Doing Business in Azerbaijan
May 2011
GRATA Law Firm / Azerbaijan Office 13A, Koroglu Rahimov St., Abu Park Baku, AZ1072, Republic of Azerbaijan Telephone: +994 12 465 43 65 Facsimile: +994 12 465 43 66 baku@gratanet.com www.gratanet.com
All of the information included in this brochure is for informational purposes only and may not reflect the most current legal developments, judgments, or settlements. This information is not offered as legal or any other advice on any particular matter. The Firm and the contributing authors expressly disclaim all liability to any person in respect of anything, and in respect of the consequences of anything, done or omitted to be done wholly or partly in reliance upon the whole or any part of the contents of Grata Law Firm Doing Business in Azerbaijan brochure. No client or other reader should act or refrain from acting on the basis of any matter contained in this brochure without first seeking the appropriate legal or other professional advice on the particular facts and circumstances.
Contents 5
Introduction
5
Starting a Business
5
Types of Business entities
5
Joint Stock Companies
8
Limited Liability Companies
9
Structural Subdivisions of Foreign Enterprises
9
Corporate Registration
10
Licensing
12
Banking and Finance
13
Licensing
13
Establishment of Banks
14
Participation of Foreign Capital
14
Management of Banks
14
Reorganization of Banks
15
Prohibited Types of Activities
15
Borrowing in Foreign Currency
15
Currency Transfer and Conversion
15
Employment Matters
15
Employment Contract
16
Work Time
17
Attraction and Use of Foreign Labour in Azerbaijan
18
Tax Regulation
18
Statutory Tax Regime
19
Corporate Tax
21
Personal Income Tax
22
Other State Taxes
23
Double Taxation Treaties
24
Transfer pricing
24
Judicial System and Dispute Resolution
24
Judicial System
24
Settlement of Disputes
25
Language Policy
3
Abbreviations CBA
Central Bank of the Republic of Azerbaijan
CIS
Commonwealth of Independent States
GMS
General Meeting of Shareholders
GMP
General Meeting of Participants
JSC
Joint Stock Company
Law
Law of the Republic of Azerbaijan
LLC
Limited Liability Company
MA
Ministry of Agriculture
MCIT
Ministry of Communication and Informational Technologies
MCT
Ministry of Culture and Tourism
ME MED MENR MES
Ministry of Education Ministry of Economic Development Ministry of Ecology and Natural Resources Ministry of Emergency Situations
MF
Ministry of Finance
MH
Ministry of Health
MLSPP
Ministry of Labour and Social Protection of the Population
MIA
Ministry of Internal Affairs
MIE
Ministry of Industry and Energy
MNS
Ministry of National Security
MT
Ministry of Transportation
USD
a dollar, national currency of the United States of America
AZN
a manat, the national currency of the Republic of Azerbaijan
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Introduction This pamphlet is the guide provided by the Grata Law Firm for foreign investors interested in Azerbaijan. Doing Business in Azerbaijan is a brief and concise overview of the legislative and administrative procedure that is necessary to be familiarized with when starting up a business. It also provides information as to the different formalities needed to be fulfilled or considered for successful business operation. This information is not exhaustive, but aims at summarizing the key facts of legislation concerning foreign investment. These pamphlets will provide Doing Business guidelines for the Central Asia and Caspian regions that have a Grata office. Azerbaijan, officially the Republic of Azerbaijan, is the largest country in the Caucasus region of the Eurasia. After regaining its independence in September 1991, Azerbaijan has been steadily improving its investment environment and now has become one of the most attractive destinations for foreign investment in the CIS. Legal and economic reforms undertaken during these years coupled with stable political situation and abundance of natural resources create welcoming atmosphere for foreign investment and entrepreneurship.
Starting a Business In Azerbaijan a company may start its commercial activities after state registration at the Ministry of Taxes. Registering a local entity is in general a prerequisite to open a bank account, apply for licenses, certify goods, etc. Azerbaijani law neither contains specific requirements regarding the size of share of a foreign company in Azerbaijani entity nor does it establish legal limitations regarding foreign founders’ jurisdiction. There are several forms of legal entities that a foreign company may choose from. Such forms include a partnership (general and limited), joint-stock company (open and closed type) and limited liability company. For general commercial activity the most recommendable and widely used in practice form of a legal entity is an LLC. Another very popular corporate vehicle is a branch office of a foreign company which although not deemed a legal entity has distinctive advantages that make it appropriate for many types of activities that foreign investors carry out in Azerbaijan. Additionally, foreign companies may set up a representative office in Azerbaijan which commonly is not authorized to conduct business operations.
