Doing business in Azerbaijan 2014

Doing Business in Azerbaijan
2014

Doing Business in Azerbaijan
2014
Baker & McKenzie - CIS, Limited
Baku Office
The Landmark Building III
96 Nizami Street
Baku AZ1010
Azerbaijan
Telephone: + 994 12 497 18 01
Facsimile: + 994 12 497 18 05
[email protected]
www.bakermckenzie.com
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 Baker & McKenzie’s Doing in 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 seeking the appropriate legal or other professional advice on the particular facts and circumstances.
Baker & McKenzie – CIS, Limited is a member of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm.
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Table of Contents
1. Republic of Azerbaijan – An Overview ................................. 1
1.1 Location, Area, and Topography ............................... 1
1.2 Demographics ............................................................ 1
1.3 Government Organization ......................................... 1
1.4 Results of Elections and Political Considerations ........................................................... 2
1.5 Foreign Relations and International Organizations............................................................. 2
1.6 Economy .................................................................... 3
2. Foreign Investment in Azerbaijan .......................................... 5
2.1 Introduction ............................................................... 5
2.2 Foreign Investment .................................................... 5
2.3 Guarantees Available to Foreign Investors ............... 6
2.4 Bilateral Investment Treaties ..................................... 7
2.5 Foreign Investment under Privatization Programs .................................................................... 9
3. Establishing a Legal Presence .............................................. 12
3.1 Introduction ............................................................. 12
3.2 Representative Offices and Branches ...................... 12
3.3 Forming a Commercial Legal Entity ....................... 15
3.4 Non-Commercial Organizations .............................. 25
3.5 Subsidiaries and Dependent Companies ................. 27
4. Issuance and Registration of Securities ................................ 31
4.1 Introduction ............................................................. 31
4.2 Regulation of the Securities Market ........................ 33
5. Licenses ................................................................................ 35
5.1 Introduction ............................................................. 35
5.2 Issuance of Licenses ................................................ 35
5.3 Application for a License ........................................ 40
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5.4 Suspension and Termination of a License ............... 41
5.5 Consequences of Operating without an Appropriate License ................................................ 41
6. Taxation ................................................................................ 42
6.1 Introduction ............................................................. 42
6.2 Administration of Taxes .......................................... 44
6.3 Types of Tax ............................................................ 44
6.4 Double Taxation Treaties ........................................ 49
6.5 Transfer Pricing ....................................................... 52
6.6 Accounting .............................................................. 52
7. Currency Regulation ............................................................. 53
7.1 Introduction ............................................................. 53
7.2 Foreign Exchange .................................................... 53
7.3 Import/Export of Foreign Currency in Cash by Individuals .......................................................... 56
8. Employment ......................................................................... 57
8.1 Introduction ............................................................. 57
8.2 Direct Employment ................................................. 57
8.3 Compensation in Foreign Currency......................... 57
8.4 Work Books ............................................................. 57
8.5 Probationary Period ................................................. 58
8.6 Minimum Wage ....................................................... 58
8.7 Work Week.............................................................. 58
8.8 Holidays .................................................................. 58
8.9 Sick Leave ............................................................... 58
8.10 Maternity Leave ...................................................... 59
8.11 Dismissal ................................................................. 59
8.12 Cost of Employment ................................................ 59
8.13 Income Tax .............................................................. 60
8.14 Foreign Workers in Azerbaijan ............................... 60
9. Property Rights ..................................................................... 61
9.1 Introduction ............................................................. 61
9.2 Limitations on Ownership ....................................... 61
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9.3 Use of Land ............................................................. 61
9.4 Land Transfers ......................................................... 63
9.5 Registration of Immovable Property ....................... 63
9.6 Mortgages ................................................................ 65
10. Language Policy ................................................................... 66
11. Civil Legislation ................................................................... 68
12. Banking ................................................................................ 70
12.1 Description of the Banking System ......................... 70
12.2 Licensing ................................................................. 71
12.3 Standards for Domestic Banks ................................ 72
12.4 Banks with Foreign Participation ............................ 72
12.5 Liquidation and Reorganization of Banks ............... 73
12.6 Non-Banking Activity of Banks .............................. 73
13. Intellectual Property ............................................................. 74
13.1 Introduction ............................................................. 74
13.2 State Patent Issuing Agencies .................................. 74
13.3 International Conventions ....................................... 75
13.4 Registration ............................................................. 75
13.5 Patent Protection, Utility Models, and Industrial Design ..................................................... 75
13.6 Trademarks and Geographic Designations .............. 76
13.7 Domain Names ........................................................ 76
13.8 Copyright ................................................................. 77
13.9 Computer Programs and Databases ......................... 77
13.10 Anti-Piracy .............................................................. 77
14. Product Liability ................................................................... 79
14.1 Background ............................................................. 79
14.2 Product Quality........................................................ 80
14.3 Protection from Unfair Competition ....................... 80
15. Specific Industries ................................................................ 82
15.1 Oil and Gas .............................................................. 82
15.2 Power ....................................................................... 85
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15.3 Telecommunications ............................................... 91
15.4 Construction ............................................................ 94
16. The Judicial System .............................................................. 97
16.1 Courts ...................................................................... 97
16.2 Judges ...................................................................... 98
16.3 Enforcement of foreign court judgments ................. 98
16.4 International arbitration ........................................... 99
17. Climate Change .................................................................. 101
17.1 General .................................................................. 101
17.2 Greenhouse Gas Emissions ................................... 101
17.3 Designated National Authority .............................. 103
17.4 Clean Development Mechanism............................ 103
18. Insurance ............................................................................ 104
18.1 Introduction ........................................................... 104
18.2 Establishment and Licensing ................................. 105
18.3 Regulation ............................................................. 106
18.4 Foreign Elements in the Insurance Sector ............. 108
18.5 Domestic standards ................................................ 109
18.6 Insurance Intermediaries ....................................... 110
Preface
Baker & McKenzie has been providing sophisticated legal advice and services to the world’s most dynamic global enterprises for over 60 years now.
With a network of more than 4,100 locally qualified, internationally experienced lawyers in 75 offices across 47 countries, we have the knowledge and resources to deliver the broad scope of quality services required to respond effectively to both international and local needs – consistently, with confidence, and with sensitivity to cultural, social, and legal differences.
Active in the former USSR and the Commonwealth of Independent States (“CIS”) for over 40 years, and with offices in Almaty, Baku, Kyiv, Moscow, and St. Petersburg, we have always had one of the largest legal practices in the CIS. Leveraging the expertise of our worldwide network of specialists, we offer the best possible legal advice in all aspects of investment in the region, including corporate law, banking and finance, securities and capital markets, venture capital, competition law, tax and customs, real estate and construction, labor and employment, intellectual property, and dispute resolution.
On October 20, 1998, having established a presence in Baku six months earlier, Baker & McKenzie became the first international law firm to be granted a license to practice law in Azerbaijan.
Since gaining independence in 1991, Azerbaijan has adopted new legislation at a rapid pace. It is a country with a legal system in ongoing development. In response to the need for accurate, up-to-date information, Doing Business in Azerbaijan has been prepared as a general guide for companies operating in or considering investment in Azerbaijan. It is intended to present an overview of the key aspects of the Azerbaijani legal system and the regulation of business activities in the country.
The information contained in this guide is current as of the date below. We would be happy to provide you with updates on the material contained in this guide, or with further information regarding a specific industry or area of Azerbaijani law in which you might have a particular interest.
Baker & McKenzie – CIS, Limited
February 2014
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1. Republic of Azerbaijan – An Overview
1.1 Location, Area, and Topography
Bounded by the Caspian Sea to the east and the Greater Caucasus mountain range to the north, the Republic of Azerbaijan has a total land area of 86,600 square kilometers (km2). Sharing borders with Georgia, Russia, Turkey, Iran, and Armenia, Azerbaijan has long been the geographical center of the region’s oil industry.
