General information Azerbaijani government has recently taken considerable legal and other reforms to ensure an attractive investment environment in the country. Under the Law on “Protection of Foreign Investments of the Republic of Azerbaijan”, foreign legal entities and natural persons, as well as stateless persons and citizens of Azerbaijan, who are residents of other countries may qualify as foreign investors in Azerbaijan.
As per the applicable laws, foreign investments are protected by certain guarantees provided by the government, including, (i) guarantee against deterioration of legislation – the legislation in force at time of investment applies for subsequent 10 years or for the term of the investment contract (except for changes in the national legislation on defense, national security, environment, public morality and health, public order, credit and finance); (ii) guarantee against nationalization and requisition – foreign investments are not subject to nationalization (except in cases of harm to public and state interest) and requisition (except in cases of natural disasters and emergencies). The law guarantees foreign investors with effective, adequate and immediate compensation in case of nationalization and requisition; (iv) guarantee of repatriation of profits earned in Azerbaijan – foreign investors are entitled to repatriate profits derived from their investments upon payment of applicable taxes, payments and duties and (iii) guarantee of compensation for damages – foreign investors are entitled to compensation for damages and lost profits, suffered as a result of unlawful acts of state bodies and state officials;.
Azerbaijan has ratified more than 48 bilateral and multilateral investment treaties and pursuant to those treaties, following guarantees, inter alia, are given to foreign investors: national and most favored nation treatment, fair and equitable treatment to foreign investors and full protection of their investments, guarantees against expropriation, nationalization, confiscation or in case of any such measures, payment of adequate, prompt and effective compensation; free bank transfers, including transfer of profit, interest, compensation and other income related to investments without unreasonable delay; submission of disputes to international arbitration, including the International Center for Settlement of Investment Disputes and ad hoc arbitration under the UNCITRAL arbitration rules.
Azerbaijan has also signed over 50 tax treaties on avoidance of double taxation with Germany, U.A.E, Austria, UK, Denmark, China, France, Israel, Iran, Spain, Italy, South Korea, Luxembourg, the Netherlands, Saudi Arabia, Georgia, Turkey, Japan, Greece, etc.
Commercial legal entities and company establishment
Azerbaijani law generally recognizes the following types of commercial (for profit) legal entities: general partnership; limited partnership, limited liability company, additional liability company, (open or closed) joint-stock company, cooperatives. Limited liability companies are usually preferred over other forms of commercial legal entities due to flexibility in management, requirements on charter capital and filing etc.
Please note that registration of commercial legal entities is conducted by the Ministry of Taxes of Azerbaijan. Registration procedures are completed 2 business days upon submission of the required documents, which varies depending on the shareholding structure. The requirement on foreign natural persons to provide their prior business ownership in another jurisdiction has been repealed lately. The state duty for registration of a commercial legal entity constitutes 11 AZN, while the foreign companies wishing to open their branches/ representative offices in Azerbaijan have to pay 220 AZN as a state duty. Upon registration with the Ministry of Taxes, an entity may commence business operations subject to applicable licensing requirements, if any.
As per the law, a license or special permit is required for certain activities, such as, banking, insurance, auditing, transportation, etc. Legal entities or individual entrepreneurs engaged in licensable activities must obtain a relevant license prior to commencing such activities. The Azerbaijani government has undertaken considerable reforms in issuance of licenses under a “one-stop shop” principle and licensing requirements were eased to a great extent. Save for certain licenses (security services, national security related licenses), licenses and special permits are issued by the Ministry of Economy of the Republic of Azerbaijan.
State duties for licenses vary on the type of activity and license. If no shortcomings are identified in an application for a license, it is issued within 10 business days. Licenses are issued for an unlimited period unless specified otherwise in respect of specific licenses.
Ownership to real estate and land plots
Azerbaijani law allows for ownership of real estate by foreigners. However, only Azerbaijani natural persons and legal entities may own land plots, i.e., foreign legal entities and natural persons cannot own land plot. Such foreign legal entities and natural persons may possess land plots by lease arrangements. Having noted that, since a legal entity, such as a limited liability company established by foreign company or person is considered a local company, foreign companies and natural persons may indirectly enjoy ownership rights over land plots in Azerbaijan.