Types of Business entities Joint Stock Companies General
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A JSC is a legal entity whose charter capital is divided into certain number of shares. Liability of shareholders of the JSC for the obligations of the company is limited by the value of their shareholding. The JSC is not responsible for obligations of its shareholders. A JSC may be open or closed. An open JSC may have a public subscription for issued shares and freely sell them, subject to legislation requirements. The number of shareholders of open JSC is unlimited. Shares in a closed JSC may only be distributed among its founders or another predetermined group of persons. The number of shareholders in a closed JSC may not exceed 50. In case the number of the shareholders exceeds the statutory limit set for closed JSC, the company must be transformed into an open JSC within one year from the date of registration in the registry of shareholders, the number of which exceeds the statutory limit. If the closed JSC fails to reregister as an open JSC, such closed JSC shall be liquidated by the court decision. Open subscription or otherwise offer of the issued shares to the public is not permitted. Shareholders of the closed joint-stock company shall enjoy a pre-emptive right to purchase shares offered for sale by other shareholders of the company at the price and terms and conditions offered to the third party and in proportion to the amount of their shares. The foundation of the JSC presumes holding of a foundation meeting and entering into agreement or adopting decision on establishment of JSC (in case if the JSC is established by one person), distribution of shares between the founders and preparation (adoption) of the charter of the JSC..
Charter Capital The charter capital of a JSC is comprised of the nominal value of the company’s shares acquired by the shareholders. The company can distribute common and preferred shares, where the nominal value of preferred shares may not exceed 25% of the company’s charter capital. The minimum charter capital of a closed JSC may not be less than AZN 2,000 (an amount equivalent to USD 2,560) and for an open JSC twice that amount. The charter capital may be increased by raising the nominal value of shares or by issuing additional shares, or decreased by reducing either the nominal value of shares or the total number of shares issued. Once the decision on decreasing of charter capital is made, the company must within 15 days notify its creditors in writing.
Shares Shares of a JSC must be registered at the SSC. The shares can be either preferred or common. Preferred shares give their holders the priority right to receive dividends and other rights as stipulated in the Civil Code of the Azerbaijan Republic, as effective of 1 September 2000.
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Common share is the voting share giving the right for dividends, participation in General Meeting and managing of the company. The forms and terms of distribution of shares are specified in the company Charter. Shares must be paid for at their fair market value, while the founders pay only nominal value when founding the JSC. Information on the amount of the charter fund, amount of shares issued, their nominal value, and the category of registered securities belonging to shareholders shall be kept with the Register of Shareholders (the “Register�). JSC may keep the Register within the company, however, when number of holders of registered shares exceeds 20 (twenty) persons, JSC must hire special depositary services to keep the register of shareholder.
Management The JSC is managed by the GMS, Supervisory Board and Executive Body.
GMS The GMS is the supreme management body of the JSC, convened not less than once a year, which decides upon the issues of high priority, such as the company’s management, administration, business policy, corporate structure, financial aspects and certain other issues. A meeting of shareholders other than the annual meeting is considered to be an extraordinary meeting. No decision within the exclusive competence of the GMS may be delegated for resolution to an executive body. For most decisions, a simple majority vote shares is sufficient. A qualified majority vote (2/3) is required for certain matters, such as approval of amendments and addendums to the company charter, reorganization and liquidation of the company. The GMS is valid if shareholders holding in aggregate over 60% of the voting shares attend such meeting.
Supervisory Board If the JSC has more than 50 shareholders, the Supervisory Board must be created. The Supervisory Board exercises overall management of the JSC within its competence, commonly covering matters related to determination of business priorities, overseeing the activities of the executive body and carrying out other issues assigned to the Board by the GMS. The charter of the JSC defines matters that fall into exclusive competence of the Supervisory Board and which cannot be transferred to the executive body. Executive Body
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The competence of Executive Body includes the management of the day-to-day activities of the company and arrangement of execution of GMS and Supervisory Board’s decisions through Director (CEO) or a Directorate (collective executive body). The Director or Directorate acts in the name and on behalf of the JSC within the capacity of authority delegated by the GMS or Supervisory Board or as provided for in the company charter. Upon the decision of GMS the power of the Executive Body can be referred to commercial organization (management company) or individual entrepreneur (manager) under the contract.
Limited Liability Companies General LLC is a company established by one or more individuals or legal entities – participants – who are not liable for its obligations while bearing the risk of losses related to company’s activity within the limits of their personal contributions value. Participants in the company are jointly liable for its obligations prior to its establishment and related in connection therewith. The liability of the company is limited to the extent of its assets.
Charter Capital The charter capital of the LLC is divided into shares of size specified in the foundation documents (the Charter and the Resolution on establishment of LLC). Under the Civil Code the LLC cannot be established in Azerbaijan solely by a legal entity which has only one shareholder. Azerbaijani Civil Code stipulates neither minimum nor maximum limit for the LLC’s charter capital. Prior to registration of the company, each participant must pay the charter capital contributions.
