Because freelancers are not Mellow's employees and we don't pay taxes on their payouts, they must declare any income received via Mellow by themselves.
To carry on tax accounting in the Republic of Azerbaijan for your Mellow income, you need to:
Be a tax resident
Follow the applicable tax obligations
Tax residence
Azerbaijan taxes its residents on their worldwide income, while non-residents are taxed on their Azerbaijan-source income only.
Persons satisfying one of the following conditions may be considered tax residents in Azerbaijan according to the national laws:
Individuals who have been physically present in Azerbaijan for a period of more than 182 days cumulatively in a calendar year.
Individuals present in the country for less than 182 days, but for whom Azerbaijan meets the following criteria:
Place of permanent stay
Center of vital interests
Regular place of residence
Citizenship of Azerbaijan
Azerbaijan has double taxation treaties with a number of countries (full list), the provisions of which may override the applicable tax residence rules and other provisions of national legislation.
Taxpayer ID number
The taxpayer identification number (VÖEN) is a registration number assigned to each taxpayer (both individuals and legal entities) by the tax authority, and it can be active or passive. An active VÖEN means that a person is currently a taxpayer and is able to receive income (including as an entrepreneur), while a passive VÖEN indicates the termination of activities (no entrepreneurial income).
VÖEN is a ten-digit code, where the first two digits reflect the code of the administrative territorial entity, and the next six digits form the serial number. The 9th digit is determined using a special software algorithm, and the 10th digit is assigned in accordance with the legal status of the taxpayer: 1 for legal entities and 2 for individuals.
Taxes and contributions payable by freelancers
Tax liabilities depend on the chosen tax status and/or eligibility for certain criteria. Azerbaijan has two tax status options for Mellow users to choose from:
Individual (fiziki şəxsin)
Sole proprietor (fərdi sahibkarlar)
IMPORTANT! Mellow does not have the option to choose a tax status for freelancers based in Azerbaijan, but you can fill in your taxpayer ID in your account.
Tax status is determined based on whether you engage in entrepreneurial activities. In accordance with Article 13.2.37 of the Tax Code of the Republic of Azerbaijan, entrepreneurial activity is an activity that a person carries out independently for the main purpose of gaining profit from the use of property, supply of goods, performance of works, or provision of services. In addition, an important factor is income cyclicity/regularity.
Individuals can also have the self-employed status.
Self-employment (Özünüməşğulluq) can mean a self-employed person or an organized business supported by the state. Only unemployed individuals can be self-employed. Those receiving unemployment insurance benefits cannot be self-employed. Persons wishing to participate in the self-employment program need to apply to their local office of the Public Employment Agency under the Ministry of Labor and Social Protection of the Population of the Republic of Azerbaijan (Azərbaycan Respublikasının Əmək və Əhalinin Sosial Müdafiəsi Nazirliyi) based on their registered address, or to a DOST center. Learn more about self-employment
Those eligible for the self-employment program can be engaged in such industries as production, services, and agriculture.
Depending on the type of activity, the state may provide equipment/assets (learn more here).
Read on for more details.
Individual
An individual (fiziki şəxsin) is the default tax status requiring no special registration. It exists for non-recurrent income as opposed to regular activities.
Under this status, you only pay the 14% income tax (fiziki şəxslərin gəlir vergisi) in accordance with Article 101.2 of the Tax Code of the Republic of Azerbaijan).
Reporting. You need to submit tax returns (gәlir vergisinin bәyannamәsi, form and filling instructions) annually before March 31 of the year following the reporting year. The tax is to be paid by the same deadline, while advance payments can be made within 15 days after the end of each quarter.
Sole proprietor
A sole proprietor (fərdi sahibkarlar), or an individual engaged in entrepreneurial activities without establishing a legal entity (hüquqi şəxs yaratmadan sahibkarlıq fəaliyyəti ilə məşğul olan fiziki şəxslər), is a tax status for persons engaged in entrepreneurial activities.
One can register as a sole proprietor at the State Tax Service of the Republic of Azerbaijan (Azərbaycan Respublikası İqtisadiyyat Nazirliyi yanında Dövlət Vergi Xidməti) by submitting the following documents and information:
Application for registering as an individual (if submitted by proxy, then also a notarized power of attorney and a copy of the proxy's ID)
A copy of the identity document (an ID for citizens of the Republic of Azerbaijan; a temporary or permanent residence permit issued by the State Migration Service of the Republic of Azerbaijan for foreigners)
Information regarding a special tax regime (if a special tax regime is used)
Azerbaijan has the following tax regimes for sole proprietors:
These regimes differ in terms of taxes. Regardless of the regime, sole proprietors that have employees are required to pay salary taxes and contributions to funds. The choice of the tax regime depends on the type of activity, the amount of income, and other factors.
Read on for more details.
Statutory tax regime
The statutory tax regime applies to sole proprietors by default and has no restrictions in terms of types of activities.
It includes the following taxes and contributions:
Income tax (gəlir vergisi) of an individual engaged in entrepreneurial activities without establishing a legal entity is levied at the rate of 20% (in accordance with Article 101.3 of the Tax Code of the Republic of Azerbaijan).
Documented expenses related to business activities are deductible.
