Comprehensive VAT Guide – Azerbaijan (2026)

Local VAT Term

VAT Rates

• Standard Rate – 18%: Azerbaijan imposes a flat 18% VAT on most taxable supplies of goods and services and on imports. There are no reduced VAT rates; only the standard rate and a zero rate apply. [taxsummaries.pwc.com]
• Zero-Rated Supplies: Certain supplies are taxed at 0% (zero rate), meaning no VAT is charged but input VAT is recoverable. Key zero-rated activities include exports of goods and services, international and transit transportation of passengers or cargo, and related services. For example, goods exported abroad or services rendered to foreign clients are zero-rated to maintain competitiveness. Other zero-rated items include goods and services purchased with foreign aid grants, contributions of fixed assets to a company’s capital, sales of gold and precious metals to the central bank, and shipbuilding or repair services provided to non-residents. [expertsm.com] [taxsummaries.pwc.com], [expertsm.com]
• VAT-Exempt Supplies: A range of transactions are exempt from VAT, meaning no VAT is charged and input VAT on related costs generally may not be deducted. Major exemptions include: financial services (e.g. banking, insurance and interest on loans); most educational and medical services; residential property leases; the sale of shares and securities; and agricultural products sold by their producers (local farmers’ sales are exempt under a long-term measure through 2026). Notably, electric and hybrid vehicles are exempt from VAT on import and sale – fully electric cars indefinitely, and hybrids (≤2500cc engines) until the end of 2025 – as are electric vehicle charging stations until 2027. Certain equipment imported by residents of industrial parks or special economic zones can also be VAT-exempt for up to 10 years to spur investment. [taxsummaries.pwc.com] [expertsm.com] [taxsummaries.pwc.com], [expertsm.com]
• No Reduced Rate: Azerbaijan has no intermediate VAT rates (such as 5% or 10%). Items are either taxed at 18%, zero, or exempt by law. There are no announced changes to the VAT rate – the standard rate has been 18% for many years and the government has no plans to alter it in the near future. [grantthornton.global]

VAT Number Format

Registration Requirements

• Mandatory Registration: Any person (individual entrepreneur or company) must register for VAT in Azerbaijan if taxable turnover exceeds AZN 200,000 in any 12 consecutive months. This threshold includes all standard-rated and zero-rated sales. Additionally, a single high-value transaction over AZN 200,000 triggers mandatory registration – if one sale or contract exceeds the threshold, the seller must register by the time of that supply. Importantly, companies that import goods into Azerbaijan are required to register for VAT regardless of turnover (to ensure import VAT is properly accounted for). Once the threshold is crossed or a qualifying transaction occurs, the business must file a VAT registration application within 10 days into the following month (or before the large transaction date, as applicable). Failure to register when required can result in penalties. [acon.az], [grantthornton.global] [taxes.gov.az] [expertsm.com]
• Recent Update – Cashless Threshold Incentive: To encourage electronic payments and reduce the cash economy, only 50% of cashless sales will count toward the AZN 200,000 threshold as of 2026. In practice, this doubles the effective threshold to AZN 400,000 for businesses that conduct all sales via bank transfers or cards (with minimal cash transactions). Businesses still taking cash must register at AZN 200,000, but those going fully cashless can delay VAT registration until around AZN 400,000 in turnover, under new Tax Code amendments. [vatupdate.com]
• Voluntary Registration: A business below the threshold may opt to register for VAT voluntarily if desired. Voluntary registration is often chosen to reclaim input VAT on expenses or to appear as a VAT-payer to clients. The tax authorities generally allow it as long as the business can comply with VAT record-keeping. Once registered (mandatory or voluntary), all VAT rules apply fully. [acon.az], [grantthornton.global]
• Non-Residents: For foreign businesses with operations in Azerbaijan, the registration requirements depend on the nature of presence:
• A non-resident with a fixed place of business (e.g. branch, office, or construction site) that conducts taxable activities in Azerbaijan for more than 90 days in a year is deemed a Permanent Establishment (PE) and must register as a taxpayer (and VAT payer) before starting business, regardless of turnover. [grantthornton.global]
• A non-resident without a PE cannot register for normal VAT per se; instead, Azerbaijani customers act as tax agents. In general, if a foreign company without local registration supplies goods or services in Azerbaijan, the VAT is handled via reverse-charge by the local business customer (see Reverse Charge below). The foreign supplier itself typically does not register for regular VAT in such cases. Azerbaijan’s law even requires any foreign entity “commencing entrepreneurial activity” in Azerbaijan to register as a taxpayer, but in practice direct VAT registration of non-established traders is rare; the mechanism of taxing their supplies is through the purchaser.
  • Importantly, no EU “OSS/IOSS” schemes apply, as Azerbaijan is not in the EU. Any distance sales or cross-border e-commerce into Azerbaijan fall under local import and VAT rules (discussed below under Distance Selling).
  • Tax Registration Process: Local companies register via the STS. For foreign entities needing VAT registration (e.g. digital services providers), an electronic portal is available (see VAT on Digital Services). Fiscal representatives are not required for VAT – non-residents can register directly if needed, or rely on the reverse-charge system instead. [grantthornton.global]

VAT Grouping Rules

• VAT grouping (group registration) – where related companies join a single VAT group – is not permitted in Azerbaijan. Each legal entity must register and account for VAT separately. There is no provision to file consolidated VAT returns for a group of companies, even if they are affiliates. All inter-company transactions are subject to normal VAT rules.

VAT Recovery for Foreign Businesses

• Unlike some jurisdictions, Azerbaijan does not offer a general VAT refund scheme for non-resident businesses that are not registered in Azerbaijan. In other words, a foreign business cannot reclaim Azerbaijani VAT via a “13th Directive”-type refund if it doesn’t have a local VAT registration. The tax law has no mechanism for overseas companies to recover VAT on local expenses (such as hotel bills or trade show costs) on a reciprocity basis. The assumption is that foreign companies doing significant business will register or have their local partners handle the VAT. If a foreign business inaccurately pays Azerbaijani VAT, recovery is difficult – essentially “N/A” in practice for non-registered non-residents. [grantthornton.global], [grantthornton.global]
• (Note: Refunds of Azerbaijani withholding taxes on income are possible under tax treaties, but this does not extend to VAT.) The only way a foreign business can recuperate input VAT is by registering for VAT in Azerbaijan (if eligible) and then claiming credits on its VAT return. If not registered, any VAT incurred is effectively a cost. [grantthornton.global], [grantthornton.global]

Fiscal Representative Requirements

• Azerbaijan does not mandate a fiscal representative for foreign companies. Non-residents can register themselves via the STS (for cases like digital services) without appointing a local tax agent. Moreover, the typical model is that foreign suppliers aren’t required to register at all (aside from digital services) – instead, their Azerbaijani customers self-assess the VAT. Because of this reverse-charge model, having a fiscal rep is generally unnecessary. [grantthornton.global]
• In summary:
  • Foreign company selling B2B in Azerbaijan: No rep needed; Azerbaijani buyer handles VAT.
  • Foreign company required to register (e.g. digital B2C): Can register directly online; no local representative requirement by law. [grantthornton.global]
  • Foreign company with a PE: Registers as a taxpayer itself.
  • Only if a foreign entity chose to appoint a tax agent for convenience (e.g. compliance outsourcing) would a representative come into play, but it’s not a legal requirement.

Currency and FX Rules

• All VAT invoices, returns, and payments must be in Azerbaijani manat (AZN), the official currency. If a transaction is priced in a foreign currency, the VAT must be calculated and reported in AZN using the appropriate exchange rate. Typically, the conversion is done at the official rate of the Central Bank of Azerbaijan on the date of the taxable transaction (tax point). Since the tax point is usually the payment date (see Time of Supply), in practice the VAT is often determined using the exchange rate on the date payment is received. Businesses should ensure that their accounting system converts any foreign-currency invoices to AZN for VAT reporting.
• Azerbaijan doesn’t have special multi-currency invoicing rules beyond this – VAT amounts can be shown in AZN alongside a foreign currency total if needed, but the tax authorities care about the AZN amount. Financial records must be kept in AZN or with AZN equivalents. All VAT payments to the state must be made in AZN. There are no separate indexing or currency adjustment rules for VAT; the standard approach is simply using the spot exchange rate at the time of supply or payment to translate into AZN.

