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Rules for deducting meal expenses from income
Rules for deducting meal expenses from income
Based on the legislation in force until the end of 2023, employees’ entertainment and meal expenses, as well as housing and other social expenses, were not deductible from income. This led to an increase in entrepreneurs’ expenses. Taking all this into account, an amendment was introduced to the relevant section of the Tax Code regarding the deductibility of meal expenses from income.
According to Article 109.3 of the Tax Code, which came into force on January 1, 2024, except for the expenses specified in Article 119.2 of this Code, the social and entertainment expenses of employees and their family members are not deductible from income. After this amendment, meal and housing expenses incurred by an enterprise for employees were classified as deductible expenses of the enterprise within certain limits. Expert Nusrat Khalilov comments on this innovation:
Article 119 of the Tax Code defines the limitation of deductible amounts. By the Law of the Republic of Azerbaijan No. 1033-VIQD dated December 5, 2023, clause 2 was added to Article 119 of the Tax Code:
“The rules and norms for the deduction of representation expenses, housing and meal expenses of employees, as well as expenses related to preventive meals, milk and equivalent products and supplements provided to employees working in harmful, hard, and underground working conditions, are determined by the body (institution) designated by the relevant executive authority.”
By Resolution No. 492 of the Cabinet of Ministers of the Republic of Azerbaijan dated November 22, 2024, the norms and rules for the deduction of representation expenses, employees’ housing and meal expenses, as well as expenses related to preventive meals, milk and equivalent products and supplements provided to employees working in harmful, hard, and underground working conditions, were approved for taxation purposes. According to the Resolution, these rules were prepared on the basis of Article 119.2 of the Tax Code and determine the procedure and norms for deducting representation expenses, housing and meal expenses of employees, as well as preventive meals, milk and equivalent products and supplements for employees working in harmful, heavy, and underground working conditions for taxation purposes. The VAT amount is also included in the deductible expense norms established for taxation purposes.
According to clause 2.1 of the Rules, meal expenses related to employees, as well as preventive meals, milk, and equivalent products and supplements provided to employees working in harmful, hard, and underground conditions, are deductible for taxation purposes within the following norms:
The daily deductible expense per employee for preventive meals, milk, and equivalent products and supplements provided to employees working in harmful, hard, and underground working conditions – 5 AZN;
The daily deductible expense per employee for preventive meals, milk, and equivalent products and supplements provided to employees working in harmful, hard, and underground working conditions – 5 AZN.
Incidentally, by this Resolution, the Cabinet of Ministers’ Resolution No. 89 of June 4, 2007, “On the determination of expense norms for preventive meals, milk and equivalent products and supplements, as well as meal expenses for crew members of maritime transport” was repealed. Under that resolution, the daily expense norm for preventive meals, milk and equivalent products and supplements for employees working in harmful, hard, and underground conditions was set at 2 AZN. With the new Resolution, this limit has been set at 5 AZN.
By Resolution No. 550 of December 14, 2017, the Cabinet of Ministers approved the “List of industries with harmful, heavy, and underground working conditions where employees are provided with free preventive meals, milk, and equivalent products” and the “Rules for providing employees with free preventive meals, milk, and equivalent products.” By Decision No. 29 of May 18, 2018, the Collegium of the Ministry of Health of the Republic of Azerbaijan approved the diet of free preventive meals and the composition of vitamin supplements.
Workplaces with underground labor conditions where free preventive meals, milk, and equivalent products are provided are determined based on the results of workplace certification and the “List of underground industries, mines, tunnels, facilities, and other workplaces where work is performed underground,” approved by the Cabinet of Ministers’ Resolution No. 30 of February 20, 2002.
The daily deductible expense norm for meal expenses for ship crew in maritime transport is set at 25 AZN per employee for crew members of vessels operating in the Caspian Sea, and 25 USD per employee for crew members of vessels operating outside the Caspian Sea.
Example 1: In addition to a monthly salary of 1,000 AZN, the enterprise pays the employee a daily allowance of 7 AZN for meal expenses for each working day.
According to the Cabinet of Ministers’ Resolution, the daily deductible norm for employees’ meal expenses is set at 5 AZN per employee when paid directly to the employee. Therefore, in the given example, 5 AZN of the 7 AZN paid daily by the enterprise to the employee will be classified as a deductible expense.