Azerbaijani tax laws provide for 2 types of tax regimes: statutory tax regime HGA and PSA tax regime applicable to foreign legal entities engaged in production sharing and similar agreements. The statutory tax regime is regulated by the Tax Code and other lower tier normative legal acts.
Below is the rates of major taxes in Azerbaijan:
(i) profit tax – 20%;
(ii) value Added Tax – 18%;
(iii) income tax of natural persons – 14% up to 2500AZN and 25% of the amount exceeding 2500AZN
(iv) withholding tax 4%, 6% or 10%;
(v) simplified tax – 2% ; and
(vi) excise tax, property tax, land tax, mining tax – depending on the volume, unit, value etc.
Under the PSA tax regime, foreign companies operating in the development of oil fields and construction of major export pipelines pay withholding tax ranging from 5% to 8 % depending of the PSA agreement and employee-related taxes/social contributions.
The Labor Code of the Republic of Azerbaijan is the main legislative act governing employment relations. The Labor Code applies all employers established and registered in Azerbaijan and it shall also be applicable to the foreign national working in local companies, including branches and representative offices of foreign companies in Azerbaijan. However, there certain exception to the application of the Labor Code, such as, foreigners who conclude an employment agreement with a legal entity of foreign jurisdiction in such foreign country and perform job duties in a legal entity or branch or representative office in Azerbaijan, and persons working under civil-law contracts (e.g., an agency or service contract).
Under the Labor Code, an employer and employee must sign an employment contract and the work regime, period of vacations, payment of salaries and other conditions of employment will be determined in accordance with the employment contract and the Labor Code. Failing to conclude an employment agreement may result in administrative or criminal liability for the employer depending on the number of employees working into an employment agreement. Employment agreements can be a fix-term or for an unlimited term.
As per the statutory requirements of the Labor Code, as a general requirement, a working day and week shall not exceed 8 and 40 hours respectively. Overtimes and work during days-off are compensated in the manner provided in the legislation.
Termination of employment agreement with certain categories of employees, such as pregnant women, women with children below 3 years of age, etc. is prohibited. An employer is further required to give advance notices to an employee based on his/her overall working experience in case of redundancy and provide a compensation to the employee, except for the cases when an employee commits gross violation of labor duties. Employees are required to provide at least one month advance notice to the employer when terminating the employment contract, however, there are certain exceptions to such rule, e.g., when an employee has already signed an employment agreement with another employer, the employee changes his place of living to another region, the employee leaves his position to get education.
Mandatory social and medical insurance
Legal entities that employ any employees are required to make monthly social insurance contributions in the amount of 22% of the salary fund of its employees. Further, employers are also under an obligation to withhold employees’ social insurance contribution in the amount of 3% of employees’ gross salaries and transfer same to the state insurance fund on behalf of the employees. In addition, the law provides for a statutory 1% contribution to the statutory insurance fund against unemployment. This amount is split by 0.5% between the employer and the employee.
Migration matters are regulated by the Migration Code of the Republic of Azerbaijan. Foreigners and stateless persons can be employed in Azerbaijan only after obtaining a work permit. Work permits may be obtained by the company wishing to employ an expatriate even is he/she is not present in Azerbaijan. Upon obtaining a work permit, an expatriate shall also obtain a temporary residence permit automatically.
Please, note that the managers or deputy managers of a company or branch (representative) office established by a foreign legal entity or natural person are exempt from in accordance with the legislation. Such persons can apply for a temporary residence permit directly upon their appointment to the respective positions.
The State Migration Service issues a work permit and temporary residence permit within 20 business days and it is issued for the maximum of 1 year or the term of the employment agreement. State fee for issuance of work permit constitutes 1000 AZN. For issuance of temporary residence permit with a one-year validity period, the state fee is 120 AZN.
The Central Bank of Azerbaijan and the Financial Markets Supervision Authority are the regulatory authority on the foreign exchange policy. Under the applicable laws, Azerbaijani manat is the legal tender in the territory of Azerbaijan and payment for goods (services and works) will be made in manat only, except where recipient of a payment is a resident of free trade zones (i.e. Alat free trade zone) or if one of the parties to transaction is a foreign physical or legal entity.