1.2 Demographics
With a population of over 9.4 million (as of the end of 2013), Azerbaijan enjoys a young demographic profile with some 28.2 percent of the population between 14 and 29 years old and only 8.8 percent at retirement age.
The population is evenly distributed between urban and rural areas, with 53 percent residing in and around cities. Some 39.7 percent of the estimated workforce of more than four million is engaged in agriculture and forestry, while 12.4 percent works in industry and construction.
While Azerbaijan is constitutionally a secular state, the vast majority (93.4 percent) of the population is Muslim. The official language is Azerbaijani, a Turkic language.
1.3 Government Organization
The country’s Constitution was ratified by popular referendum in November 1995 and is Azerbaijan’s first Constitution as an independent state. It provides for a unicameral parliament (the National Assembly – the Milli Majlis) with members elected for five year terms. While the Constitution previously provided for both majority voting and proportional representation; nowadays, following amendments to the Constitution in 2002, National Assembly members are elected by majority vote only.
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The President is elected for a five-year term by popular vote. With the consent of the National Assembly, the President appoints the Prime Minister and other members of the Cabinet of Ministers.
Judicial power in Azerbaijan is exercised by a court system whose independence is guaranteed by the Constitution. The Constitutional Court decides issues relating to compliance of laws, governmental acts, court decisions and international treaties with the Constitution. It resolves disputes among branches of Government and interprets the Constitution and laws on issues related to human rights and fundamental freedoms. The Supreme Court of the Republic of Azerbaijan is the court of last resort for civil, criminal, administrative, and other matters.
1.4 Results of Elections and Political Considerations
The current President, Ilham Aliyev, was elected in October 2003 and re-elected for a second presidential term in October 2008. Ilham Aliyev was re-elected for a third presidential term in October 2013. Since the 2010 parliamentary elections, the majority of National Assembly seats have been held by members of the New Azerbaijan Party, established by former President Heydar Aliyev.
Following the May 1994 ceasefire in the armed conflict with Armenia over the Daglig Qarabag (Nagorno-Karabakh) region of Azerbaijan, the political situation in Azerbaijan has been stable. The resolution of the Nagorno-Karabakh conflict is being mediated by the Organization for Security and Cooperation in Europe (“OSCE”).
1.5 Foreign Relations and International Organizations
Since gaining independence, Azerbaijan has become a member of many international organizations, including the United Nations, OSCE, the Council of Europe, the European Bank for Reconstruction and Development, the World Bank, the International Monetary Fund (“IMF”), Interpol, the Organization of the Black Sea Economic Cooperation, the Black Sea Trade and Development Bank, and the Asian Development Bank. It enjoys observer status in the World
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Trade Organization (“WTO”), it has joined the Partnership for Peace program of the North Atlantic Treaty Organization (“NATO”), and it participates in the European Union’s New Neighborhood Policy. Azerbaijan has been a member of the Commonwealth of Independent States (“CIS”) since September 1993.
1.6 Economy
1.6.1 Background
Azerbaijan possesses fertile agricultural land, considerable oil and gas reserves, and a relatively developed industrial sector. However, the legacy of Soviet central planning, and the instability of the early 1990s which was largely due to deteriorating trade relations with former Soviet partners and the conflict in Nagorno-Karabakh, resulted in a significant decline in economic output. By 1995, for example, output had declined by 50 percent in the petrochemical and machine-building industries, although less dramatically in light industries.
Most of Azerbaijan’s industrial enterprises are located in Baku, Sumgayit, and Ganja. Heavy industry consists of petroleum extraction and refining, metallurgy, aluminum mining and refining, petrochemicals, and chemical production. Light industry consists of food processing, textiles, and wine production. Baku’s main industries are oil and gas equipment and light manufacturing; Sumgayit’s production focuses on chemical and petrochemical products, textiles, and aluminum smelting; and Ganja is home to an aluminum refining plant and also specializes in textiles, machine building, and metallurgy.
The effect of the economic decline of the early 1990s has also been evident in agriculture – a critically important sector in Azerbaijan, employing about 39 percent of the labor force. Cotton is Azerbaijan’s leading cash crop, together with grapes (for wine production), fruit, nuts, vegetables, and tobacco.
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1.6.2 Gross Domestic Product
Since the economic downturn in the early 1990s, Azerbaijan’s economy has been increasing at a rapid pace. The long awaited production from offshore fields developed by the Azerbaijan International Oil Consortium (AIOC), completion of the major Baku-Tbilisi-Ceyhan and South Caucasus (Shah Deniz) oil and gas pipelines, and global demand for oil and gas have all exercised a significant influence on the Azerbaijani economy in recent years. For 2011 the gross domestic product (GDP) was AZN 51,157.5 billion, equal to a per capita GDP of AZN 5,650.80. For 2012 the GDP was AZN 52,282.9 billion; and per capita GDP AZN 5,587.87. The figures for 2013 are as follows: GDP AZN 57 billion and per capita GDP AZN 6,132.00.
1.6.3 Unemployment, Wages and Inflation
Official statistics as of January 2013 indicate that approximately 36,800 people are unemployed, although the actual figure is probably higher. The average monthly wage as of January-September 2013 was AZN 423 (approximately USD 539). The inflation rate as of December 2013 was 1.9%, compared to 2.3% in December 2012.
1.6.4 Foreign Trade and Balance of Payments
The Government has made a significant effort to attract foreign investment in the domestic oil and gas industry, which has grown sharply since 1995 as a result of the increase in the number of oil contracts signed with foreign companies during this period.
Total foreign trade in 2012 was approximately USD 33.5 billion, of which imports accounted for approximately USD 23.9 billion and exports USD 9.6 billion.
1.6.5 Internal and External Debt
Azerbaijan has a relatively low level of external indebtedness (one of the lowest among CIS countries), estimated in 2013 at USD 5.75 billion.
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2. Foreign Investment in Azerbaijan
2.1 Introduction
Foreign investment in Azerbaijan is regulated by a number of international treaties and agreements, and by domestic legal acts, including the Law on Protection of Foreign Investment dated January 15, 1992 (the Foreign Investment Law); the Law on Investment Activity dated January 13, 1995 (the Investment Activity Law); and the Privatization Law; the Law on Investment Funds, dated October 22, 2010 (the Investment Funds Law); and the Second Privatization Program, as well as laws regulating specific sectors of the Azerbaijani economy.
2.2 Foreign Investment
Foreign investors (foreign entities, governments, international organizations, and individuals permanently residing outside Azerbaijan) may engage in any investment activity not prohibited by Azerbaijani law. Pursuant to the Foreign Investment Law, foreign investment may take any of the following forms:
• Participation in entities established jointly with legal entities and citizens of the Republic of Azerbaijan;
• Establishment of enterprises wholly owned by foreign investors;
• Purchase of enterprises, proprietary complexes, buildings, structures, shares in enterprises, other shares, bonds, securities, and other kinds of property which, under the laws of the Republic of Azerbaijan, may be owned by foreign investors;
• Acquisition of rights to use land and other natural resources, as well as other proprietary rights; and
• Conclusion of agreements with legal entities and citizens of the Republic of Azerbaijan providing for other forms of foreign investment.
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Enterprises with foreign investment include joint ventures, enterprises wholly owned by foreign investors, and representations (offices and branches) of foreign legal entities.
2.3 Guarantees Available to Foreign Investors
Under Azerbaijani law, foreign investments are provided with the following guarantees:
• A “not-less-favored” regime for foreign investors: except as otherwise provided for in an applicable bilateral investment or other treaty or the Foreign Investment Law, foreign investors have the same rights as local investors and may, additionally, be granted preferential rights not accorded to local investors.