Management The LLC is managed by the GMS, Executive Body, and by if provided by the Charter, Supervisory Board. GMP, which held not less than once a year, is a supreme management body of the LLC. According to the Civil Code the following matters lay within the exclusive competence of the GMP: making changes to the charter and the charter capital of the company; establishment of the executive bodies of the company and early termination of their authorities; approval of the company’s annual statements and accounting balance sheets, and distribution of its profits and losses; 8
decision onto reorganization or liquidation of the company; election of the inspection commission (inspector) of the company, board of directors of the Company (or supervisory board). An executive body, Supervisory Board, inspection committee and participants holding together no less than 10% of votes can request an extraordinary GMP at any time for any reason. Day-to-day management of the LLC’s operations is carried out: by its sole executive body – Director (Manager); or by collegial executive body – Managing Board. Depending on scope of business and necessity of control, GMP can establish the Supervisory Board and/or inspection committee (auditor) which oversee activities of the executive body.
Structural Subdivisions of Foreign Enterprises Representative Offices and Branches A representative office or a branch of a foreign legal entity represents the interests of a foreign company in Azerbaijan. Being a subdivision of a foreign legal entity, representative office generally is not entitled to conduct business activity. A representative office and a branch acts on the basis of a “Regulation”, and is managed by an individual authorized by the parent company under a power of attorney. A branch, however, may fulfil all or part of the functions of its parent company, including income generating business activity. Structural subdivisions are formed in essentially the same manner as a legal entity and are subject to the same formation procedures that are applicable to a legal entity with foreign ownership.
Corporate Registration Commercial legal entities and subdivisions of legal entities are registered at the Ministry of Taxes. Incorporation of a corporate vehicle in Azerbaijan depends on the type of legal entity or subdivision and commonly consists of the following steps:
adoption of a decision on establishment of an entity;
drafting and adopting statutory documents (charter, foundation agreement, if applicable, or regulation);
establishment of management and supervisory bodies;
carrying out registration with the Ministry of Taxes.
All documents required for the purposes of establishment of the corporate presence of foreign legal entity in Azerbaijan and adopted/passed/executed abroad, require notarization and 9
legalization in the country of its origin (apostil) and notary-certified translation into Azerbaijani language. Letters and applications necessary for submission to the mentioned authorities can be signed by duly authorized representatives of a foreign company. The process of state registration of the commercial legal entities and their subdivisions with relevant state registration authority takes 3 (three) business days from the submission of all required documents. The state duty for registration of legal entities and subdivisions of the foreign legal entities ranges from AZN 11 to AZN 220 (equivalent of USD 14 to USD 280), respectively.
Licensing Presidential Decree No. 782, “On Improving the License Issuance Rules for Some Types of Activity,� dated 2 September 2002 constitutes the principal legislation in this field. Decree No. 782 stipulates the activities that are subject to licensing, authorities that are entitled to issue licenses and the state fee to obtain a respective license. License is the official document which grants a right to carry out certain types of business activities to all legal entities, including with foreign investment and individuals carrying out entrepreneurial activities without establishing a legal entity. Each type of activity requires a separate license. The license can only be used by a licensee and cannot be transferred. In general the term of a license is five years, except for a license for the production (three years) and import (one year) of ethanol (alcohol) and alcoholic drinks. Carrying out the licensable activity without a license may lead to significant penalties under the Administrative Offences Code and Criminal Code. Current list of activities due to licensing is as follows: Activities Subject to Licensing Private security activity to ensure the safety of legal entities created in Azerbaijan by foreign legal entities or foreigners or stateless persons, including legal entities, established with direct or indirect participation of the foreign capital; Design and production of data protection devices Private security activity (other than above-mentioned); Production of seals and stamps. Cartographic activities Utilization and neutralization of toxic production waste; Collection of raw wild medicinal plant materials Purchase, processing and sale of non-ferrous metals waste and industrial waste containing precious metals and stones; Commodity exchange
Licensing Authority MNS
MIA Committee on Land and Cartography MENR MED
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Sale of oil and gas products Medical and pharmaceutical activities; Production, import, export and transit transportation of precursors Production and import of ethanol (alcohol) and alcoholic drinks; Production and import of tobacco products; Production and sale of veterinary medications; private veterinary services. Sale of ethanol (alcohol) and alcoholic drinks; sale of tobacco products Carriage of passengers and cargo by air Carriage of passengers and cargo by sea; Carriage of cargo (within the country and abroad) and of passengers (intercity, city, international and by taxi) by motor transport Communication services: telephone (fixed line), mobile, radio trunk and wireless, arrangement of internal telecommunication channels, arrangement of international telecommunication channels, IP-telephony, express postal service, data communications; Mobile communication service of 3rd generation (3G); Creation and servicing of biometric technologies Establishment of databases and information systems for private data; maintenance services Educational activities: preschool institutions, general education schools, vocational schools and professional lyceums, colleges, higher education institutions, secondary special and higher religious education institutions Intermediary services related to job placement of citizens of Azerbaijan abroad Banking activities (banks and non-bank credit institutions) National operator of post communication Activities of non-state pension funds; Activities in insurance sector: insurance, reinsurance, insurance brokers and agents’ activities; Manufacturing of financial reporting documents; Production of precious metals and gemstones (extraction of precious metals from ore and concentrate); Processing and use of precious metals and gemstones (manufacturing and repair of products, including jewellery and other personal items, from precious metals and stones) Turnover (retail and wholesale, purchase of precious metals and gemstones from the population as well as products, including jewellery and other personal items made from them) Auditing activities Stock exchange and investment funds activities; Activities of professional participants of securities market (brokers, dealers, securities management, clearing, depository, register of holders of securities, organization of trade on securities market; Preparation and sale of securities Tourism and hotel activities TV and radio broadcasting, addition information broadcasting, cable network broadcasting, satellite broadcasting, re-broadcasting of foreign TV and radio channels via satellite using coding devices