Foreign exchange regulations provide for various cases when residents and non-residents may transfer foreign currency from Azerbaijan (e.g. re-payment of loans, royalties, franchising fees etc.). Under the recently introduced foreign exchange regulations, persons making monetary transfers on a pre-payment basis must provide the bank with the document (customs declaration, acts of acceptance etc.) of receipt of the goods (services, works) within 270 days of such pre-payment. Otherwise, administrative penalties may apply to legal entities in the amount of 20-30 % of amount transferred as a pre-payment.
Customs regulations and regimes
There are several customs regimes applicable to the goods imported in Azerbaijan and they are temporary import, transit, customs storage, bonded warehouse, processing on and outside customs territories etc., among others. Consignees pay use advance declaration or “green-line” fast track customs declaration procedures depending on the goods to be imported and their prior cooperation with the customs authorities.
A consignee shall be permitted to retain goods under temporary customs regime for the same purposes for 24 months, with a possibility of further extension of 12 months. Following the expiry of the temporary import period, the goods shall be exported or cleared for in-country processing, unless the consignee does have an obligation to re-export the goods from Azerbaijan.
Import of goods into Azerbaijan shall be subject to imports duties (amount of duties ranging from 0% to 15%, per unit or metric units). Excise taxes will be applicable to certain types of goods (e.g. tobacco, alcohol products, and sports yachts). Azerbaijan adopted destination VAT principle and VAT (currently set at 18%) is payable (subject to applicable customs regime) on the declared value of goods. In addition, under PSA regime, contractors, its agents and sub-contractors, upon receiving a customs exemption certificate, shall be entitled to import and re-export goods used for hydrocarbon activities to and from Azerbaijan free from import duties and imports under PSA regime are subject to zero VAT rate.
It is important to note the Azerbaijani law exempts exports from customs duties (save for certain types of metal products) as an incentive to promote export activities.
Juridical system of Azerbaijan
There is a 3-tier court system in place in Azerbaijan – (i) courts of first instance (district-city courts), (ii) appellate courts and (iii) the cassation court.
(i) Courts of first instance (district-city courts) – Courts of first instance include the district (city) courts of general jurisdiction, administrative-economic courts, grave crimes courts and courts-martial. Courts of general jurisdiction review disputes arising out of civil, family, labor, housing or land-related matters, use of natural resources, environmental protection, tax and other matters, where at least one of the parties to a dispute is a natural person and where s/he does not have the status of an entrepreneur (or even if s/he has the status of an entrepreneur, the dispute is not related to his/her entrepreneurial activity). The administrative-economic courts consider cases in respect of economic disputes between legal entities and physical persons having the status of an individual entrepreneur. The proceedings in these courts have to be finalized within 3 months of their receipt by the court, unless there are a shorter or longer period determined by law for specific cases.
(ii) appellate courts – the appellate courts review the decisions of courts of first instance which are appealed to the appellate courts. Appellate courts are organized based on geographical locations. The decisions of the appellate courts can be appealed to the court of cassation.
(iii) the cassation court – the Supreme Court of Azerbaijan is a court of cassation in the Republic of Azerbaijan and it is the last court resort. It considers the decisions of the appellate courts appealed to the Supreme Court. The matters on which the relevant board of the Supreme Court has already issued its decision, can be further reviewed by the Plenum of the Supreme Court upon the initiation of the Chairman of the Supreme Court (following application of a third party whose interests are affected by the decision or upon protest by the Prosecutor General).
IMPORTANT NOTICE: This information is provided by Baku Attorneys & Consultants (BAC) for general guidance only. Specific legal advice shall be sought prior to taking any action in respect of the matters discussed below depending on the circumstance of your case. BAC is full-service Azerbaijani law firm, based in Baku. BAC attorneys advise on wide range of legal matters, inter alia, investment, business, corporate, banking, migration, employment, foreign exchange matters, customs laws etc., as well as litigation. Please, do not hesitate to contact us via www.batco.az in case you seek further advice in relation to the subject matter of this article or any legal matters in Azerbaijan.