BUSINESS CLIMATE

Business conduct framework and FDI regime

The Republic of Azerbaijan is the leading FDI destination in the region. In the last decade the total FDI stock in Azerbaijan exceeded 25 bln USD. Azerbaijan has achieved gradual improvement in the overall legal framework for the investment activities in the country for last several years with a number of practical regulations liberalizing conduct of business and reducing red tape obstacles. It carried out a revolutionary legal reform several years ago with adoption of new Tax code, Civil and Civil Procedure Codes, Land Code, Labor Code, Customs Code, Foreign Exchange Law as well as Law on International Arbitration made the system a way more transparent and friendly for local and foreign businesses.

The Government managed to open up economy for the international business and introduce investments friendly laws and regulations. Generally, the Azerbaijani legislation establishes a very permissive national regime for FDI (which means that FDI are welcome in any sectors where the local investor is allowed to invest). Such regime also basically exists for the privatization of the state owned property. There are no special permissions or specific registration requirements for foreign investment. The licensing was substantially simplified with foreign investors' interest in mind.

As of now a foreign investor in Azerbaijan enjoys a non-discrimination regime. The major economic policies are FDI element inclusive. E.g. the Government lifted limitations for foreign participation in the banking sector. Privatization process is open for foreign investors as well. Few sector based restrictions for FDI are limited to national security related.

The major factors that turned Azerbaijan into a leading FDI destination and provide for justification to do business here are:

Abundant resources

Azerbaijan is rich in mineral and climatic resources. The Caspian Sea oil & gas reserves are one of the major deposits globally. Azerbaijani proper has also substantial explored deposits of precious metals (including gold and silver), ferrous and non-ferrous metals, various construction raw materials deposits etc.

One of the major resources the country has is its natural diversity. Despite relatively small size the Azerbaijani territory due to complex terrain and geography has a number of distinct climatic zones: from humid subtropical climate to semi-arctic. This creates unique opportunities in agriculture and tourism.

Favorable location

Azerbaijan is located on the very south-eastern border of the European continent and serves as the natural bridge between Europe and Central Asia as well as it is the most convenient route from the north-east of Europe to the Middle East. The country is the logistics hub for the Caspian region. Excellent infrastructure of Baku (including largest regional sea and air terminal) is the best choice for any business entering the markets of the Caspian Sea region.

Competitive cost of production

Azerbaijan has long lasting industrial and trade traditions. The industrial revolution has taken place here in the late XIX century due to expanding and advanced oil production and processing sector. Further industrial development led to growing R&D base. A large R&D centre, Academia of Sciences with circa 7,000 researches exists in Azerbaijan in parallel with a number of universities and colleges.

The country is rich in engineering skills yet the wages are still very competitive. Azerbaijani government’s policies in respect of utilities tariffs are manufacturer friendly.

FDI friendly laws

Azerbaijani legislation is evolving in accordance with the strategic goal of the Government which implements the "welcoming policy" for foreign businesses.

Foreign investments are protected by certain guarantees provided by the government and legislation, including:

I. Guarantee against deterioration of legislation - the general rule is that legislation in force at time of making an investment continues to apply for subsequent 10 years;

II. Guarantee against nationalization and requisition - foreign investments are not subject to nationalization (except in cases of harm to population and state) and requisition (except in cases of natural disaster, epidemics, accidents, emergencies). Foreign investors are guaranteed immediate, adequate and effective compensation in case of nationalization and requisition. Compensation should be commensurate to the amount of the investment at time of nationalization or requisition, payable in foreign currency and may be freely transferred abroad;

III. Guarantee of compensation of damages - foreign investors are entitled to compensation of damages, including lost profits, incurred as a result of unlawful acts of state authorities;

IV. Guarantee of repatriation of profits - foreign investors are entitled to repatriate profits derived from foreign investments subject to payment of applicable taxes and duties.

The new Foreign Investment Bill that is being discussed in the Parliament at the moment is expected to reinforce the above guarantees as well as to introduce new legal instruments to protect foreign businesses.

The Government will continue the policy of support to industries with the domination of privately held enterprises including those owned by foreigners.

There are no general trade barriers or prohibitions for import of any types of goods in Azerbaijan and a minimum non trade barriers level for international trade exists. The country is not a member of WTO yet, though the Government started the accession process. The export is not subject to any customs duties and restrictions. Regulations exist for the export of strategic commodities such as electricity, petrol, cotton and non-ferrous metals.

A foreign investor is particularly welcome to enter the Azerbaijani market with a so called green field project. This is particularly attractive bearing in mind the regional markets and the geographic location of the country as the transportation hub for the Caspian region and Central Asia.

The Government has introduced a number of initiatives recently aimed at the improvement of the dialogue with the business community. Apart from the usual ways of policy lobbying and communication with the government via its ministries and agencies the avenues exist for a foreign investor to deliver the messages via such structures as the Azerbaijan Export & Investment Promotion Foundation (AZPROMO) aimed at the promotion of export & investment mainly in the non-oil sector.

Steps aimed at the simplification of the process of business start up were undertaken recently. Azerbaijani legislation is permissive in respect of expatriate staff employment.

Other substantial comparative advantages of doing business in Azerbaijan include such important factors as macroeconomic stability and political predictability and Baku being the only metropolitan and capital on the Caspian Sea.

Pursuant to the 1992 Foreign Investment Law in force, foreign investment, may take any of the following forms:

Participation in enterprises and organizations established with legal entities and citizens of the Republic of Azerbaijan on a shared basis;

- Establishment of enterprises wholly-owned by foreign investors;

- Purchase of enterprises, property, buildings, structures, shares in enterprises, other shares, bonds, securities, and certain other property, which, under the law of the Republic of Azerbaijan, may be owned by foreign investors;

- Acquisition of rights to use land and other natural resources, and also other proprietary rights; and

- Conclusion of agreements with legal entities and citizens of the Republic of Azerbaijan providing for other forms of foreign investments.

