessments - Article 92 specifies the circumstances and time limits
that the Ministry of Finance may amend income tax assessments to correct
intentional or inadvertent errors.
2. Default Assessments – Article 92 provides authority for the Ministry of
Finance to raise an assessment for income tax based on estimated income,
where no income tax return has been provided by the person.
3. Deduction Denial - Persons (including employers) are required in certain
situations to withhold tax from payments that they make. For example, a
tenant paying rent to a landlord may be required to withhold tax from the
payment or an employer paying wages to an employee may be required to
withhold tax from the payment. Also, legal persons paying dividends,
interest, royalties and commissions are required to withhold. Such payments
are normally allowable as an income tax deduction. Where a person is
required to withhold tax from a payment that is a deductible expense, the
deduction will not be allowed unless or until the person pays the withheld tax
to the State – Article 18 (2) 2. Further, the law allows for the imposition of
penalties for late or non-payment of amounts withheld – Articles 104 to 112.
4. No Court Order for Rent withholding Enforcement – Previously the Ministry
of Finance required a court order to enforce provisions regarding failure to
comply with rent withholding obligations. Article 59 pertaining to rent
withholding tax no longer requires the Ministry of Finance to obtain a court
order to enforce provisions of this tax.
1. Charge over Property - A charge over property of the person (also known as a
lien) is a court approved order which places a restriction on the sale or transfer
of property. If the property is to be sold, the buyer acquires the property
subject to the claim by the Ministry of Finance. Article 101.
2. Restriction Over Property – Article 101 provides for a restriction on sale of
property of the person (also known as a jeopardy order). This is a court
approved order which restricts the person from selling or transferring
ownership of assets such as land and buildings.
3. Seizure of Property – Article 101 provides for the seizure of property (also
known as distraint or attachment of property). This is a court approved order
which allows the Minister to take possession of property. The property is
either held pending payment of due taxes or sold and the proceeds applied to
pay the due taxes.
4. Liability of Directors, Partners or Agents for Debts of Person – Often the
person is unwilling or unable to pay the taxes due. In the case of companies,
partnerships and some other types of persons, a director of the company, a
partner of the partnership, or an agent of the person may be held accountable
for taxes that are not paid by the person. Article 98 makes provision for the
Ministry of Finance to collect the tax due from any of the listed persons.
5. Collection of Money Held by Third Parties – Where a tax liability remains
unpaid, power to issue an order (sometimes known as a garnishee order)
allows the Ministry of Finance to collect amounts owed to the person by third
parties. For instance, an amount held by a bank, rent due from a tenant,
salaries and wages payable or payments due from customers may be the
subject of such a collection or garnishee order. Article 97.
6. Departure Prevention Order – This is an order to the appropriate authorities to
restrict or prevent individuals who have unpaid taxes (more than 20,000
Afghanis) from leaving the country unless or until a satisfactory arrangement
to pay tax due has been made. Usually, the person’s passport will be
confiscated. Article 99.
7. Closure of Business Order – Where a business operates from a business
premises, a temporary closure of business (in whole or in part) order prevents
the business from operating until due taxes have been paid. Police under the
Ministry of Interior will assist in ensuring compliance with as closure order.
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Access to, and Collection of, Information
1. Access to Premises, Books, Records etc – In order to confirm that a tax
liability has been properly established, Ministry of Finance officers are
entitled to have access to the business premises and to the books of account,
papers, records and other information held by the person or by third parties.
Third parties would include business associates, customers, suppliers, banks
etc. Information collected by the Ministry under Article 96 is confidential and
may not be disclosed to anyone outside the Ministry unless authorized by law.
Additional Tax/Offences on the Part of the Person
1. Failure to Create Business Records – Persons not subject to fixed taxes are
compelled to keep adequate books of account and other information or be
subject to additional tax or penalties. Article 106 outlines these additional
2. Failure to Comply With Income Tax Law – Persons who do not have a Tax
Identification Number, fail to file a tax return, pay their tax liability late, fail
to pay their tax, or fail to withhold tax on behalf of others are required to pay
additional tax by way of penalty or in severe cases be subject to prosecution
for an offence punishable by a fine, a term of imprisonment or both. Articles
104, 105 & 107 through 110.
Additional Offences on the Part of the Tax Officer
1. Unauthorized Disclosure of Information – Officers of the Ministry of Finance
are now obliged to treat information about persons as confidential or be
subject to penalties. Article 111 provides for court imposed fines up to
125,000 Afghanis or imprisonment of up to one year, or both.
2. Abuse of Position – Officers of the Ministry of Finance must not use their
position for non-authorized purposes such as being paid or otherwise
rewarded for providing favourable but illegal treatment to persons. Article 111
provides for court imposed fines up to 225,000 Afghanis or imprisonment of
up to three years, or both.
