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Which entrepreneurs cannot be simplified tax payers?
Which entrepreneurs cannot be simplified tax payers?
The simplified tax is a special tax regime предусмотрed for a number of business entities in the Republic of Azerbaijan. The main purpose of this system is to simplify tax accounting, reduce administrative costs for entrepreneurs, and increase the level of voluntary tax compliance. However, the legislation does not apply this tax regime universally to all taxpayers. So, which business entities are not covered by the simplified tax regime and why? Nurlan Mustafayev provides clarification on this issue.
Article 218.5 of the Tax Code clearly defines the entities whose right to be a simplified tax payer is restricted.
1. Taxpayers exceeding the turnover threshold
According to Article 218.1.1 of the Tax Code, taxpayers whose taxable transactions exceed AZN 200,000 in any month(s) of a consecutive 12-month period cannot be simplified tax payers. As an exception, persons engaged in public catering activities are allowed not to change their tax regime.
Pursuant to Article 218.1.2 of the Tax Code, even if the volume of taxable transactions exceeds AZN 200,000 in any month(s) of a consecutive 12-month period, such persons may retain their status as simplified tax payers by paying tax at a rate of 8% instead of 2% on turnover without VAT registration, in accordance with Article 220.1-1 of the Tax Code. For services provided to the population and paid in a non-cash manner via POS terminals, the tax base formed on this basis shall be taxed at a rate of 6% for a period of 3 years starting from January 1, 2026. Non-cash payments must be made via POS terminals integrated into the unified operational system of cash registers.
Example 1: A restaurant operating in Baku has an annual turnover of AZN 270,000. The restaurant owner may become a VAT payer or remain a simplified tax payer and pay 8% tax on turnover (Tax Code, Article 220.1-1). However, a retail store with the same turnover must obligatorily register for VAT.
2. Production of excisable and mandatory-marked goods
According to Article 218.5.1 of the Tax Code, persons engaged in the production of excisable goods or goods subject to mandatory marking do not have the right to be simplified tax payers. This rule is closely linked to the state’s fiscal interests. Excisable products (alcoholic beverages, tobacco products, etc.) are considered high-profit and socially sensitive, therefore entities operating in this sector must be under full tax control.
Example 2: Even if an enterprise producing alcoholic beverages has an annual turnover of AZN 100,000, it cannot obtain simplified tax payer status and must operate under the VAT and profit tax regime.
3. Financial and capital market entities
According to Article 218.5.2 of the Tax Code, the following entities cannot be simplified tax payers:
1. Credit organizations;
2. Professional participants of the insurance market;
3. Investment funds and their managers;
4. Licensed persons in the securities market;
5. Pawnshops.
The legislation considers these areas as activities with a high level of professionalism, risk, and profitability, and therefore does not deem the use of the simplified tax regime appropriate.
As a special exception, under Article 218.5.2-1 of the Tax Code, the provisions of Articles 218.5.2 and 218.5.10 do not apply to insurance agents providing services under compulsory insurance contracts.
Example 3: An insurance agent engaged in compulsory motor insurance may be a simplified tax payer, while an agent offering voluntary insurance products does not have this right.
4. Non-state pension funds
Article 218.5.3 of the Tax Code prohibits non-state pension funds from being simplified tax payers.
5. Property leasing and royalty income
According to Article 218.5.4 of the Tax Code, persons earning income from leasing property or from royalties cannot be simplified tax payers. These activities are considered non-entrepreneurial for individuals, and tax is withheld at source at a rate of 14% (for lease) or 10% (for rent), in accordance with Article 124.1 of the Tax Code.
Example 4: A legal entity leases out a building recorded on its balance sheet. In this case, regardless of turnover, it cannot obtain simplified tax payer status.
6. Natural monopoly entities
According to Article 218.5.5 of the Tax Code, natural monopoly entities determined by the relevant executive authority cannot be simplified tax payers. The list approved by Resolution No. 189 of the Cabinet of Ministers dated July 19, 2013 includes entities operating in electricity supply, water supply, and telecommunications.
7. Residual value of fixed assets
According to Article 218.5.6 of the Tax Code, persons whose fixed assets owned by them have a residual value exceeding AZN 1,000,000 at the beginning of the year (except for persons specified in Articles 218.1.2 and 218.4 of this Code) do not have the right to be simplified tax payers.
Example 5: An enterprise engaged in production has:
Turnover: AZN 150,000;
Number of employees: 8;
Residual value of fixed assets: AZN 1,600,000.
The enterprise meets the turnover requirement (150,000 < 200,000) and the employee limit (8 < 10), so under normal circumstances it could be a simplified tax payer. However, solely due to the residual value of fixed assets (1,600,000 > 1,000,000), it loses this right.
8. Public legal entities
According to Article 218.5.7 of the Tax Code, public legal entities cannot be simplified tax payers. This restriction is linked to their special status of serving public interests.
