FISCAL YEAR

Ensuring the sustainability of the tax system is of crucial importance if stable economic growth and the long-term development of the state are to be guaranteed. It establishes conditions for fair income redistribution, stimulates entrepreneurial activity and investment, and reduces the economy's vulnerability to external shocks. It is indisputable that a balanced tax policy is of paramount importance for Azerbaijan, particularly in view of global challenges such as volatile commodity markets, geopolitical factors and climate change.

The fiscal system demonstrates resilience today, thanks to reforms aimed at digitalisation, increasing transparency, and combating the shadow economy. However, in the long term, the country will need to adapt to global trends, including the transition to a low-carbon economy and the development of the digital sector. In this regard, new amendments to the Tax Code, effective as of January 1, 2025, have been introduced. These amendments are designed to address deficiencies, deepen fiscal reforms, and enhance their impact on the real sector. 

A key measure to boost the diversification of the economy has been the effective use of tax incentives. These incentives are granted to enterprises operating in the renewable energy, IT, agriculture, and tourism sectors. Special attention is given to technoparks and industrial zones, where residents are exempt from profit, land, and property taxes for a specified period.

These measures have already yielded results by stimulating foreign investment inflows into the non-oil sector and fostering innovative industries. However, the effectiveness of tax incentives necessitates regular analysis: it is vital not only to create favourable conditions for businesses but also to monitor the real impact of these incentives—assessing their effects on employment growth, export potential, and the tax base.

Azerbaijan's fiscal legislation is subject to significant changes on an annual basis. The latest amendments to the Tax Code, which came into force on 1 January 2025, aim to improve the business climate and stimulate entrepreneurial and investment activity through expanded tax benefits while also enhancing tax administration. These innovations reflect current economic realities and lay the foundation for sustainable and inclusive economic growth aligned with the country's strategic priorities. It is important to note that tax rates have not been changed.

Transport Benefits

One of the key changes in the Tax Code is the introduction of a zero VAT rate for services related to repairing ships, water transport vehicles, and hydraulic structures provided by shipbuilding and ship repair enterprises at the request of non-residents. The shipbuilding industry holds significant strategic importance for Azerbaijan; this measure aims to reduce reliance on imports, modernise the national fleet, and enhance export potential. The introduction of this zero-rating is expected to have a positive impact on competitiveness in the ship repair sector, leading to the creation of new employment opportunities and strengthening the collaboration with international clients. This strategic move is anticipated to position Azerbaijan as a prominent regional hub for ship repair services in the future.

Another "transport" benefit involves the allocation of ₼90 million from the state budget last year for the purchase of electric buses for BakuBus LLC as part of efforts to modernize the country's bus fleet. These purchases will be made from suppliers prepared to establish production facilities for these buses in Azerbaijan. Additionally, from 2025, a VAT exemption will be introduced on the sale of buses produced in Azerbaijan as well as on the import of spare parts for these vehicles for an eight-year period. This is similar to an exemption that was introduced on May 1, 2023, for a duration of 10 years concerning passenger cars produced in Azerbaijan and their spare parts imports. Collectively, these fiscal incentives are intended to stimulate investment inflows into the motor vehicle manufacturing sector and facilitate the establishment of new enterprises in this area.

It should also be noted that new rules for calculating road tax on fuel and changes in freight transport taxation were introduced this year. Accordingly, road tax on petrol, diesel fuel, and liquefied gas produced in Azerbaijan and intended for domestic consumption (wholesale) is calculated at a rate of ₼0.02/litre and included in the wholesale price (inclusive of VAT and excise duty). A tax rate of ₼0.02/litre is applied to imported fuel. This amount is added to the customs value (including import duty, excise duty, and VAT), but cannot be lower than the wholesale market price.

Simultaneously, road tax exemptions have been established for trucks, trailers and semi-trailers from foreign countries. The aim of this measure is to simplify logistics processes and support the competitiveness of transport corridors that transit through Azerbaijan.

Extras

These benefits collectively span a broad spectrum of economic sectors. Alongside the introduction of new incentives, existing benefits have also been extended. Unsurprisingly, Azerbaijan’s proactive role in tackling pressing issues within the global climate agenda has been incorporated into the latest revisions of the Tax Code. As part of its green energy strategy, tax incentives have been introduced for companies engaged in generating energy from renewable sources. This move is designed to motivate investors to channel resources into the development of environmentally sustainable energy.