The taxpayer’s meal expenses related to employees, within the above-mentioned limits, are deductible under the following conditions:
• when the meal allowance is paid directly to the employee in a non-cash form;
Example 2: The enterprise pays the employee a daily food allowance of 5 manats. Although the employee’s salary is paid non-cash to his payroll card, the food allowance is paid in cash.
In this case, the daily food allowance paid to the employee will not be deductible from income. This is because, according to the Regulation, food expenses are deductible only when reimbursed to the employee directly in a non-cash form.
According to Article 109.4 of the Tax Code, if the business activity of a taxpayer is of an entertainment or social nature, then the relevant entertainment and social expenses incurred within the framework of such activity are deductible from income.
When meals are provided directly by the employer, and the purchase of products for meal preparation is documented in accordance with the Tax Code;
When catering services are obtained from another taxpayer engaged in public catering activities on the basis of an electronic invoice.
Meal expenses for days when employees are not at work (due to leave, illness, etc.) or on business trips are not deductible from income under this Regulation.
Example 3: An employee receives a daily meal allowance of 5 manats. There are 20 working days in November. During this month, the employee was on a business trip for 3 days, absent due to temporary incapacity for 3 days, and on leave for 2 days.
As can be seen, the employee did not work for 8 out of 20 working days. Accordingly, the employee is entitled to 60 manats of meal allowance:
20 – 8 = 12 days;
12 × 5 = 60 manats.
It is possible that the enterprise may still pay the employee 100 manats (20 days × 5 manats) for the entire month. In this case, the excess amount paid above 60 manats will not be deductible from income.
Another important issue is whether the meal expenses paid to employees are considered taxable employment income and whether mandatory contributions apply to these payments.
According to Article 98.2.3 of the Tax Code, except for the expenses specified in Article 119.2 of this Code, if an employee’s expenses are reimbursed, the amount paid is considered income derived from employment.
Thus, the expenses specified in Article 119.2 of the Tax Code are exceptions, meaning such payments are not treated as the employee’s income.
According to Article 98.5 of the Tax Code, income derived as a result of expenses incurred by the employer under Articles 109.3 and 119.2 of this Code is not considered taxable income.
Article 109.3 of the Tax Code stipulates that, except for expenses specified in Article 119.2, social expenses and entertainment expenses for employees and their family members are not deductible from income.
Expenses defined in Article 119.2 of the Tax Code are not considered taxable employment income and are included in the deductible expenses of the enterprise in accordance with established rules. These include representation expenses, housing and meal expenses for employees, as well as the costs of therapeutic and preventive meals, milk, and equivalent products provided to employees working in harmful, heavy, or underground conditions. The standards and procedures for deducting such expenses are determined by the relevant authority designated by the competent executive body.
According to this Regulation, meal expenses related to employees are deductible for tax purposes within the following limits:
The daily deductible limit per employee when food expenses are reimbursed directly to the employee in a non-cash form – 5 manats;
When catering is provided by the employer or obtained from another taxpayer engaged in public catering activities – up to 5 manats.
Meal expenses paid within the established limits, if made in accordance with the rules, are not considered taxable income of employees and are deductible for tax purposes. Since reimbursements for meal expenses within the limit are not treated as taxable income, they are not subject to income tax or mandatory state social insurance contributions.
According to Article 119.2 of the Tax Code, except for the expenses specified therein, social and entertainment expenses for employees and their family members are not deductible from income.
According to Article 15 of the Law “On Social Insurance,” income derived by the insured as a result of social expenses incurred by the employer, including amounts paid to third parties, is considered income not subject to mandatory state social insurance contributions. If housing and meal expenses paid for employees are regarded as social expenses, then they will not be subject to mandatory state social insurance contributions.
However, any amount of meal expenses paid in excess of the statutory limit is considered taxable income of the employee. In such cases, the excess portion is subject to income tax and mandatory state social insurance contributions. To comply, when meal allowance is paid non-cash, the payment designation must explicitly state that it is a meal expense. If meal expenses are paid not directly to the employee but to third parties, then the payment must be formalized with an electronic invoice in accordance with the Tax Code.
If meals are provided directly by the employer, the relevant transactions must also be documented in accordance with the Tax Code.
In addition, whether meal expenses are paid within or above the statutory limit, since they are social expenses and not part of wages, they are not subject to mandatory health insurance contributions or unemployment insurance contributions.