• Foreign investors have the right to repatriate profits, revenues, and other amounts received in connection with investments, provided that all applicable Azerbaijani taxes have been paid.
• Where a change in Azerbaijani legislation adversely affects an investment, the application of that change is subject to a 10-year moratorium. The moratorium has the force of law and is automatically enforceable and binding upon all Azerbaijani state agencies. Legislation that governs national security, defense, public order, morality, public health, and environmental protection, as well as acts affecting credits and finances, fall outside the scope of the moratorium. However, under the Investment Activity Law, subsequent acts (including acts governing defense, national security, public order, and tax) adversely affecting investment terms should not apply to the investor for the term of an “investment contract.”
• Nationalization is possible by resolution of the National Assembly under exceptional circumstances to prevent harm to the people or state interests of the Republic of Azerbaijan. Confiscation is possible only under circumstances of natural disaster, epidemics, and other extraordinary situations by a
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decision of the Cabinet of Ministers. In both cases, foreign investors are entitled to compensation that must be “prompt, adequate and effective.”
• Free access to international arbitration. The use of arbitration for dispute resolution is generally possible where two conditions are present: the law does not specifically prohibit a particular type of dispute from being submitted to an arbitration tribunal; and the parties agree to transfer specific disputes to the international tribunal.
Incentives may be available to foreign investors and enterprises with foreign investment in certain sectors of the Azerbaijani economy, notably the energy sector. These are granted by legislative acts regulating those sectors of the economy, as well as by agreements concluded by the state with investors.
Bilateral investment treaties and other treaties on foreign investment provide additional guarantees to foreign investors, and are aimed at establishing a more favorable investment climate. Under Azerbaijani law, international treaties prevail over local law (except for the Constitution and acts adopted by referendum) regulating the same issue.
2.4 Bilateral Investment Treaties
Azerbaijan has concluded 44 bilateral treaties on the mutual protection of investments as shown in Table 1 below, with several more treaties currently under negotiation. Azerbaijan is also party to a number of multilateral treaties concerning foreign investment.1
1 The convention on the Protection of Investor Rights was signed by CIS countries on March 28, 1997. Turkmenistan, Uzbekistan and Ukraine, however, did not sign this Convention.
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Table 1: Bilateral Investment Treaties
Country
Signed
Ratified
1
Turkey
February 9, 1994
June 14, 1994
2
USA
August 1, 1997
April 14, 1998
3
Pakistan
October 9, 1995
March 12, 1996
4
Germany
December 22, 1995
June 25, 1996
5
Great Britain
January 4, 1996
March 15, 1996
6
Georgia
March 8, 1996
April 19, 1996
7
Uzbekistan
May 27, 1996
July 16, 1996
8
Kazakhstan
September 16, 1996
November 15, 1996
9
Ukraine
March 25, 1997
June 6, 1997
10
Kyrgyzstan
April 23, 1997
June 26, 1997
11
Poland
August 26, 1996
February 13, 1998
12
Iran
October 28, 1996
December 1, 1998
13
Italy
September 25, 1997
February 17, 1998
14
Moldova
November 27, 1997
December 8, 1998
15
Lebanon
February 11, 1998
December 4, 1998
16
France
September 1, 1998
November 27, 1998
17
Austria
July 4, 2000
October 24, 2000
18
Egypt
October 24, 2002
May 13, 2003
19
Romania
October 29, 2002
December 5, 2003
20
Finland
February 26, 2003
May 13, 2003
21
Belgium-Luxemburg Economic Union
May 18, 2004
October 26, 2004
22
Bulgaria
October 7, 2004
March 1, 2005
23
Greece
June 21, 2004
October 26, 2004
24
Saudi Arabia
March 10, 2005
May 10, 2005
25
Tajikistan
March 15, 2007
June 5, 2007
26
Korea
April 23, 2007
October 1, 2007
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Country
Signed
Ratified
27
Hungary
May 18, 2007
October 1, 2007
28
Latvia
October 3, 2005
March 1, 2006
29
Switzerland
February 23, 2006
April 10, 2007
30
United Arab Emirates
November 20, 2006
April 10, 2007
31
Lithuania
June 8, 2006
April 10, 2007
32
Israel
February 20, 2006
October 1, 2007
33
Qatar
August 28, 2007
October 19, 2007
34
Croatia
October 2, 2007
February 1, 2008
35
Jordan
May 5, 2008
October 2, 2008
36
Syrian Arab Republic
July 8, 2009
September 30, 2009
37
Kuwait
February 10, 2009
April 28, 2009
38
Serbia
May 13, 2010
September 30, 2010
39
China
May 27, 2010
June 16, 2010
40
Mauritania
July 15, 2010
October 22, 2010
41
Uzbekistan
September 27, 2010
February 11, 2011
42
Czech Republic
May 17, 2011
September 30, 2011
43
Montenegro
September 16, 2011
December 13, 2011
44
Albania
February 09, 2012
May 22, 2012
In addition to the conventions listed in 16.3 below, Azerbaijan signed a multilateral treaty on the mutual protection of investments with the OPEC Fund for International Development on November 19, 2002, which was ratified on December 9, 2003.
2.5 Foreign Investment under Privatization Programs
The privatization process in Azerbaijan occurred in two stages. The first stage, from 1995 to 1998, ended up being extended, however, until the adoption of the Second Program for the Privatization of State
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Property of the Republic of Azerbaijan (the Second Privatization Program) in 2000.
This first wave of privatization allowed for four methods of privatization of state-owned property: privatization of small enterprises; privatization of medium- and large-scale enterprises; privatization of banks (later excluded from the program); and the sale of shares in specialized investment funds (this latter method did not develop into an effective privatization tool).
All privatized medium- and large-scale enterprises (except those already existing as joint stock companies) were to be restructured into joint stock companies, the shares of which were to be distributed through discount sales to employees of the privatized enterprises, voucher auctions2, investment tenders, or cash auctions.
Because the first privatization program did not fully achieve its objectives, new legislation was created -- the Law on Privatization of State Property (the Privatization Law), which came into effect on August 11, 2000, and the Second Privatization Program, one day later on August 12, 2000. Together, these allowed for the privatization of the remaining large-scale enterprises and “strategic units” in the telecommunications, chemical and petrochemical, and metallurgy sectors. While the new program introduced certain new methods of privatization (such as “special project” privatization designed to attract strategic investors), it retained the principal methods provided for under the first program.
Under the general principles of the Privatization Law, all state-owned property (except certain categories prohibited by law) may be privatized. Property types that may not be privatized include subsoil reserves, military facilities, certain entities and organizations funded by the state budget, other property units of state importance, and certain public facilities. The main authority responsible for
2 Voucher privatization ended on January 1, 2011.
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implementing the Second Privatization Program and for coordinating the activities of other authorities related to privatization is the State Committee on Property Issues.
According to the Second Privatization Program, the most significant state assets are privatized by a decision of the President, who also approves foreign investors’ participation in such privatizations; other properties which qualify for privatization are privatized by a decision of the State Committee on Property Issues.
Specific conditions may apply to the participation of foreign investors in privatization tenders. If foreign investors participate in privatization by reinvesting funds earned in Azerbaijan prior to participating in auction and investment tenders, they must submit to the State Committee on Property Issues a statement on such funds which has been approved by the tax authorities.
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3. Establishing a Legal Presence
3.1 Introduction
Establishing a legal presence in the Republic of Azerbaijan is a procedure regulated mainly by the Civil Code3 effective September 1, 2000, as amended (the Civil Code), and the Law on State Registration and the State Register of Legal Entities4, as amended.
A foreign investor wishing to establish an entity in Azerbaijan may choose either a limited presence, in the form of a representative office or a branch, or a full presence in a number of legal organizational forms.