VAT Law and Legal Framework

• Azerbaijan’s VAT is governed by the Tax Code of the Republic of Azerbaijan, which consolidates all major tax laws. The Tax Code (enacted in 2000) includes detailed provisions on VAT (rates, scope, exemptions, administration) and is updated frequently — significant amendments are typically adopted each year as part of the budget process. The VAT rules in the Tax Code take precedence over any other legislation on indirect taxes. There was previously a separate VAT law in the 1990s, but now VAT is fully embedded in the unified Tax Code. [grantthornton.global] [expertsm.com]

Key aspects of the legal framework:

• Type of Tax: VAT is an indirect tax on consumption. It applies at each stage of production/distribution, but the economic burden falls on the final consumer. [vatupdate.com], [vatupdate.com]
• Taxable Persons: Any individual or entity engaged in business in Azerbaijan that is VAT-registered or required to register is a taxable person for VAT. This includes local businesses above the threshold and certain non-residents (for digital services). [taxsummaries.pwc.com]
• Tax Authority: The State Tax Service (STS) (formerly the Ministry of Taxes, now under the Ministry of Economy) is the central authority enforcing VAT law. The STS issues regulations, clarifications, and administers electronic systems (e-invoicing platform, VAT refund programs, etc.). [norma.az]
• Legal Continuity: The Tax Code and associated regulations are the source of VAT law. Court decisions and interpretations can clarify the law, but Azerbaijan does not have an EU-style court for VAT – domestic law is sovereign.
• Special Regimes: Some sectors operate under special legal frameworks:
  • Oil & Gas PSAs: Foreign oil contractors under Production Sharing Agreements (PSAs) and similar Host Government Agreements often carry VAT exemption certificates. Under the Tax Code, supplies and imports under PSA projects can be zero-rated if the contractor holds an STS-issued exemption certificate. These companies are effectively out of the VAT system (they do not charge VAT on local purchases and do not pay VAT on imports), as a concession to encourage investment. PSA participants file only limited reports (quarterly) to reconcile their exemption usage. [taxsummaries.pwc.com] [grantthornton.global]
  • Simplified Tax Regime: Small businesses can elect out of VAT into a simplified turnover tax (see Other Notable Features). Those under the simplified regime are governed by a different chapter of the Tax Code and treated as non-VAT-payers. [expertsm.com]
• The legal framework is regularly refined to incorporate new trends (e.g. digital services taxation introduced in 2017 and strengthened in 2023–2025, and the cash basis VAT accounting introduced in 2020). Taxpayers are expected to stay updated via official publications and guidance from STS.

Tax Authorities

• The State Tax Service (STS) is the primary authority for VAT administration in Azerbaijan. The STS (which operates under the Ministry of Economy since a 2019 reorganization) handles VAT registrations, returns, audits, and refunds. All VAT payers interact with STS – for example, VAT returns are submitted through the STS’s online portal e-taxes.gov.az, and any inquiries or audits will come from STS regional tax offices. The STS also maintains the electronic invoicing system and the VAT deposit accounts (discussed later). [norma.az]
• For VAT on imports and exports, the State Customs Committee plays a crucial role. Customs collects import VAT at the border when goods are brought into Azerbaijan (unless an exemption applies). Customs works closely with STS – data on imports and paid VAT feed into the taxpayer’s account. Exports are zero-rated but still require customs documentation to prove the export, which Customs provides. [vatupdate.com], [vatupdate.com]
• Taxpayers may need to coordinate with both bodies: e.g., a foreign company might register with STS for VAT, but also deal with Customs for importing goods. Collaboration between STS and Customs has improved, especially with digital systems.
• Enforcement: STS conducts VAT audits and imposes penalties for non-compliance. It can compare a business’s sales reported via e-invoices and POS systems with VAT returns to flag discrepancies. Customs ensures importers pay due VAT before releasing goods. Both authorities are investing in data-matching and electronic oversight to detect tax evasion.
• In sum, STS is the domestic “in-country” VAT authority, and Customs is the border authority for VAT on international trade. There are no separate regional VAT bodies – it’s centralized under STS. [norma.az]

Scope of VAT

• General Scope: Azerbaijan’s VAT applies to the supply of most goods, works, and services in Azerbaijan, and to the import of goods into Azerbaijan. If a transaction meets the following conditions, it falls within Azerbaijani VAT: (1) it is a supply of goods or services (including certain deemed supplies like self-consumption), (2) it takes place in Azerbaijan (per place-of-supply rules), and (3) it is made by a taxable person in the course of business.
• Territorial Coverage: “In Azerbaijan” generally means within the territory of the Republic of Azerbaijan (including its sector of the Caspian Sea). For goods, VAT applies if the goods are located in Azerbaijan at the time of sale. For services, it depends on the nature of the service and where it is performed or used:
• Services performed in Azerbaijan (e.g. construction work on a building in Baku) are within scope.
• Services performed entirely outside Azerbaijan are typically outside the scope of Azerbaijani VAT, unless special rules bring them in (notably digital services to local consumers – see below).
• Imports of goods are in scope the moment goods enter free circulation in Azerbaijan (VAT is due at customs). [vatupdate.com]
• Exports of goods are within scope but taxed at 0% (zero-rated).
• Taxable vs. Exempt: If an activity is in scope and not exempted by law, it is a taxable supply subject to VAT (18% or 0%). Exempt activities (described earlier) are in scope of VAT law but not taxed due to a specific exemption provision.
• Notable points on scope:
  • Business vs Personal: VAT only targets business transactions. Private, non-business activities (e.g. a person selling their used household items) are outside VAT. Only those engaged in business and registered (or required to be) charge VAT. [taxsummaries.pwc.com]
  • Government and NGOs: The state and municipal authorities are generally subject to VAT on their economic activities. However, certain government fees and non-commercial services can be outside the VAT scope if not considered “economic activity”.
• Place-of-Supply Exceptions: By default, services are taxed where performed. Azerbaijan does not systematically follow the “customer location” rule except for e-services. For example, consulting services provided by a foreign firm to an Azerbaijani business are considered outside scope if performed entirely outside (instead, reverse-charge VAT applies on the Azerbaijani side). Conversely, if an Azerbaijani firm provides services abroad, that revenue is outside Azerbaijani VAT scope (or zero-rated if deemed export).
• Use & Enjoyment: Azerbaijan’s VAT law does not explicitly have use-and-enjoyment overrides common in EU law. One exception is digital services: these are taxed where the customer resides (Azerbaijan), regardless of where the service is technically supplied.
• In summary, VAT covers nearly all commercial sales of goods and services consumed in Azerbaijan. A transaction is outside the scope only if it’s entirely abroad or falls under a special exclusion. Most goods imported are taxed, and most goods sold locally (even if imported previously) are taxed once in the chain. The end consumers in Azerbaijan bear the cost of VAT in the price they pay. [vatupdate.com]