- Enterprises with foreign investment include joint ventures, enterprises wholly-owned by foreign investors, and representations (offices and branches) of foreign legal entities.

Bilateral Investment Treaties

Azerbaijan has 26 bilateral treaties on the mutual protection of investments. Several more treaties are currently being negotiated. Azerbaijan is also a party to a number of multilateral treaties concerning foreign investment. Please see ANNEX 1 for the list of bilateral treaties on the encouragement and protection of investments.

Company Incorporation

A company may start operations in Azerbaijan from the moment of state registration. Currently, registration authorities are carried out by the Ministry of Justice of the Republic of Azerbaijan.

Without a formal registration with the relevant authorities, such as the Ministry of Justice, the Tax Authorities, the State Statistics Committee and others, a company may not maintain a bank account, clear goods through customs, etc.

There are few forms in which a legal entity / company can be incorporated in Azerbaijan. There are no specific rules for the incorporation of companies by foreigners apart from usual legalization and translation requirements. Foreign business normally chooses between opening a representative office/branch and registering a local company.

The Law on State Registration of Legal Entities and State Register sets out the requirements of the legal registration process.

One may start his own business in Azerbaijan with 100% foreign investment or form a joint venture with a local partner. There are no specific requirements for the size of share or legal limitations for the foreign element in a company and investment. There are no additional general business licenses or permissions apart from general business registration for the start up.

Certain but limited number of documents is required for submission to the Ministry of Justice for registration purposes (for foreign participants / shareholders, these documents include, inter alia, extract from the companies' register, constituent documents, decision on foundation of a company). Azerbaijan has recently acceded to the Hague Convention Abolishing the Requirement of Legalization for Foreign Public Documents and legalization requirement ceased to exist in respect of documents produced and executed abroad in the convention member countries.

The new Law on State Registration of Legal Entities and State Register determined the timeframe of the entire process. The basic term for state registration is set at 5 working days. In case of failure of the Ministry of Justice to issue a certificate of registration within the statutorily prescribed term or to issue a letter refusing registration, a company shall be considered registered, in which case the Ministry of Justice is obliged to issue a registration certificate within the following 10 business days.

The state register of legal entities includes general information on a legal entity and founders of a legal entity. Any interested party is entitled to request extract from a register and copies of documents submitted for registration.

The state duty for registration of a local company is around 12 USD, and that in respect of branches / representative offices of foreign legal entities is around 290 USD.

Azeri law generally recognizes the following types of commercial legal entities (commercial legal entities are defined as those operating for profit):

I General partnership
II Limited partnership
III Limited liability company ("LLC")
IV Joint-stock Company (open type and close type)

LLCs and joint stock companies are most popular choices of legal entities. Please see ANNEX 1 for a brief comparative analysis of these two types of legal entities.

Joint Stock Companies. A JSC is a legal entity with charter capital divided into a certain number of shares. JSC shareholders are liable for the obligations of the JSC only to the extent of their shares' par value. A single individual or legal entity may be the founder or the shareholder of a JSC. The charter capital of a JSC is divided into a fixed number of shares of a stated par value. A JSC has a Board of Directors comprising at least three individuals who are either shareholders or independent directors. The Supervisory Board is mandatory for JSCs with more than 50 shareholders. General Meeting of Shareholders (GMS) is the supreme body in JSC.

General Partnership ("GP"). A general partnership is a legal entity comprised of at least two individuals and/or legal entities. An individual may participate in the creation of a GP only it such individual is registered as an entrepreneur. Individuals and/or legal entities may only participate in one GP. General partners are jointly subject to the partnership's liabilities. To the extent that the partnership does not have sufficient assets to cover its obligations, the partners are then personally liable for such obligations.

Limited Partnership. A limited partnership ("LP") has one or more general partners and one or more limited partners, General partners are personally liable for the partnership's obligations. Limited partners' liability is limited to the amount of their contributions. A person may only participate as a general partner in one LP. Similarly, a partner of a GP may not participate as a general partner in a LP.

Limited Liability Company. A limited liability company ("LLC") is an entity established by one or more individuals and/or legal entities contributing their participatory interests to the charter capital. A LLC having only one participant may not be a sole participant of another LLC or any other company. The participants of a LLC are normally liable only to the extent of their contributions. A LLC is not normally responsible for the obligations of its participants to third parties.

Additional Liability Company. An additional liability company (“ALC”) is an entity established by one or more individuals and/or legal entities contributing their shares to the charter capital. The legal structure of an ALC is similar to a LLC, except that the participants in an ALC may assume liability for the company in excess of their contributions, as regulated by the charter.

Cooperative (Kooperativ, a concept close to a Building Society). A Cooperative is a voluntary union of at least five individuals and/or legal entities, for the purpose of satisfying needs of its members through the consolidation of their financial or in kind resources. Depending on the purpose of their activity, cooperatives may be of different kinds, such as consumer or housing cooperatives.

Non-Commercial Organizations. An Azerbaijani non-commercial or not-for-profit organization is an entity created to engage in various social and economic activities, not related to the generation of profit and distribution of such profit to its equity holders. Since an Azerbaijani non-commercial organization is treated as a legal entity, it may own property, enter into contracts, acquire ownership and intellectual property rights, incur obligations in its own name, maintain an independent balance sheet, maintain settlement and other bank accounts, and act as a claimant and defendant in courts and arbitration. Azerbaijani non-commercial organizations are presumed to engage in non-commercial activities.

Under the Civil Code, non-commercial organizations may be created in any of the following forms: public association, foundation and union of legal entities. Other forms permitted include federations, schools, universities and clubs.

Public Associations. A public association is a voluntary, not-for-profit organization created by its members to engage in activities in their mutual interest. Azerbaijani law authorizes both individual and corporate membership in public associations. A member in a public organization loses any ownership or other rights to property transferred to the public association, including their membership contributions. Members of the public association are not responsible for its obligations and, likewise, the public association is not responsible for the obligations of its members.