Examples:
Copyright Agency;
“Icherisheher” State Historical and Architectural Reserve Administration.
9. Employee limit in production activities
According to Article 218.5.8 of the Tax Code, production entities whose average number of employees during a quarter exceeds 10 lose their simplified tax payer status. This rule is aimed at protecting micro-production entities.
10. Wholesale trade
According to Article 218.5.9 of the Tax Code, persons engaged in wholesale trade cannot be simplified tax payers, regardless of their turnover. That is, all legal and natural persons engaged in wholesale trade are, respectively, profit tax or income tax payers. If the turnover from this activity exceeds AZN 200,000 over a consecutive 12-month period, the taxpayer must register for VAT. If the turnover is below AZN 200,000, wholesale traders may apply for voluntary VAT registration.
11. Restrictions on service provision
According to Article 218.5.10 of the Tax Code, persons providing works or services to persons registered with tax authorities as taxpayers (mainly legal entities and individual entrepreneurs) cannot be simplified tax payers. This rule does not apply to services provided to the population. Exceptions are also предусмотрed for persons specified in Articles 218.4.1 and 220.10 of the Code. Considering practical difficulties arising from this approach, a 30% threshold has been established for taxpayers operating in the service sector since January 1, 2020.
12. Restrictions on the sale of gold, diamonds, and fur-leather products
According to Article 218.5.11 of the Tax Code, persons selling gold, jewelry and other household items made of gold, as well as diamonds (whether processed or unprocessed), do not have the right to be simplified tax payers. Article 218.5.12 also excludes persons selling fur and leather products from this right.
Example 6: Even if an entrepreneur engaged in retail sale of jewelry has an annual turnover of AZN 110,000, they cannot be a simplified tax payer due to selling gold products and must operate under the income or profit tax regime.
It should be noted that the high unit value of products in the sale of gold, diamonds, and fur-leather goods, the risk of concealing real turnover, and the need for extensive tax control mechanisms justify the restriction of simplified tax payer rights in these fields.
13. Activities requiring a license
According to Article 218.5.13 of the Tax Code, except for persons providing services under compulsory insurance contracts, persons engaged in activities requiring a license do not have the right to be simplified tax payers.
This restriction is justified by the fact that licensed activities are generally characterized by high responsibility, special control, and professional requirements. Therefore, it is not considered appropriate for taxpayers operating in such fields to apply the simplified tax regime. For example, if an individual licensed to operate a pharmacy also engages in another business activity, such as retail sale of household appliances, they must be registered as an income tax payer for all activities and cannot use simplified tax payer status.
The simplified tax is a special tax regime предусмотрed for a number of business entities in the Republic of Azerbaijan. The main purpose of this system is to simplify tax accounting, reduce administrative costs for entrepreneurs, and increase the level of voluntary tax compliance. However, the legislation does not apply this tax regime universally to all taxpayers. So, which business entities are not covered by the simplified tax regime and why? Nurlan Mustafayev provides clarification on this issue.
Article 218.5 of the Tax Code clearly defines the entities whose right to be a simplified tax payer is restricted.
1. Taxpayers exceeding the turnover threshold
According to Article 218.1.1 of the Tax Code, taxpayers whose taxable transactions exceed AZN 200,000 in any month(s) of a consecutive 12-month period cannot be simplified tax payers. As an exception, persons engaged in public catering activities are allowed not to change their tax regime.
Pursuant to Article 218.1.2 of the Tax Code, even if the volume of taxable transactions exceeds AZN 200,000 in any month(s) of a consecutive 12-month period, such persons may retain their status as simplified tax payers by paying tax at a rate of 8% instead of 2% on turnover without VAT registration, in accordance with Article 220.1-1 of the Tax Code. For services provided to the population and paid in a non-cash manner via POS terminals, the tax base formed on this basis shall be taxed at a rate of 6% for a period of 3 years starting from January 1, 2026. Non-cash payments must be made via POS terminals integrated into the unified operational system of cash registers.
Example 1: A restaurant operating in Baku has an annual turnover of AZN 270,000. The restaurant owner may become a VAT payer or remain a simplified tax payer and pay 8% tax on turnover (Tax Code, Article 220.1-1). However, a retail store with the same turnover must obligatorily register for VAT.
2. Production of excisable and mandatory-marked goods
According to Article 218.5.1 of the Tax Code, persons engaged in the production of excisable goods or goods subject to mandatory marking do not have the right to be simplified tax payers. This rule is closely linked to the state’s fiscal interests. Excisable products (alcoholic beverages, tobacco products, etc.) are considered high-profit and socially sensitive, therefore entities operating in this sector must be under full tax control.
Example 2: Even if an enterprise producing alcoholic beverages has an annual turnover of AZN 100,000, it cannot obtain simplified tax payer status and must operate under the VAT and profit tax regime.
