In Azerbaijan, employers have several tax responsibilities. These include income tax withholding, social security contributions, unemployment insurance, and mandatory medical insurance.

Income Tax Withholding

Employers are responsible for withholding income tax from the gross salaries of their employees. The income tax rates in Azerbaijan are progressive, ranging from 0% to 25%.

Social Security Contributions

Employers are required to make substantial social security contributions for their employees. These contributions cover pensions, disability, sickness, and other social benefits. For most private sector employees, the standard social security rates are as follows:

• Employer: 22% of employee gross salary (for income up to AZN 200, additional 15% for income above that threshold).
• Employee: 3% of employee gross salary (for income up to AZN 200, additional 10% for income above that threshold).

In the oil and gas industry, the social security contribution rates are the same as the standard rates.

Unemployment Insurance

Both employers and employees contribute to unemployment insurance in Azerbaijan to fund unemployment benefits:

• Employer Contribution: 0.5% of the employee's gross salary
• Employee Contribution: 0.5% of the employee's gross salary

Mandatory Medical Insurance

Since 2021, employers have the obligation to contribute to mandatory medical insurance based on these rates:

• Employer Contribution: 2% on salaries up to AZN 8,000 per month. For income exceeding AZN 8,000, the employer rate drops to 0.5%.
• Employee Contribution: 2% on salaries up to AZN 8,000 per month. For income exceeding AZN 8,000, the employee rate drops to 0.5%.

Important Considerations

Azerbaijan has a minimum monthly wage requirement. Employers must ensure all employees are paid at least this minimum amount. Employers are also responsible for accurately calculating, withholding, and paying all applicable taxes to the appropriate Azerbaijani authorities on a timely basis.

In Azerbaijan, employees are subject to income tax on their earnings. The income tax system is progressive, with higher income earners paying a higher percentage in tax.

Income Tax Calculation

Here's a simplified example of how income tax is generally calculated:

• Monthly Income Below AZN 2,500: 14% tax rate
• Monthly Income Above AZN 2,500: AZN 350 + 25% of the excess amount

Temporary exemptions may apply for employees in non-oil-gas and non-government sectors.

Social Security Contributions

Employees in Azerbaijan are also required to contribute to social security, which funds pensions, disability benefits, sickness benefits, and more. The standard social security contributions for most employees are:

• Employee: 3% of gross salary (for income up to AZN 200, additional 10% for income above that threshold).

In the oil and gas industry, the social security contribution rates are the same as the standard rates.

Unemployment Insurance

Employees contribute a small percentage of their salary towards unemployment insurance:

• Employee Contribution: 0.5% of the employee's gross salary

Mandatory Medical Insurance

Since 2021, employees have the obligation to pay into mandatory medical insurance based on these rates:

• Employee Contribution: 2% on salaries up to AZN 8,000 per month. For income exceeding AZN 8,000, the employee rate drops to 0.5%. Please note, for non-public sector and non-oil and gas industries, specific discounts may be in effect for certain periods.

Important Considerations

Employers are responsible for withholding the correct amount of income tax, social security contributions, unemployment insurance, and medical insurance from their employees' salaries. Also, deductions cannot reduce earnings below the minimum wage established in Azerbaijan.

Azerbaijan has a standard VAT rate of 18% that applies to most goods and services. Certain supplies may be eligible for zero-rating (0% VAT) or exemption from VAT altogether. These often include exports of goods and specific services.

VAT on Services Rendered within Azerbaijan

Services provided within Azerbaijan are generally subject to VAT at the standard 18% rate. The place of supply rules in Azerbaijan determine when a service is considered to be rendered within the country. Generally, business-to-business (B2B) services are considered supplied where the customer is located. Business-to-consumer (B2C) services often depend on the type of service for determining the place of supply. Specific types of services may be exempt from VAT.

VAT on Imported Services

Azerbaijan applies a reverse charge mechanism for VAT on imported services. This means the recipient of the service in Azerbaijan becomes responsible for reporting and paying the VAT, rather than the foreign service provider. The VAT on imported services is calculated based on the value of the service at the prevailing 18% rate.

VAT Registration and Reporting

Businesses in Azerbaijan with a taxable turnover exceeding AZN 200,000 within a 12-month period are generally required to register for VAT. VAT-registered businesses must file VAT returns on a monthly basis and remit the VAT due to the tax authorities.

Special Considerations for E-Services

Foreign providers of electronic services to consumers in Azerbaijan (B2C) are not generally required to register for VAT due to a special reverse charge mechanism where the bank coordinating the transaction with the customer charges the VAT and accounts for it with the tax authorities. Non-resident suppliers of electronic services to businesses in Azerbaijan (B2B) follow the usual reverse charge procedure, where the Azerbaijani business recipient accounts for the VAT.

Azerbaijan offers a variety of tax incentives to stimulate investment in different economic sectors. These incentives aim to create a conducive business environment for both local and international companies.

Special Economic Zones (SEZs)

Companies operating within designated Special Economic Zones enjoy significant tax benefits, as outlined in the Law on Special Economic Zones (SEZs):

• 0.5% tax on overall turnover
• 0% VAT rate
• Exemption from customs duties

Tax Incentives in Specific Industries

Agriculture

• Tax holidays for agricultural producers
• Exemptions from profit tax, land tax, and property tax under specific conditions and timelines (often for significant periods, such as 10 years)

Technology and Innovation

Companies operating in High-Tech Parks benefit from:

• Exemption from profit (corporate income) tax
• Exemption from property tax
• Exemption from land tax
• VAT exemption
• Simplified customs procedures

Industry and Manufacturing

• Industrial parks offer reduced corporate tax rates and exemptions from VAT, property tax, and land tax for specified periods (usually 7 years).
• Incentives for businesses investing in the production of import-substitution goods.

Additional Tax Benefits

• Accelerated Depreciation: Businesses can benefit from accelerated depreciation rates for specific investments, enabling them to write off assets more quickly and lower taxable income.
• Investment Deductions: Companies making significant investments in capital assets might be eligible for investment deductions, further lessening their tax burden.
• Tax Exemptions for Reinvested Profits: Profits that are reinvested in the business may qualify for tax exemptions under certain conditions.
• Double Taxation Treaties: Azerbaijan has an extensive network of double taxation treaties with over 50 countries. These treaties prevent double taxation for businesses with international operations.

How to Apply for Tax Incentives

The process for applying for tax incentives varies depending on the specific incentive. In many cases, businesses will need to register with the relevant authorities and provide supporting documents. More detailed information is available from:

• The Ministry of Economy of Azerbaijan
• The State Tax Service under the Ministry of Economy of the Republic of Azerbaijan