In general, Azerbaijan resident entities are subject to a profit tax on their worldwide income. A non-resident enterprise operating in Azerbaijan through a PE must pay tax on the gross income generated from Azerbaijan sources, less any related deductions attributable to the PE. Gross income of a non-resident enterprise generated from Azerbaijan sources and not connected with a PE is taxed at the source of payment without any deductions allowed for expenses.
Domestic enterprises and PEs of non-residents are subject to profit tax at the flat rate of 20%.
Taxable profits are defined to be the difference between a taxpayer’s gross income and deductible expenses.
Gross income encompasses all revenues received by a taxpayer from all economic activities, unless the revenues are expressly exempted under the law.
Deductible expenses encompass all expenses that are incurred in the furtherance of a taxpayer's business activities, except for those determined as non-deductible under the Tax Code. See the Deductions section for more information.
Simplified tax system
The Tax Code stipulates payment of taxes based on a simplified system for enterprises or sole entrepreneurs not registered as value-added tax (VAT) payers and whose cumulative gross revenue during any consecutive 12-month period is not more than 200,000 Azerbaijani manats (AZN).
The following are some of the taxpayers’ categories not eligible to be classified as simplified taxpayers:
- persons who produce goods subject to excise duty and mandatory marking
- non-state pension funds
- public legal entities
- persons selling gold, jewellery made from it and other household goods, as well as diamonds
- persons selling fur products
- Persons engaged in wholesale trade
- Persons engaged in retail trade activities with turnover exceeding AZN 200,000 over a consecutive 12-month period
- Persons with a residual value of fixed assets owned at the beginning of the year more than AZN 1 million.
- Companies with headcount over ten employees engaged in production.
- Professional participants of the insurance market (except for insurance agents providing services under a mandatory insurance agreement).
- Persons providing services to tax registered persons.
- Persons engaged in licence-required activities.
- Persons earning income from renting property and royalties.
Persons engaged in both wholesale and retail activities may choose to be simplified taxpayers unless the volume of transactions (other than non-operating income) to be executed by electronic invoices in a quarter does not exceed 30% of total trading operations.
Persons who provide services to non-tax-registered persons and tax-registered persons may choose to be simplified taxpayers if the portion of the revenue (other than non-operating income) in relation to services supplied to tax-registered persons does not exceed 30% of the total revenue for a quarter.
Persons engaged in building construction activities do not have right to be a simplified taxpayer, except for those who have commenced but have not completed their construction works by 1 January 2020.
Persons who are operators of sports betting games and sellers of sports betting games, as well as organisers of lotteries and sellers of lottery tickets, are considered to be simplified taxpayers irrespective of their turnover.
The simplified tax is imposed on gross revenue at a rate of 2%, whereas the simplified tax rate for enterprises rendering catering services with taxable transactions exceeding AZN 200,000 shall be at 8%.
A special rate of simplified tax is set for individuals selling residential and non-residential premises (except for premises of individuals where one has been residing for at least five years) at a fixed amount of AZN 15 per square metre multiplied by an applied coefficient. The applied coefficient is determined by regional executive authorities.
Special tax rates apply in relation to the income of sports betting operators and lottery organisers at 6% of the proceeds generated from the sale of tickets and income of sports betting and lottery ticket sellers and 4% of the commissions paid to them by the operators and lottery organisers.
Simplified tax is calculated at 1% for cash withdrawals by legal entities and sole traders.
Other special corporate tax regimes
There are other tax regimes applicable under special agreements concluded between the Azerbaijan government and foreign oil companies: production sharing agreements (PSAs) and host government agreements (HGAs). The PSA and HGA regimes apply to all enterprises involved in these agreements, including foreign oil companies functioning as contractors and foreign service companies providing services to the contractor or the operating company.
There are 30 signed and ratified PSAs and two HGAs, each with its own separate tax regime. Each PSA and HGA is in force, published on the official website of the Ministry of Taxes (www.taxes.gov.az), and contains a tax article that outlines the tax regime for that particular agreement. While there are several similarities with respect to tax terms in the various PSAs, there are some differences, other than merely differing tax rates (e.g. taxation of foreign subcontractors) or reporting requirements. Additionally, tax protocols for each PSA and HGA, which provide specific guidance regarding the procedures for payment of taxes and filing of reports, are negotiated with the Ministry of Taxes and other executive authorities.
Under PSAs, PSA contractor parties and foreign subcontractors are subject to tax only on their corporate income. Contractor parties pay profit tax on income derived from hydrocarbon activities, and foreign subcontractors are subject to tax only on income from services and mark-up on goods supplied in Azerbaijan. Local subcontractors are subject to the statutory tax regime.
No corporate tax is applicable to HGA subcontractors. HGA participants pay tax only on their transportation income.
See the Tax credits and incentives section for a description of other tax incentives.
Local income taxes
Local income taxes are paid only by companies and organisations that are in the property of municipalities. Tax rates do not exceed 20% for profit taxpayers and 2% to 8% for simplified taxpayers.