Azerbaijan proposes major tax relief for businesses in 2025 budget Caliber.Az analysis

Each November, as part of Azerbaijan's annual budget planning, proposed amendments to the Tax and Customs Codes, as well as legislation on state duties, come under review. During a recent meeting of the Milli Majlis (parliament) Committee on Economic Policy, Industry, and Entrepreneurship, discussions focused on fiscal incentives aimed at reducing the tax burden on businesses in 2025.

The proposed amendments to the Tax Code include a reduction in taxes for micro-businesses and media outlets. Cultural institutions such as theatres, cinemas, museums, and orchestras are also set to benefit from significant tax relief. Furthermore, plans are underway to exempt bus manufacturers and film production companies from VAT and to streamline the taxation framework for the construction industry, among other initiatives.

At the end of September 2024, during a Cabinet meeting in Azerbaijan, the parameters of the 2025 budget package were outlined. It was announced that amendments to the Tax Code (TC) and adjustments to customs tariffs are planned for next year to stimulate investment and boost business activity. These changes will be incorporated into the relevant legislation, reflecting the need for continuous modernization of fiscal and business laws amid rapidly evolving global dynamics.

Key drivers include the integration of green technologies in energy and transport, the digitalization of the economy and financial sector, and broader transformations under the Fourth Industrial Revolution (4IR). To this end, Azerbaijan continues to implement reforms aimed at improving its investment climate. Business registration and operations have been streamlined through the "single window" system and digital document management, with all tax declaration processes now fully digitized.

Legislative and administrative reforms in the fiscal domain have contributed to increasing the number of taxpayers in the non-oil sector, supporting SMEs, and strengthening public-private partnerships. Over the past five years, amendments to the Tax Code have reduced fiscal burdens across various sectors, including agro-industrial clusters and green energy projects. A special tax regime has also been established for businesses operating in territories liberated from occupation.

These measures have expanded the tax base by bringing undeclared income from employees and shadow transactions of industrial and commercial enterprises into the formal economy.

During a recent session of the Milli Majlis Committee on Economic Policy, Industry, and Entrepreneurship, proposed amendments to Azerbaijan's Tax Code were discussed.

"Unregistered and tax-evading activities by market participants will be firmly addressed in Azerbaijan," stated Orkhan Nazarli, head of the State Tax Service (STS), who participated in the meeting. "Tax oversight will be intensified for businesses, accounting and cash management processes will be optimized, and new approaches will be introduced for micro-enterprises. These are crucial and long-awaited changes for many private sector entrepreneurs."

Since October, the STS has ramped up efforts to combat violations of cashless transaction regulations among small and microbusinesses. These measures specifically target practices such as concealing revenue through peer-to-peer money transfers and imposing stricter penalties on businesses in retail, service, and food sectors that fail to utilize POS terminals.

Contrary to tightening administrative measures, the current draft amendments to Azerbaijan’s Tax Code aim to provide benefits for microbusinesses and promote individual entrepreneurship. If approved by parliament, starting January 1, 2025, individuals engaged in micro-entrepreneurship within certain service sectors and generating an annual turnover of up to 45,000 manats ($26,470) will receive a 75% tax exemption on their income.

Notably, this incentive will be granted without imposing conditions such as employing three workers, having no outstanding debts, or mandatory contributions to state social insurance.

The proposed amendments to Azerbaijan’s Tax Code introduce new taxation mechanisms for the construction sector. Specifically, changes to Article 130.6 are designed to establish a new framework for determining the portion of income from long-term contracts and allowable expenses that can be deducted for each reporting period.

Additionally, to encourage foreign investment, the tax rate on the repatriation of net profits from a non-resident company's permanent establishment in Azerbaijan is set to be reduced from 10% to 5%.

To support the localization of automobile production in Azerbaijan, the draft amendments include an exemption from VAT on the sale of locally produced buses. This provision also includes an eight-year VAT exemption for imports of parts and components by legal entities for manufacturing purposes.

As part of Azerbaijan’s large-scale projects involving international companies and donor organizations in the field of green energy, amendments to the Customs Tariff Law have been proposed. Specifically, the import of machinery, technological equipment, and installations for electricity generation using renewable energy sources will be exempt from customs duties.

This exemption applies to purchases made by individual entrepreneurs and legal entities participating in electricity generation projects, with the condition of complying with state procurement requirements under the Renewable Energy Usage Law in Electricity Generation. The exemption will be valid for up to 30 years, including the construction period.

The green energy and electric transport sectors have been identified as key areas for the future development of Azerbaijan’s economy. In this context, the VAT exemption period for the import and sale of second and third-level electric vehicle charging stations has been extended from 3 to 5 years. This equipment was initially exempt from VAT starting January 1, 2022, for a three-year period, and in October, the exemption was extended through 2025 and 2026.

The proposed changes to the fiscal legislation for the coming year include not only incentives for businesses but also tax breaks for certain professions and cultural sectors. Under the draft amendments to the Tax Code, about 90% of the profits from the activities of Azerbaijani theatres, film industry entities, museums, and symphonic orchestras are set to be exempt from taxes in the coming year.

"To stimulate film production, we should consider fully exempting this sector from VAT," stated MP Tahir Mirkishili during a parliamentary committee meeting. "Last year, the Chamber of Accounts reported on the number of films produced under government orders, and likely, to further stimulate film production, we should expand tax incentives in this area. Overall, increasing film production could positively impact Azerbaijan’s economy."

The upcoming package of tax amendments for next year includes provisions for tax incentives aimed at supporting the development of Azerbaijan’s domestic film industry.

An additional bonus to support domestic media could be the introduction of a new article (102.1.30-1) in the Tax Code, which would exempt 75% of journalists' income (for individuals) from personal income tax without any conditions. This would apply to those engaged in journalism whose income (excluding expenses) from this activity does not exceed 45,000 manat ($26,470) per calendar year.

Furthermore, certain fiscal benefits, including VAT refunds for medical services under the tax-free regime, are planned for next year for foreigners and stateless individuals.