Time of Supply Rules

• Azerbaijan’s time of supply (tax point) rules determine when VAT becomes chargeable on a transaction. Uniquely, since 2020 Azerbaijan has largely moved to a cash accounting basis for VAT. This means that for many transactions, VAT is triggered when payment is received rather than at invoice or delivery. Key rules: [taxsummaries.pwc.com]
• General Rule (Monetary Transactions): For supplies where payment is monetary (cash or bank transfer), the tax point is the date the supplier receives payment (in full or part). In other words, output VAT on a sale is generally recognized when the customer pays, not when the invoice is issued or goods delivered (if different). For non-cash payments, “received” means the money credited to the supplier’s bank or payment account. For cash sales (retail), it’s when cash is taken and recorded – typically the moment the fiscal receipt is issued on the cash register. This cash basis rule covers both cash and non-cash settlements of invoices. If a payment is only partial, VAT is due on that portion, and subsequent payments each trigger VAT on their portion. [taxsummaries.pwc.com] [taxes.gov.az]
• Prepayments: If a customer pays before goods/services are provided (advance payment or deposit), that payment creates a tax point immediately. Each upfront payment is treated as a separate taxable amount at that time. (Any balance paid later will trigger VAT then.) [taxes.gov.az]
• Multiple Installments: If a supply is paid in installments, each installment is considered its own taxable event to the extent of the payment. [taxes.gov.az]
• Non-Monetary Transactions: If the consideration is non-monetary (barter, in-kind payment) or free-of-charge:
• For barter or exchange deals, the tax point is when the exchange is carried out (when each party takes possession of the other’s goods/services). [taxsummaries.pwc.com]
• For free supplies (gifts, samples, or use of goods for non-business purposes), the tax point is when the goods or services are provided to the recipient (since no payment will ever be received). [taxes.gov.az]
• If a business permanently withdraws goods for personal or non-commercial use, a deemed supply is triggered at that time. [taxes.gov.az]

Effect of Cash-Basis System: This regime (applicable from 1 Jan 2020) means VAT is generally aligned with actual cash flow. It eases cash flow for businesses (no VAT outlay before being paid) and reduces bad-debt VAT issues. Input VAT is likewise only creditable when paid (see Input VAT deduction rules), which complements this approach. [taxsummaries.pwc.com]

Examples:

• A local supplier issues an invoice on March 1, 2026 for AZN 10,000 + VAT, due in 30 days. The customer pays on April 10. The supplier’s tax point is April 10 (payment date), so the sale is included in the April VAT return (due by May 20) and not in March. [taxsummaries.pwc.com]
• A retail store sells an item on the spot for cash on July 5 – the tax point is July 5 (cash receipt date, which is simultaneously the sale date).
• A company delivers equipment on August 1 but allows the buyer to pay in three installments (Aug, Sep, Oct). VAT on each installment is triggered as each payment comes in. [taxes.gov.az]
• A foreign contractor completes services in Azerbaijan on June 1, but doesn’t get paid until September 15 – the tax point for VAT (which will be via reverse-charge by the client) is September 15 when the payment is made.
• This cash-based time of supply is a distinctive feature of Azerbaijan’s VAT. It contrasts with the standard accrual method in many countries (where invoicing or delivery creates the tax point). Taxable persons must monitor payments closely to ensure VAT is declared in the correct period.
• (Note: There are anti-avoidance rules to prevent abuse – e.g., paying only a token amount to indefinitely defer most VAT would likely be challenged. Also, if payment is made to an escrow or notary account in a barter settlement, the law treats it as paid to the supplier’s account.) [taxes.gov.az]

VAT Invoicing Requirements

• Azerbaijan has strict invoicing rules, with a fully electronic invoicing system in place:
  • Electronic Invoices (E-qaimə faktura): Since 2020, the traditional concept of a paper VAT invoice has been replaced by mandatory electronic invoices (also termed “electronic delivery notes”). All VAT-registered suppliers must issue an e-invoice for each taxable supply to another business. These e-invoices are generated and transmitted through the government’s online portal (e-taxes system). Sellers fill in standardized invoice data fields on the portal (buyer’s VÖEN, description of goods/services, quantity, taxable amount, VAT amount, etc.), and the system generates the official invoice document. The content and format are fixed by the tax authorities, ensuring compliance – taxpayers cannot alter the format, only input the relevant details. [grantthornton.global]
  • Digital Signature: Every e-invoice (delivery note) must be authorized by the supplier using an approved digital signature tool. Azerbaijan uses the Asan Imza system (a mobile digital signature) to sign e-invoices. This ensures the authenticity and integrity of the invoice. Once signed, the e-invoice is considered issued and is automatically available to the buyer and the tax authority in real time. [grantthornton.global]
  • Invoice Issuance Deadline: Invoices should be issued promptly. If goods are pre-ordered, the e-delivery note must be issued on the date of delivery of the goods. For other regular supplies, the invoice should be issued within 5 days of the taxable transaction’s completion. In practice, most businesses issue the e-invoice on the day of delivery or service completion. Delayed invoicing can attract penalties. The system timestamps when the invoice is transmitted, so compliance is verifiable. [grantthornton.global]
• Buyer Types: If the buyer is a VAT-registered business, the supplier must issue an electronic VAT invoice via the portal. The buyer will see this in their online account and use it to claim input VAT. [taxes.gov.az]
• If the customer is not VAT-registered (e.g. a private individual or a small business under the simplified tax), the supplier is not required to issue an e-invoice. Instead, for cash sales to consumers, a fiscal receipt from a cash register is compulsory, and for non-cash sales to unregistered entities, a receipt or payment document is given. Essentially, consumers get receipts, businesses get e-invoices. [taxes.gov.az]
• Self-billing (where the customer issues the invoice on behalf of the supplier) is generally not practiced in Azerbaijan due to the centralized e-invoice system. All invoices must come through the seller’s tax portal account, so any self-billing arrangement would require the seller’s approval and issuance through the system.
• Invoice Contents: The e-invoice format includes all legally required details (which are auto-validated by the system). Key fields: Supplier’s name, address and VÖEN; Buyer’s name and VÖEN; date of issue; unique invoice number; description of goods/services; quantity; unit price; net amount (excluding VAT); VAT amount; and gross amount. The system ensures the VAT calculation is correct (18% of net for standard-rated supplies). Since the format is predetermined, compliance with content requirements is inherently achieved. One cannot issue an incomplete VAT invoice – omissions are prevented by the portal’s required fields. [grantthornton.global]
• Credit and Debit Notes: Adjustments to an invoice (for example, a discount after invoicing or returning goods) are handled by issuing an electronic credit note or debit note (technically another e-invoice with reference to the original). The tax code treats these as “correcting e-delivery notes”. They must also be sent through the portal and signed. A credit note will carry negative values to reduce the taxable amount as needed.

Overall, Azerbaijan’s invoicing system is highly regulated and technology-driven. Every B2B sale flows through the state e-invoice portal, ensuring that both seller and buyer have matched records and the tax authority has a complete audit trail. This reduces fraud and simplifies audits, but requires taxpayers to be diligent in using the system for every transaction by the deadline.

Compliance and Deductions

Input VAT deduction is fundamental to VAT. Azerbaijani VAT law allows businesses to recover the input VAT they pay on purchases to the extent those purchases are used for taxable or zero-rated activities. However, there are strict conditions and notable exceptions:

The purchase must be for business purposes and related to VAT-taxable transactions (not exempt sales). If a company makes both taxable and exempt sales, it can only deduct the portion of VAT attributable to taxable sales (requiring apportionment). [grantthornton.global]

The buyer must obtain a valid electronic VAT invoice (e-qaimə) from the supplier. Input VAT is only creditable if supported by a proper e-invoice (or an import customs declaration for imports). Essentially, no invoice = no deduction. [taxes.gov.az]

The purchase must have been paid for in a prescribed manner. Critically, Azerbaijan conditions VAT deduction on non-cash payment and use of the VAT deposit account:

The net cost (excluding VAT) must be paid from the buyer’s bank account to the supplier’s bank account (no cash handovers). [taxes.gov.az]

The VAT amount on that purchase must be paid into a special VAT deposit account held by the State Treasury on behalf of the supplier. Essentially, when paying an invoice, the buyer splits the payment: the net goes to the seller, and the VAT goes to the government’s VAT account (credited to the seller). The law requires the VAT portion to be deposited within 1 business day of paying the net amount. If this procedure is not followed, input VAT is not claimable. [grantthornton.global], [taxes.gov.az] [taxes.gov.az]

The input VAT must not be specifically disallowed by law (see below).

