Ilham Aliyev Signs Amendments to Several Laws Related to Startups

President Ilham Aliyev Signs Amendments to Tax, Migration and Other Legislation

President Ilham Aliyev has signed amendments to the Tax Code, the Migration Code, as well as the laws “On Social Insurance,” “On Customs Tariff,” “On Licenses and Permits,” and “On Public Procurement.”

Startup.az reports that, under the amendments, starting January 1, 2027, income derived from the sale of an ownership interest or shares in a legal entity will be exempt from income and profit tax for 10 years, provided that the entity is a micro or small business, has obtained a “Startup” certificate or a technology park registration certificate, and does not engage in any other business activity. The exemption will apply to 100% of the income derived from the sale of such ownership interests or shares, provided they have been held for at least three years.

Under the previous legislation, startups operating as micro or small businesses and individual entrepreneurs were exempt from income and profit tax on income generated from innovation activities for three years from the date of obtaining a “Startup” certificate. This exemption period has been extended from three to seven years.

The income and profit tax exemptions will also apply to the following:

• Income earned by individuals investing through crowdfunding platforms in persons holding a “Startup” certificate or an industrial or technology park registration certificate, derived from the subsequent sale of securities acquired as a result of such investments. The exemption will apply for 10 years starting January 1, 2027.

• Dividends paid to individuals in respect of the above-mentioned ownership interests (shares), excluding those held by technology park residents. The exemption will apply for 10 years starting January 1, 2027.

• Payments made to non-resident individuals or entities that do not have a permanent establishment in Azerbaijan for cloud computing, infrastructure, platform and software services, as well as application programming interface (API) services, provided that these services are obtained by taxpayers holding a “Startup” certificate or a technology park registration certificate and are used directly to support their own operations. These payments will be exempt from tax for 20 years starting January 1, 2027, provided they are not classified as royalties. The exemption will not apply if the services are resold or re-provided to other persons by the taxpayer.

• Dividends paid to participants (shareholders or partners) of venture capital funds from profits earned through investments in micro and small businesses holding a “Startup” certificate or an industrial or technology park registration certificate. The exemption will apply for 10 years starting January 1, 2027.

Under the amendments, starting January 1, 2027, for a period of 10 years, investments made by a designated accredited investor to acquire newly issued shares or ownership interests through additional capital contributions in resident legal entities holding a “Startup” certificate or an industrial or technology park registration certificate may be deducted from an individual entrepreneur’s taxable gross income, subject to the following conditions:

• The deductible amount must not exceed 50% of the individual entrepreneur’s taxable gross income for the relevant reporting year, after the deduction of expenses.

• The individual making the investment must not be a related party to the founders (owners) or executive management of the legal entity receiving the investment.

• As a result of the investment, the individual must not directly or indirectly hold 50% or more of the legal entity’s ownership interests, shares or voting rights. This restriction does not apply to investments made in venture capital funds.

• The acquired ownership interest or shares must remain continuously in the individual’s ownership for at least three years from the date of investment.

• Within one month after the end of the reporting year, the investee company must provide the investor with documents confirming that the funds received have been spent for their intended purpose. Such documents may include purchase and sale agreements, acceptance and handover certificates, payment orders and statements issued by payment service providers. The deduction from the individual’s taxable income will apply only to the portion of the investment that the recipient has actually spent.

• For investments in innovation and technological developments in industrial parks, a relevant supporting document must be issued by the authority (institution) designated by the relevant executive authority.

Under the law, from January 1, 2027, for a period of 10 years, taxpayers will be entitled to deduct qualifying operating expenses incurred through non-cash payments, with a coefficient of 2.5, from their taxable income for the relevant reporting year. These expenses must relate to research and development, design and engineering, and experimental development work carried out directly as part of developing innovative products, or commissioned from holders of a “Startup” certificate, residents of industrial and technology parks, and higher education and research institutions.

The deduction will not cover the acquisition of fixed assets or intangible assets. The 2.5 coefficient will also not apply to transactions between related parties where the customer and the entity carrying out the research, design or experimental development work are related parties.

The scope and areas of eligible expenses, as well as the procedures and rules for confirming the outcomes of technological and industrial failures, will be approved by the authority (institution) designated by the relevant executive authority.

In addition, services obtained by taxpayers holding a “Startup” certificate or a technology park registration certificate from non-residents without a permanent establishment in Azerbaijan will be exempt from value-added tax (VAT) for 20 years starting January 1, 2027. The exemption covers cloud computing, infrastructure, platform and software services, as well as application programming interface (API) services, provided they are used directly to support the taxpayers’ own operations and are not classified as royalties.

The VAT exemption will not apply if the taxpayer resells or re-provides the services to other persons.