In 2008, Azerbaijan introduced a “one-stop shop” system of registration of local commercial legal entities and foreign commercial legal entities’ representative offices or branches, with a greatly simplified registration procedure that allows persons wishing to engage in business in Azerbaijan to interact and file all documents with a single state authority, the Ministry of Taxes, in the process of establishing a legal presence.
3.2 Representative Offices and Branches
3.2.1 Legal Status
Neither a representative office nor a branch of a foreign legal entity is considered an Azerbaijani legal entity. Under the Civil Code, a representative office is a separate subdivision of a legal entity (including, presumably, a foreign entity) that represents and protects the legal entity’s interests. A branch is also a separate subdivision of a legal entity engaging in some or all of the functions of the legal entity,
3 Approved by Law No. 779-IQ of the Republic of Azerbaijan, dated December 28, 1999.
4 Law No. 560-IIQ of the Republic of Azerbaijan, On State Registration and the State Register of Legal Entities, dated December 12, 2003.
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including the functions of a representative office. These definitions suggest that the scope of a branch’s activities is wider than that of a representative office.
Since a representative office may only represent and protect the interests of a legal entity, without engaging in the functions of a legal entity, a representative office generally may not engage in commercial or business activity. A branch, on the other hand, being able to carry out all or part of a legal entity’s functions, may engage in business or commercial activity.
3.2.2 Registration
Branches and representative offices of foreign commercial legal entities are registered with the Ministry of Taxes, while branches and representative offices of foreign non-commercial legal entities are registered with the Ministry of Justice.
The Ministry of Taxes is required to effect registration within three business days of submission of the necessary documents; the Ministry of Justice within 40 business days.
Since 2009, the only registration required for branches and representative offices of foreign non-commercial legal entities is an agreement between the foreign legal entity and the Ministry of Justice.
The Cabinet of Ministers of the Republic of Azerbaijan enacted Resolution No. 43, dated March 16, 2011, approving the Regulations for Negotiating and Entering into an Agreement Concerning Registration of Branches and Representative Offices of Foreign Non-Commercial Legal Entities in the Republic of Azerbaijan (the “Regulations”). Pursuant to the Regulations, a letter (free form) stating the foreign entity’s objectives and the benefits to Azerbaijan of the entity’s presence must be submitted to the Ministry of Justice. The Regulations, however, do not mention the timeframe for consideration of the letter, or the procedures to be followed if the letter fails to convince the Ministry of the foreign entity’s benefits to Azerbaijan.
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Statutory changes further provide that the deputy head of a foreign non-commercial legal entity’s branch or representative office in Azerbaijan must be a citizen of the Republic of Azerbaijan.
The state duty for registration of a branch or representative office of a foreign legal entity is AZN 220 (approximately USD 280).
In order to be registered as a representative office or a branch, an applicant must submit to the Ministry of Taxes (for foreign commercial legal entities) or the Ministry of Justice (for foreign non-commercial legal entities) an application along with a set of statutorily required corporate and other documentation. Both representative offices and branches operate in Azerbaijan on the basis of regulations (similar to a charter) approved by the parent legal entity. A representative office and a branch are subject to the same registration procedure and submit largely the same set of documents for state registration. Documents from the parent entity must be notarized and apostilled (legalized) in the home country. Any document in a language other than Azerbaijani must be accompanied by a notarized translation into Azerbaijani.
The Ministry of Taxes and the Ministry of Justice accept documents with an apostille issued abroad by member countries of the 1961 Hague Convention Abolishing the Requirement of Legalization for Foreign Public Documents. An apostille normally involves fewer formalities than legalization. The acceptability in Azerbaijan of an apostille certification issued in a particular foreign country, and vice versa, should be checked with the respective authorities before proceeding with such certification. As the Federal Republic of Germany objected to Azerbaijan’s accession to the 1961 Hague Convention, German apostilles are not recognized in Azerbaijan, and vice versa.
Following state registration, a representative office or branch needs to obtain an official seal and to open bank accounts.
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3.3 Forming a Commercial Legal Entity
Commercial legal entities established in Azerbaijan are subject to state registration with the Ministry of Taxes, which is required to effect registration within two business days of submission of the necessary documents.
The state registration duty for banks, insurance companies and certain other types of companies is AZN 220 (approximately USD 280); for ordinary companies it is AZN 11 (approximately USD 14).
Under the Civil Code, legal entities may be either commercial or non-commercial. The Civil Code provides for the following organizational forms of commercial legal entities:
• Joint Stock Companies;
• General Partnerships;
• Limited Partnerships;
• Limited Liability Companies;
• Additional Liability Companies; and
• Cooperatives.
Azerbaijani entities are generally incorporated or established pursuant to a founders’ agreement and a charter. A founders’ agreement is not, however, required in the creation of companies with one participant. The founders’ agreement governs the rights and obligations of the founders and the relations between the founders and the entity. The charter generally governs the structure and management of the entity and the rights of participants and shareholders in connection therewith. Certain provisions of the founding documents defined in the Civil Code are mandatory.
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Pursuant to Law No. 382, dated June 12, 2012, approving amendments to the law On State Registration and the State Register of Legal Entities, information on founders (participants) and their shares in the charter capital of commercial legal entities is considered a commercial secret and may only be disclosed to third persons under specific circumstances.
Azerbaijani corporate law fixes a minimum amount of charter capital for JSCs. In certain cases (such as for banking and insurance companies), additional requirements are imposed by specific legislation.
3.3.1 Joint Stock Company (“JSC”)
3.3.1.1 Nature of JSCs
A JSC is a legal entity whose charter capital is divided into a certain number of shares, which are securities. JSC shareholders are liable for the obligations of the JSC only to the extent of their shares’ value.
3.3.1.2 Types of JSCs
A JSC may be either open or closed.
A closed JSC with more than 50 shareholders must be reorganized into an open JSC. Shares of a closed JSC are distributed only among the founders and may be transferred to third parties only upon the shareholders’ failure to exercise the right of first refusal and upon a closed JSC’s failure to purchase such shares.
Shares of an open JSC are publicly sold and may be alienated by shareholders to third parties without restriction.
3.3.1.3 Creation of JSCs
A sole individual or legal entity may be the founder or shareholder of a JSC.
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The process of establishing a JSC is initiated at the founders’ meeting, which adopts the founders’ agreement, if applicable, and the charter of the JSC. It includes state registration of the JSC, state registration of the share issue, placement of the issued shares, and registration of the report on the results of the placement. The par value of the shares of a newly established JSC must be paid by the founders prior to state registration of the JSC. Subsequent to establishment, the JSC’s shares may be placed either among the founders in closed JSCs or through a public offering in open JSCs. An open JSC may conduct the public offering itself or through a stock exchange.
3.3.1.4 Charter Capital
The charter capital of a JSC is divided into a fixed number of shares of a stated par value. The minimum amount of charter capital is AZN 2,000 (approximately USD 2,550) for a closed JSC, and twice that for an open JSC.
The charter capital of a JSC must be fully paid on or before the date of the JSC’s state registration. If the net worth of a JSC’s assets is less than the amount of its charter capital at the end of each fiscal year, the JSC must decrease its charter capital and register the decrease with the Ministry of Taxes.
3.3.1.5 Charter Capital Contributions
Contributions to the charter capital of a JSC may be made in cash or in kind. The value of the contributions made in kind must be confirmed by the founders’ meeting. Payment for publicly placed shares must be made in cash.
3.3.1.6 Shares
Shares in a JSC are investment securities, and their issuance must be registered with the State Securities Committee. Only a JSC may be an issuer of shares. Shares may be either common or preferred; preferred shares may not be issued in an amount exceeding 25 percent of the
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charter capital. Shares may be merged, divided, or converted into other shares. The shares in a JSC may be denominated only in AZN.