These conditions ensure a paper trail and cash trail for every input VAT claim, tackling fraud. The VAT deposit account system is unique: each VAT-registered taxpayer has a virtual VAT account with the Treasury, and customers pay VAT directly into it. This system guarantees the VAT charged actually reaches the government, allowing the buyer to claim it confidently. [grantthornton.global]

VAT on purchases used to make exempt supplies cannot be claimed. For example, a bank providing exempt financial services cannot deduct VAT on its purchases (those VAT costs become part of its expenses). [grantthornton.global]

VAT incurred by someone not registered for VAT is not claimable (naturally). Only VAT payers can claim input VAT. [grantthornton.global]

Purchases not paid through a bank: If a business pays a supplier in cash (or via an unofficial means) rather than bank transfer to the supplier’s account, the input VAT cannot be reclaimed. Likewise, if the buyer fails to deposit the VAT amount to the VAT account (e.g. paying the supplier gross in cash), the VAT isn’t creditable. Azerbaijan effectively denies VAT deduction on cash transactions to enforce traceability. [grantthornton.global]

Entertainment and employee benefits: Input VAT on expenses for entertainment, hospitality, food and accommodation for employees is generally blocked. This includes client meals, staff dinners, leisure events, etc., except if required by law (like providing meals to offshore oil rig crews or certain regulated preventative food). Typical business entertainment VAT is non-deductible, aligning with many countries’ rules. [grantthornton.global]

Passenger cars: VAT on passenger vehicles and related expenses might be restricted (not explicitly in the snippet, but common in many systems – likely Azerbaijan follows similar logic that personal car use is not fully deductible unless exclusively for business).

Housing and personal use: Any VAT on purchase of residential property, or goods/services for personal use of owners/employees, is not deductible.

Domestic Reverse-Charge: In Azerbaijan, most supplies by local businesses are just standard VAT (no general domestic reverse-charge mechanism on B2B). However, a few cases function similarly:

• The goods themselves will be imported (VAT paid at import by whoever is the importer – either the foreign supplier if acting as importer, or the local customer if they handle importation).
• The installation service, being performed in Azerbaijan, is a local supply. If the foreign supplier has no VAT registration, the local customer might have to apply reverse-charge on the service fee. Alternatively, if the contract is lump-sum, authorities may deem the foreign supplier to have a PE and require registration.

• International phone roaming by an Azerbaijani resident might not be taxed in Azerbaijan (treated as service by foreign telecom outside Az).
• Digital services and e-commerce, however, are taxed where the consumer resides, which is a sort of use-and-enjoyment rule ensuring local taxation (details below).
• There’s also a specific exclusion: purchases of airline tickets or hotel accommodation outside Azerbaijan by residents are not subject to Azerbaijani VAT (even though those could be “enjoyed” by Azerbaijanis, they’re specifically excepted from the digital services tax). This indicates Azerbaijan doesn’t tax services simply because a customer is resident, except in the clearly defined digital service context. [grantthornton.global]
• Capital Goods Adjustment Period: Azerbaijan does not have a long-term input VAT adjustment period for capital assets akin to the EU’s 5-year/10-year rules. Once a company claims input VAT on a capital good (say machinery), that claim is final unless the good’s use changes to exempt very soon. The Tax Code does require an adjustment if a new VAT payer had bought assets in the past and later registers for VAT retroactively (rare scenario) or if an error occurred. But there’s no yearly adjustment if the asset’s use ratio changes. Companies do not need to revisit past input VAT claims on capital assets annually.
• In summary, VAT deductions in Azerbaijan are tightly controlled. Only properly documented, business-use, non-cash transactions yield input VAT credits. The VAT deposit split-payment system is a standout compliance feature ensuring the government receives VAT concurrently with deduction. Businesses must maintain discipline in payments: if they pay suppliers in cash or delay paying VAT portions, they lose the credit and may face fines (indeed, paying the VAT to the supplier late triggers a penalty of 50% of that VAT). By adhering to the rules, companies can effectively recover most VAT and maintain neutrality, except for specifically blocked items like entertaining or exempt activities. [grantthornton.global] [taxes.gov.az]

VAT Recovery for Non-Residents (VAT Refunds to Foreign Businesses)

• Azerbaijan generally does not refund VAT to non-resident businesses that are not registered for VAT locally. There is no equivalent to the EU 8th or 13th Directive refund schemes. This means:
• A foreign company not registered in Azerbaijan cannot claim back Azerbaijani VAT incurred on local purchases.
• Azerbaijan has no reciprocal refund arrangements with other countries for VAT. Even if a foreign business is from a country that refunds VAT to Azerbaijani companies, Azerbaijan provides no mechanism for a refund in return (no reciprocity provision).
• Example: If a UK company attends a trade fair in Baku and pays AZN 100 + 18 VAT for services, that 18 VAT is stuck – the UK company cannot reclaim it from Azerbaijan since it’s not registered here.
• Exceptions: The only partial exception is if a foreign business has withholding tax credits under a tax treaty, but that’s income tax, not VAT. For VAT, effectively “N/A” – as Grant Thornton notes, overseas businesses can’t reclaim Azerbaijani VAT unless they become taxable here. [grantthornton.global]
• Thus, foreign companies are advised to avoid incurring Azerbaijani VAT where possible (e.g. use zero-rated export services, have the local customer be the importer, etc.). If a foreign entity does need to regularly incur VAT (for example, on local expenses), the strategy is often to register a local entity or register for VAT voluntarily (if allowed) to reclaim input tax through returns.
• Diplomats and International Orgs: A minor exception is that foreign diplomatic missions and certain international organizations in Azerbaijan can claim VAT refunds on purchases under diplomatic agreements. But this is a governmental privilege, not a business refund scheme.
• Tourist Refund Scheme: Azerbaijan currently does not operate a tourist VAT refund scheme for retail purchases by foreign visitors (commonly known as Tax Free Shopping). So even tourists cannot get VAT back on goods bought in Azerbaijan when they depart.
• In conclusion, unless a foreign business becomes a VAT registrant in Azerbaijan, any VAT it pays in Azerbaijan is a sunk cost. Non-residents should structure transactions (through direct exports or charging without Azerbaijani VAT involvement) to mitigate this, because the country offers no standalone refund window for non-established traders.