In the event of the liquidation of a public association, any property remaining after liquidation is allocated for the purposes specified in the charter. If this is not possible, such property is remitted to the state budget.

Foundations. A foundation is a not-for-profit organization created by individuals and/or legal entities to engage in public, charitable, educational and other kinds of social activities. Since an Azerbaijani foundation is not subject to a minimum requirement for the number of founders, it may be created by one individual or legal entity. Moreover, they are not based on membership, i.e. the founders do not become its members. A foundation’s founders are not responsible for its obligations. Likewise, a foundation is not responsible for the obligations of its founders.

Unions of Legal Entities. A union of legal entities is created by business or non-commercial entities to provide for the cooperation and coordination of their entrepreneurial or non-commercial activities, representation, and the protection of their common interests. A union is not responsible for the obligations of its corporate members. Corporate members, however, are responsible for the union’s obligations to the extent provided under the union’s charter.

Subsidiaries. A legal entity, whether or not established in Azerbaijan, may form a subsidiary in Azerbaijan in one of the three legal forms available for commercial purposes, i.e. a JSC, a LLC, or an ALC. A subsidiary is a separate and distinct legal entity; the parent enterprise may contribute property to its subsidiary but, typically, is not liable for the obligations of the subsidiary. A parent company, however, may be held liable for the obligations of its subsidiary in bankruptcy if such bankruptcy was caused through the fault of the parent company in connection with the execution of its instructions. Additionally, a parent company and its subsidiary are jointly liable for obligations incurred by the latter as a direct result of the implementation of instructions of the former, even if the former is not in bankruptcy.

Acquisition & ownership of land and property

A revolutionary land reform was implemented in Azerbaijan in the 90-s of XX century. The country was one of the first among the former USSR republics to introduce private ownership of land as well as free trade and transfer of titles to land and distributed the large portion of land to the population. A lot of formerly state owned real estate was also either sold or distributed to population and businesses.

Azerbaijani law provides for the following basic rights in land: (I) ownership; (II) lease; (III) use. The real estate in the Azerbaijani legislation is best matching the term "immovable property". Further to recent adoption of the Law on State Register of Immovable Property, creation of rights in property (ownership and other rights), transfers and termination of rights are subject to state registration with the register of immovable property.

The Law recognizes registration of the rights in immovable property carried out by various state authorities prior to the date of the law and provides for data transfer to the Register from various state authorities engaged in registration of rights in immovable property in the past. The Register in accordance to the Law will be available to a limited list of persons entitled to receive information on data maintained in the Register. As a general rule, registration of property rights over immovable property shall be accomplished within 20 days.

The Law contains special provisions in respect of registration of certain rights in immovable property:

- Ownership and other property rights regarding unfinished construction of immovable property can be registered in advance.

- Property right regarding individual apartments in unfinished buildings or non-residential properties and mortgages thereon can also be registered in advance.

- In the event immovable property is leased or given for use for a period exceeding 11 months, such right shall be registered by either party of a lease or use agreement.

The concept of ownership in Azerbaijan includes rights to exercise possession, right to use/benefit and the right to dispose of the land (transfer ownership or other rights in land to third parties). It should be noted that ownership right in land is a privilege of (I) the Republic of Azerbaijan, (II) municipalities, and (III) Azeri individuals and legal entities. Foreigners (individuals and legal entities) and stateless individuals cannot own land in Azerbaijan. Foreigners who acquired ownership rights in land through general legal procedures such as enforcement of security interest, grant or succession shall dispose of their ownership within one year; otherwise the land shall be acquired by the state or relevant municipality. International organizations, foreign legal entities and foreign citizens and states may lease land in Azerbaijan, although they may not own land and may not be granted a purchase option on a lease. There is no legal limitation for ownership of buildings, constructions etc. by foreign individuals and legal subjects.

Certain categories of land plots are in the exclusive ownership of the state or municipalities, and may only be leased by or granted for the use of private persons. Individuals may own land within the limits established by law.

In addition to ownership, the Land Code recognizes perpetual and temporary land use rights, lease rights and easements.

Temporary land use right is granted for up to 99 years and may be extended by the parties. A perpetual land use right is granted for an indefinite period. The holder of such rights is liable only for the land tax for the land use. Perpetual and temporary land use rights are granted by the state and municipalities only in exceptional circumstances to a limited number of persons listed in the Land Code. Landowners may grant perpetual or temporary land use rights under an agreement with the land user. Land use terms are defined by an agreement between the landowner and the land user.

Land lease is the use of land for a definite period, for a charge. Leases are concluded for a period agreed by the parties. Rent payments for the lease of privately held land parcels are freely negotiable. Rent payments for state or municipally owned land parcels are determined according to market conditions, but cannot be less than specified statutory rents. With regard to agricultural land, discounts from statutory rents are available depending on market conditions in the agricultural sector.

Obtaining licenses

A license is granted without discrimination to any entity that satisfies the requirements for that specific license. Thus (with certain

As per Azerbaijani law: License is an official record permitting relevant types of entrepreneurial activities to a legal person, as well as to a natural person engaged in entrepreneurial activities without creation of a legal person, irrespective of its organizational and legal form.

Exceptions: foreign investors may obtain licenses under the same conditions and in with the same procedure as Azerbaijani nationals. Normally, a licensee may not transfer a license to another legal entity or individual.

Licensing in Azerbaijan is regulated by the presidential decrees and orders of the Cabinet of Ministers of the Republic of Azerbaijan. The Ministry of Economic Development is the government agency entrusted to exercise overall control in the field of licensing and to maintain a single register of licenses.

Regulations on procedures for the licensing of specific types of activities are generally issued by the Cabinet of Ministers. An applicant is required to submit all documents specified in the regulations and pay the required fee, upon which (subject to the application meeting all requirements) a license is issued within 15 days. The basic term of any license is five years.

Azerbaijani licensing system was reformed in 2002. As a result the number of business activities requiring a license went down to 30. The application, paper processing and regulating bodies were defined and the overall procedure streamlined.