3. Financial and capital market entities
According to Article 218.5.2 of the Tax Code, the following entities cannot be simplified tax payers:
1. Credit organizations;
2. Professional participants of the insurance market;
3. Investment funds and their managers;
4. Licensed persons in the securities market;
5. Pawnshops.
The legislation considers these areas as activities with a high level of professionalism, risk, and profitability, and therefore does not deem the use of the simplified tax regime appropriate.
As a special exception, under Article 218.5.2-1 of the Tax Code, the provisions of Articles 218.5.2 and 218.5.10 do not apply to insurance agents providing services under compulsory insurance contracts.
Example 3: An insurance agent engaged in compulsory motor insurance may be a simplified tax payer, while an agent offering voluntary insurance products does not have this right.
4. Non-state pension funds
Article 218.5.3 of the Tax Code prohibits non-state pension funds from being simplified tax payers.
5. Property leasing and royalty income
According to Article 218.5.4 of the Tax Code, persons earning income from leasing property or from royalties cannot be simplified tax payers. These activities are considered non-entrepreneurial for individuals, and tax is withheld at source at a rate of 14% (for lease) or 10% (for rent), in accordance with Article 124.1 of the Tax Code.
Example 4: A legal entity leases out a building recorded on its balance sheet. In this case, regardless of turnover, it cannot obtain simplified tax payer status.
6. Natural monopoly entities
According to Article 218.5.5 of the Tax Code, natural monopoly entities determined by the relevant executive authority cannot be simplified tax payers. The list approved by Resolution No. 189 of the Cabinet of Ministers dated July 19, 2013 includes entities operating in electricity supply, water supply, and telecommunications.
7. Residual value of fixed assets
According to Article 218.5.6 of the Tax Code, persons whose fixed assets owned by them have a residual value exceeding AZN 1,000,000 at the beginning of the year (except for persons specified in Articles 218.1.2 and 218.4 of this Code) do not have the right to be simplified tax payers.
Example 5: An enterprise engaged in production has:
Turnover: AZN 150,000;
Number of employees: 8;
Residual value of fixed assets: AZN 1,600,000.
The enterprise meets the turnover requirement (150,000 < 200,000) and the employee limit (8 < 10), so under normal circumstances it could be a simplified tax payer. However, solely due to the residual value of fixed assets (1,600,000 > 1,000,000), it loses this right.
8. Public legal entities
According to Article 218.5.7 of the Tax Code, public legal entities cannot be simplified tax payers. This restriction is linked to their special status of serving public interests.
Examples:
Copyright Agency;
“Icherisheher” State Historical and Architectural Reserve Administration.
9. Employee limit in production activities
According to Article 218.5.8 of the Tax Code, production entities whose average number of employees during a quarter exceeds 10 lose their simplified tax payer status. This rule is aimed at protecting micro-production entities.
10. Wholesale trade
According to Article 218.5.9 of the Tax Code, persons engaged in wholesale trade cannot be simplified tax payers, regardless of their turnover. That is, all legal and natural persons engaged in wholesale trade are, respectively, profit tax or income tax payers. If the turnover from this activity exceeds AZN 200,000 over a consecutive 12-month period, the taxpayer must register for VAT. If the turnover is below AZN 200,000, wholesale traders may apply for voluntary VAT registration.
11. Restrictions on service provision
According to Article 218.5.10 of the Tax Code, persons providing works or services to persons registered with tax authorities as taxpayers (mainly legal entities and individual entrepreneurs) cannot be simplified tax payers. This rule does not apply to services provided to the population. Exceptions are also предусмотрed for persons specified in Articles 218.4.1 and 220.10 of the Code. Considering practical difficulties arising from this approach, a 30% threshold has been established for taxpayers operating in the service sector since January 1, 2020.
12. Restrictions on the sale of gold, diamonds, and fur-leather products
According to Article 218.5.11 of the Tax Code, persons selling gold, jewelry and other household items made of gold, as well as diamonds (whether processed or unprocessed), do not have the right to be simplified tax payers. Article 218.5.12 also excludes persons selling fur and leather products from this right.
Example 6: Even if an entrepreneur engaged in retail sale of jewelry has an annual turnover of AZN 110,000, they cannot be a simplified tax payer due to selling gold products and must operate under the income or profit tax regime.
It should be noted that the high unit value of products in the sale of gold, diamonds, and fur-leather goods, the risk of concealing real turnover, and the need for extensive tax control mechanisms justify the restriction of simplified tax payer rights in these fields.
13. Activities requiring a license
According to Article 218.5.13 of the Tax Code, except for persons providing services under compulsory insurance contracts, persons engaged in activities requiring a license do not have the right to be simplified tax payers.
This restriction is justified by the fact that licensed activities are generally characterized by high responsibility, special control, and professional requirements. Therefore, it is not considered appropriate for taxpayers operating in such fields to apply the simplified tax regime. For example, if an individual licensed to operate a pharmacy also engages in another business activity, such as retail sale of household appliances, they must be registered as an income tax payer for all activities and cannot use simplified tax payer status.