VAT on Digital Services

• Azerbaijan has implemented special rules to tax digital services provided by non-residents to local consumers, aligning with the global trend of VAT on e-services:
• Non-Resident E-Service VAT (B2C): Since 2017, Azerbaijan requires foreign providers of electronic (digital) services to Azerbaijani individuals to pay Azerbaijani VAT. Initially, this was enforced via a withholding mechanism – if an unregistered individual in Azerbaijan paid for e-services (like app purchases, streaming subscriptions) with a local bank card, the Azerbaijani bank would automatically withhold 18% VAT and remit it to the tax authorities. This applied to B2C e-services like downloads of ebooks, music, software, online advertising, gaming, etc. That withheld VAT was final (and non-creditable by the consumer). [taxsummaries.pwc.com], [expertsm.com] [taxsummaries.pwc.com]
• New Direct Registration Regime: Azerbaijan is shifting to a direct registration model for such foreign suppliers. Effective 1 January 2026, all non-resident entities providing digital services to individuals in Azerbaijan are required to register for VAT electronically and charge 18% VAT on their B2C sales. This is moving from “voluntary” to mandatory compliance by the supplier: [taxnews.ey.com]
• In July 2024, the STS launched an online VAT registration portal for non-residents. From late 2023 through 2025, foreign e-service suppliers could voluntarily register via this portal and start collecting VAT instead of relying on bank withholding. [taxsummaries.pwc.com] [taxnews.ey.com]
• From 2026, registration and direct VAT collection is obligatory. Non-compliance (not registering and charging VAT) will expose the non-resident to potential penalties and the risk that banks might still withhold the tax due (ensuring it is paid one way or another). [taxnews.ey.com] [taxnews.ey.com], [taxnews.ey.com]
• This new rule targets all kinds of digital services: downloads or streaming of media, software and SaaS, online advertising services, cloud services, e-learning, e-books, dating apps, and any similar electronically supplied service when the customer is a private individual in Azerbaijan. Marketplace platforms facilitating digital services are also included (they may be deemed suppliers if they collect payment).
• Scope of E-Services: The Tax Code defines electronic services broadly (downloadable content, digital goods, online platforms). It explicitly excludes certain things: online purchase of airline tickets and hotel bookings abroad are not treated as e-services for this purpose. So foreign airline or hotel bookings by Azerbaijan individuals remain outside Azerbaijani VAT. Almost all other digital content is included. [grantthornton.global]
• Determining Customer Location: The law uses proxies to determine if the service is consumed in Azerbaijan: e.g. the buyer’s country of residence, IP address, phone country code, or billing address should indicate Azerbaijan. If so, VAT applies. The bank withholding in the old system simply looked at if an Azerbaijan bank/card was used, but the new system expects the foreign vendor to assess the customer’s location by these criteria. [taxsummaries.pwc.com]
• VAT Rate and Accounting: The rate is the standard 18%. Non-resident suppliers do not charge Azerbaijani VAT to business customers (B2B) – more on that below. For B2C, they add 18% to the price and will remit it via quarterly or monthly returns through the portal. Currently, **B2C e-services VAT applies only to B2C (consumers), not to B2B transactions.
• B2B Digital Services: For digital services provided to VAT-registered businesses in Azerbaijan, the reverse-charge mechanism applies rather than the foreign supplier registering. In fact, as of 2023, Azerbaijan removed an older simplification that allowed not charging VAT on B2B digital services – now, technically, even B2B electronic services are subject to VAT, but handled by tax agent. The Azerbaijani business customer must self-assess 18% VAT on digital services bought from abroad if the supplier doesn’t charge VAT. Practically, a foreign SaaS or software provider should not charge Azerbaijani VAT to a business customer who provides their VÖEN. The buyer’s valid VÖEN acts like a VAT ID to exempt the foreign supplier from charging VAT, and the Azerbaijani buyer will reverse-charge it. If the foreign supplier cannot validate that the customer is a VAT-registered business (by collecting a VÖEN), they might treat the sale as B2C and charge VAT. This makes customer VAT number validation critical for foreign digital suppliers: failing to confirm a B2B means they’d have to charge 18% and handle it, which could be avoided. [taxdo.com]
• Compliance for Non-residents: A foreign digital service provider registered through the portal will file simplified VAT returns (likely quarterly) and pay the collected tax in AZN (the portal provides FX conversion for payments). They are not required to issue Azerbaijani e-invoices – instead, they can use their normal billing, but they must show VAT charged. The STS’s portal essentially is a special regime with fewer formalities (no local bank account needed; online payment by card of VAT is possible).
• Local Digital Services: Azerbaijani resident companies providing digital services locally just charge 18% like any other service if B2B, or have it embedded in price for B2C. There’s no special rule for them beyond standard VAT law.
• Summary: Consumers in Azerbaijan pay 18% VAT on digital services from abroad, either directly charged by the foreign provider (from 2026) or indirectly via bank withholding (pre-2026). Foreign e-service companies must register and comply if they have Azerbaijani B2C sales. Business-to-business digital supplies use reverse charge – the local business declares and can deduct the VAT (so foreign supplier avoids double-tax by not charging). By closing the gap on digital services, Azerbaijan protects its VAT base as more commerce goes online. [taxsummaries.pwc.com], [taxnews.ey.com] [taxnews.ey.com]

Distance Selling Rules

• “Distance selling” in the EU sense (cross-border sales of goods to consumers with threshold) does not directly apply in Azerbaijan, since Azerbaijan is not part of a common market. There is no OSS or special distance selling threshold for foreign sellers of goods. Instead, the following principles cover goods sold from abroad to Azerbaijan:
• Imports by Private Individuals: If an overseas retailer sells goods to an Azerbaijani consumer and ships them, those goods will go through customs, and import VAT will be charged (usually collected by the courier or postal service from the consumer before delivery). Every import is subject to VAT regardless of value, except small duty-free allowances for personal imports (Azerbaijan has some de minimis exemptions, e.g. import of low-value parcels under a certain threshold per month might be exempt from duties/VAT, but those thresholds are relatively low and subject to change by customs regulations). There is no unified public threshold like EU’s €10,000 for distant sales; customs handles each parcel per rules.
• No Foreign Seller Registration for Goods Only: Azerbaijan does not require foreign online retailers to register for VAT just for selling goods into Azerbaijan. The tax is collected at import from the buyer (or buyer’s agent). The liability to pay VAT on import lies with the importer of record – often the Azerbaijani customer. Thus, a foreign e-commerce seller typically quotes prices excluding Azerbaijani VAT, and the consumer pays the VAT to DHL or the postal service on arrival.
• Local Warehousing: If a foreign company decides to hold stock within Azerbaijan (e.g. in a fulfillment center) and sell locally to customers, then that company (or its local subsidiary) would become the supplier of goods within Azerbaijan and would need to register for VAT (there’s no threshold benefit because the moment they import goods for resale, they are considered an importing company and must register). In effect, foreign companies selling via local warehouses are treated like any local business: they must VAT-register and charge 18% on sales, no matter how small, because importing triggers VAT registration. [expertsm.com]
• Sales by Non-residents to VAT-registered buyers: If the buyer in Azerbaijan is a business, often that business will import the goods itself. In such cases, the business pays import VAT and can reclaim it, and the foreign seller doesn’t charge any Azerbaijani VAT (they zero-rate an export from their side). This is the standard model for B2B imports.
• No Simplified OSS: Azerbaijan has not implemented an “One Stop Shop” system for foreign sellers. Each import is handled through customs formalities.
• Summary: For distance sales of goods to Azerbaijan:
• B2C imports: VAT collected at the border from the consumer. The foreign seller doesn’t need an Azerbaijani VAT number.
• B2B imports: the local business handles import VAT itself.
• Local stock sales: foreign seller must register and adhere to all domestic VAT rules (like any local company, including issuing e-invoices to customers if those customers are businesses).
• Therefore, distance selling rules per se are not codified; the existing import VAT regime covers it. Azerbaijan effectively taxes imports at AZN 0 threshold (with minor duty-free limits for private use like personal allowances). There’s no notion of exempting small foreign sellers or using foreign VAT. All consumption on Azerbaijani soil is intended to bear Azerbaijani VAT.
• (Note: In practice, enforcement on myriad small incoming parcels can be challenging, but legally import VAT is due. Azerbaijan has been tightening enforcement on e-commerce imports in recent years as part of its push for a cashless, formal economy.)

Cash Accounting Scheme

Azerbaijan does not have an optional cash accounting scheme for small businesses because its entire VAT system already largely operates on a cash basis (as described in Time of Supply). The reform effective 2020 shifted the recognition of VAT to the time of payment for all taxpayers, so all VAT payers benefit from cash accounting by default. There is no need for an additional scheme election. [taxsummaries.pwc.com]

• Under this default:
• Output VAT is due when the customer pays.
• Input VAT is claimable when the supplier is paid (and the VAT is deposited).
• This achieves the main advantage of a cash accounting scheme – aligning tax timing with cash flow – for all businesses, not just small ones.
• Prior to 2020, Azerbaijan had the standard accrual method (tax point at invoice issuance or delivery). The change effectively made accrual accounting obsolete for VAT. The only remnants of accrual concepts are the special cases where a tax point is forced (like non-payment by a certain time).
• Small Business Regime: Instead of a cash accounting scheme, Azerbaijan offers the Simplified Tax regime (see Other Notable Features), wherein small businesses pay a flat turnover tax in lieu of VAT and profit tax. Those who opt for simplified tax are not VAT-registered at all. Thus, they handle taxes on a cash or accrual basis as per simplified tax rules (which operate on cash for some transactions as well). [expertsm.com]
• In summary, cash accounting is effectively standard in Azerbaijan’s VAT, so there is no separate scheme to adopt. All taxpayers already enjoy that benefit automatically. The focus for taxpayers is to manage the specifics of this system (especially the requirement to pay suppliers via bank and deposit accounts to utilize input credits).

