Azerbaijan's Milli Majlis approved in its third reading on July 15 a package of amendments to the tax code, migration code and five other laws designed to formalise and incentivise the country's digital economy, alongside a separate law establishing a legal framework for crowdfunding.

The reforms come as Baku seeks to diversify its hydrocarbon-dependent economy by building out a domestic technology and startup sector, following earlier moves to create technology parks and free economic zones.

The tax amendments introduce legal definitions for digital technology, artificial intelligence, innovation products, cybersecurity and cloud computing services, the latter now classified as a direct service rather than royalty or lease income. Freelancers and self-employed individuals working independently in digital technology, AI or cybersecurity, without hired staff and registered as residents of an industrial or technology park, will receive formal legal status.

Remote workers in Azerbaijan contracted by foreign non-resident companies will not trigger a permanent establishment for their employer, and such freelancers and "digital nomads" will qualify for tax relief once registered with the tax authorities. Income earned by individuals and legal entities (excluding technology park residents) from digital technology, AI and cybersecurity services will be tax-exempt, provided export earnings are channelled through Azerbaijani bank accounts.

Highly qualified migrants in these fields, specialists with no prior Azerbaijani tax liability in the past 24 months, and returning Azerbaijani citizens working in these sectors will pay 0% income tax on wages. Dividends paid by companies operating in these fields will be exempt from tax for 20 years.

Accredited investors placing non-cash investments in venture capital funds or in companies holding a startup or technology park certificate may deduct 100% of the investment from taxable income in the reporting year, capped at 50% of annual taxable income, provided the investor holds no more than a 50% stake and retains it for at least three years. Dividends paid by venture funds to their investors, and gains from crowdfunding platform investments, will receive similar exemptions.

Income from the transfer, technology transfer or sale of copyrighted works, software and know-how developed through a taxpayer's own research and development in Azerbaijan will be 95% tax-exempt. Grants and subsidies for digital projects will not count as taxable income.

The total duration of a field tax audit, including extensions and suspensions, may not exceed 90 working days, after which no further tax or sanction may be assessed. Startups and technology park certificate holders in their first three years with tax debts below AZN50,000 ($29,400) will be shielded from account freezes while a dispute is under appeal, except for taxpayers classed as high-risk.

A related package of changes to the civil code, labour code, currency regulation law, banking law, investment funds law and securities market law introduces employee share ownership plans for the first time in Azerbaijani law, allowing companies to grant shares to staff free of charge or at a discount, subject to time- or performance-based vesting conditions. Shares granted under such plans are not classed as wages.

The civil code changes also introduce shareholder agreements, allowing tag-along, drag-along and right-of-first-refusal provisions common in venture financing, along with liquidation preference and anti-dilution clauses. Companies will be permitted to issue convertible instruments such as convertible notes and SAFE (simple agreement for future equity) instruments; in a liquidation, SAFE investors would be repaid ahead of ordinary shareholders but after secured creditors.

Currency rules are also loosened. Foreign currency earnings from startup-related exports may be credited to and transferred from Azerbaijani bank accounts without limit, as may dividends and capital gains from real estate, shares and stakes in Azerbaijan repatriated abroad. Venture funds may transfer unlimited sums to foreign startups, while accredited individual investors face an annual cap of $2mn for outward investment. Resident companies developing software abroad through foreign subsidiaries may sell resulting products directly overseas without customs clearance, provided the intellectual property remains Azerbaijani-owned and net income is repatriated within 365 days. Payments up to $200,000 a month for foreign cloud services, digital licences and international subscriptions may be made on the basis of an electronic invoice alone, without a bilateral contract.

Separately, parliament approved the law "On crowdfunding" in its third reading, establishing the legal, organisational and economic basis for equity- and debt-based crowdfunding and setting requirements for platform operators and their supervision. The law is aimed at giving startups and micro, small and medium-sized enterprises alternative financing channels while protecting investor rights. It does not apply to state-owned investment vehicles, and crowdfunding in the Alat free economic zone will be regulated separately under that zone's own legislation. It takes effect six months after publication.

A related set of amendments to 12 legislative acts, including the civil, criminal, tax and administrative offences codes, brings crowdfunding platform operators under the supervision of the Central Bank of Azerbaijan. Registering a crowdfunding platform management company with the central bank's registry will require a state fee of AZN2,750 ($1,620). Operators failing to disclose or publish required information face fines of AZN3,000-4,000; failing to submit or misrepresenting reports carries fines of AZN2,000-3,000; and breaches of fund management rules carry fines of AZN6,000-7,000. Individuals failing to submit documentation for outward transfers or failing to repatriate foreign currency face fines of 5-10% of the sum involved, and legal entities 20-30%. Crowdfunding operators also become subject to anti-money laundering and counter-terrorism financing legislation. This package takes effect on the same day as the crowdfunding law itself.