MIE MH MA City and district executive bodies (except city districts) State Civil Aviation Administration MT
MCIT
ME MLSPP CBA
MF
Chamber of Auditors State Securities Committee MCT National Council on Television and Radio Broadcasting
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Engineering research, construction and engineering works of Class One and Class Two buildings and structures (except for residential buildings and suburban houses of up to 12 meters in height); Fire protection of the companies and settlements on the basis of agreement; Production, purchase and testing of the fire fighting equipment; Installation, repair and maintenance of fire protection systems and facilities; Repair and servicing of fire fighting equipment and primary fire fighting appliances, restoration of fire fighting appliances performance; Construction, reconstruction and repair of fire protection buildings, constructions and premises; Storage and disposal of radioactive and ion-emitting substances; Transportation of dangerous goods; Installation and operation of facilities for liquid and natural gas infrastructure; Mining and drilling work; Installation and repair of elevators; Installation and operation of attractions; Installation, set-up and repair of power plants, equipment and facilities; Production, installation and repair of lifting facilities, metallurgical equipment, boilers and vessels, operating under pressure; Diagnostics and other checkups of equipment and technical equipment operated at potentially dangerous work places.
MES
Projection of Class One and Class Two buildings and structures
State City-Building and Architecture Committee
Customs broker activity; Establishment of bonded warehouses, short term, storehouses and free warehouses
State Customs Committee
Banking and Finance Banking and finance sector is primarily regulated by the Civil Code, Law of the Azerbaijan Republic “On banks” dated 16 January 2004 (“Banking Law”), Law of the Azerbaijan Republic “On Central Bank” dated 10 December 2004 (“CBA Law”), Law of the Azerbaijan Republic “On non-banking credit institutions”, dated 25 December 2009 (“Credit Institutions Law”) and other regulations of the CBA. The CBA, under the CBA Law, is described as a state authority the goal of which is to ensure price stability within its authorities. The CBA is to also ensure stability and development of banking and payment systems of Azerbaijan. In order to fulfil its goals the CBA is authorized to provide foreign currency regulation and control, manage foreign exchange reserves, issue licenses for banking activity, issue normative acts regulating banking and payments operations, etc. The CBA issues licenses for banking activity in Azerbaijan, establishes minimum charter capital limits for banking activity, stipulates prudential requirements and establishes management standards for the banks, etc.
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Banking Law entitles banks to attract deposits, extend loans and carry out other money transfer activities while under the Credit Institutions Law non-banking credit institutions are regarded as specialized credit institutions dealing with lending and other limited functions relating to creation of security instruments to secure extended loans. The Banking Law stipulates that banks are permitted to engage in securities trading activities in the stock exchange provided that respective activity is included into banking license.
Licensing Banks and non-bank credit organizations may implement banking activities on the territory of the Azerbaijan Republic on the basis of special permit (license), issued by the CBA. Foreign citizens and foreign legal entities, registered in offshore zones, the list of which is determined by the CBA, including also foreign banks and foreign bank holding companies, cannot be the founders or shareholders of local banks and establish local subsidiary banks, open local branches and representations. The CBA has exclusive rights to issue and cancel banking licenses as well as issuance of permits to banks for opening of branches, departments and representations and cancellation of issued permits. Banking licenses and permits shall be issued in writing for unlimited period of time. Banking licenses and permits may be used only by persons they have been issued to, and cannot be transferred to third parties. Banking licenses and permits enter into force from the date of issuance by the CBA. Where the applicant does not have sufficient technical base or qualifications, the CBA may establish certain limitations of activities in licenses and permits. In order to apply for bank license and permit, founder of the bank or their representatives authorized in accordance with legislation shall submit written application to the CBA and provide documents and information required under the Banking Law. Branch offices of foreign banks can function in Azerbaijan only based on special permit of the CBA. The Banking Law stipulates list of documents and requirements for such application. While in accordance with the Banking Law branch offices of banks have the right to carry out banking activity in Azerbaijan, the scope of activity of representative offices of banks is limited to representation and protection of the banks’ interests only. The Banking Law does not permit representative offices of banks to engage in banking activity.
Establishment of Banks Banks can be established by at least three legal entities and/or individuals in the form of a public joint-stock company. 13
Political parties, public associations, funds and other non-commercial organizations can not be the shareholders of the bank. A bank may issue a nominal share only. Owners of preferred shares shall not have the voting rights. Owners which are the founders of the bank shall not have any additional privileges or additional obligations compared to future bank shareholders.