3.3.1.7 Rights of Shareholders
Shareholders of a JSC have the following rights, among others: the right to receive the JSC’s declared dividends, the right to vote at the general meeting of shareholders, the right of access to the JSC’s records, and the right to receive dividends and a share of the property of a JSC upon liquidation, after payment to creditors. Shareholders owning preferred shares have a preferential right to dividends and to distributed assets upon liquidation, but do not have the right to vote unless so provided in the JSC’s charter. Shareholders have one vote for each share of common stock owned.
3.3.1.8 Management Structure
General Meeting of Shareholders
The General Meeting of Shareholders (“GMS”) has exclusive competence in:
• amending the JSC’s charter and charter capital;
• appointing and terminating the JSC’s management bodies and their members;
• approving the JSC’s annual reports, balance sheets and financial statements, as well as distribution of its dividends and losses; and
• reorganizing and liquidating the JSC.
The GMS makes its decisions unanimously or by a simple or qualified majority of votes present at the GMS. The minimum number of votes necessary to make a decision must be set forth in the JSC’s charter. A quorum for a GMS is present if shareholders owning (at least) 60 percent of the voting shares participate in the GMS.
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A GMS must be held at least once a year. Any GMS other than the annual GMS is considered an extraordinary GMS. Either the executive body, the Board of Directors (Supervisory Council), the internal auditor (Audit Commission), or a group of shareholders holding at least 10 percent of the shares may call an extraordinary GMS. Any annual or extraordinary GMS must be called with notice (containing an agenda) thereof being sent to each shareholder, and an announcement of the GMS published in an official mass-media press outlet (except for closed JSCs) at least 45 days before the GMS.
Board of Directors (Supervisory Council)
A JSC with more than 50 shareholders must have a Board of Directors whose members may be shareholders or outsiders and must constitute the number specified in the JSC’s charter. The Board of Directors monitors the activity of the JSC’s executive body and performs other functions entrusted to it by the GMS. A member of the Board of Directors may not serve as a member of the JSC’s executive body.
Executive Management
A JSC’s executive management may consist of a collegial executive body (a management board) or a sole executive body (general director). The executive body is responsible for the JSC’s day-to-day management. It reports to the Board of Directors/Supervisory Council and to the GMS. Pursuant to a GMS resolution, the JSC may be managed by an outside sole entrepreneur or another commercial legal entity.
Both JSC shareholders and outsiders may be members of a collegial executive body. Neither members of the Board of Directors nor shareholders holding (more than) 20 percent of the shares may be members of the executive management. The management board or general director is competent to make any decision not reserved, either by law or the founding documents, for the exclusive competence of the GMS or the Board of Directors.
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Internal Audit Commission/Auditor
The internal audit commission/auditor is mandatory for JSCs with more than 50 shareholders. This body monitors the finances and business operations of the JSC and prepares a review of the JSC’s annual reports and accounts. The audit commission must conduct an audit at the end of the financial year pursuant to a resolution of the GMS, or at the request of a group of shareholders collectively holding more than 10 percent of shares, the executive management, or the Board of Directors/Supervisory Council, as well as in other cases provided for in the JSC’s charter.
3.3.2 General Partnership (“GP”)
A GP is a legal entity that is formed by at least two sole proprietors and/or commercial legal entities, i.e., the general partners. Partners are jointly and severally liable for the partnership’s liabilities. To the extent that the partnership lacks sufficient assets to cover its obligations, the partners are personally liable for its obligations. Participation in the GP by each partner is considered to be an entrepreneurial activity. Individuals and/or legal entities may participate in only one GP at a time.
3.3.2.1 Rights of Partners
A partner may withdraw from a GP under the terms and procedures provided for in the founding documents without causing the dissolution of the GP. The withdrawing partner must provide the other partners with at least six months’ notice prior to the actual date of withdrawal. The withdrawing partner will receive payment for the market value of his or her interest in the partnership.
The withdrawing partner may transfer his or her participatory interest in the GP to any other person only with the consent of the other partners. The remaining partners have a preemptive right to acquire the participatory interest.
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The remaining partners and the withdrawing partner are equally liable, for a period of two years following approval of the annual accounts for the year of the withdrawal, for the GP’s debts arising prior to the withdrawal. Additionally, a newly admitted partner is liable for all partnership debts of the GP, including those which arose prior to his or her admittance.
3.3.2.2 Management Structure
The supreme body of a GP is the general meeting of partners (“GMP”). The issues addressed at the GMP are essentially the same as those addressed at the GMS of a JSC.
The management of the GP’s activities is conducted with the unanimous consent of all partners except where the GP’s charter provides otherwise. Each general partner has only one vote and may act on behalf of the GP unless otherwise provided for by the GP’s charter.
3.3.3 Limited Partnership (“LP”)
An LP is a legal entity having one or more general partners and one or more limited partners – individuals and/or legal entities. General partners are personally liable for the partnership’s obligations. The liability of limited partners is limited to the amount of their contributions. A person may participate as a general partner only in one LP. Similarly, a partner of a GP may not participate as a general partner in an LP.
3.3.3.1 Rights of Partners
A partner may withdraw from an LP without causing the dissolution of the LP. The withdrawing partner must provide the other partners with at least six months’ notice prior to the actual date of withdrawal. The LP must pay the withdrawing partner the value of his or her participatory interest.
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3.3.3.2 Management Structure
The management of an LP’s activities is conducted by the general partners.
3.3.4 Limited Liability Company (“LLC”)
An LLC is an entity established by one or more individuals and/or legal entities contributing their participatory interests to the charter capital. The sole participant in an LLC may not be a company having only one participant/shareholder (either an individual or a legal entity). The participants in an LLC are normally liable only to the extent of their contributions. An LLC is not responsible for the obligations of its participants to third parties.
Azerbaijani law provides different registration regimes for foreign and local investment LLCs. According to Law No. 284, dated December 30, 2011, approving amendments to the law On State Registration and the State Register of Legal Entities, and to Presidential Decree No. 429, On Certain Measures for Organization of the Rendering of Electronic Services by State Authorities, dated May 23, 2011, a local investment LLC (an LLC founded by an Azerbaijani citizen and/or a legal entity registered in Azerbaijan), in addition to ordinary paper-based registration, can be registered electronically. Certain restrictions apply, for example the person must use a charter template recommended by the Ministry of Taxes.
3.3.4.1 Rights of Participants
A participant in an LLC has the same basic rights as those provided to a shareholder of a JSC. A participant in an LLC is not liable for the LLC’s obligations and bears the risk of loss for the LLC’s activities only to the extent of the value of his or her contribution to the LLC’s charter capital.
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3.3.4.2 Management Structure
The supreme governing body of an LLC is the general meeting of participants (“GMP”). A GMP must be held at least annually. A GMP dealing with the results of annual activity must be held no later than four months following the end of the reporting year. Any GMP other than the annual GMP is an extraordinary GMP, and such a GMP may be called at the initiative of the executive management, Board of Directors, or internal audit commission (auditor), or at the demand of LLC participants holding at least 10 percent of the total votes in the LLC. The issues addressed at the GMP are essentially the same as those addressed at the GMS of a JSC.
Between GMPs, the Board of Directors or the Supervisory Council (if such has been provided for in the founding documents of the LLC), composed of participants or outsiders, supervises the LLC’s executive body.
An LLC’s executive management may be either a collegial body (management board) or a sole manager. A member of the Board of Directors may not be a member of the executive management. An LLC may hire an outside manager (either an individual or entity) if provided for in the charter.
An LLC may have an internal audit commission (auditor) if such is provided for in its founding documents. If the LLC does not have an audit commission, the functions of this body may be performed by the Board of Directors (Supervisory Council), if such exists.