II. Taxation of Legal Persons (limited liability companies, partne rships,
1. Taxation of Distribution of Branch Profits - Foreign companies may choose to
conduct business in Afghanistan either through a branch (not incorporated in
Afghanistan) or through a subsidiary (incorporated in Afghanistan). A tax on
the distribution of branch profits has been introduced so that taxation is
consistent for both branches and subsidiaries of foreign companies. The ra te of
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tax on branch profits will be the same rate as for withholding on dividends –
20%. The transfer of profits from a branch in Afghanistan to another part of the
non-resident company is deemed to be a dividend and subject to tax at the rate
of 20%. Articles 8(5) & 13(3) relate to branch profits.
2. Withholding Tax on Dividends, Interest and Royalties – the law has been
amended to ensure that the withholding tax applies not just to the payment of
dividends but also applies to the payment of interest and royalties. Persons
paying dividends, interest and royalties are required to withhold income tax at
the rate of 20%. The tax withheld is to be paid to the Ministry of Finance no
later than 10 days after the end of the month. Article 46.
3. Non deductibility of payments between branches and non-resident persons –
Rules regarding payments between a local branch of a foreign person and the
foreign person have been incorporated into the new law. The law provides that
the taxable income of a branch is to be calculated on the basis that it is a distinct
and separate person and no deductions will be allowed for payments between
the branch and the foreign person. Rather, expenses incurred by the branch or
foreign person directly related to the earning of income by the branch will be
treated as deductible expenditure of the branch. Articles 8(5) & 18(2)3 cover
4. Transactions Between Connected Persons (“Transfer Pricing”) - An entity
conducting business in Afghanistan may artificially inflate the purchase price of
goods or services from, or artificially deflate the sale price of goods or services
to, associated entities, particularly foreign entities, with the effect of reducing
the taxable income and therefore tax payable in Afghanistan. Where amounts
paid or payable between connected persons is different from would take place
between unconnected persons, the Ministry of Finance may substitute the
amount that would be paid or payable had the transaction taken place between
unconnected persons. Article 102.
5. Quarantining Foreign Losses Against Foreign Income - Resident companies
which have foreign business operations may incur a loss in conducting those
foreign operations. In the previous law those companies could deduct the
foreign loss against income from business activities conducted in Afghanistan.
Under the new law, such losses will only be deductible against the future profits
of those foreign operations and will not be deductible against the current profits
of domestic business activities. Article 42(2) relates to this issue.
6. Tax (fiscal) Year - It is common for foreign businesses to account for their
business activities in the host country on the basis of the same accounting period
used by the foreign 'parent' company or group in the home country. The income
tax law now allows legal persons to apply to the Ministry of Finance for an
accounting period different from the Afghan solar year. Article 3.
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7. General Anti-avoidance Provision – The law now includes a general anti-
avoidance provision. Where entities enter into arrangements for the sole or
dominant purpose or the principal effect of avoiding tax, Article 103 allows the
Ministry of Finance to re-characterize the transaction and allow the income tax
law to apply as intended.
III. Corporate Tax Measures for Extractive Industries (Mining & Hydrocarbons):
Chapter XII of the 2005 law pertains solely to Qualifying Extractive
Industry Persons (“QEIT”).
1. Definitions – A QEIT is a person that holds a mining license, mining
authorization or is party to a hydrocarbons contract. Article 82 provides
definitions for the terms “mining license”, “mining authorization”, “hydrocarbons
contract”, and various other terms.
2. Precedence of Chapter XII – Article 83 states that all other Chapters of the
Income Tax Law apply to QEITs unless changed by Chapter XII.
3. QEIT is Treated as a Separate Person in Respect of each Authorization, License, or
Contract - Revenue and expenditure related to a geographic area covered by a
contract or license is isolated from those of other geographic areas under other
contracts or licenses even if the same company operates all of them. Article 84
4. Business Receipts Tax – As extractive industries typically pay royalties to the
state, there is an exemption from the business receipts tax imposed under the law
for the receipts of a QEIT. Article 85.
5. Depreciation Deductions – Article 86 sets out the depreciation rules for “QEIT
assets” which override those of paragraph 1(7) of Article 18. Included are rules
for depreciating the acquisition cost of Authorizations, Licenses and Contracts
and the disposal of a “QEIT asset”.
6. Cost of Constructing Roads – Article 87 outlines the rules for the amortizing of
the cost of road construction by a QEIT. The deduction period is 15 years from
the time the road is completed. Also covered in this Article are rules governing
the continued depreciation of road construction costs when the License, Contract
or Authorization is sold.