Participation of Foreign Capital A foreign bank can be represented in Azerbaijan through a branch office, representative office or a fully owned subsidiary. According to the law, banks with foreign participation shall be subject to the same legal treatment as those established with 100% local capital. However, the law provides that in subsidiary banks of foreign banks and foreign bank holding companies no less than one member of the Board, and in local branches of foreign bank no less than one of the administrators shall be a citizen of the Azerbaijan Republic.
Management of Banks Each bank is managed by the general meeting of shareholders, a supreme management authority, supervisory board, an authority performing control over its management and operations, auditing committee which performs the auditing activities in the bank and managing board, an executive authority.
Reorganisation of Banks Reorganisation (merger, association, division, separation or reformation) of the bank including the bank the license of which is cancelled shall be allowed in accordance with procedures established by the CBA, and with its prior written consent. However, the bank is not entitled to purchase the share of the bank in other legal entities if such purchasing will result in one of the following: balance amount of participation exceeds 10 percent of the cumulative bank capital; accumulated balance amount of all such shares of the bank exceeds 40 percent of the accumulated bank capital.
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Prohibited Types of Activities With exception of activities for which the permit is issued in accordance with the law, no bank can engage in wholesale or retail trade, production, transportation, agriculture, development of mineral resources, construction and insurance, or with exception of insurance companies, participate in such activities as partner, companion or shareholder.
Borrowing in Foreign Currency The law allows local banks to attract foreign capital in a variety of ways. The most widely used form of foreign financing is through borrowing from foreign debt markets or participation of the foreign banks in the equity capital of Azerbaijani banks. Under the law, ownership interest contributions to bank’s share capital are exempt from taxation. Azerbaijani banks can make borrowings in hard currency. Principal loan amount is exempt from taxation. The law stipulates 10% withholding tax on interest to be paid to non-resident banks without a permanent establishment in Azerbaijan.
Currency Transfer and Conversion The law provides that currency conversions within Azerbaijan can be carried out through licensed banks of the Azerbaijan Republic only. The law does not stipulate any restrictions for foreign currency cash flows on cross-jurisdictional basis except for a requirement to provide local banks with underlying documents supporting the transfer However, the law provides that foreign currency transfers within Azerbaijan can be carried out based on CBA’s permit only.
Employment Matters Employment Contract Employment agreement (contract) is the written agreement between employee and employer concluded on an individual basis and describing basic conditions of employment relations and the rights and obligations of the parties. Employment contract is concluded for either uncertain term, term not exceeding five years, or for the period of fulfillment of work, and specifies the workplace (enterprise or its branch), functions of an employee (specialization, qualification, and appointment), the commencement of work, period of employment contract (if concluded for a fixed period), amount of remuneration and other labor conditions.
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In accordance with the Labour Code remuneration of labour cannot be lower than Minimum Wage adjusted by the Legislation. The minimum wage has been set up for computation of taxes, dues, compulsory payments and social protection of population.
The person applying for work must present the following documents:
Workbook
Personal identification document
State social insurance certificate (except the cases of the first employment)
Diploma of higher or specialized secondary education
Medical certificate (when applicable)
Persons can be employed from 15 years old upon the written permission of one of the parents or guardian.
Work Time Normal duration of work time cannot exceed 8 hours a day, 40 hours per week. In a six-day work week, the duration of daily work cannot exceed 7 hours, whereas in a five-day work week a maximum of 8 hours a day is allowed. In general, the Labor Code establishes a five-day work-week with two days off. Duration of the work-time on the day before the election day, holidays considered as nonbusiness days, referred to in the Labor Code and the day of National Mourning shall be reduced by one hour regardless of the number of working days in the week. Day off holidays are as follows:
January 1 and 2 – New Year
March 8 – Women’s Day
May 9 – Victory Day over Fascism
May 28 – Republic Day
June 15 – Salvation Day
June 26 – Armed Forces Day
October 18 – State Independence Day
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November 9 – State Flag Day
November 12 – Constitution Day
November 17 – National Renaissance Day
December 31 – Azerbaijan World Solidarity Day
Novruz – five days
Gurban – two days
Ramadan – two days
Employees are entitled for annual leave, which cannot be less than 21 calendar days.
