Azerbaijan

Azerbaijan continues to advance a broad tax reform agenda aimed at modernising administration, strengthening fiscal discipline and supporting priority areas of the economy. The current reform cycle reflects a strategic shift toward transparency, digitalisation and risk‑based oversight, aligned with the government’s 2022–2026 socio‑economic development strategy.

The State Tax Service is increasingly focused on cooperative compliance, data‑driven monitoring, and measures designed to formalise economic activity. Recent legislative initiatives - including the introduction of Horizontal Monitoring, revisions to personal taxation, enhanced incentives for cashless payments, and region‑specific tax relief - demonstrate a balanced approach combining administrative efficiency with targeted economic support.

Implementation of Cooperative Compliance via Horizontal Monitoring

As part of the modernisation of its tax administration, Azerbaijan has introduced Horizontal Monitoring (HM) starting from January 2026. HM aimed at enhancing transparency and cooperation between taxpayers and the tax authority. Key highlights:

Scope and Purpose
Horizontal monitoring focuses on verifying the correct calculation and timely payment of taxes. It does not cover transfer pricing audits or foreign income inquiries, which remain under separate control measures.

Eligibility Criteria and Benefits for Taxpayers

Application for HM is voluntary, and taxpayers may apply if they:

• Qualify as medium or large businesses;
• Maintain automated accounting and tax records;
• Implement an internal control system for tax risk management.

Acceptance into HM is not permitted in the following cases:

• When a decision classifying the taxpayer as a ‘risky taxpayer’ is in effect.
• When a criminal case has been initiated in connection with violations of tax legislation.

There are following benefits of HM for taxpayers:

• Tax authority does not conduct additional desktop tax audits and onsite tax audits for the reporting periods covered by HM (with some exceptions);
• If risks/non-compliances proactively disclosed under internal control system prior to monitoring, no sanction is applied for respective understatements revealed via HM;
• Understatements disclosed through HM, except for proactively reported risks, are subject to a reduced financial sanction of 25%, in contrast to a 50% sanction applied to understatements identified during onsite tax audits;
• Taxpayers have the option to use straight-line method for depreciation.

Application Process

Applications must be submitted by September 1 of the year preceding the monitoring period, along with supporting documentation on tax calculations and internal controls.

Monitoring Period

Covers one calendar year and must be completed within six months (extendable by two months if additional review is needed).

Taxpayer Obligations

• Provide required documents via an electronic platform;
• Maintain and disclose internal tax risk controls.

Termination
HM is terminated, and the taxpayer is removed from the regime in the following cases:

• When the taxpayer voluntarily submits an application to discontinue participation (removal is completed within 3 business days);
• When the taxpayer twice consecutively fails to comply with the tax authority’s requests for documents or information;
• When a court or law‑enforcement authority issues a decision to conduct an onsite audit in accordance with criminal procedural legislation;
• If the taxpayer fails to disclose possible tax risks as required under internal control, and an unscheduled audit is initiated for the period covered by HM due to signs of concealment (reduction) of the taxpayer's income or taxable object are identified based on any information obtained by the tax authority;
• If, during an onsite audit for a period outside the HM scope, the audit period is extended due to evidence of tax evasion;
• When the taxpayer is classified as a risky taxpayer, or when a criminal case is initiated for violations of tax legislation.

Expiry of seven-year tax incentives for non-oil and gas sector in 20

Starting in 2019, the monthly salary of employees working in the non-oil, gas and non-governmental sectors up to 8,000 manats was exempt from tax for a period of 7 years. Beginning January 1, 2026, this 7-year tax incentive has ended, and a new progressive PIT schedule has applied. The rates will increase in stages for income up to AZN 2,500 (approx. USD 1,470): 3% in 2026, rising to 5% in 2027 and 7% from 2028 onward, while higher income brackets will continue to be taxed at incremental rates with fixed base amounts and percentages as follows:

• For monthly income in the amount of AZN 2,500 (approx. USD 1,470) -AZN 8,000 (approx. USD 4,705): 10%
• For monthly income exceeding AZN 8,000 (approx. USD 4,705): 14%

Exemptions related to Nakhchivan Autonomous Republic (NAR)

A legal entity or individual registered for tax purposes in the territory of Nakhchivan or under centralized tax registration rules and operating directly in Nakhchivan are considered Nakhchivan residents. Exemptions are granted to residents of the NAR for the following taxes for a period of 10 years starting from January 1, 2026:

• Profit (income) tax;
• Property tax;
• Land tax;
• Simplified tax;
• Dividend income;
• Import VAT (on certain goods).

Exemption applies to the following types of activities:

• Production, processing and extraction activities;
• Wholesale trade, construction, and service sectors (excluding services provided to individuals);
• Tourism, retail trade, public catering, and other consumer services.

Organistion for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS)

In December 2022, Azerbaijan joined the OECD/G20 Inclusive Framework on BEPS. By joining the OECD/G20 Inclusive Framework on BEPS, Azerbaijan, together with over 145 countries and jurisdictions, has taken on the commitment to implement 15 measures to tackle tax avoidance, improve the consistency of international tax rules, and ensure a more transparent tax environment.

Some of the Action Plans have already been fully or partially adopted into Azerbaijan’s tax legislation, such as controlled foreign company (CFC) rules, permanent establishment (PE) provisions, transfer pricing regulations, and country-by-country (CbC) reporting requirements.

Through joining the OECD/G20 Inclusive Framework on BEPS, Azerbaijan has committed to addressing tax challenges arising from the digitalisation and globalisation of the economy by joining a two-pillar plan to reform the international taxation rules to make multinational enterprises pay a fair share of tax wherever they operate.

Further strengthening its commitment to the OECD/G20 BEPS agenda, Azerbaijan signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (BEPS Multilateral Instrument or MLI) on 20 November 2023, becoming the 102nd signatory. The MLI is a key international tax instrument that allows jurisdictions to swiftly modify their existing bilateral tax treaties to address tax treaty abuse and artificial avoidance of PE status and to improve dispute resolution mechanisms.

Following the signing, Azerbaijan ratified the MLI by depositing its instrument of ratification with the OECD on 24 September 2024. As a result, the MLI entered into force for Azerbaijan on 1 January 2025. With this, Azerbaijan has committed to updating its existing network of double tax treaties (DTTs) in accordance with the BEPS measures, further enhancing its tax system's integrity and transparency. In parallel, Azerbaijan is monitoring global developments on the implementation of Pillar Two and the emerging Subject to Tax Rule (STTR) multilateral convention, but as of August 2026 it has not yet enacted domestic Pillar Two (GloBE) legislation or signed the STTR MLI.

New tax incentives

Beginning from 2023, a new tax incentives regime has been created for the legal entities and sole entrepreneurs operating in the liberated territories.

Exemptions for IT companies

Companies involved in system integration, software preparation, and development activities (so-called ‘IT companies’), beginning from 2023, can benefit from certain profit tax exemptions.