VAT-Registered Cash Tills (Point-of-Sale Requirements)

• Azerbaijan heavily regulates point-of-sale transactions to combat the “grey” economy. All retail businesses and any business dealing with cash transactions must use certified fiscal cash registers (often called “control cash machines” (CCMs) or new-generation cash register machines). Key requirements:
• Mandatory POS Terminals: Businesses selling to consumers are required by law to install POS terminals for cashless payments and issue fiscal receipts via online cash registers. Each sale must be recorded and a receipt (check) given to the customer. The cash register is linked to the tax authorities, sending transaction data in real-time or near real-time. [vatcalc.com], [vatcalc.com]
• Cash Payment Limits: Recent rules severely restrict the volume of cash transactions:
• Large businesses (over AZN 200k turnover per month) can only do up to 2% of their monthly sales in cash; at least 98% must be cashless (card, transfer). [vatcalc.com], [vatcalc.com]
• Other VAT-registered taxpayers have absolute monthly cash caps (e.g. any settlement above AZN 15,000 must be non-cash if 2% of last month’s turnover is less than AZN 30,000). Effectively, medium businesses also must do most of their sales via bank. [vatcalc.com], [vatcalc.com]
• Enforcement and Penalties: The government conducts inspections to ensure compliance. In late 2024, many businesses in Baku were fined for violating non-cash rules. Penalties start at AZN 1,000 for the first offense of breaking cash transaction limits, rising to AZN 3,000 and AZN 6,000 for repeat offenses. Also, if a business fails to issue a receipt from a cash register, separate fines apply. [vatcalc.com]
• Next-Generation Cash Registers: Azerbaijan introduced new e-fiscal devices (often with internet connection to tax servers). Over 100,000 such cash register units (CRMs) are now in use nationwide. In H1 2024, these machines recorded AZN 12.2 billion in sales, up 10% YoY as compliance improved. The system allows STS to monitor retail turnovers live. [vatcalc.com]
• Integration with VAT refunds: These receipts feed into the consumer VAT refund system (detailed under Other Notable Features), where consumers can scan their receipt to get a portion of VAT back. This incentivizes customers to demand receipts, further enforcing the use of registered tills. [vatcalc.com]
• Industries: All sectors taking payments from the public (shops, restaurants, hotels, taxis, etc.) are covered. Even small kiosks are expected to have cash registers or issue official receipts from a government book if exempted.
• Exceptions: Some remote or micro trades might have slightly different rules, but generally, since 2019–2020 reforms, cash registers are ubiquitous.
• In essence, VAT-registered tills are mandatory for recording sales. They ensure that every sale (cash or card) is documented and reported. This not only secures VAT collection but also provides transparency of income for direct taxes. Non-compliance is met with steep fines, reflecting the government’s policy to greatly reduce cash, unrecorded trade. Businesses need to invest in the required technology and abide by transaction reporting rules as part of VAT compliance.

Statute of Limitations

• The statute of limitations for VAT assessments in Azerbaijan is generally 3 years. Specifically:
• The tax authorities (STS) can audit and assess additional VAT for up to 3 years after the end of the tax period in question as the standard limitation.
• There are circumstances that extend this period:
• In cases of significant underreporting or if the taxpayer consents to an extension (for instance, ongoing audits), the period can be extended up to 5 years for tax assessments or enforcement actions. Recent tax code amendments allow certain enforcement within 5 years.
• If tax evasion or fraud is suspected, there is no statute of limitation – the 3-year limit does not apply in cases involving deliberate concealment or criminal tax offenses. The clock can be disregarded if fraudulent activity is proven, meaning STS could go back indefinitely for egregious cases.
• The statute “clock” typically starts at the end of the year in which the VAT return was due. For example, VAT for March 2023 (filed April 2023) would normally fall out of scope by end of 2026 (3 years after 2023).
• Practical audit window: In practice, STS focuses on the last 3 years of returns during audits. Audits beyond 3 years are uncommon unless triggered by special investigations.
• Invoice Retention: Businesses are required to keep all VAT records (invoices, ledgers, returns) for at least 5 years. This aligns with the maximum audit window (3 + potential 2 extended). In fact, the Tax Code requires records to be kept for 5 years after the tax year, effectively 6 years total for a given transaction. This slightly exceeds the standard 3-year audit period, ensuring records are available if an extension or late audit occurs.
• Corrections and Amendments: A taxpayer can typically amend a VAT return within that same statute period if an error is discovered. After the statute lapses, changes are generally not allowed and neither party (taxpayer or STS) can reopen the period (absent fraud).
• In summary:
  • Normal audit/reassessment period: 3 years.
  • Extended in some cases: up to 5 years.
  • No limit for fraud or tax evasion cases.
  • Record retention: 5 years after the year of the document (so usually covers the maximum needed).
  • Taxpayers should maintain records accordingly and be prepared to support their VAT positions for at least 5-6 years. After that, the risk of audit diminishes (unless something very serious comes up).

VAT Return Filing

• Filing Frequency: In Azerbaijan, VAT returns are filed monthly in almost all cases. Each VAT-registered person must submit a VAT declaration for every calendar month, consolidating all sales and purchases for that period. The monthly frequency applies regardless of the size of the business (there is no quarterly filing option for standard businesses). The only exceptions are unique regimes: [acon.az], [grantthornton.global]
• Certain oil & gas companies under PSA contracts with VAT exemption certificates file quarterly reports instead of monthly (because they mostly don’t charge VAT but need to report some details). [grantthornton.global]
• Businesses that are not VAT-registered but had to pay reverse-charge VAT in a quarter (e.g. a small company that made a one-time payment to a foreign supplier) file a one-off quarterly VAT return for that quarter as a tax agent. [grantthornton.global]
• Apart from these, all active VAT payers file 12 returns a year.
• Deadlines: The VAT return for a month is due by the 20th of the following month. For example, the January VAT return must be filed by February 20. This deadline also typically applies to payment of any VAT due. So: [acon.az], [expertsm.com]
• Filing deadline: 20th of next month.
• Payment deadline: 20th of next month (same date as filing). If the 20th falls on a weekend or holiday, the deadline usually shifts to the next business day. [taxes.gov.az]
• Filing Method: Electronic filing is mandatory. All VAT returns are submitted online via the STS e-taxes portal using the taxpayer’s account. The return form requires details such as total output VAT, total input VAT, any adjustments, and resulting payable or credit. Because every transaction is captured by e-invoices and the VAT deposit system, the return essentially summarizes those totals. Some large taxpayers might also use authorized accounting software that integrates with the portal. There are no paper returns for VAT anymore. [acon.az], [expertsm.com]
• Payment Method: Payment must be made in AZN, usually via bank transfer to the Treasury account of the Ministry of Finance with the taxpayer’s unique reference. Many companies effectively have credits in their VAT deposit accounts; however, the VAT deposit accounts cover invoice-level VAT, not the final net liability. Typically, companies ensure by the 20th that if their output VAT exceeds input VAT, they pay the balance due. If input VAT exceeds output VAT, they may carry forward or seek refund (see below).
• Pre-Filled Returns: As of 2026, Azerbaijan does not provide pre-filled VAT returns to taxpayers, even though the STS has invoice data. The taxpayer must compile and file the return themselves. However, because all sales invoices are known, the STS can cross-verify returns. In the future, they may introduce partially pre-populated returns, but not yet.
• Handling VAT Credits/Refunds: If in a given month a taxpayer’s input VAT exceeds output VAT (e.g. due to zero-rated exports or large capital purchases), the result is a VAT credit. By default, this credit is carried forward to offset future VAT liabilities. A taxpayer can also apply for a cash refund of excess VAT, particularly in cases of regular exports:
• Exports: VAT on exports is zero, so exporters often accumulate credits (input VAT on purchases). They can claim a refund of input VAT related to zero-rated supplies. The claim is made through the e-system with supporting documentation (invoices, customs export proof). [acon.az]
• Refund Process: The process can be lengthy. The STS will audit or verify the claim. Officially, refunds should be made within a few months if approved. However, in practice VAT refunds are rare and often slow. The administration tends to prefer offsetting credits against future taxes unless the law mandates payment (as with some exports). Many companies simply roll credits forward rather than go through refund bureaucracy. [grantthornton.global]
• In 2020, Azerbaijan also introduced a VAT refund to consumers (which is different – see Other Notable Features), but that doesn’t affect business filing.
• If a return shows a payable VAT amount, that must be paid by the deadline. Late payment triggers interest (0.1% per day). If a return shows a credit, the taxpayer records it and either requests refund or carries it to next return’s input. [grantthornton.global]
• Correction of Errors: If a taxpayer discovers an error in a past VAT return (within the statute of limitation), they are expected to file a corrective (amended) return for that period. Alternatively, minor adjustments can be included in the next return with an explanation. Under the Tax Code, any under-declared VAT caught by the taxpayer should be paid with that correction, and any overpaid can be adjusted against future payments or refunded. It’s important to correct errors proactively because if the STS finds undeclared VAT in an audit, a 50% penalty on that amount applies. [grantthornton.global]
• Non-Resident Filing: A non-resident digital service supplier registered via the special portal will file simplified VAT returns (likely quarterly) as per that system’s rules – which may differ slightly from the regular monthly domestic return. Those returns will declare the sales to Azerbaijani consumers and VAT collected.
• Non-Filing Situations: If a VAT-registered business has no taxable transactions in a month, they must still file a nil return by the deadline. Failure to file at all triggers a fine of AZN 40 for each missed return, and persistent non-filing can lead to audits or suspension of the VAT number. [grantthornton.global]
• To summarize, VAT compliance in Azerbaijan requires timely monthly filings and payments by the 20th via the electronic system. Businesses must be prompt because late filing and payment incur penalties. With the e-invoice data available, returns should accurately reflect actual activity. The system is designed for prompt monthly settlement of VAT liabilities. [expertsm.com]