Attraction and Use of Foreign Labour in Azerbaijan Azerbaijani law does not directly set any local content or personnel quotas. However, there is a sometimes cumbersome permit system in place if an employer attracts foreign citizens for work in Azerbaijan. There is not a notion of work visa under Azerbaijani law. Instead there is a special permit for carrying out labour activity - work permit. Consequently, if a foreigner intends to be engaged in labour activity in Azerbaijani the multiple-entry visa cannot replace the work permit. The “Rules on issuing work permits for foreigners intending to carry out labour activity in Azerbaijan” approved by Decree No. 214 of the Cabinet of Ministers provide that work permit shall not be required for foreigners working in Azerbaijan on a business trip for a period of up to 3 months. The law does not provide whether the 3 month period shall be regarded as a cumulative period of 3 months during a year or simply a consecutive period of 3 sequential months per calendar year. This uncertainty creates risks of various interpretations. According to the Law of the Azerbaijan Republic “On entering in the country and leaving the country and passport regime” dated 14 June 1994, foreigners intending to leave in the territory of the Azerbaijan Republic for the period of more than 1 month shall apply for police registration with district police department. Foreigners living in Azerbaijan based on work permit can obtain residence permit which is tied to the period of work permit (usually 1 year) and entitles foreigners to live, enter and leave the country for multiple times within its period of validity. This residence permit replaces visa and police registration applications. The position of the State Migration Service is that a foreigner applying for work permit shall file simultaneous residence permit application regardless of the period of their actual residence in Azerbaijan. The assumption is that the work permit application in fact implies that the foreigners will live and work in Azerbaijan for more than 3 months and therefore shall file residence permit application. 17
Penalties for non-compliance with work permit requirements are substantial and vary from USD 36,000 to USD 42,000.
Tax Regulation Currently, three separate and distinct tax regimes are applicable in Azerbaijan: the statutory regime, tax regime applicable to oil and gas companies operating under Production Sharing Agreements (PSAs) and Main Export Pipeline (MEP) regimes. In general statutory tax regime is applicable to all entities operating in Azerbaijan outside the scope of the PSAs regime and the Main Export Pipeline regimes. The PSAs regime is a description of the rules which covers a number of PSAs that have been ratified by the Milli Majlis so far. The Main Export Pipeline regimes apply to enterprises operating on the Baku-Tbilisi-Ceyhan oil export pipeline and on South Caucasus Pipeline gas export pipeline.
Statutory Tax Regime The tax regime outlined below is based on the Tax Code that was enacted on 1 January 2001 with consideration of subsequent amendments. The Tax Code has replaced most of the individual tax acts adopted prior to it. In compliance with provisions of the Constitution, the Tax Code stipulates three–level tax system, which consists of the following:
State taxes (established by the Code);
Taxes of the Autonomous Republic (established by the legislation of the Nakhichivan Autonomous Republic);
Local (municipal) taxes (established by decrees of the municipalities).
State Taxes:
Profit tax on legal entities (excluding enterprises and organizations in the ownership of municipalities);
Personal income tax;
Value added tax;
Excise taxes;
Property tax on legal entities;
Tax on land on legal entities;
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Road tax;
Mining tax;
Tax on simplified system.
Local (Municipal) Taxes:
Tax on land on individuals;
Property tax on individuals;
Mining tax on construction materials of local significance;
Property tax of enterprises and organisations in the ownership of municipalities.
Corporate Tax Tax payers All entities engaged in business activity in Azerbaijan (including non-residents who carry out their activities through PE) are subject to taxes, unless a specific exemption is provided in the law. The following entities are generally subject to profit tax in Azerbaijan: Legal entities incorporated under the Azerbaijani laws , with or without foreign participation – i.e. Azerbaijani residents; Foreign legal entities with the Azerbaijan based place of management, which are regarded as Azerbaijani residents; Branches of foreign legal entities duly registered under Azerbaijani laws, i.e. permanent establishments of non-residents in Azerbaijan; Representative offices of foreign enterprises undertaking commercial activities in Azerbaijan, i.e. permanent establishments of non-residents in Azerbaijan.
Taxable Base Taxable profits are generally determined on the basis of gross revenue (excluding VAT, excise tax) less business expenses except for those specifically disallowed by the Tax Code. Taxable profits include trading profit, capital gains, profits from financial activities and other profit items. Residents, including Azeri entities with foreign investment, are taxable on worldwide income. Non-residents are taxable only on income from activities performed in Azerbaijan. The 19
gross income of a foreign enterprise received from Azeri sources not connected with the permanent establishment is to be taxed at the source of payment without expenses being deducted (see respective section below on withholding tax). The most significant items of non-deductible expenditures for tax purposes are: interest on loans received from abroad or from a related party in excess of 1.25 times refinancing (discount) rate; repair expenses in excess of established limits (excess amounts to be capitalized and expensed through depreciation); entertainment, accommodation and meal expenses; business travel expenses in excess of statutory limits; financial sanctions. Income Source
Withholding Tax Rate
Dividends and interests
10 %
Rent payment and royalty
14%
Insurance premiums paid for insurance or reinsurance of risks
4%
Telecommunications or freight activities
6%
Other income except for those specified above
10%
Losses may be carried forward to the next five years and offset against profits of the future years without limitation.