Reporting. Like individuals, sole proprietors must submit income tax returns (gәlir vergisinin bәyannamәsi) in line with these instructions. The returns are to be submitted on an annual basis before March 31 of the year following the reporting one. Importantly, in case of deregistering as a sole proprietor or suspending entrepreneurial activities, you are obliged to submit to the tax authority within 30 days an income tax return covering the period from the beginning of the tax year to the date of suspension of entrepreneurial activities.
The tax is to be paid by the same deadline, while advance payments must be made within 15 days after the end of each quarter, or monthly.
The value-added tax / VAT (Əlavə dəyər vergisi / ƏDV) is levied at the rate of 18%. The tax base includes all income from the performance of works, sales of goods, and rendering of services.
Registering as a VAT payer is possible on a voluntary basis, or mandatory subject to one of the following conditions:
Taxable transactions for any 12-month period exceed AZN 200,000.
The value of one transaction or contract exceeds AZN 200,000.
You can register for VAT online by filling out the VAT Registration Application (Vergi ödəyicisinin əlavə dəyər vergisinin məqsədləri üçün qeydiyyata alınması haqqında).
Reporting. You need to file VAT returns (ɪlavə dəyər vergisinin bəyannaməsi) in accordance with these instructions. This is done monthly, no later than the 20th day of the month following the reporting period. In case of deregistering as a VAT payer (terminating activities), you need to file a VAT return covering the period from the beginning of the designated reporting period until the termination date to the tax authority within 30 days, but no later than the 20th day of the month following the reporting month. The tax payment deadline is the same as the tax returns one.
Insurance contributions (sığorta haqları) Individual entrepreneurs must pay social contributions at rates that vary depending on their type of activity and region of operations. The calculation is based on the minimum monthly wage (minimum aylıq əməkhaqqını), which amounted to AZN 345 in 2023–2024. Below are some details on social contribution rates:
50% of the minimum monthly wage for entrepreneurial activities in construction
25% – in other areas:
100% – Baku
90% – Sumgait and Ganja
80% – other cities
60% – administrative and territorial units and settlements serving as administrative centers
50% – rural areas
Learn more about the requirements and rates in Clause 14.5 of the Social Insurance Act (Sosial sığorta haqqında) or here.
Entrepreneurs are also required to pay compulsory health insurance contributions in the amount of 4% of the minimum monthly wage.
Note that entrepreneurs that do not have employees are not required to pay unemployment insurance contributions.
The reporting must be submitted quarterly, before the 20th day of the month following the reporting quarter, in the form of a Single Tax Return on Tax Withheld for Hired Labor (simplified form for individuals without employees) (Muzdlu işlə əlaqədar ödəmə mənbəyində tutulmalar üzrə vahid bəyannamə (işçisi olmayan fiziki şəxslər üzrə sadələşdirilmiş forma)). Recommendations + video instructions.
Contributions are calculated and paid monthly before the 15th day of the month following the reporting month, by bank transfer only.
Simplified tax regime
The simplified regime is a special tax regime that exempts entrepreneurs from paying income tax (gəlir vergisi) and VAT (ƏDV).
Restrictions. To apply this tax regime, you need to meet certain conditions, such as not exceeding AZN 200,000 in annual turnover and having no more than 25 hired employees. Also, Article 218.5 of the Tax Code of the Republic of Azerbaijan stipulates a list of persons not eligible for this tax regime.
This status requires you to pay the following taxes and contributions:
Simplified tax (sadələşdirilmiş vergi): a single tax in the amount of 2% to 8% (in accordance with Article 220 of the Tax Code of the Republic of Azerbaijan), which may be adjusted depending on the region of operations. In addition, Articles 220.5 and 220.10 of the Tax Code of the Republic of Azerbaijan set out a fixed tax for certain types of activities (regional coefficients apply).
Reporting. You need to file a Simplified Tax Return (Sadələşdirilmiş verginin bəyannaməsi) in accordance with these instructions. The filing is done on a quarterly basis, before the 20th day of the month following the reporting period. The activities specified in Article 220.10 of the Tax Code of the Republic of Azerbaijan do not need to be reported.
The tax payment and returns deadlines are the same. Individuals engaged in private activities (without hiring employees) that are listed in Article 220.10 of the Tax Code of the Republic of Azerbaijan need to pay a fixed tax for a certain period (month, quarter, six months, twelve months) in advance, i.e., before commencing their activities.
They then need to get a Receipt Certifying the Payment of a Fixed Amount of Simplified Tax (Sadələşdirilmiş vergi üzrə sabit məbləğin ödənilməsi haqqında qəbz) from the tax authority at their place of registration or at a taxpayer service center. The receipt is issued based on a taxpayer's written application within 2 business days, and in case of an online application, in real time.
The tax under such receipt is non-refundable, regardless of whether the individual had been carrying out activities during the period specified in the receipt or not. Neither can it be set off against future taxes.
Obligations regarding insurance contributions (sığorta haqları) are the same as for the statutory tax regime. The difference is that from January 1, 2024, individuals who pay simplified tax can deduct 25% of the mandatory state social insurance paid for themselves from their three-year simplified tax.
Additional info
The State Tax Service of the Republic of Azerbaijan (Azərbaycan Respublikası İqtisadiyyat Nazirliyi yanında Dövlət Vergi Xidməti)
Income received via Mellow is declared based on certificates (also known as "acts") and invoices, and as per the offer agreement.
If you have any questions, get in touch via the chat in your Mellow account or email us at [email protected].