Other Filings

• Azerbaijan’s VAT system does not require many of the supplementary VAT filings that exist in the EU, because Azerbaijan is a single-country system with real-time data. Notably:
• EU Sales List: Not applicable. Azerbaijan is not in the EU, so there is no EC Sales List or similar requirement to report intra-community supplies (there is no concept of intra-community transactions).
• Intrastat: Not applicable. Intrastat (trade statistics for intra-EU trade) does not apply outside the EU. Azerbaijan collects all import/export data through customs declarations, so businesses don’t file separate statistical returns.
• Annual VAT returns: Azerbaijan does not require an annual consolidated VAT return. The monthly returns are final, and there’s no separate yearly summary. The monthly filing for December serves as the year-end account. (However, companies do file annual corporate income tax returns, which is separate.)
• SAF-T / Digital Reporting: There is no SAF-T (Standard Audit File for Tax) or periodic unified audit file submission mandated for VAT in Azerbaijan. Instead, the electronic invoicing system and online cash register reporting act as continuous transaction-level reporting. The tax authorities get sales and purchase data in real time; thus, in effect, Azerbaijan has real-time digital reporting of VAT without needing a separate SAF-T file. As of now, companies are not asked to upload additional detailed VAT transaction listings on a schedule, since the data is already in the STS system once invoices are issued. [grantthornton.global]
• Domestic Listing: Some countries require listing of domestic sales or purchases. Azerbaijan does not, because the e-invoice platform provides the tax authority with both sides of each B2B transaction. There’s no need for businesses to submit lists of purchases or sales; the STS can compile that if needed, and businesses can download their own records from the portal.
• Sector-specific reports: Almost everything is covered in the one VAT return. There are no separate filings for things like capital goods adjustments (none required), or bad debt relief (no mechanism).
• Excise and Others: Excise tax (for excisable goods) has its own monthly return but that’s separate from VAT. There is no combined form – companies subject to excise file it in addition to VAT.
• One additional filing related to VAT:
  • Reverse-Charge VAT Statement: A non-VAT-registered person who paid reverse-charge VAT (for instance a small business that imported a service and whose bank withheld VAT) must file a quarterly VAT return for tax agents. This is not common, but it exists for compliance completeness. E.g., a small company (not VAT-registered) pays an architect overseas for services in Q1; the bank withholds 18% VAT. That small company is required to submit a brief VAT return for Q1 to declare that transaction. [grantthornton.global]
  • Digital Services Report: Non-resident digital suppliers using the portal may have to file quarterly statements of sales. This is in essence a VAT return, not an “other filing”.
  • Summary: Other than the monthly VAT return (or special quarterly cases for certain entities), there are no routine additional VAT filings in Azerbaijan. The tax authority relies on the data captured via e-invoices, cash registers, and import/export declarations for cross-checking, eliminating the need for separate lists such as domestic sales/purchase listings or EU sales lists. [grantthornton.global]
  • Taxpayers should, however, maintain internal records and be prepared to provide detailed transaction data during an audit, since the STS might request supporting lists or documentation even if not regularly filed.

Penalties and Interest

• Azerbaijan imposes various penalties and interest charges to ensure VAT compliance:
• Late Filing Penalty: Failure to submit a VAT return by the due date incurs a fixed financial sanction of AZN 40 per return. For example, if a company misses three monthly filings, it’s AZN 120 in fines. While AZN 40 (~USD $23) is not high for a single instance, repeated non-filing can accumulate and also flags the company for audit. [grantthornton.global]
• Late Payment Interest: If a taxpayer does not pay the VAT owed by the deadline, interest applies at 0.1% of the unpaid tax per day. This is effectively 36.5% annual interest, simple (not compounded daily by law). The interest accrues from the day after the due date until payment. So a one-month late payment roughly equals a 3% interest charge. This steep rate incentivizes timely payment or, preferably, using available credits to offset liabilities. [grantthornton.global]
• Understatement Penalty: If an audit finds that a taxpayer underreported VAT (output was under-declared or ineligible input was over-claimed), the additional VAT assessed is subject to a 50% penalty. This means the taxpayer pays the tax difference plus an extra half of that as a fine. This 50% penalty on underpaid tax typically applies in cases of tax evasion or significant errors discovered by inspectors. It’s often applied during field audits as noted. [grantthornton.global]
• Improper VAT Payment Handling: There is a specific sanction aimed at enforcing the VAT split-payment rule: if a buyer pays the VAT amount to a supplier late or not via the proper channel, the tax authorities can impose a penalty of 50% of that VAT amount. For instance, if a company paid a supplier’s invoice but delayed depositing the VAT into the Treasury VAT account, it faces a fine equal to half the VAT in question. This is a unique penalty to ensure buyers comply with the deposit system. [grantthornton.global]
• Documentation Penalties: Failure to issue proper invoices (e-delivery notes) or receipts can lead to penalties. If a VAT payer does not issue an e-invoice to another VAT payer, the input VAT for the buyer is denied and the seller may be fined. Similarly, not providing a cash receipt to a consumer can result in fines (in 2024, ~150 businesses were fined for not following non-cash/payment rules). Typically fines for not using a cash register begin at AZN 1,000 for first offense, as noted with the non-cash rule enforcement. [vatcalc.com]
• False Invoicing: Issuing fake invoices or claiming input VAT on fictitious transactions is a serious offense. It can lead to hefty fines (the 50% of tax shortfall penalty would apply) and potentially criminal charges if large scale.
• Non-Registration: If a business fails to register for VAT when it was required to, the STS can impose a penalty (not specified above, but the law does have a fine for late registration – often a fixed amount or a small percentage of turnover during the period of non-registration).
• Fraud Penalties: In cases of deliberate tax evasion or fraud, aside from no time limit on assessment, the matter can be referred for criminal prosecution. For extreme cases, individuals responsible can face fines, assets seizure, or imprisonment under the criminal code. Administrative penalties (financial) would also apply.
• Miscellaneous: There are penalties for failing to maintain records for the required period, obstructing tax audits, etc. For VAT specifically, if records (like e-invoice data) are missing or tampered with, that could result in fines and further scrutiny.
• Interest on Refund Delays: The law doesn’t clearly specify interest if the government delays a refund, but typically if a refund is approved and not paid within a certain time, the taxpayer might be entitled to interest. However, since refunds are rare, this is not commonly seen.
• Consumer VAT violations: The government even penalizes consumers who don’t follow rules in rare instances, e.g. big purchases not through bank can void their refund. But that’s more of a loss of incentive than a penalty.
• In summary: Compliance is encouraged by a mix of daily interest for late payments (0.1%) and fixed or ad-valorem penalties for non-compliance:
• Minor lapses like late filing have modest fines. [grantthornton.global]
• Monetary non-compliance like non-payment or underpayment carry substantial cost (interest + up to 50% of tax). [grantthornton.global]
• Structural non-compliance (not registering, not using e-invoices or cash registers) can lead to significant fines and even business license issues if uncorrected.
• These measures, coupled with strict enforcement (frequent audits for risky taxpayers), create a strong deterrent against VAT evasion. As a result, most large taxpayers in Azerbaijan comply closely with VAT requirements, especially given the high visibility of transactions via the digital systems.