3.3.4.3 Charter Capital
Charter capital consists of the contributions of the participants. The charter capital of an LLC is divided into a fixed number of participatory interests set forth in the LLC’s charter. Azerbaijani law does not establish a minimum charter capital requirement for an LLC.
Pursuant to Law No. 287, On Amendments to the Civil Code of the Republic of Azerbaijan, dated December 30, 2011, if the charter of an
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LLC does not specify a period for making charter capital contributions, the founding participants must make their contributions by the date of the LLC’s state registration. Should the charter of an LLC specify a period for the payment of charter capital, the founding participants must make their contributions within the specified timeframe, which should not exceed a three-month period. The value of “in-kind” contributions (e.g., equipment, property) or contributions in the form of property rights is determined by a resolution of the GMP.
3.3.5 Additional Liability Company (“ALC”)
An 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 that of an LLC. The distinction between an ALC and an LLC is that the participants in the former may assume liability for the company in excess of their contributions as regulated by the charter.
3.3.6 Cooperative
A cooperative is a voluntary union of at least five individuals and legal entities for the purpose of satisfying the material and other needs of the participants through the consolidation of their material contributions. Depending on the purpose of their activity, cooperatives may be of different kinds, such as consumer cooperatives and condominiums.
3.3.6.1 Rights of Members
In essence, a member of a cooperative enjoys the same rights available to founders of other types of legal entities, including the right to participate in the management of the cooperative, unless the membership is associative. Unless otherwise provided for in the charter of the cooperative, the members of a cooperative have the right to obtain membership in other cooperatives.
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3.3.6.2 Cooperative’s Property
The members of a cooperative must make contributions to the share fund in full, prior to the state registration of the cooperative. The cooperative’s property is divided into shares among its members, in accordance with the charter.
If, pursuant to the results of the fiscal year, a cooperative suffers financial losses, the members must cover such losses by way of additional contributions made not later than two months from the date of approval of the annual balance sheet. The cooperative members bear secondary liability for the cooperative’s obligations to the extent of the unpaid portion of their additional contributions.
3.3.6.3 Management Structure
The supreme management body of a cooperative is the general meeting of members. Each member of the cooperative has one vote at the general meeting, without regard to the size of its contribution to the share fund. A cooperative with more than 50 members may have a Supervisory Council that controls the activities of the cooperative’s executive bodies. The executive bodies of the cooperative are a Management Board and/or a chairman of the cooperative. A member of the Supervisory Council or Management Board of a cooperative may not be a member of another similar cooperative.
3.4 Non-Commercial Organizations
An Azerbaijani non-commercial or not-for-profit organization is an entity created to engage in various social and economic activities not related to the generation of profit and the distribution of such profit to its founders. Because an Azerbaijani non-commercial organization is treated as a legal entity, it may own property, enter into contracts, acquire ownership and intellectual property rights and incur obligations in its own name, maintain an independent balance sheet, maintain settlement accounts and other bank accounts, and act as a claimant and defendant in courts and arbitration tribunals. All non-commercial legal entities are registered with the Ministry of Justice,
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which is required to effect registration within 40 business days of submission of the necessary documents. Azerbaijani non-commercial organizations are presumed to engage in non-commercial activities.
Under the Civil Code, non-commercial organizations may be created in any of the following forms: (1) public associations, (2) foundations (funds), and (3) unions of legal entities. There are also other forms such as professional associations and trade unions.
3.4.1 Public Associations
A public association is a voluntary not-for-profit organization created by individuals or legal entities to engage in activities in their common interest.
A public association’s members lose any ownership or other rights to property transferred to the public association, including their membership contributions. They are not responsible for the public association’s obligations, in the same way that 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. Where this is not possible, such property is remitted to the state budget.
3.4.2 Foundations (Funds)
A foundation or fund 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. As there is no requirement for a minimum number of founders, an Azerbaijani fund may be created by one individual or legal entity. Moreover, funds are not based on membership, i.e., founders of the fund do not become its members. A fund’s founders are not responsible for the fund’s obligations. Similarly, a fund is not responsible for the obligations of its founders.
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In 2009, Azerbaijani law introduced a minimum (initial) charter capital requirement of AZN 10,000 (approximately USD 12,745) for Azerbaijani funds.
The management structure of a fund must be established by a charter approved by the founders. The law does not grant the founders the right to participate in the management of the fund through any kind of general meetings. All management decisions are made by the governing bodies established by the charter. If, according to the charter, the governing bodies do not have such right, the fund’s charter may be amended only by a court, based on an application of the fund’s governing bodies.
A fund may be liquidated only pursuant to a court decision, and in cases established by law. After liquidation, a fund’s remaining property must be used for the purposes specified in the charter. If this is impossible, such property must be remitted to the state budget.
3.4.3 Unions of Legal Entities
A union of legal entities is an organization created by business or non-commercial entities to facilitate cooperation and coordination of their entrepreneurial or non-commercial activities, and to represent and protect 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.
If, pursuant to a decision of its members, a union of legal entities is to engage in any commercial activity, then such union must either: (1) be reorganized into a commercial company or partnership; or (2) establish or participate in a commercial company.
3.5 Subsidiaries and Dependent Companies
Regardless of whether it was established in Azerbaijan or elsewhere, a legal entity may form, in Azerbaijan, a subsidiary in one of the three legal forms available for commercial purposes, i.e., JSC, LLC, or
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ALC. A subsidiary is a separate and distinct legal entity; the parent enterprise contributes property to its subsidiary but, typically, is not liable for the obligations of the subsidiary. Exceptions to this rule concern liability to third parties, liability to other (minority) shareholders, and liability in bankruptcy. For instance, a parent company may be held liable for the obligations of its subsidiary in bankruptcy if such bankruptcy was caused by the fault of the parent company in connection with the execution of its instructions. Additionally, a parent company and its subsidiary are jointly and severally 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. Laws governing specific types of activity, such as banking, could vary these general rules.
As a matter of law, a company is considered a subsidiary if another legal entity, by virtue of a majority shareholding in the company’s charter capital or by virtue of an agreement between them, can determine the resolutions adopted by that company.
An LLC or a JSC may be deemed dependent on another company or partnership if the other company or partnership holds more than 20 percent of the charter capital of an LLC or voting shares of a JSC. A company or partnership acquiring such qualifying ownership must promptly publicize the information on acquisition.
3.6 Liquidation of a Legal Entity
The liquidation process can be divided into several stages.
The first stage includes adoption of a decision on liquidation by the founder(s) or an authorized body of a legal entity, the establishment of a liquidation commission/liquidator, the adoption of liquidation terms and procedure. A maximum of 20 days prior to the adoption of a decision on liquidation, the executive body of a legal entity should adopt a declaration of solvency confirming that the legal entity is capable of repaying the claims of all creditors within 12 months. If an executive body is unable to adopt such a declaration of solvency, an
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independent auditor could be engaged to issue its opinion on the legal entity’s solvency.
Within 10 days of its appointment, the liquidation commission/liquidator should publish the first announcement on liquidation of the legal entity in the official press, indicating the procedure and the term for submitting creditors’ claims. This announcement should be published in the same manner two more times at intervals of 15-20 days. The term for submission of creditors’ claims should not be less than 60 days following publication of the first announcement on the liquidation of a legal entity.
The liquidation commission/liquidator should submit an application together with the above documents and corporate stamp to the relevant executive body responsible for the state registration of legal entities within 15 days of its appointment. Information on the liquidation of a legal entity should be entered into the state register within five days after receipt of the application.
The next stage is adoption of necessary measures by the liquidation commission/liquidator to identify the creditors and collect accounts receivable, notification of creditors, application to the responsible state authorities to identify if there any debts to the state budget or non budget state funds. The liquidation commission/liquidator prepares an intermediate liquidation balance sheet within 10 days following the expiration of the period for the submission of the creditors’ claims, including information on the assets of the legal entity, creditors’ claims and accounts receivable.
