Dear Colleagues,
We present a concise summary of the key tax regulation changes expected to take effect from January 1, 2026. The information is based on the draft state budget and pending amendments currently in their final stage of approval.
Executive Summary
- Reintroduction of Personal Income Tax (PIT) – The 7-year exemption period for the private sector ends; PIT will be re-applied gradually starting January 2026.
- Transitional Rates (2026–2028) – Initial low rate (~3% for income up to AZN 2,500) in 2026, with gradual increases thereafter.
- Taxation of Rental Income – Individuals renting residential property will be required to declare and pay tax on rental income.
- Sectoral Incentives (ICT, Renewable Energy, Culture, Tourism) – Existing tax incentives are maintained and expanded for specific industries.
- Administrative and Digital Reforms – Continued digitalization of VAT processes, e-invoicing, and strengthened compliance controls.
Detailed Overview
- Personal Income Tax (PIT)
- The exemption introduced in 2019 will expire at the end of 2025.
- A gradual rate schedule is planned: ~3% for low-income levels in 2026, increasing in 2027–2028.
- Businesses should prepare a salary fund and cash-flow forecasts accordingly.
- Rental Income Taxation
- Individuals must declare and pay tax on rental income from residential properties.
- The calculation methodology and rate will be confirmed by a separate regulation.
- Sectoral Benefits (ICT, Renewable Energy, Culture, Tourism)
- Tax and social incentives for ICT and innovation sectors continue.
- Tax exemptions for renewable energy and tourism infrastructure projects are extended.
- VAT and Operational Adjustments
- Expansion of e-invoice and deposit account procedures continues.
- ERP and accounting systems should be updated to comply with new requirements.
- Enhanced Tax Oversight
- Broader inspection and price-validation powers granted to tax authorities.
- Updated requirements for reporting changes and maintaining transfer pricing documentation.
Practical Recommendations for CEOs and CFOs
- Salary Fund Scenarios – Prepare base, conservative, and stress tax-impact models.
- Compensation Structure Review – Adjust pay mix (fixed + variable) to balance motivation and tax exposure.
- IT & ERP Updates – Ensure integration of new tax rates and e-reporting modules.
- Lease Contract Audit – Inform landlords within your ecosystem of the new reporting obligations.
- Eligibility Review for Incentives – Verify your company’s qualification for extended benefits.
- Compliance Documentation – Maintain updated contracts, pricing evidence, and transfer pricing files.
Next Steps (2–4 Weeks)
- Conduct a payroll “shock test” (P&L + cash-flow scenarios).
- Assign responsibility for reporting updates and system adjustments.
- Consult with your tax advisor for local compliance guidance.
ABC Consulting LLC
Your Strategic and Tax Advisory Partner