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06.06.2019

Amendments to the Tax Code of Azerbaijan

"Amendment Law" brought significant changes with effect from 1 January 2019

Key Facts
  • Changes in personal income tax rates for non-oil and gas sector and non-public sector employees.
  • Changes in social security contribution rates for non-oil and gas activities and the non-public sector.
  • The Amendment Law limits the applicability of the simplified tax regime in Azerbaijan.
  • Excise rates are increased - Energy drinks have been included in the list of products subject to excise duty.
  • The Amendment Law provides some profit tax exemptions for micro-businesses.

It should be noted that significant changes have been made to the Tax Code of the Republic of Azerbaijan by adopting the Law on Amendments to the Tax Code dated 30 November 2018, effective from 1 January 2019 (“Amendment Law”).

1. Personal Income Tax

According to the Amendment Law, for a period of seven years starting from 1 January 2019, personal income tax rates for non-oil and gas sector and non-public sector employees will be as follows:

   Taxable monthly income  PIT rate
 1  Up to AZN 8,000  0%
 2  Over AZN 8,000  14% of the amount exceeding AZN 8,000


Personal income tax rates for the oil and gas sector and public sector are not affected by the Amendment Law. They remain as follows:

   Taxable monthly income  PIT rate
 1  Up to AZN 2,500  14%
 2  Over AZN 2,500  AZN 350 + 25% of the amount exceeding AZN 2,500


The new amendments have not provided any criteria for determining oil and gas activities and those of the non-public sector. According to a Presidential Decree dated 20 December 2018, the respective criteria shall be determined by the Cabinet of Ministers within one month. In cases where the taxpayer is involved in both oil and gas and non-oil and gas activities simultaneously, the company shall keep separate accounting records for those employees working in multiple sectors. Should the company fail to keep separate accounting records, then all employees will be subject to the income tax rates indicated for the oil and gas and public sectors (i.e. the higher rate).

By means of Resolution 56 dated 18 February 2019, the Cabinet of Ministers approved the respective criteria for determining oil and gas activities and those of the non-public sector for the purposes of Article 101.1-4 of the Tax Code and Article 14.7 of the Social Insurance Law.

The oil and gas sector covers the activities of:

(i) The state oil company of the Republic of Azerbaijan (including its structural subdivisions), and contractors and operating companies that are engaged in PSAs;

(ii) Local and foreign subcontractors that provide services to the persons indicated above (1). The activities of this group of persons will be regarded as oil and gas sector for PIT and SSC purposes if certain conditions are met pursuant to Resolution 53.

A definition of ‘non-public sector’ covers the legal entities established in accordance with the laws of the Republic of Azerbaijan and individuals, except for public legal entities established by the state, budget organisations and other bodies and organisations funded by the state budget, as well as other state-owned funds in the Republic of Azerbaijan, and legal entities in which the state directly or indirectly holds a controlling package of shares (51% or more).

2. Social Security Contributions

It should be also noted that, for a period of seven years starting from 1 January 2019, social security contribution rates for non-oil and gas activities and the non-public sector will be as follows:

 Accrued monthly income   SSC rate
   Total  From insured (employees) F rom insurers (employers)
 AZN 200  25%  3%  22%
 Over AZN 200  25%  10% of the amount exceeding
 AZN 200 plus AZN 6 
 15% of the amount exceeding
 AZN 200 plus AZN 44


SSC rates for the oil and gas sector and the public sector remain as follows:

 Accrued monthly income   SSC rate
   Total  From insured (employees)  From insurers (employers)
 N/A  25%  3%  22%

3. Simplified Tax

The simplified tax regime in Azerbaijan applies if (i) a taxpayer is not registered for VAT purposes, and (ii) their taxable turnover does not exceed the AZN 200,000 threshold during any month (or months) of a consecutive 12-month period. The simplified tax regime also applies to persons who are engaged in a public catering business, even if an entity’s turnover exceeds AZN 200,000.

The Amendment Law limits the applicability of the simplified tax regime in Azerbaijan. Under the Amendment Law, the following persons do not qualify as simplified taxpayers (Art. 218.5.8-13):

  • Persons who are engaged in production activities with more than 10 employees;
  • Persons who are engaged in wholesale trading activities;
  • Persons who provide services to taxpayers (i.e. individual entrepreneurs and legal entities) rather than to individuals (population) who are not registered with the tax authority;
  • Persons who are engaged in sale of gold, gold jewellery and diamond products;
  • Persons who are engaged in sale of leather and fur products;
  • Persons who are engaged in licensable activities (except for building construction and services on compulsory insurance contracts).

In addition, the simplified tax rate in Baku has been reduced from 4% to 2%.

4. Excise

In general, the Amendment Law increases excise rates. Energy drinks have also been included in the list of products subject to excise duty.

   Products subject to excise duty  Excise rate
 1  Alcoholic energy drinks  AZN 2 per litre
 2  Non-alcoholic energy drinks  AZN 3 per litre
 3  Cigars  AZN 1 per unit
 4  Liquids for electronic cigarettes  AZN 20 per litre

5. Profit Tax

The Amendment Law also provides some profit tax exemptions for micro-businesses. According to Resolution 55 of the Cabinet of Ministers dated 21 December 2018, a micro-business is a business with (i) between 1 and 10 employees, and (ii) an annual income of up to AZN 200,000. Article 106.1.20 of the Tax Code provides a 75% exemption on the profit of micro-businesses as legal entities. Additionally, micro-businesses are exempted from paying property tax, pursuant to the Amendment Law (Art. 199.14 of the Tax Code).


Contact

Mr. Ummi Jalilova
Email: ujalilova@gratanet.com 

Article published in ITP Newsletter #1/2019
Changes in international tax law and country-specific developments with respect to the taxation of permanent establishments in 10 selected countries
View publication
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