As the result of the reform the licensing system in Azerbaijan was liberalised. Licensing differs from the permitting procedure related to special “hazardous” activities such arm trade or nuclear materials storage. In Azerbaijani terms this type of permits is called “special licenses”.

A person who wishes to obtain a license to carry out specified entrepreneurial activity should either create a legal person or register as an entrepreneur, i.e. become an “individual businessman”.

The list of documents required for obtaining a permit is limited. No other documents can be requested from a business to get the license.

Hiring & Firing

Labor relations governing the employment of all workers and employees in the Republic of Azerbaijan are regulated by the Labor Code, effective 1 July 1999 (the Labor Code), together with other laws issued pursuant to the Labor Code.

The main legislative act regulating labor issues is the Labor Code adopted in 1999 that codified the legislative acts adopted in the early years of independence and number of lower tier normative legal acts that expand certain provisions of the Labor Code.

A standard working week is 40 hours. Overtimes and work during days-off (which are Saturdays, Sundays, public holidays and a mourning day) are compensated in the manner provided for in law.

Employment relations are established by virtue of execution of an employment contract, which is made without a fixed term in most cases. In limited cases (such as seasonal nature of work, work under a fixed term project or assignment, agreement of employer and employee) employment contract can be made for a fixed term. Probation period of up to 3 months is allowed in most cases and the contract can be terminated by either party upon giving a 3-day notice.

Fixed-term contract will be deemed to be extended unless terminated by a notice within 7 days of the expiration of the original term of the contract.

A contract without a fixed term can be terminated by employer in cases specified such as gross violation of labor duties by an employee, redundancies, determination of an employee's qualification as inadequate for performance of his duties, change of labor conditions etc.

An employer is under a duty to give a termination notice. The general term of such a notice is 2 months (e.g. redundancies). However, certain exclusions are available (e.g. in case of gross violation of labor duties). An employee can terminate a contract at any time upon giving a 1-month notice. In certain cases when employment is terminated by the employer, the employer shall allocate to an employee a fixed number of days in a working week to allow an employee look for a different workplace.

Termination of employment with certain categories of employees (e.g. pregnant women, women with children below 3 years of age) is prohibited.

In cases of termination of employment due to redundancy, termination of work place or liquidation of an enterprise employer shall pay to the employee severance payment, which may total to up to three months of employee's salary.

Generally, legal entities are required to make monthly social insurance contributions in the amount of 22% of the salary fund of its employees. Legal entities are also under an obligation to withhold employees' social insurance contribution in the amount of 3% of employees' gross salaries and transfer same on behalf of the employees to the State Social Fund.

Individual entrepreneurs are, generally, required to pay social insurance contributions in the amount of 20% of the average statistical monthly salary for the previous year. Different rates are provided for certain categories of individual entrepreneurs (such as auditors, private notaries, auditors, accountants etc.)

Azeri law also provides for obligatory medical insurance procured by employers.

Compensation in Foreign Currency

All salaries paid in Azerbaijan must be paid in manats.

Probationary Period

To have force in law, a probationary period can be stated in an employment contract and may not exceed three months.

Minimum Wage

Employee remuneration may not be lower than the minimum monthly wage, currently 150,000 manats (approximately US$ 33) per month.

Work Week

The regular work week is 40 hours, reduced for certain groups of people. Overtime is, as a rule, not enforceable unless necessary for state defense, public safety, ensuring the supply of public utilities, and in certain other situations. The duration of overtime work may not exceed a certain limit established by the Labor Code. For each hour of overtime work, an employee must be compensated at a rate at least twice his or her normal hourly rate.

Holidays

Employees are entitled to 17 official public days off, 16 of which are public holidays and one is a day of mourning. The minimum paid annual leave is 21 calendar days, more for certain groups of employees.

Sick Leave

Except for the first 14 days of any absence, compensation for sick leave is provided by the State Social Protection Fund, not the employer.

Maternity Leave

Women are entitled to be paid maternity leave for 70 calendar days prior to and 56 days (70 in certain cases) after the birth of a child. Maternity pay is provided by the State Social Protection Fund.

Dismissal

Grounds for dismissal include, among other things: staff redundancy; employee’s lack of ability to perform required employment duties; and violation of employment duties as determined by the employment contract. There are certain restrictions covering the dismissal of certain categories of employees. In certain cases an employer is required to report an employee’s dismissal to the appropriate state authorities.

Cost of Employment

Employers are required to pay social security contributions (see Section 6.3.8 above) on behalf of their employees.

Income Tax

The employer is obliged to withhold income taxes for its employees and certain social contributions.

Foreign Workers in Azerbaijan

Foreign employees who are employed by enterprises (affiliates or representative offices) operating in Azerbaijan are subject to Azerbaijani labor law, except for those working in enterprises, branches or representative offices located in Azerbaijan under employment contracts concluded in the foreign state where the employer is located.

Foreign nationals wishing to work in Azerbaijan are required to register at their place of residence and obtain a work permit. Work permits are issued by the Ministry of Labor and Social Protection. Heads of representative offices and branches of foreign legal entities (and their deputies) are not required to obtain a work permit in Azerbaijan.

Foreign trade regulation

Azerbaijan has started negotiations with WTO on accession to the organization. The government has undertaken a number of steps to liberalize foreign trade. As of end 2005 the weighted average import tariff in Azerbaijan was 5.7 % i.e. a way below the international average. Import and export is one of the most rapidly developing business segments in Azerbaijan. Azerbaijan is developing trade relations with a number of countries. In 2004 there were trade operations with more than 100 partners. European Union remained the major destination for export of Azerbaijani goods. Russia and CIS are the major importers.

The main export commodities are oil and petrochemicals, a/c products. The import includes machinery and luxury goods, constructions materials etc.

Azeri law recognizes several customs regimes applicable to goods imported in Azerbaijan, of which most important to foreign investors being transit, customs storage, bonded warehouse, temporary import, processing on and outside customs territories.