Furthermore, VAT exemptions on the import of equipment and materials essential for modernizing large refineries and producing competitive petroleum products have been prolonged for an additional year.

For another two years, VAT on the sale of agricultural products—whether domestically produced or imported—will be calculated solely based on trade margins.

Other updates include the exemption of property tax for management companies operating within industrial zones, as well as the removal of land lease income from the list of services subject to VAT.

Starting in 2025, new tax incentives will also focus on fostering the growth of cultural sectors and enhancing citizens' quality of life. Specifically, individuals earning income from royalties tied to copyrights or rights granted for the use of intangible assets related to theatres, museums, symphony orchestras, film production, broadcasting, and dubbing will be exempt from a 14% withholding tax for a period of five years.

Additionally, 90% of the income earned by individuals involved in film production and dubbing will be exempt from personal income tax. This marks an increase from 2024, when only 75% of their income was exempt over a three-year period. Beginning in 2025, not only have the scope and duration of these benefits expanded, but the categories of beneficiaries have also widened. The incentives now extend beyond film industry workers to include those employed in theatres, museums, symphony orchestras, and film production.

Land parcels on which facilities engaged in these activities are located will also enjoy a five-year exemption from land taxes. Furthermore, individuals will receive a refund of 50% of VAT paid through non-cash transactions when attending theatres, museums, symphony orchestra concerts, or film screenings.

For Investment Growth

Azerbaijan has implemented significant changes this year with the aim of stimulating its investment climate and attracting foreign capital.

Income derived from investing resources from the State Social Protection Fund and Unemployment Insurance Fund is exempt from income tax. This decision aims to intensify financial flows while enhancing state fund utilization efficiency.

Another significant innovation within this context is a VAT refund under a tax-free regime for medical services provided to foreigners and stateless persons. Internationally, a range of approaches are used to stimulate medical tourism, including VAT exemptions, zero or differentiated rates, and cash-back tax refunds. Azerbaijan has opted for a tax-free mechanism limited to non-cash payments, drawing upon both foreign experiences and domestic considerations. The legislation that took effect on January 1 allows for full VAT refunds on non-cash transactions related to medical services, applicable to both medical institutions and private practitioners. The implementation of these measures will strengthen Azerbaijan's position as a medical tourism centre, stimulate investment inflows and improve the overall business climate.

A key change in the Tax Code introduces a 75% tax exemption for individuals engaged in specific entrepreneurial activities. This relief applies to income not exceeding ₼45,000 annually (excluding expenses). The objective is to support micro-entrepreneurs engaged in tangible activities while reducing tax burdens on low-income businesses.

If an entrepreneur operates across multiple sectors, this benefit applies provided that income from these sectors constitutes at least 50% of total annual income.

Tax Audits

A key aspect of entrepreneurship regarding relations with fiscal authorities pertains to tax audits. As of 2025, regulations concerning tax audits, particularly those pertaining to foreign income, have been clarified, and the scope of operational tax control has been expanded.

New areas have been integrated into operational tax control mandates, including monitoring of leased properties in markets, overseeing business entity registration information, and verifying the correct placement of registration certificates with tax authorities at business locations (with the exception of agricultural and cooperative markets). Specifically, information indicating business names along with individual taxpayer identification numbers must be displayed at entrances to entrepreneurial activity venues.

The updated rules aim to enhance business transparency while strengthening control over compliance with tax regulations, especially concerning leasing arrangements and business facility registrations.

Measures are being taken to tighten controls over transfer pricing alongside monitoring transnational companies' operations, with a view to improving Azerbaijan's standing within international rankings while enhancing transparency across tax administration practices. These modifications are directly related to fostering investor confidence while improving overall business environments.

The amendments made to the Tax Code reflect a strategic approach towards establishing a progressive tax administration that supports business and implements social initiatives, thereby emphasising Azerbaijan's commitment to meeting international standards and reinforcing its position within global economies.

The practical execution of reforms remains paramount for success, and this can only be achieved through the cooperation of all participants in economic processes: the state, entrepreneurs and taxpayers.