Based on the legislation in force until the end of 2023, employees’ entertainment and meal expenses, as well as housing and other social expenses, were not deductible from income. This led to an increase in entrepreneurs’ expenses. Taking all this into account, an amendment was introduced to the relevant section of the Tax Code regarding the deductibility of meal expenses from income.
According to Article 109.3 of the Tax Code, which came into force on January 1, 2024, except for the expenses specified in Article 119.2 of this Code, the social and entertainment expenses of employees and their family members are not deductible from income. After this amendment, meal and housing expenses incurred by an enterprise for employees were classified as deductible expenses of the enterprise within certain limits. Expert Nusrat Khalilov comments on this innovation:
Article 119 of the Tax Code defines the limitation of deductible amounts. By the Law of the Republic of Azerbaijan No. 1033-VIQD dated December 5, 2023, clause 2 was added to Article 119 of the Tax Code:
“The rules and norms for the deduction of representation expenses, housing and meal expenses of employees, as well as expenses related to preventive meals, milk and equivalent products and supplements provided to employees working in harmful, hard, and underground working conditions, are determined by the body (institution) designated by the relevant executive authority.”
By Resolution No. 492 of the Cabinet of Ministers of the Republic of Azerbaijan dated November 22, 2024, the norms and rules for the deduction of representation expenses, employees’ housing and meal expenses, as well as expenses related to preventive meals, milk and equivalent products and supplements provided to employees working in harmful, hard, and underground working conditions, were approved for taxation purposes. According to the Resolution, these rules were prepared on the basis of Article 119.2 of the Tax Code and determine the procedure and norms for deducting representation expenses, housing and meal expenses of employees, as well as preventive meals, milk and equivalent products and supplements for employees working in harmful, heavy, and underground working conditions for taxation purposes. The VAT amount is also included in the deductible expense norms established for taxation purposes.
According to clause 2.1 of the Rules, meal expenses related to employees, as well as preventive meals, milk, and equivalent products and supplements provided to employees working in harmful, hard, and underground conditions, are deductible for taxation purposes within the following norms:
The daily deductible expense per employee for preventive meals, milk, and equivalent products and supplements provided to employees working in harmful, hard, and underground working conditions – 5 AZN;
The daily deductible expense per employee for preventive meals, milk, and equivalent products and supplements provided to employees working in harmful, hard, and underground working conditions – 5 AZN.
Incidentally, by this Resolution, the Cabinet of Ministers’ Resolution No. 89 of June 4, 2007, “On the determination of expense norms for preventive meals, milk and equivalent products and supplements, as well as meal expenses for crew members of maritime transport” was repealed. Under that resolution, the daily expense norm for preventive meals, milk and equivalent products and supplements for employees working in harmful, hard, and underground conditions was set at 2 AZN. With the new Resolution, this limit has been set at 5 AZN.
By Resolution No. 550 of December 14, 2017, the Cabinet of Ministers approved the “List of industries with harmful, heavy, and underground working conditions where employees are provided with free preventive meals, milk, and equivalent products” and the “Rules for providing employees with free preventive meals, milk, and equivalent products.” By Decision No. 29 of May 18, 2018, the Collegium of the Ministry of Health of the Republic of Azerbaijan approved the diet of free preventive meals and the composition of vitamin supplements.
Workplaces with underground labor conditions where free preventive meals, milk, and equivalent products are provided are determined based on the results of workplace certification and the “List of underground industries, mines, tunnels, facilities, and other workplaces where work is performed underground,” approved by the Cabinet of Ministers’ Resolution No. 30 of February 20, 2002.
The daily deductible expense norm for meal expenses for ship crew in maritime transport is set at 25 AZN per employee for crew members of vessels operating in the Caspian Sea, and 25 USD per employee for crew members of vessels operating outside the Caspian Sea.
Example 1: In addition to a monthly salary of 1,000 AZN, the enterprise pays the employee a daily allowance of 7 AZN for meal expenses for each working day.
According to the Cabinet of Ministers’ Resolution, the daily deductible norm for employees’ meal expenses is set at 5 AZN per employee when paid directly to the employee. Therefore, in the given example, 5 AZN of the 7 AZN paid daily by the enterprise to the employee will be classified as a deductible expense.