Tax Rates The general rate of corporate profit tax is 20%. Companies which are not required to register for VAT purposes (with exception of credit and insurance organizations; investment funds; companies producing excisable goods; securities’ market participants and certain other ones) may be subject to the simplified tax regime. Tax is levied at 2% (4% for Baku city) on gross amount of the total revenue of a taxpayer during an accounting period for realized goods (work, services) and property, and for non-sale operations. It should be noted that in addition to profit tax, a branch of foreign legal entities is subject to a 10% tax for transmitting the branch profit abroad. 20
Withholding Taxes Income gained by non-resident from the source of payment in Azerbaijan not related to permanent establishment, is subject to withholding tax at the source of payment on aggregate income with no deductions at the following rates (which can be reduced by international treaties):
Monthly (annual) amount of taxable income
Tax rates (%)
Up to AZN 2,000 (24,000)
14 %
Above AZN 2,000 (24,000)
AZN 280 (3,360) plus 30% of the amount above of AZN 2,000 (24,000)
Personal Income Tax Tax payers Individuals who are present in Azerbaijan for 183 days or more in any calendar year are deemed to be residents of Azerbaijan for tax purposes. Resident taxpayers are subject to tax on income gained from sources of their activity both within Azerbaijan and abroad. Non-residents, however, are taxed only on their income from sources within Azerbaijan. Tax on Azerbaijani source income is normally paid by deduction of tax at source, at progressive rates. Income from overseas source is assessed on a current year basis for residents. Azerbaijani source income is defined as any income from commercial activities and sources in Azerbaijan, and specifically includes any income from employment in Azerbaijan. Place of payment in determining the source of income is irrelevant. Virtually all income and benefits-in-kind are taxable in Azerbaijan, unless they are specifically exempt. Taxable income specifically includes hardship, living and vacation allowances. The list of specifically exempt income includes alimony, severance pay, gifts (within statutory limits), state pension and other social allowances (excluding illness payments). Compensation of business expenses also is not taxable.
Rates Personal income tax rates applicable to annual non-commercial activity taxable income of individuals are as follows:
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Social security/national insurance payments Azeri nationals and expatriates employed in Azerbaijan must contribute 3 percent of gross salary to the state pension fund. Contributions are deducted at source and paid and reported by the employer. All employers must make social insurance contributions at the rate of 22 percent based on gross payroll. Reports should be filed quarterly by the 20th of the month following the reporting quarter. Social insurance contributions shall be remitted monthly at the date of salary payment but not later than 15th of the following month. Contributions are deductible for profits tax purposes. All entities are required to account for contributions on most remuneration paid to local and foreign employees.
Other State Taxes Value Added Tax Value added tax (“VAT�) is a tax on the value added in the course of the production, sale, and import of goods, work, and services. VAT is payable on turnover related to the sale, export, and import of goods, work, and services. The VAT rate is 18%.
Excise Tax Legal entities and individuals engaged in the production of excise goods in the Azerbaijan Republic, or importation of such goods into the Azerbaijan Republic shall pay excise tax. Rates of excise on imported goods and on production of hydrocarbon goods are separately to be determined by the Cabinet of Ministers. Rates of excise on production of alcoholic beverages, beer and tobacco products and rates of excise on importation of passenger vehicles are determined in the Tax Code. Exports of these goods are subject to zero-rated excise tax.
Mining tax Legal entities and individuals engaged in the extraction of mineral resources are subject to a mining tax at the appropriate rate in addition to any land tax due. The tax is applied to the wholesale price of the mineral resources at the rates, depending on the type of the mineral resource: 3 percent (for all kinds of metals), 20 percent for natural gas and 26 percent for crude oil. For other types of mineral resources, tax is based on fixed amounts ranging from 0.02 AZN up to 6 AZN for each cubic meter. The corresponding tax rates and the list of minerals are given in the Tax Code. Mining tax is deductible for profits tax purposes.
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Property Tax Property tax is levied at the rate of 1 percent on the average annual residual value of fixed assets including buildings, machinery and equipment. The taxable base is calculated as the average value at the beginning and the end of the year. Property tax is deductible for profit tax purposes. From the 1st January 2010 in case the insurance of enterprise property exceeds the remaining cost, the tax on property is counted up with the use of level of tax on property on the price determined in accordance with the market value. In case the cost of insured property is determined by taking into account the market value, calculation of the average of the above mentioned value is not applied. The following are specifically exempt from property tax:
education, health, cultural and sport facilities of the enterprises engaged in such fields;
environmental protection and security assets;
transportation, communication and power transmission networks.
Taxpayers shall submit their declarations not later than 31 March of the following year. The tax due is payable in quarterly instalments by the 15th of the second month of the calendar quarter in the amount of 20 percent of the property tax due for the previous year (companies which were not payer of property tax during preceding year should pay quarterly instalments by the 15th of the second month of the calendar quarter after obtaining taxable property in the amount of 20 percent of the annual property tax due on such property for the current year). The difference between the amounts of quarterly instalments and final property tax should be made before the deadline of submission of tax returns.
Land Tax Companies owning and using land are subject to a land tax (for Baku, tax in the amount of 10 AZN for each 100 quadratic meters of industrial and etc. lands). Taxpayers shall submit their declarations annually by May 15th. The tax due is payable in equal amounts twice a year, not later than August 15th and November 15th of the year.