Other Notable VAT Features

Azerbaijan’s VAT system has several distinctive features and additional points of interest:

• Simplified Tax Regime (VAT Alternative): Small businesses in Azerbaijan have the option to opt out of VAT and pay a simplified turnover tax instead. This Simplified Tax is available to entities with annual turnover up to AZN 200,000 (the same threshold as VAT registration) that are not otherwise required to register (e.g. not importers). If they choose this regime, they do not charge VAT on their sales and cannot claim input VAT. Instead, they pay a flat percentage of gross revenue: typically 2% for most activities, or 8% for catering businesses (restaurants), with other special rates for certain sectors (construction, transport at special rates, etc.). Banks, insurers, and some others cannot use simplified tax. The simplified tax effectively replaces both VAT and profit tax for those small taxpayers. This regime is notable because it provides a simple alternative to handling VAT – many micro-businesses find it easier to pay 2% on revenue than to administer VAT. However, choosing simplified tax means they can’t recover VAT on purchases, which is a trade-off. Businesses on this regime often advertise prices as VAT-free (since they aren’t charging VAT). The availability of simplified tax with a low rate encourages small enterprises to formalize their business rather than operate informally. [expertsm.com]
• VAT Deposit Account System: Azerbaijan’s VAT split-payment system is a unique feature. When a VAT-registered buyer pays a VAT-registered supplier, the VAT amount must go into a dedicated VAT deposit account managed by the State Treasury. The supplier can only access those funds for paying their own VAT liabilities (or transferring VAT to their suppliers’ VAT accounts). This system essentially ring-fences VAT collected so it can’t be misused by the seller. It has dramatically reduced incidents of sellers collecting VAT and disappearing without remitting it. While it adds complexity (two transfers for each invoice), it’s notable for ensuring secure VAT collection. Many countries consider such split payment; Azerbaijan implemented it widely. Non-compliance (e.g. failing to use the deposit account) leads to penalties as mentioned. This feature is particularly relevant in B2B transactions – it requires good coordination between accounts departments of trading partners. [grantthornton.global], [taxes.gov.az]
• Cashless Economy Incentives: Azerbaijan ties VAT enforcement to its cashless economy drive. One notable program is the VAT refund to consumers (receipt cashback) scheme introduced in 2019. Under this scheme, final consumers who pay via electronic means (card or transfer) and obtain a fiscal receipt can reclaim a portion of the VAT they paid:
• Currently, the government refunds 15% of the VAT amount for non-cash payments and 10% for cash payments to consumers. (These rates have been used in practice: e.g., if a consumer buys something for AZN 118 (including 18 VAT) and pays by card, they can get AZN 2.70 of that VAT back, which is 15% of 18.)
• Consumers must scan or enter their receipt details into a government portal (or mobile app) to claim the refund. The refund is then paid to their bank card or account.
• In 2024, about AZN 130.6 million was refunded to consumers under this program, a huge sum indicating high participation. These refunded amounts are exempt from income tax for the individuals, making it purely an incentive. [vatcalc.com]
• This system effectively gives consumers a reason to demand a proper receipt and to pay by card (since cash refunds are lower at 10%). It pressures businesses to ring up sales legally because consumers want their VAT back.
• It’s a unique approach globally – essentially sharing part of VAT revenue with consumers to boost compliance. The government still keeps 85% (or 90%) of the VAT in these cases, but curbs evasion and fosters a habit of asking for receipts.
• The STS emphasizes that if consumers pay by informal methods (like direct card-to-card transfers to a seller, bypassing the POS), they lose their refund right and are actually violating consumer protection laws. Thus, the public is enlisted in the fight against unrecorded sales. [vatcalc.com]
• Public Sector and PPPs: Azerbaijan has extended VAT incentives to priority projects:
• Public-Private Partnership (PPP) projects and renewable energy producers with state purchase guarantees get import VAT exemptions for machinery and equipment during the project term (up to 30 years). [taxsummaries.pwc.com]
• Special Economic Zones: As noted, goods imported into certain special zones or parks can be exempt from VAT to encourage investment. This is time-limited (e.g. 10 years for industrial park residents on specific equipment). [taxsummaries.pwc.com], [expertsm.com]
• These encourage infrastructure and development by reducing VAT costs.
• VAT on Agriculture: Historically, agricultural producers’ output has been VAT-exempt (to support farmers). Since 2022, an interesting tweak: wholesale/retail mark-up on agricultural products is subject to VAT for 5 years. This means while the farmer’s sale may be exempt, the trader’s margin is taxed, provided proper documentation. It’s a compromise to tax value added in the supply chain without burdening farmers. This rule is set to expire in 2027 (5 years from 2022). If traders don’t follow documentation rules, VAT applies on full value. It’s a niche but notable measure in VAT law aiming to capture revenue in a formerly exempt sector. [grantthornton.global] [taxes.gov.az]
• Oil Sector and Exports: Almost all crude oil exports (a huge part of Azerbaijan’s economy) are zero-rated. The oil consortia operating under PSAs are exempt on inputs (via certificates), meaning they purchase many goods/services locally without VAT. This could lead to accumulation of credits for their suppliers, which the government presumably manages carefully (often by exempting upstream chain or via zero rating like PSA-related imports are zero-rated with certificate). This shows how VAT law is flexibly applied to accommodate the dominant oil industry. [taxsummaries.pwc.com]
• Electronic Tax Administration: Azerbaijan is actively modernizing tax administration:
• E-taxes portal: central hub for filings, e-invoices, and taxpayer services.
• Real-time data analytics: The STS likely cross-checks e-invoice data between suppliers and buyers automatically, flagging mismatches (e.g. one reports output, other doesn’t report input).
• Pre-approval of invoices: Because e-invoices must be issued for every B2B transaction, STS practically approves every invoice in real time (you can’t issue without the system).
• There’s discussion that all these data feed into a risk-scoring system that picks who to audit.
• They even abolished paper waybills in favor of e-delivery notes, streamlining logistics and tax tracking.
• Inflation and Currency Stability: The manat has been fairly stable (pegged) in recent years, so VAT rate changes have not been driven by currency issues. If any fiscal policy changes, it’s more often through exemptions or threshold changes rather than the 18% rate.
• Future plans: Azerbaijan continuously updates its tax code every year. The focus has been:
• Encouraging cashless payments (achieved via threshold incentives and consumer refunds). [vatupdate.com], [vatcalc.com]
• Expanding the tax base (e.g. now taxing digital services from abroad and possibly more sectors).
• Using digital tools to simplify compliance (the government may eventually auto-fill parts of VAT returns or integrate more systems).
• Notably, from 2026, they effectively raise the VAT threshold for cashless businesses to AZN 400k by counting only 50% of turnover, showing a policy direction to formalize transactions. [vatupdate.com]
• Interaction with Income Tax: Businesses often get simplified profit tax treatment for certain cashless transactions (for example, currently salaries in the non-oil private sector have tax exemptions to encourage formal payroll). While not directly VAT, these initiatives collectively create a more compliant tax environment. [expertsm.com]
• In conclusion, Azerbaijan’s VAT system mixes stringent control mechanisms (e-invoicing, split payment) with innovative incentives (consumer cashback, threshold perks) to improve compliance. It stands out for its cash-basis taxation, its split-payment infrastructure, and aggressive stance on reducing cash transactions. These notable features reflect Azerbaijan’s broader economic reform goals and make its VAT system somewhat unique compared to many others.