Changes to the Tax Code of the Republic of Azerbaijan, effective from 1 January 2019 provides for new rules regarding tax reductions, tax exemption application expansion of taxation base and tax administration improvement. Below please find the main changes to the Tax Code.
Monthly income of an individual up to 8,000 manat shall be exempt from income tax for 7 years starting from 1 January 2019. According to new changes, when the income of an individual exceeds 8000 manats, 14% of its income is held as income tax. Please, note that these changes will apply only to non-oil & gas and private sector employees. Income of the employees working in oil & gas and public sector shall be taxes as per the previous rules, i.e., 14% up to 2500 manat and 350 manat + 25% of the amount exceeding 2500 manat.
The list of exemptions on profit tax has been expanded sufficiently. Revenues of legal entities and entrepreneurs acting as SME clusters and startups within a certain period of time exempted from profit tax.
According to the new tax exemptions from profit tax:
- Legal entities created on behalf of the state with more than 49% of total revenues earned from entrepreneurial activity;
- Determination of the relevant executive authority operating in the field of mortgage lending and guarantees of entrepreneurial loans his body’s revenues;
- Profit of educational institutions;
- 50% of taxpayer’s income or share income is deducted from profit tax for at least 3 years;
- In addition, the exemption granted for legal entities engaged in the production of agricultural products (including industrial methods) from January 1, 2014 is extended from 5 to 10 years;
- 75% of earnings from entrepreneurship activities of legal entities engaged in micro entrepreneurship;
- Profit of SMEs Cluster Company from the time when SME Cluster Company registered in the registration of the SME Cluster Companies;
- From the date when the Startups received a startup certificate, the profit gained from innovation activities is exempted from profit tax for 3 years.
Based on previous rules the taxpayer should pay 100 manat in case of not submitting documents on the calculation and payment of taxes within the period established by the legislation or submission of them in distorted form, or not being kept documents relating to international agreements to which the Republic of Azerbaijan is a party, as well as accounting records for 5 years without valid reason. According to new amendments, the financial sanctions will be imposed in the amount of 1,000 manat for violating the same requirements. Further, 1200 manats of monetary sanction shall be imposed on taxpayer for violating rules of payment in cash.
In addition, the amount of applicable financial sanction for employing persons without a valid employment agreement was increased from 1,000 manat to 2,000, 4,000 and 6,000 manat for the first, second and third times accordingly..
When the tax-deductible income is not reported or decreased, the taxpayer will be imposed a financial sanction of 6% of the income.
Financial institutions which open accounts or render financial services to legal entities shall be subject to a financial sanction of 500 AZN if they do not comply with the requirements of applicable legislation.
Tax burden of small and medium enterprises was also reduced to certain extent in terms of simplified tax. Simplified tax rate has been set at 2% for all cities and regions of Azerbaijan (rate was 4% for Baku and 2% for other regions).
New activity fields have been added to the list of activities that will pay a monthly fixed amount as a simplified tax. Persons engaged in the following types of activity will be a fixed simplified taxpayer:
- Individuals (waiters) serving customers at public catering facilities – 10 manat per month;
- Hairdresser – 20 manat per month; and
- Tailor – 10 manat per month.
The list of individuals who are NOT entitled to become a simplified taxpayer is further expanded:
- Taxpayers carrying out production activities with more than 5 employees;
- Taxpayers who provide goods under the wholesale trade activity;
- Taxpayers selling gold, jewelry and other household goods, as well as diamond;
- Taxpayers selling fur products;
- Taxpayers engaged in the type of activity required by the license, except for those engaged in the construction of buildings.
Legal entities and individual entrepreneurs who are subjects of micro-entrepreneurship are exempt from property tax. SME cluster companies are exempt from property tax for 7 years from the date of their entry into the Register.
Many new provisions have been added to the Tax Code in order to strengthen tax administration rules.
According to the proposed amendments, the taxpayer does not need to submit a seal to the documents sent electronically. Additionally, the list of documents sent to taxpayers has been clarified in more detail and referred to in the new edition as a decision, act, notice, claim, letter or other documentary.
This article was prepared as a general information by the attorneys of Baku Attorneys & Consultants (BAC), Azerbaijani law firm. BAC is a full service law firm based in Baku and it has a strong team of highly experienced attorneys and consultants, specialized in rendering various expert services to foreign and local clients in Azerbaijan, including tax advice, tax optimization, tax disputes and establishment of businesses. Please, feel free to reach us via www.batco.az to further discuss your case.