7. Pre-production Costs – Article 88 deals with pre-production costs and specifies
the amortization period of those costs depending on whether it is a mining
License or mining Authorization or a hydrocarbon Contract. “Pre-production
cost” and “pre-production cost recovery period” are defined, including the rules
for when a QEIT is treated as commencing commercial production of minerals or
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8. Deduction for Contributions to a Fund for Environmental & Social Obligations –
Article 89 outlines the regulations regarding deductibility of contributions to a
fund for environmental and social obligations under Article 82 of the Minerals
Law 2005 or any other applicable law. The Article also makes provision for bank
guarantees of the deductible amount in the case of non-application of the
9. Loss Carry- forward and Stability Agreements – Article 90 overrides Article 42
and allows unlimited loss carry- forward for QEITs. Also included in this Article
are provisions whereby a QEIT can agree to a 30% corporate income tax rate in
exchange for tax stability over differing periods of time – 5 years in the case of a
mining Authorization, 8 years in the case of a mining License and the actual
duration of the hydrocarbons Contract in the case of a hydrocarbons Contract
IV. Assessment, Returns, Objections and Payment of Tax
Chapter XIII of the 2005 law is a new chapter in the 2005 law.
1. Assessments and Amended Assessments – Article 92 specifies the circumstances
and time limits that the Ministry of Finance may amend income tax assessments
to correct intentional or inadvertent errors. Also, it provides authority for the
Ministry of Finance to raise an assessment for income tax based on estimated
income, where no income tax return has been provided by the person.
2. Duration for Submitting Returns and Payment of Tax – Article 93 contains 10
paragraphs setting out the rules for the filing of various tax returns and the time
frames for submitting those returns.
3. Objections and Appeals – Article 94 makes provision for objections and appeals
and lays out the time limits in those processes.
4. Refunds and Claims – Article 95 deals with refunds and claims. If the claim by a
person for a refund is upheld, the amount will be first applied against the person’s
tax or customs liabilities before being refunded.
V. Other Measures:
1. Business Receipts Tax – the 10% business receipts tax rate threshold has been
raised from 50,000Afs to 100,000Afs. Article 65, paragraph 6.
2. Fixed Tax of Physicians – the annual fixed tax rate has been increased under
Article 78. The new rates are 6,000Afs for less than 10 years experience,
10,000Afs for 10-20 years of experience and 15,000Afs for more than 20 years of
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3. Partnerships – the general tax rate of 20% for partnerships (former Article 3) has
been eliminated as the partners are taxed individually at that rate. Article 33.
4. Entertainment and Advertising – expenses incurred to provide entertainment or
for advertising are deductible expenses provided they are directly related to the
commercial activities of the business. Article 18(2)1. The 2% of net income
limitation in previous Article 19(m) has been eliminated.
5. Wage Withholding Tax – Article 58 (previously Article 64) now refers to a
natural person so that individuals employing two or more employees in any month
are included in the wage withholding tax requirements.
6. Wage Withholding Tax – the remittance of the tax withheld from salaries and
wages has been changed from weekly to “no later than 10 days after the end of the
month in which the amounts were withheld”. Article 60 (previously Article 66).
7. Business Receipts Tax: Remittance & Payment - Article 93(5) clarifies that the
business receipts tax remittance and payment is required quarterly. Both the filing
and payment are due by the 15th day of the next month after the end of the quarter.
For businesses in the 10% tax category (hotels, restaurants, telecommunications
and airline services) the filing is required even if, for a period of time, they fall
below the 100,000Afs per month threshold.
8. Non-Issuance of Licenses – When natural or legal persons have not paid their
taxes according to the law, Article 114 empowers the Ministry of Finance to
inform other government agencies and departments who have authority to issue
licenses, not to issue or renew those licenses. The licenses can only be renewed
when the Ministry of Finance confirms that the tax obligations of the person have
9. Fixed Tax on Imports & Fixed Tax on Exports – There is a 2% fixed tax on
imports and exports by persons who have a business license imposed under
Articles 70(1) and 71(1). These articles confirm that the tax paid is considered to
be a credit that is applicable against the person’s annual income tax liability.
10. Enforcement Dates – Article 117 states the income tax law shall come into force
from the date it is signed and shall be published in the official gazette.
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VI. Transitional Provisions:
A separate decree signed by the President provides for commencement dates for
various income tax provisions on dates other than the date that the income tax law is
signed. These commencement dates are:
(i) Articles to commence from 1 Hamal 1385 (21 March 2006)
Article 8(5) – taxation of branches of non-resident persons.
Article 13(2) – the extended definition of dividends.
Article 13(3) – deemed dividends from branches of non-resident persons.
Article 18(2)3 – non-deductibility of expenses incurred by a non-resident
for a branch in Afghanistan.
Article 42(2) – separate treatment of foreign losses against foreign income
Article 93(5) – business receipts tax returns are to be lodged quarterly.
(ii) Articles to commence from 1Mizan 1384 (23 September 2005)
Article 58 – individuals who employ two or more persons are required to
Article 60 - remittance of the tax withheld is payable within 10 days of the
end of the month.
(iii) Articles to commence from 1 Hamal 1384 (21 March 2005)
Article 70(1) – fixed tax on imports and credit against income tax liability.
Article 71(1) - fixed tax on exports and credit against income tax liability.
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