In case of temporary import, no duties are applied and the goods must be re-exported from Azerbaijan until the deadline established by the customs authorities. The goods brought under the temporary import regime should be re-exported without substantial changes in their nature.

Import of goods into Azerbaijan is subject to imposition of imports duties (ad valorem duties ranging from 0% to 15%, per unit duties, duties per metric units).

Excise tax applies to certain types of goods (e.g. tobacco and alcohol products). Azerbaijan adopted “destination VAT” principle and VAT (currently set at 18%) is payable (subject, of course, to applicable customs regime) on the declared value of goods (including assessed import duties and excise tax). Certain categories and types of goods are import exempt and to some others 0% VAT applies.

0.15% customs clearance fee is applicable to all imports/exports with certain minor exceptions.

Exports are exempt from customs duties, except for certain types of metals and metal products.

Under PSA regime, contractors, its agents and sub-contractors are entitled to import and re-export from Azerbaijan free from import duties and restriction goods employed for hydrocarbon activities. Imports under PSA regime are subject to zero rate VAT. Similar regime applies under HGAs.

Another important development worth mentioning is a number of regional trade initiatives including Central Asia - Caucasus - Europe transport corridor (TRACECA) and Russia-Azerbaijan-Iran transport corridor (North-South Transport Corridor). The projects are directed at stimulation of international trade along the above routes via synchronization of trade policies and tariffs, upgrade of infrastructure, simplification of customs procedures etc. The impact of the above initiatives on international trade of Azerbaijan and on its status of a regional transportation hub is substantial.

Currency regulation & repatriation of profit

Foreign exchange

Foreign exchange transactions are governed by the Law on Currency Regulation. The National Bank of Azerbaijan administers the overall enforcement of currency regulation. Various aspects of foreign currency regulation also cover precious metals and foreign securities, among other matters.

Azerbaijan’s currency control legislation distinguishes between “residents” and “nonresidents”, with more stringent requirements currently applying to residents. The definition of “resident” includes private individuals having a permanent place of residence in Azerbaijan and legal entities established in accordance with Azerbaijani legislation. Branches and representative offices of foreign entities established in Azerbaijan do not fall within the definition of a resident.

Currency operations are divided into routine currency operations and operations involving the movement of capital. Routine currency operations include:

Transfers for payment of goods and services under import/export contracts with a term of payment not exceeding 180 days; Transfers in connection with the financing of export/import transactions with a term not exceeding 180 days; Transfers of dividends, interest, and other income from deposits, investments, credits and other operations; and Non-commercial transfers, for example including transfers of inheritances, wages, pensions or alimony.

Currency operations involving the movement of capital must be performed in a manner approved by the NBA. No procedure, however, has been established by the NBA on this point and, in effect, no licensing of the currency operations involving the movement of capital is required at present.

Foreign exchange regulations are comparatively less restrictive for non-residents. Nonresidents are permitted to hold offshore bank accounts without restriction, may deposit their funds offshore, and are not bound to sell foreign currency proceeds or submit a report upon withdrawal of foreign currency. Non-resident legal entities may purchase foreign currency on the domestic foreign currency market for routine currency operations and in other cases stipulated by legislative acts.

Import/Export of Foreign Currency in Cash by Individuals. Resident and non-resident individuals are treated equally with regard to the import/export of foreign currency in cash. There are no limitations on the amount of foreign currency an individual may bring into Azerbaijan, provided that such amount is declared to the Azerbaijani customs authorities. Azerbaijani customs authorities are required to issue a certificate to an individual importing more than US$ 10,000 or its equivalent into Azerbaijan.

Residents can export of a hard currency in the amount up to the equivalent of USD 10,000 free of tax without any documentation except the tax declaration. Non-residents, however, are required to submit some documents. Residents must pay a 1% fee for the amount from USD 1,000 up to USD 10,000. In case the USD 10,000 threshold is exceeded, supporting documentation must be provided in any event.

Azeri companies and individuals are prohibited from holding bank accounts outside Azerbaijan without obtaining prior approval from the National Bank of Azerbaijan.

Foreign companies and individuals may have both Manat and foreign currency accounts in a local bank. All settlements within Azerbaijan including payments of employee salary should be made in Manats with a few exceptions. A permission of the National Bank of Azerbaijan is required to conduct certain transactions in foreign currency.

From 1st January 2006 new Azerbaijani manats were introduced to replace the old ones. The exchange of banknotes is accompanied by denomination of the currency at a rate of 1 to 5000. The international abbreviation for the new manat is AZN.

Taxes

Tax policy and collection of taxes in Azerbaijan is carried out by the Ministry of Taxes. For the purposes of this review we will concentrate on the corporate taxation.

Currently, there are two different types of tax regimes in Azerbaijan. The companies that work predominantly in the oil & gas sector under the Production Sharing Agreements (PSA) are subject to the oil consortia tax regime which will be looked at below in this publication. The statutory tax regime is applicable to all other legal entities. The statutory tax regime is regulated by the Tax Code 2000 and numerous normative legal acts. The tax legislation in force is regarded as one of the best pieces of legislation among the transition economies.

All Azerbaijani enterprises, representative offices, branches, and individuals engaged in business activities (as well as foreign entities and individuals conducting business activity in Azerbaijan through a “permanent establishment” (“PE”) as defined under the Tax Code) must register with the tax authorities regardless of whether or not their activities are taxable in Azerbaijan. Divisions which have not established a PE are subject to a separate regime.

Double Taxation Treaties

Azerbaijan has entered into bilateral treaties for the avoidance of double taxation with 18 countries, as well as indirect taxation treaties with Belgium, Canada, Italy and Germany. Double taxation treaty negotiations are currently underway with Finland, Bulgaria, Denmark, China, Greece, India, Kuwait and Kyrgyzstan.

Road Tax

Legal entities and individuals of foreign states pay this tax when entering into the territory of the Azerbaijan Republic. Taxes are assessed on cars, buses and trucks depending on seat number and days spent in Azerbaijan (e.g. US-US per day for buses, etc.)