The liquidation commission/liquidator should then prepare the liquidation balance sheet and a report reflecting the plan for distribution/use of the remaining assets within five days following settlement of all creditors’ claims. The liquidation balance sheet and the report should be approved by the founder(s) or authorized body of the legal entity within 45 days from the preparation date.
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Further, within 10 days following the approval of the liquidation balance sheet, the liquidation commission/liquidator should ensure distribution/use of the remaining assets in accordance with the approved plan.
The last stage is the submission by the liquidation commission/liquidator of an application to remove the legal entity from the state register, submitted (with the required documents) to the relevant executive body responsible for the state registration of legal entities within 10 days from the distribution/use of the remaining assets. If the submitted documents are sufficient, the relevant executive body should issue a decision on removal of the legal entity from the state register within seven days.
The length of the liquidation process should not be more than one year starting from the date of entry of the information on the liquidation of the legal entity into the state register of legal entities. Failure to complete the liquidation process within a year means that the liquidation process will have to be started again from the beginning.
The above procedure for liquidation of legal entities equally applies to the liquidation (de-registration) of branch and representative offices of foreign legal entitles in Azerbaijan.
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4. Issuance and Registration of Securities
4.1 Introduction
The securities market in Azerbaijan is regulated primarily by provisions of the Civil Code and acts of the State Securities Committee, the securities market regulator created at the end of 1998.
Under the Civil Code, securities may be issued as registered or bearer securities, or order securities. In addition, depending on the method of placement, securities are of two types:
• Investment securities, which are placed through separate issuances and, regardless of the time of their acquisition, have equal rights thereunder within the respective issuances, such as shares and bonds; and
• Non-investment securities, which are placed otherwise and have different rights, such as options, warrants, privatization checks, futures, mortgage certificates, bills of lading, and so on.
There are two forms of securities:
• Documentary, in which the rights of securities holders to the securities are established by a paper document. The specific requirements for the certificates are determined by the State Securities Committee; and
• Non-documentary, where the rights of the securities holders to the securities are evidenced by entries made in a deposit account held by a depositary.
4.1.1 Issuance and Placement of Investment Securities
The issuance of investment securities involves the following stages:
• Resolution of the issuer’s authorized body on the issuance of investment securities;
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• Preparation of an issuance prospectus of investment securities (if the investment securities are placed publicly);
• State registration of the issuance of investment securities and issuance prospectus (if applicable) with the State Securities Committee;
• Publication of information from the issuance prospectus in the mass media (if the investment securities are placed publicly);
• Placement of the investment securities;
• Registration of the report on results of the placement of the investment securities with the State Securities Committee; and
• Publication in the mass media of the report on results of the placement of the investment securities (if the investment securities are placed publicly).
Placement of the investment securities may be of two types:
• “Closed,” in which the securities are placed without announcing a public sale. As a matter of law, in the following cases, shares are placed through a “closed” placement and among pre-defined persons:
o Establishment of a JSC;
o Reorganization of another company or partnership into a JSC;
o Conversion of existing shares; and
o Placement of shares in a closed JSC.
• “Public” or “open,” in which the securities are placed by a publicly announced sale (normally through the stock exchange), followed by the preparation and publication in the mass media
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of a prospectus and a report on the results of the placement of the securities.
An issuance of investment securities is deemed accomplished upon the successful placement of 50 percent (or more) of the total number of issued investment securities.
An additional issuance of investment securities may be carried out only after the previously issued securities have been placed.
4.1.2 Disclosure Requirements
In contrast to Western jurisdictions, disclosure requirements under Azerbaijani law are not very onerous. An issuance prospectus, required only in case of a public placement of investment securities, i.e., shares and bonds, must provide general information about the issuer, its management bodies and branches and representative offices, persons holding 10 percent or more of the issuer’s shares, and companies in which the issuer holds shares; the latest financial statements along with an auditor’s report; previously issued securities; issuer’s debts and certain other information. Neither risk factors nor a detailed description of the issuer’s business need to be provided in the prospectus.
4.2 Regulation of the Securities Market
The following professional activities on the securities market may be carried out by legal entities and individuals that have obtained a license from the State Securities Committee:
• Brokerage;
• Dealing activities;
• Acting as a depositary;
• Acting as a registrar;
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• Portfolio management;
• Securities clearance; and
• Operation of a stock exchange.
4.2.1 Stock Exchanges and Registrars
A stock exchange may be formed only as a closed JSC and must obtain a license from the State Securities Committee. The Baku Stock Exchange was established by the State Securities Committee at the end of December 1999; its shareholders include banks and investment companies.
A JSC must maintain a register of its shareholders, and the register of shareholders of a JSC having more than 20 shareholders must be maintained by an outside registrar. The National Depositary Center of the Republic of Azerbaijan, a state-owned closed joint stock company established in 1997, is a licensed public registrar for the Azerbaijani securities market.
Additionally, both the Baku Stock Exchange and the National Depositary Center render depositary services.
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5. Licenses
5.1 Introduction
Activities requiring licenses are stipulated by Presidential Decree No. 782, “On Improving the License Issuance Rules for Certain Types of Activities,” dated September 2, 2002 (“Decree 782”). It unifies the licensing rules for all types of licenses and specifies: (a) the business activities subject to licensing, (b) the licensing authorities, and (c) the license fees for each business activity subject to licensing. Additionally, Presidential Decree No. 310 dated March 28, 2000, establishes certain limits and exceptions to the general licensing rules.
Licenses may be granted to Azerbaijani citizens and legal entities, as well as to foreign legal entities and foreign citizens. An international agreement may recognize a license obtained by a foreign entity in its home country.
A license is granted without discrimination to any entity that satisfies the requirements for that specific license. Thus (with certain exceptions), foreign investors may obtain licenses under the same conditions and in accordance with the same procedures applicable to Azerbaijani nationals.
A licensee may not transfer a license to another legal entity or individual unless otherwise provided for by law.
5.2 Issuance of Licenses
The issuance of licenses is principally regulated by Decree 782 which sets out the procedure for obtaining licenses and the list of licensed activities. It also directs the Azerbaijani Ministry of Economic Development to exercise overall control of business licensing in Azerbaijan and to maintain a unified state register of licenses.
With the purpose of streamlining the process of issuing licenses and consents, on October 26, 2011 the President of Azerbaijan signed Decree No. 509. This decree requires the Azerbaijani Cabinet of
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Ministers to submit to the President a draft law On Licenses and Permits, which will set out a unified procedure for issuing licenses and permits. It also requires the Azerbaijani Ministry of Economic Development to set up an internet portal containing information about the procedure for obtaining business licenses. Although the Cabinet of Ministers has not submitted the draft law yet, the Ministry of Economic Development has set up the internet portal (http://icazeler.gov.az/).
Table 2 contains a partial list of licensed activities and the government agencies responsible for issuance of licenses.