Double Taxation Treaties As of 1 January 2011, Azerbaijan is a signatory to double taxation treaties with 40 countries, with 36 of them being in effect: Austria, Belarus, Belgium, Bulgaria, China, Czech Republic, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, Islamic Republic of Iran, Islamic Republic 23
of Pakistan, Italy, Japan, Canada, Kazakhstan, Korea, Kuwait, Latvia, Lithuania, Luxemburg, Moldova, Netherlands, Norway, Poland, Qatar, Romania, Russian Federation, Serbia, Switzerland, Tajikistan, The Hashemite Kingdom of Jordan, Turkey, Ukraine, United Arab Emirates, United Kingdom, Uzbekistan. Treaties with Jordan, Kuwait, Pakistan and Serbia are yet to come into force.
Transfer pricing For taxation purposes transfer pricing rules are provided for use in cases of import and export operations, barter transactions, transactions between related parties and transactions where price varies from market prices by more than 30% within 30 days. Since neither the Ministry of Taxes nor the Ministry of Finance has issued comprehensive guidelines, there is considerable uncertainty about the application of the transfer pricing rules at the time of writing this guide. From the 1st January 2010 transfer pricing rules have been applied in case if insurance of enterprise property exceeds its remaining cost.
Judicial System and Dispute Resolution Judicial System Judicial system of Azerbaijan consists of three-tier judiciary: (i) first-instance courts, (ii) appeal courts, and (iii) cassation courts. The courts of first instance include the city (district) courts, military and local economic courts that operate subject to territorial jurisdiction. There is also a court on grave crimes, a military court on grave crime cases and a court on grave crime cases of Nakhchivan Autonomous Republic. Court of appeal serves as a court of appellate instance. The court of appeal tries appeals lodged against decisions of the first instance courts on civil, criminal, administrative and military matters. The Supreme Court of Nakhchivan Autonomous Republic is regarded as an appellate court. The Supreme Court of the Republic of Azerbaijan is a cassation instance court and consists of 4 collegiums: on civil cases, on criminal cases, on military courts’ cases and on administrativeeconomic dispute cases. The Supreme Court hears cassation appeals to the decisions of the appellate courts.
Settlement of Disputes In accordance with the Civil Procedure Code a foreign investor may resolve the dispute at Azerbaijani courts or choose foreign jurisdiction court, including arbitration court. Azerbaijani 24
courts have exclusive jurisdiction over disputes regarding immovable property in Azerbaijan, rent or pledge of such property; recognition of validity or invalidity of the Azerbaijani legal entity, and its decisions; patent rights. The Civil Procedure Code stipulates that Azerbaijani courts shall recognize and enforce foreign jurisdiction court judgments provided that such an enforcement is envisaged either in laws of the Azerbaijan Republic, in international conventions or bilateral intergovernmental agreements. The Azerbaijan Republic has concluded several bilateral treaties but is not party to any multilateral or bilateral treaties with most of the Western countries for the mutual enforcement of court judgements. Azerbaijan, however, is a party to the CIS Convention on Mutual Legal Assistance in Civil, Family and Criminal Cases of 2004 as well as to the Convention on solving disputes in connection with conducting business activity dated March 20, 1992 (the Kiev Convention). The Azerbaijan Republic also is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Accordingly, a foreign arbitral award obtained in a state which is a party to that Convention should be recognised and enforced by an Azerbaijani court, subject to the qualifications in the Convention, compliance with Azerbaijani civil procedure, public order rules and the procedures established by Azerbaijani legislation on commercial arbitration for the enforcement of arbitration decisions. In addition Azerbaijan has signed and ratified the 1965 Washington Convention on the Settlement of the Investment Disputes between States and Nationals of Other States, which provides a possibility for arbitration of certain investment disputes under the auspices at the International Centre for Settlement of Investment Disputes. Azerbaijan has also ratified the European Convention on Foreign Commercial Arbitration dated April 21, 1961.
Language Policy In accordance with the Constitution Azerbaijani language is the state official language of the Azerbaijan Republic. Azerbaijani alphabet is based on the Latin script. Law of the Azerbaijan Republic “On state language�, as effective of 04 January 2003, requires Azerbaijani legal entities to conduct their paperwork filing and other documentation in the Azerbaijani language. In compliance with the provisions of this law, courts and state authorities of the Azerbaijan Republic carry out the official interactions, produce and accept documentation in Azerbaijani language only. In order to comply with the legal requirements any official foreign document to be officially used in Azerbaijan should be duly translated into Azerbaijani with subsequent notarization. Due to legal requirements in practice many contracts with foreign parties are executed in two languages: Azerbaijani and any other language acceptable to the parties.
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Doing Business in Azerbaijan
May 2011
All of the information included in this brochure is for informational purposes only and may not reflect the most current legal developments, judgments, or settlements. This information is not offered as legal or any other advice on any particular matter.