Simplified Tax

This tax is intended to ease tax burden for small size businesses and is in lieu of general profit tax. Simplified tax is charged at the following rates on the gross revenue of the taxpayers:

• 4% for taxpayers operating in Baku
• 2% for taxpayers operating in other regions of Azerbaijan

In order to qualify for this tax, the total revenue should not exceed 123,750,000 million old Azerbaijan manats (approximately USD 26,6000 at the current exchange rate) in a three month period. The payers of the simplified tax are also exempt from VAT, profits tax and property tax.

Simplified tax is payable on a quarterly basis.

Dividend Withholding Tax

Dividend withholding tax of 10% applies to both domestic and foreign shareholders. Tax is withheld in the currency in which the dividend is paid. Double Taxation Treaties (“DTT”) may reduce the rate at which dividend tax applies. See the ANNEX 4 for brief information about DTTs in Azerbaijan.

Other Withholding Taxes

Foreign legal entities with no permanent presence (permanent establishment) in Azerbaijan are subject to withholding tax on income derived from sources in Azerbaijan at the following rates.

10% - Interest
14% - Rent and Royalty
6% - Freight income
6% - Telecommunication services
4% - Financial leasing and insurance payments
10% - Other income

Losses and bad debts

Losses may be carried forward over the next five years using one of the following two options. Under the first option, losses can be offset against the taxable profit in a given tax period in the amount of up to 20% of the amount of such taxable profit for that tax period. Alternatively, losses can be carried forward on a pro rata basis where 20% of the total losses is used in a given tax period. Losses cannot be carried back. Bad debts may be deducted from taxable income only if recognized as having no value in the accounting books of the company and if they were reflected as income in previous periods.

Losses and bad debts recovered in the future periods shall be recognized as income in the period of their recovery.

VAT registration

There are detailed requirements for registration and accounting for VAT, with penalties for non-compliance. Companies with taxable transactions exceeding a certain threshold (currently approximately ,000 USD per three consecutive months) must register as VAT payers. Other companies carrying out business activity in Azerbaijan may voluntarily register. Only registered VAT payers may charge VAT or claim a credit for input VAT that they pay.

Interest and penalties

There are certain interests and penalties applicable for failure id comply with the tax legislation. For example, interest on outstanding tax liabilities accrues at a rate of 0.05 percent per day. The following penalties may also be applicable:

Breach Fine
Failure to register as a taxpayer with the tax authorities AZN 44
Failure to file declarations AZN 44
Understatement of tax liability 25 percent of understated tax
Payments from petty cash while bank accounts are imposed tax sanctions or penalties by the tax authorities 20 percent of expenses paid from petty cash
Failure to notify tax authorities on changes in a taxpayer’s registration documents AZN 44

Accounting

The new Accounting Law 2004 stipulates gradual transition to the new accounting standards based on IAS by 2008. Thus the Soviet-era accounting principles will eventually cease to regulate the financial reporting. It should be noted however, that Azerbaijan has already made substantial advancement towards new financial reporting philosophy. The banks as well as the companies under Production Sharing Agreements and similar commercial deals are not regulated by the 1995 Law on Accounting.

The new Law charges the Cabinet of Ministers with the task of publishing new National Accounting Standards (NAS), which are yet to be developed. The Law stipulates that all significant entities including credit institutions, insurance companies, investment funds and commercial organizations meeting certain criteria will be subject to International Financial Reporting Standards (IFRS). Others (except for small private businesses) will have the choice of using either the IFRS or NAS. Small private business will have the right to choose between the NAS or a simplified method of accounting.

All entities registered in Azerbaijan (Azeri Legal entities, representative offices and branches) are required to maintain their books and records on the territory of Azerbaijan, in local currency, and in accordance with the Azerbaijan accounting legislation (AAL). This includes the use of a mandatory, and quite rigid, chart of accounts. In most cases this will necessitate the employment of a Full-time, experienced Azeri chief accountant.

The Civil Code 2000 contains general provisions regarding financial reporting and audit requirements for legal entities. Joint stock companies and limited liability companies are required to use independent auditor to audit their annual financials (in addition, joint-stock companies are required to publish their annual accounting reports and balance sheets). Any legal entity with the value of balance sheet exceeding 1 mln AZN (1,020,000 USD) or annual revenues exceeding 500 thsd AZN (510,000 USD) shall perform audit of its balance-sheet. Legal entities with balance-sheet value of below 1 mln AZN or annual revenues below 500 thsd. AZN are allowed to prepare simplified balance sheet.

Tax Code 2000 also contains certain provisions dealing with accounting matters, such as depreciation. Depreciation is made in accordance with a declining balance method and the following rates apply to these selected categories of assets:

- buildings, facilities and installations - up to 7%;
- machines, equipment and computers - up to 25%;
- vehicles - up to 25%;
- intangible assets - up to 10% when life time is not defined or in accordance with life time when life time is defined;
- other fixed assets - up to 20%.

Actual capital expenditures for production purposes made in a current tax year in form of buildings, facilities, installations, machines, equipment, computers vehicles and other assets may be depreciated at a rate of up to 2 times of standard rates, i.e. depreciated in an accelerated manner. An accelerated depreciation rate was recently also introduced for the leased equipment in order to stimulate this financial service.

As mentioned above separate chart of accounts based on western accounting principles has been adopted for the commercial banks few years ago.

AAI differs from TFRS and generally accepted accounting principles in other countries (e.g., the United States). A summary of the most significant differences is as follows.

Accounting policies. AAL do not require detailed disclosure of accounting policies used in the preparation of the financial statements or footnote disclosures that provide additional information, analysis and clarification of the financial statements.

Property, plant and equipment (PPE). Property, plant and equipment is maintained under the historical cost convention (at acquisition price or cost of production including transportation and assembly costs) as modified by the revaluation of assets. At various times since 1992, PPE was revalued in accordance with Government decrees (most recently in 1996).
Indexes used for these revaluations did not necessarily properly account for the changes in the value of Manat nor did they result in the value of the underlying fixed assets to which they were applied being revalued to a current market value. Revaluations of property, plant and equipment are generally not required under 1AS and US GAAP.

