Tax legislation significantly amended in Azerbaijan

Farida Mammadova's picture
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Relevant measures have been taken to ensure transition to a new tax system taking into account leading global practices. This process is carried out through relevant amendments both to tax administration and tax legislation without compromising economic growth, embedded business habits and business environment.

The amendments are aimed at:

  • Supporting entrepreneurship;
  • Reducing the scale of shadow economy and tax evasion;
  • Expanding tax base;
  • Improving tax administration;
  • Increasing efficiency of the existing and new tax incentives.

The most notable change to the tax legislation features introduction of tax incentives in respect of taxes from salary income for the citizens employed in non-oil private sector.

According to the change, monthly income up to 8000 manats (Exchange rate: 1 EUR = 1.9383 AZN) is fully exempted from income tax, whereas citizens with monthly income over 8000 manats are subject to income tax at the rate of 14 percent for the amount exceeding 8000 manats. It is worth mentioning that this is a big concession on behalf of the state which is estimated at hundreds of millions manats. It is anticipated that following the implementation of this reform the shadow economy will be reduced, level of informal employment decreased, economic and business activity, especially in private segment of non-oil sector galvanized and enhanced, and citizens’ rights will be protected more thoroughly. The aforementioned incentive will remain applicable during 7 years. Taxpayers thereby will have an opportunity to plan their activities in a long term perspective.

Moreover, income tax of individuals and social security contributions will be merged under a single administration that means further simplification of procedure for the taxpayers.

Recent amendments also include certain changes with regard to VAT refund. Hence, in retail and catering, citizens are entitled to cashback of up to 15 percent of VAT in case of paid via cashless transaction and to cashback of up to 10 percent of VAT if they pay in cash.

Furthermore, income (profit) tax rate on sales transactions in retail business and catering completed with a bank card will be reduced by 25 percent for 3 years.

As part of the measures aimed at supporting entrepreneurship, allocations made by taxpayers to the institutions engaged in the fields of science, education, health, sports and culture in the amount not exceeding 10 percent of taxpayer’s profit have been exempted from tax for the period of 10 years. It is also worth noting that profit of educational institutions (excluding portion of profit paid as dividend) was also exempted from tax.

Supporting SME is among top priorities of the fiscal policy of Azerbaijan. Recent amendments to the tax legislation stipulate certain provisions geared to stimulate activities of SME.

The most substantial changes include reduction of simplified tax rates, fast depreciation opportunities for small and micro (annual income up to 200.00 manats, the number of employees 1-10) entrepreneurship, expansion of the scope of flat tax mechanisms for micro entrepreneurs, as well as substantial tax incentives in respect of income, profit and property taxes offered for SME cluster companies and their entrepreneurs. Thus, SME cluster companies are exempted from profit, property and land tax for the duration of 7 years. Furthermore, the micro and small businesses are exempted from income and profit tax for 3 years upon receipt of the startup certificate. Besides, 75 percent of income (profit) of micro-entrepreneurships will be exempt from tax.

Small entrepreneurs who are classified as simplified taxpayers will be taxed at the rate of 2 percent instead of previously applied 4 percent. In the meantime, activities under the simplified tax regime have been revised and a new list of eligible activities has been introduced. This was triggered by misuse of tax benefits originally meant for small entrepreneurs by the persons who were not eligible for those benefits.

Current amendments combined with tax administration measures that are expected to be implemented in the immediate future are aimed at preventing unfair competition and supporting activities of disciplined taxpayers.