Azerbaijan as one of the pioneering oil and gas countries in the region welcomes foreign investors to its countries for the purpose of subsoil exploration. Their rights are strongly protected with the Law on Protection of Foreign Investment dated 15 January 1992. Azerbaijani legislation gives foreign enterprises the same rights with Azerbaijani persons in carrying their businesses in Azerbaijan. Thus, foreign investors can engage in any investment activity not prohibited (for example, gambling, narcotics and etc…) by Azerbaijani law. Under the Foreign Investment Law, foreign investment can take any of the following forms:

  1. participation in entities established with entities and citizens of the Republic of Azerbaijan on a shared basis;
  2. establishment of enterprises wholly-owned by foreign investors;
  3. purchase of enterprises, proprietary complexes, buildings, structures, shares in enterprises, other shares, bonds, securities, and certain other property which, under the laws of the Republic of Azerbaijan, can be owned by foreign investors;
  4. acquisition of rights to use land and other natural resources, and other proprietary rights; and
  5. conclusion of agreements with entities and citizens of the Republic of Azerbaijan providing for other forms of foreign investment.

Two major ways are applicable for foreign entities to engage in oil and gas production: 1) within the frameworks of Production and Sharing Agreements (“PSAs”) and legal regime outside PSAs. In the case if it is intended to be involved in oil and gas production outside of PSAs, two requirements must be met:

  • a person must be a state enterprise or a joint-stock company, in which the controlling stake belongs to the state; or
  • a person must have the relevant licence under the Subsoil Law.

But in most cases foreign investors chose legal regime under PSAs and the mentioned above two options are not applied. Thus, PSA tax regimes requires lower withholding income tax rates, exempts from value added tax, and simplifies reporting and accounting procedures. In addition, most of the time PSAs exempt contractors from the payment of the mining tax as well. Also, The tax paid by oil contractors can be included into the state’s share of the profit coming from the oil production under a PSA.

Foreign entities intended to engage in oil and gas production shall take into account that, such a production under PSA regime is the most beneficial and useful form for foreign investors and contractors. Thus its very important to initiate and carefully negotiate such agreements.

This article was published by the energy law experts of Baku Attorneys & Consultants, an Azerbaijani law firm, which is highly specialized in such deals and negotiations and tends to assist and bring a value to foreign investors and contractors. Please, feel free to reach us via in case you have further questions or need advice on energy law, taxation or other aspects on Azerbaijani law, as well as, provision of legal services on business, migration, employment, contracts and other related matters.

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