Impairment of assets. AAL does not permit the recording of an allowance against the carrying value of an impaired asset. This includes setting up an allowance for tangible assets as well as inventories, accounts receivable and other assets.

IAS requires, among other things, that long-lived assets and certain identifiable intangibles that are held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, allowances may be made upon the carrying value of short-term assets (for example, accounts receivable) when it is likely that the full carrying value of the asset will not be recovered.

Deferred taxes. Deferred tax assets and liabilities under IAS are recorded for the expected future tax consequences of existing differences between financial reporting and tax reporting basis of assets and liabilities, and loss or tax credit carry forwards. Under AAL rules, there are no provisions regarding deterred tax accounting.

Equity. In the balance sheet of an Azeri company equity is represented by charter capital, paid-in-excess capital, reserve capital, appropriated earnings, social funds and retained earnings for the current and previous years. Deductions can be made directly from reserve funds for non-tax deductible expenses.

Under IAS, equity is generally represented only by capital stock, additional paid-in capital and retained earnings for the current and previous years.

Intellectual property

In 1996 and 1997 Azerbaijan started implementation of a national system for registration and protection of intellectual property rights. Intellectual property rights in Azerbaijan include: all rights to industrial property (including inventions, industrial designs, utility models, trademarks, and geographic names); and copyright and related rights. Current legislation pertaining to intellectual property includes the Law on Copyrights and Related Rights (the Copyright Law), the Law on Trademarks and Geographic Names, the Law on Patents, and the Law on Topology of Integral Schemes.

Under existing legislation, the Cabinet of Ministers is empowered to authorize various state agencies to register and protect intellectual property rights in respective areas. The State Agency for Standardization, Metrology and Patents is responsible for the issuance of patents and trademark registration. There is also the State Copyright Agency. Beyond this however, procedures for the registration and protection of various intellectual property rights differ from one state agency to another.

Azerbaijan is a party to several international agreements concerning the protection of intellectual property including: the Convention Establishing the World Intellectual Property Organization; the Paris Convention for the Protection of Industrial Property, the Madrid Agreement Concerning the International Registration of Trade Marks, the Patent Cooperation Treaty, and the Eurasian Patent Convention, the Performances and Phonograms Treaty of the World Intellectual Property Organization Copyright Treaty of the World Intellectual Property Organization.

Azerbaijan is a “first to file” and not a “first to use” jurisdiction, meaning early registration of intellectual property rights is essential to ensure protection.

Patent protection is granted to an invention if it is novel, inventive and useful. The maximum duration of protection for an invention patent is 20 years.

Utility models are granted patent protection if they are new and “industrially applicable”. The term of utility patents is ten years.

An industrial design right is characterized by an artistic and structural form which determines its external appearance. Patent protection is granted if an industrial design is novel, original, and capable of industrial application. The term is ten years.

Patents may be assigned and/or licensed by their owner(s) to natural persons or legal entities. However, an assignment must be registered with the relevant state agencies to be valid. Infringement carries civil, criminal and administrative liability.

The right to a trademark is based on registration with the respective state agencies. Trademark registration is granted for a term of ten years, renewable every ten years. Assignments of licenses for trademarks and geographic names must be registered with the relevant state agencies.

Legal protection is given to the appellation of origin of goods based on registration with the relevant state agencies, and to trademarks existing under international agreements on the registration thereof or bearing the status of a known trademark. Violations of intellectual property rights carry civil, criminal, and administrative liability.

The Copyright Law protects works of science, literature and the arts (copyrights) as well as stage productions, phonograms of radio or cable broadcasts, and computer programs and databases (allied rights). Copyright protection is normally granted to the author without registration. The right to use a copyrighted work may be re-assigned. A copyright provides protection for the lifetime of the author and normally for a period of 50 years following his or her death.

Rights to computer programs, databases and topologies of integrated circuits are protected under the Copyright Law and the Law on Topology of Integral Schemes. The unauthorized re-creation (copying) of computer programs, alteration of existing programs, and unlawful accessing of legally protected computer information are criminal offenses.

Proper quality is determined by legislative norms and technical specifications applicable to a particular product. Certain goods are subject to mandatory certification by state agencies, in accordance with procedures established by legislation. The advertising and distribution of goods without such certification is prohibited.

Dispute resolution & arbitration

Courts

Azerbaijan has a three tier court system - courts of first instance, appellate courts and cassation court. Courts of first instance are the district (city) courts of general jurisdiction, local economic courts and economic courts for disputes arising from international agreements.

It is necessary to emphasize that Azerbaijani courts are undergoing critical stage of transition and reforming from a soviet type "just courts" to an independent and modern judiciary. Vital steps such as re appointment of judges and recent legal reforms are underpinning this process. It is safe to say that Azerbaijani system is getting more adequate and fit for the open market economic relations.

Courts of general jurisdiction consider disputes arising out of civil, family, or land-related matters, use of natural resources, environmental protection, tax, administrative and other matters, where at least one of the parties to a dispute is a physical person and where he does not have the status of an entrepreneur, or, if he has such status, the dispute arises other than in connection with the carrying out of his entrepreneurial activity.

The economic courts consider cases in respect of economic disputes arising from civil, administrative and other legal relations between legal entities and physical persons with the status of individual entrepreneurs.

The economic court for disputes arising from international agreements considers cases in respect of disputes arising out of trans-border agreements between physical and legal persons of the Azerbaijan Republic and foreign legal entities, legal entities with foreign investments, international institutions, foreigners carrying out entrepreneurial activity and stateless persons.

The cassation court is located in Baku while the regional appellate courts must be established in certain regions pursuant to the recent reforms initiative.

