The Parliament approved the draft law on amendments to the Tax Code and 16 other legislative acts in its first reading on November 21st, linking them directly to the 2026 budget package. The primary objectives of these changes are to accelerate national economic development, strengthen measures against the shadow economy, promote strategic investments, protect the domestic market, and improve governance.
1. Regulation of Fiscal Burden on Wage Income
The most significant change affects personal income tax for employees in the non-oil private sector. Firms must be careful of such adjustments and ready to update the payroll systems to ensure tax compliance.
- For monthly income up to 2,500 AZN, the income tax rate will be applied gradually: 3% in 2026, 5% in 2027, and 7% from 2028 onward.
- This new structure avoids restoring the higher pre-2019 rates (14% and 25%) and is set to be the lowest rate among countries in the region for this income bracket.
2. Regional and Strategic Investment Incentives
The legislation targets specific geographic and economic sectors for constant growth.
- Nakhchivan Autonomous Republic will be subjected to the same tax regime established for the liberated territories starting January 1, 2026. This includes a 10-year exemption from profit tax, property tax, land tax, and simplified tax. Additionally, mandatory state social insurance contributions paid by employers on behalf of employees will be subsidized. The goal is to boost economic activity, attract investment, and improve employment in the region.
- A preferential tax regime will be applied to support the local automotive industry.
- Tax incentives previously granted to the agricultural sector will be extended to include fisheries.
- Tax incentives granted to media entities will be extended for the next 3 years to continue supporting the sector.
- Public-Private (PPP) construction projects will receive exemptions from import VAT and customs duties, facilitating major infrastructure development.
3. Enhancing Transparency and Reducing Tax Evasion
Measures are proposed to encourage legal operations and cashless payments.
- To promote non-cash payments, the VAT registration turnover threshold for cashless payments for services provided to individuals by entities not registered for retail trade/tax will be doubled from 200,000 AZN.
- The scope of the existing VAT refund mechanism will be expanded.
4. Reducing Tax Burden on Specific Income Streams
The amendments aim to optimize tax rates to expand the tax base and encourage investment.
- The tax rate on dividend income earned by resident individuals from abroad is proposed to be significantly reduced from 14% to 5%.
- The tax rate on rental income from residential premises owned by individuals (and not used for entrepreneurial purposes) is proposed to be reduced from 14% to 10%. The aim is to incentivize the proper registration of rental agreements.
This legislative package is a powerful mechanism for enhancing transparency, and improving the business environment.
*UTB remains available to address any inquiries concerning the recent legislative amendments and to provide the necessary guidance.*