The taxpayer’s meal expenses related to employees, within the above-mentioned limits, are deductible under the following conditions:
• when the meal allowance is paid directly to the employee in a non-cash form;
Example 2: The enterprise pays the employee a daily food allowance of 5 manats. Although the employee’s salary is paid non-cash to his payroll card, the food allowance is paid in cash.
In this case, the daily food allowance paid to the employee will not be deductible from income. This is because, according to the Regulation, food expenses are deductible only when reimbursed to the employee directly in a non-cash form.
According to Article 109.4 of the Tax Code, if the business activity of a taxpayer is of an entertainment or social nature, then the relevant entertainment and social expenses incurred within the framework of such activity are deductible from income.
When meals are provided directly by the employer, and the purchase of products for meal preparation is documented in accordance with the Tax Code;
When catering services are obtained from another taxpayer engaged in public catering activities on the basis of an electronic invoice.
Meal expenses for days when employees are not at work (due to leave, illness, etc.) or on business trips are not deductible from income under this Regulation.
Example 3: An employee receives a daily meal allowance of 5 manats. There are 20 working days in November. During this month, the employee was on a business trip for 3 days, absent due to temporary incapacity for 3 days, and on leave for 2 days.
As can be seen, the employee did not work for 8 out of 20 working days. Accordingly, the employee is entitled to 60 manats of meal allowance:
20 – 8 = 12 days;
12 × 5 = 60 manats.
It is possible that the enterprise may still pay the employee 100 manats (20 days × 5 manats) for the entire month. In this case, the excess amount paid above 60 manats will not be deductible from income.
Another important issue is whether the meal expenses paid to employees are considered taxable employment income and whether mandatory contributions apply to these payments.
According to Article 98.2.3 of the Tax Code, except for the expenses specified in Article 119.2 of this Code, if an employee’s expenses are reimbursed, the amount paid is considered income derived from employment.
Thus, the expenses specified in Article 119.2 of the Tax Code are exceptions, meaning such payments are not treated as the employee’s income.
According to Article 98.5 of the Tax Code, income derived as a result of expenses incurred by the employer under Articles 109.3 and 119.2 of this Code is not considered taxable income.
Article 109.3 of the Tax Code stipulates that, except for expenses specified in Article 119.2, social expenses and entertainment expenses for employees and their family members are not deductible from income.
Expenses defined in Article 119.2 of the Tax Code are not considered taxable employment income and are included in the deductible expenses of the enterprise in accordance with established rules. These include representation expenses, housing and meal expenses for employees, as well as the costs of therapeutic and preventive meals, milk, and equivalent products provided to employees working in harmful, heavy, or underground conditions. The standards and procedures for deducting such expenses are determined by the relevant authority designated by the competent executive body.
According to this Regulation, meal expenses related to employees are deductible for tax purposes within the following limits:
The daily deductible limit per employee when food expenses are reimbursed directly to the employee in a non-cash form – 5 manats;
When catering is provided by the employer or obtained from another taxpayer engaged in public catering activities – up to 5 manats.
Meal expenses paid within the established limits, if made in accordance with the rules, are not considered taxable income of employees and are deductible for tax purposes. Since reimbursements for meal expenses within the limit are not treated as taxable income, they are not subject to income tax or mandatory state social insurance contributions.
According to Article 119.2 of the Tax Code, except for the expenses specified therein, social and entertainment expenses for employees and their family members are not deductible from income.
According to Article 15 of the Law “On Social Insurance,” income derived by the insured as a result of social expenses incurred by the employer, including amounts paid to third parties, is considered income not subject to mandatory state social insurance contributions. If housing and meal expenses paid for employees are regarded as social expenses, then they will not be subject to mandatory state social insurance contributions.
However, any amount of meal expenses paid in excess of the statutory limit is considered taxable income of the employee. In such cases, the excess portion is subject to income tax and mandatory state social insurance contributions. To comply, when meal allowance is paid non-cash, the payment designation must explicitly state that it is a meal expense. If meal expenses are paid not directly to the employee but to third parties, then the payment must be formalized with an electronic invoice in accordance with the Tax Code.
If meals are provided directly by the employer, the relevant transactions must also be documented in accordance with the Tax Code.
In addition, whether meal expenses are paid within or above the statutory limit, since they are social expenses and not part of wages, they are not subject to mandatory health insurance contributions or unemployment insurance contributions.