The decisions of the appeal courts can be further appealed to the court of cassation. The appellate board for civil cases of the Supreme Court considers appeals brought in respect of the decisions of the Court of Appeal. The appellate board of the Supreme Court for economic cases reviews the decisions of the Panel of the Appellate Court on economic cases (as an appeal instance).

Mandatory enforcement

Enforcement procedures set forth in Law on the Execution of Court Orders apply to judgments of Azeri and foreign courts as well as international arbitration and foreign arbitration awards.

The following documents have the status of execution orders:

- court orders (e.g. judgments of Azeri courts, interim orders, awards of international arbitration courts and tribunals, decisions of courts of foreign states and arbitration courts);
- notarized agreements concerning the recovery of alimony;
- execution notes of notaries;
- decisions of state bodies (officials) authorized to consider cases related to administrative offences;
- decisions of other state bodies when provided by law.

The documents should be submitted to a bailiff for execution within following periods:

I. writs issued in accordance with courts decisions and courts orders – one month;
II. writs issued in accordance with resolutions of courts on taking of measures related to provisional remedies - immediately;
III. execution notes of notaries and decisions of bodies (officials) authorized to consider cases on administrative offences - ten days;
IV. writs issued in accordance with decisions of international arbitration court and arbitration tribunals and decisions of courts of foreign states and arbitration courts - three years.

Failure to voluntarily execute the appropriate decisions triggers obligatory execution. The following are obligatory execution measures:

I. foreclosure and subsequent sale of assets;
II. garnishment of salaries and similar payments;
III. foreclosure of debtor's assets in possession of third parties;
IV. taking of debtor's assets with subsequent transfer to claimant.

Referral of a dispute to arbitration is a permitted dispute resolution mechanism. In general, matters over which courts have jurisdiction can be arbitrated in cases provided in law, international agreements and upon agreement of the parties.

Certain matters over which Azeri courts have exclusive jurisdiction cannot be arbitrated and include, inter alia, rights over immovable property located in Azerbaijan, cases concerning the recognition of patents, or other marks or rights, if such were registered (or application for registration was filed) in Azerbaijan, cases where an action is brought against a carrier under a contract for the carriage of goods, or cases relating to the existence of a legal person registered in Azerbaijan or cases where cancellation of a decision taken by a legal person is sought.

Interestingly enough, civil procedure legislation does not set forth provisions regulating the conduct of domestic arbitration. Hence, one can naturally assume that the parties are at liberty to provide for these by their agreement.

Commendably, Azerbaijan has made significant progress as far as international arbitration is concerned. Azerbaijan has acceded to 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards when ratification procedure was completed on 29 May 2000. Azerbaijan has also enacted the Law on International Arbitration, which basically adopts the UNCITRAL Model Law on International Commercial Arbitration of 21 June 1985. In addition, Azerbaijan is a signatory to 1998 Agreement on the Order of Reciprocal Enforcement of Arbitral Awards and Economic Court Judgments on the Territory of the country-members of the Commonwealth of Independent States.

Decisions on enforcement and recognition of foreign arbitral awards are taken by the Supreme Court. In certain cases, enforcement can be declined, most notably, if:

I. an award contravenes legislation, offends public policy or sovereignty of the Republic of Azerbaijan;
II. the principle of reciprocity is not adhered to;
III. there is a valid judgment of an Azeri court relating to the same parties and same subject-matter;
IV. an award has not entered into force in the country where it was made.

New York Convention will certainly not apply to the recognition and enforcement by the Azeri courts of domestic awards (where an award is made in Azerbaijan arbitral proceedings). In the absence of relevant provisions in the civil procedure law, the Law on International Arbitration could be looked at for guidance.
Under said law an international commercial arbitral award made in arbitration proceedings in Azerbaijan may be set aside if, inter alia:

I. the notice of the appointment of an arbitrator or arbitration proceedings were defective;
II. the dispute does not fall within the scope of the arbitration agreement;
III. the composition of the arbitration tribunal or the arbitration procedure was not in accordance with the agreement of the parties;
IV. the subject-matter of the dispute is not capable of settlement by arbitration under legislation of the forum state;
V. the arbitral award is in conflict with Azeri legislation.

Privatization

Foreign investment Under Privatization Programs

Under the Privatization Law, the following are considered to be foreign investors:

• Foreign legal entities and their subsidiaries;
• Azerbaijani legal entities in which participation of foreign investment exceeds 50% of the entity's charter capital;
• Foreign nationals; and
• Stateless persons.

Azerbaijan to the moment has undergone long process of getting from a state dominated economy to the current situation with 75% of economy being in private hands. This became possible largely thanks to de-nationalization of the state owned enterprises and property. Privatization went in two stages. Denationalization of small sized enterprises was carried out within the First Stage Privatization Program (1995-1998). 26,000 enterprises as well as 1.3 million hectares of land were sold and distributed to private persons and legal entities. Few large enterprises were also sold to investors as part of the Program. They include, among others, brewery, cement and steel plants transferred to foreign investors.

At the moment the Second Stage Privatization Program adopted in 2000 is underway. It stipulates privatization of mainly medium and large enterprises.

The enterprises are declared "open for privatization" by special Decrees signed by the President. The list of enterprises currently open for privatization is publicly available.

The law also contains the list of exemptions, i.e. enterprises that can not be denationalized. Such enterprises include military and other facilities of strategic importance. Railways, radio and TV stations, irrigation systems are excluded from the privatization as well.

The programs explicitly do not mention any difference as regards to who may participate in privatization, i.e. foreign national takes part in the process on a non discrimination basis.

The State Committee on State Property Management is in charge of privatization process. There are few privatization methods legally adopted in Azerbaijan:

- direct sale to strategic investor;
- sale at the investment tender;
- special cash and voucher auctions;
- general auctions;
- sale to employees on preferential terms.

The Government also practices long term transfer of management to a private operator in accordance with an obligatory investment program. To the moment the number of medium and large enterprises privatized within both Privatization programs is over 1,000. There are, however, still very substantial opportunities in privatization as a mode of entry to the market.