Business conduct framework and
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
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
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:
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
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
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
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.
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
The Government will continue
the policy of support to industries with the domination
of privately held enterprises including those owned
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
- 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.
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.
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
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.
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.
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.
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.
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
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.
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.
& 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
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 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.
A license is granted
without discrimination to any entity that satisfies
the requirements for that specific license. Thus (with
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
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.
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
The list of documents
required for obtaining a permit is limited. No other
documents can be requested from a business to get the
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.
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
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
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.
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
Azeri law also provides
for obligatory medical insurance procured by employers.
in Foreign Currency
All salaries paid in
Azerbaijan must be paid in manats.
To have force in law,
a probationary period can be stated in an employment
contract and may not exceed three months.
may not be lower than the minimum monthly wage, currently
150,000 manats (approximately US$ 33) per month.
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.
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
Except for the first
14 days of any absence, compensation for sick leave
is provided by the State Social Protection Fund, not
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
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
Cost of Employment
Employers are required
to pay social security contributions (see Section 6.3.8
above) on behalf of their employees.
The employer is obliged
to withhold income taxes for its employees and certain
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.
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
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
Exports are exempt from
customs duties, except for certain types of metals and
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.
& repatriation of profit
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.
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
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
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
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
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
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.
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.
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,
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
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.
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
10% - Interest
14% - Rent and Royalty
6% - Freight income
6% - Telecommunication services
4% - Financial leasing and insurance payments
10% - Other income
Losses and bad
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.
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.
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:
Failure to register as a taxpayer with the tax authorities
Failure to file declarations AZN 44
Understatement of tax liability 25 percent of understated
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
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
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
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
- 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
As mentioned above separate
chart of accounts based on western accounting principles
has been adopted for the commercial banks few years
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.
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
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.
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
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
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
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
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
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
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).
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
I. writs issued in accordance
with courts decisions and courts orders – one
II. writs issued in accordance with resolutions of courts
on taking of measures related to provisional remedies
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 -
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
IV. taking of debtor's assets with subsequent transfer
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.
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.
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
II. the dispute does not fall within the scope of the
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
V. the arbitral award is in conflict with Azeri legislation.
Foreign investment Under
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
• 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
At the moment the Second
Stage Privatization Program adopted in 2000 is underway.
It stipulates privatization of mainly medium and large
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
- 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.