Innovation for taxpayers engaged in building construction: conditions and key points

Innovation for taxpayers engaged in building construction: conditions and key points



Expert Anar Bayramov comments on the topic.
A second subsection has been added to Article 130.6 of the Tax Code, with the following content:

Determination of the portion of income and deductible expenses under long-term contracts allocated to each reporting year is carried out as follows:

For each building under construction, the actual expenses incurred are compared to the total estimated costs for that building, and the share of actual expenses in the total estimate is determined (Article 130.6.1).

The sales value of residential and non-residential units delivered from that building is allocated to taxable income in proportion to the ratio determined under Article 130.6.1 (Article 130.6.2).

Actual expenses incurred are considered deductible expenses (Article 130.6.3).

Example: For a taxpayer engaged in building construction, the total estimated cost of the building (the construction budget) is AZN 6 million. In 2025, the taxpayer incurred expenses of AZN 1,800,000—i.e., 30% of the total estimate (1,800,000 ÷ 6,000,000). In the same year, the sales value of delivered residential and non-residential units was AZN 2,000,000. Therefore, the taxpayer’s recognized income is not AZN 2 million but AZN 600,000:

2,000,000 × 30% = 600,000 AZN.

Accordingly, AZN 1,400,000 is treated as revenue of future periods:

2,000,000 − 600,000 = 1,400,000 AZN.

Although income for 2025 is determined proportionally, expenses are recognized based on actual spending—AZN 1,800,000—resulting in a net loss of AZN 1,200,000 for that year:

1,800,000 − 600,000 = 1,200,000 AZN loss.

In 2026, the taxpayer’s actual expenses amounted to AZN 1,200,000. Thus, over two years, the share of expenses in the total estimate is 50%:

(1,800,000 + 1,200,000) ÷ 6,000,000 = 50%.

The taxpayer’s profit from construction in 2026 was AZN 3,000,000. Including the deferred revenue from 2025 (AZN 1,400,000), total revenue is:

3,000,000 + 1,400,000 = 4,400,000 AZN.

With a 50% expense ratio, taxable income in the 2026 declaration is:

4,400,000 × 50% = 2,200,000 AZN.

Of this AZN 2.2 million:

AZN 1,200,000 corresponds to the taxpayer’s actual expenses in 2026,

AZN 1,200,000 was the loss carried over from 2025.

Thus, the net result is a deficit of AZN 200,000:

2,200,000 − 1,200,000 − 1,200,000 = −200,000 AZN.

In the final year of construction (2027), sales amounted to AZN 5,000,000 and expenses to AZN 3,000,000. Since the estimated cost is fully realized (100%), the entire AZN 5,000,000 is recognized as income.

Considering the deferred revenue of AZN 2,200,000 from 2026, the reported income in the 2027 tax return will be:

5,000,000 + 2,200,000 = 7,200,000 AZN.

After deducting:

Actual expenses in 2027: AZN 3,000,000,

Carried-over loss: AZN 200,000,

the net profit is:

7,200,000 − 3,000,000 − 200,000 = 4,000,000 AZN.

Purpose of this illustration: to help taxpayers engaged in building construction better understand the newly introduced rule on long-term revenue in the Tax Code.

Key points:

First: Actual expenses incurred each year are fully deductible from income.

Second: When determining annual income, the taxpayer must consider the share of actual expenses in the total estimated cost.

These amendments to the Tax Code are intended as measures that benefit taxpayers involved in building construction.