Understanding Azerbaijan's Tax System: Rates And Rules

Azerbaijan's tax system is made up of state taxes, taxes of the autonomous republic, and local (municipal) taxes. The country's tax laws are laid out in its Constitution, Tax Code, and other legal standards. Azerbaijan's tax year runs from 1 January to 31 December, and the country currently has three distinct tax regimes. These include the statutory tax regime, which applies to all companies operating in the country outside of the oil and gas industry, and two regimes related to Production Sharing Agreements and Host Government Agreements.

Personal income tax

For residents, the taxable base is determined as the difference between gross income for a calendar year and any expenses or deductions. If a resident's income from dependent employment has already been taxed at the source, no further income tax or deductions are calculated. Natural persons who have stayed in Azerbaijan for 182 days or more in a calendar year are considered residents and are responsible for paying taxes on their worldwide income.

Non-residents, on the other hand, are taxed only on their income generated from sources within Azerbaijan. The taxable base for non-resident physical persons engaged in activity in Azerbaijan through a permanent establishment (PE) is calculated as the difference between gross income generated from Azerbaijani sources during a specific period and any expenses or deductions incurred during that same period.

The personal income tax rates in Azerbaijan are progressive. For residents, if their income is less than 2,500 AZN, they are taxed at a rate of 14%. If their income exceeds 2,500 AZN, a 25% tax is levied on the proportion above this threshold.

From 1 January 2019, a seven-year tax exemption period was introduced for employees in the non-oil-gas and non-government sectors, with a taxable monthly income of up to 8,000 AZN. After this grace period, the standard rates for employees in the oil and gas and government sectors will apply: a taxable monthly income of AZN 350 plus 25% of the amount exceeding AZN 2,500.

Corporate tax

Corporate income tax (CIT) in Azerbaijan is levied on the profits of resident and non-resident enterprises. The standard corporate tax rate is 20% for both resident and non-resident taxpayers. The taxable profits are calculated as the difference between a taxpayer's gross income and deductible expenses. Gross income includes all revenue from economic activities, unless expressly exempted by law, while deductible expenses include all expenses incurred in the furtherance of business activities, except for those deemed non-deductible under the Tax Code.

The tax year in Azerbaijan runs from 1 January to 31 December, and tax returns must be filed by 31 March of the following year. Taxpayers must also make advance quarterly tax payments by the 15th day of the month following the end of each calendar quarter. These payments are determined as either 25% of the previous fiscal year's tax or by multiplying the actual income for the quarter by a ratio of tax to gross income for the previous year.

There are separate tax regimes for companies operating under Production Sharing Agreements (PSAs) and Host Government Agreements (HGAs). The PSA regime covers rules for existing PSAs, with pre-negotiated tax rates of 25% to 32% or a withholding tax of 5% to 10% on gross payments for foreign subcontractors. The HGA regime applies to the Baku-Tbilisi-Ceyhan oil export and South Caucasus pipelines, with a fixed rate of 27% on the taxable income of each participant.

A simplified tax regime is available for small taxpayers who are not registered for value-added tax (VAT) and have revenue below AZN 200,000 in a 12-month period. The simplified tax is levied on gross revenue, with rates varying depending on the region and type of business activity. For example, the simplified tax rate for Baku is 4%, while for trading activities, it is 6%, and for catering services, it is 8%.

Value-added tax

Businesses are required to register for VAT if their cumulative taxable income exceeds AZN 200,000 for a consecutive 12-month period, or if the value of one taxable transaction exceeds AZN 200,000.

A zero rate of VAT applies to certain goods and services, including:

• Exports of goods and services
• The supply of gold and other valuables to the Central Bank of Azerbaijan
• Products and services designated for the authorised utilisation by diplomatic and consular offices of international organisations and foreign nations accredited in the Republic of Azerbaijan, as well as for the individual utilisation by the diplomatic, administrative, and technical personnel of these offices (including accompanying family members) who are not citizens of the Republic of Azerbaijan
• International and transit cargo and passenger transportation
• Financial services
• The sale of participation interests or shares of a legal entity
• The provision of paid educational services
• Investment of any property (other than fixed assets) in the form of a share into the charter fund (capital) of an enterprise, with the exception of imported property (if the investment of property is not related to the acquisition of other property in exchange)
• Imports of fixed assets being a subject-matter of leasing agreements
• Turnover of agricultural products producers (including by industrial process) for the sale of agricultural products produced by them for a 13-year period beginning from 1 January 2014
• Payment for rent or lease of aircraft and aircraft engines from non-residents of Azerbaijan who do not have a permanent establishment in Azerbaijan within the scope of this activity
• Industrial and technology equipment imported by taxpayers—VAT exemption applies for a period of ten years since their registration as a resident of the industrial and technological park
• Goods imported into special economic zones (excluding those that are subject to an excise tax)
• Certain categories of imported goods as defined by the Cabinet of Ministers

VAT exemptions are also granted by the Cabinet of Ministers for the import of goods and equipment used for production purposes or to provide advanced technology know-how. Such exemptions are granted for a specific period and in a specific area and only if it is impossible to satisfy the respective needs from local resources.

Excise tax

Excise duties are paid by individuals, companies, and registered foreign companies in Azerbaijan that import and produce excise goods. The following operations are subject to excise duties:

• The release of excise goods produced in Azerbaijan outside the premises of the building in which they were produced.
• The import of excise goods according to Azerbaijan's customs legislation.

The executive authority determines the rates of excise tax for excise goods imported into Azerbaijan, except for light vehicles, leisure and sports yachts, and other floating transports. The excise tax rates for these items are set by the Cabinet of Ministers.

Excise rates vary depending on the product and its amount. For example, wine and vineyard materials are taxed at 0.1 AZN per liter, while cigarillos are taxed at 45.5 AZN per 1,000 items.

Property tax

For legal enterprises, the taxable base of property tax is the average annual value of fixed assets. The rate is 1% of the average annual book value of the taxable property.

For physical persons, the taxable base of property tax is the value of buildings and their parts, and any water and air transportation or facility. The rate is based on the area of the building and varies between AZN 0.1 and AZN 0.4 per square metre, depending on the location of the building. In Baku, the rate is AZN 0.4 per square metre. In the Gyandja, Sumgait, and Absheron regions, the rate is AZN 0.3 per square metre. In other cities and regions, the rate is AZN 0.2 per square metre. In cities and towns of regional subordination, the rate is AZN 0.1 per square metre.

In residential areas, property tax is applied only to the area of the property exceeding 30 square metres. If the building is located in Baku, tax is calculated using coefficients (minimum 0.7 and maximum 1.5).

The property tax for movable properties is calculated by considering either the volume of their engines or their market value.

The following entities are exempt from property tax:

• Legal entities involved in the production of agricultural products (including production by industrial methods)
• Residents, managers, and operators of industrial or technological parks
• Micro-enterprises with a total book value of assets less than AZN 1 million
• Companies in the small and medium-sized enterprise (SME) cluster are exempt from property tax on property used for the operation of the SME cluster for seven years from the date of registration in the SME group register

Companies are required to report the average annual value of taxable property by 31 March of the year following the reporting year and pay property tax on a quarterly basis, subject to any necessary recalculations at the end of the year. Tax payments are due within 15 days of the second month of each quarter. The payment should be 20% of the previous year's property tax amount.

Frequently asked questions