Table 2: Licensing of Activities
Type of Activity
Executive Agency
Recycling and disposal of hazardous, toxic or industrial waste; collection of raw wild medicinal plant materials
Ministry of Ecology and Natural Resources
Sale of oil products; sale of gas products
Ministry of Industry and Energy
Storage, processing, and sale of waste from non-ferrous metals; industrial and factory waste containing precious metals and stones; commodities exchanges
Ministry of Economic Development
Production and import of ethanol (alcohol) and alcoholic drinks; Production and import of tobacco products; production and sale of veterinary medications; private veterinary services
Ministry of Agriculture
Communication services (telephone [fixed-line], cellular [mobile], radio trunk and wireless telephone, installation of domestic and international telecommunication channels, IP telephony, data
Ministry of Information Technology and Telecommunications
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Type of Activity
Executive Agency
transmission, high-speed courier services and 3G mobile communication services); creation and servicing of biometric technologies
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); transportation of dangerous goods; installation and operation of facilities for liquid and natural gas infrastructure; mining and well-drilling operations; installation and maintenance of elevators in buildings; installation and maintenance of amusement equipment; installation, maintenance, and management of energy-related objects, equipment, and facilities; production, installation, and maintenance of metallurgical equipment, lifting facilities, boilers, and vessels operating under pressure; diagnostics and other checks of equipment and technical facilities used for infrastructure, potentially presenting a risk of danger; fire protection services to communities and entities; production, purchase, and testing of firefighting machinery; installation, maintenance, and repair of fire prevention systems and facilities; repair and maintenance of firefighting accessories and prime firefighting facilities and repair of
Ministry of Emergency Situations
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Type of Activity
Executive Agency
firefighting equipment; construction, reconstruction, and maintenance of firefighting buildings, constructions and premises; disposal and burial of radioactive and ion-emitting substances
International, intercity, and city transportation of passengers and cargo by motor transport; taxi passenger services
Ministry of Transportation
Water transportation of passengers and cargo
State Maritime Administration
Air transportation of passengers and cargo
State Civil Aviation Administration
Sale of ethanol (alcohol) and alcoholic drinks; sale of tobacco products
City and District Executive Authorities (except for city districts)
Educational institutions (preparatory school, primary schools [including lyceums and gymnasia], vocational schools and lyceums, secondary specialized schools, post-secondary schools, and religious secondary and post-secondary schools)
Ministry of Education
Non-state pension fund activities; printing of financial reporting documents; insurance activities (insurance, re-insurance, insurance broker and insurance agent); production of precious metals and gemstones (extraction of precious metals from ores and concentrates); processing and use of precious metals and gemstones (manufacture and repair of products, including jewelry and other personal ornaments made from gemstones); turnover of precious
Ministry of Finance
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Type of Activity
Executive Agency
metals and stones (wholesale and retail of precious metals and gemstones, including wholesale and retail of jewelry and other personal ornaments made from gemstones, and the trade of these items in jewelry pawnshops)
Certain services on the stock market including those provided by stock exchanges, investment funds, and professional participants in the securities market (such as securities brokers and dealers, securities management, clearing, depository, register of securities’ holders, organization of trade on the securities market), and preparation and sale of securities documents
State Committee for Securities
Pharmaceutical and medical activities; import, export, transit, and production of pharmaceutical precursors
Ministry of Health
Employment brokerage services for the employment of Azerbaijani citizens abroad
Ministry of Labor and Social Protection of the Population
Auditing
Audit Chamber
Banking activity (banks and non-banking credit organizations)
Central Bank
Tourism; hotel operations
Ministry of Culture and Tourism
Manufacture of seals and stamps; security guard services (in cases other than those relating to the authority of the Ministry of National Security)
Ministry of Internal Affairs
Performance of cartographic works
State Committee for Land and Cartography
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Type of Activity
Executive Agency
Design and production of information protection devices; processing, production, sale, purchase, import, and export of technical devices for the illegal procurement of information by persons and legal entities not entitled to perform investigative activity; security guard services5
Ministry of National Security
Customs brokerage and customs carriage activities; establishment of customs warehouses and temporary detention warehouses
State Customs Committee
Television and radio broadcasting, additional data broadcasting, cable network broadcasting, satellite broadcasting, re-broadcasting via satellite of foreign television and radio channels through the use of coded equipment
National Council on Television and Radio Broadcasting
Design of Class One and Class Two buildings and structures
State City-Building and Architecture Committee
5.3 Application for a License
Decree No. 782 approves the Rules for the Issuance of Special Permits (Licenses) for Certain Activities in the Republic of Azerbaijan (the “License Rules”). In particular, an applicant must submit all documents specified in the License Rules and other regulations, and pay the required state fee, after which (subject to fulfillment of all application requirements) a license is issued within 15 days. If no other term is specified by applicable law, the term of a license is five
5 For protection of legal entities established in Azerbaijan by foreign legal entities or foreigners or stateless persons, including legal entities incorporated directly or indirectly with the participation of foreign capital.
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years. The license term may be extended by the relevant agency’s reissuance of the license.
5.4 Suspension and Termination of a License
An issued license may be terminated (suspended) in the following cases:
• By a voluntary decision of the license holder;
• If the license application documents contain incorrect information;
• By court order;
• Upon bankruptcy;
• Upon liquidation of the legal entity or death of the individual license-holder; and
• Other cases specified by law.
5.5 Consequences of Operating without an Appropriate License
The penalties for operating without a license may be severe, and an individual or entity may be held liable under the Code on Administrative Offenses and the Criminal Code.
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6. Taxation
6.1 Introduction
The basis of the Azerbaijani tax system was first established with the adoption of the Law on the Fundamentals of the Economic Independence of the Republic of Azerbaijan dated May 25, 1991. The system has since undergone further development; following almost three years of parliamentary and government review, the first codified digest of Azerbaijani tax legislation, the Tax Code (the Tax Code), was adopted on July 11, 2000, taking effect on January 1, 2001. The Tax Code superseded most of the tax legislation preceding it.
The Tax Code is divided into two main parts: General and Special. The General Part describes the tax system, lists defined terms used in the Tax Code, discusses the powers and duties of the tax authorities, provides penalties for noncompliance with tax laws, sets out the procedural rules for taxpayers to appeal actions taken by tax authorities, and addresses general issues of tax payment and collection. The Special Part of the Tax Code deals with each of the taxes imposed by the Tax Code: income tax of individuals, profits (corporate income) tax, value-added tax (“VAT”), excise, property tax, land tax, highway tax, subsoil use tax, and simplified tax (“ST”).
In furtherance of the provisions of the Constitution, the Tax Code stipulates a three-level tax system, with state taxes levied at the first level, taxes of the Nakhchivan Autonomous Republic within Azerbaijan at the second, and local or municipal taxes at the third. Taxes listed in the Tax Code are levied at the state or autonomous republic level or at the state/autonomous republic level and municipal level.
Taxes levied at the state level consist of all taxes listed in the Special Part of the Tax Code, with the exception of land and property taxes payable by individuals, subsoil use taxes (applicable only to those minerals consumed at the local level), and profits taxes of enterprises owned by municipalities whose liabilities are payable at the local
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level. Taxes levied at the second level include all taxes listed in the Special Part of the Tax Code and payable in the Nakhchivan Autonomous Republic. Municipal taxes include land and property taxes payable by individuals, subsoil use taxes (applicable only to those minerals consumed at the local level), and profits taxes of entities owned by municipalities. Other obligatory payments which are payable at the municipal level are determined by acts adopted at the state level.
The Tax Code also recognizes the existence of special tax regimes, distinct from those described above. Such regimes are, by and large, applicable to contracting and subcontracting parties in oil and gas production sharing agreements (“PSAs”). While tax regimes applicable under PSAs differ individually, generally they provide for lower withholding tax rates, exemption from VAT, and simplified reporting and accounting procedures.
Additionally, in 2008, the Tax Code recognized tax regimes that may exist in special economic zones. The Law on Special Economic Zones, which became effective in April 2009, determines a preferential tax regime applicable to residents of special economic zones. Pursuant to the law, residents are subject to 0.5% simplified tax on their profits. Furthermore, no other taxes (excluding income taxes of employees) are applicable for such residents. Notwithstanding the establishment of the tax regime for special economic zones, no such zones have been established yet.
Starting from 2013, the Tax Code introduced significant tax privileges for residents of industrial and technology parks. Such privileges include exemption from profit tax and property tax for 7 years for the legal entities and individual entrepreneurs that are residents of such industrial and technology parks and exemption from VAT on importation of certain goods for use in industrial and technology parks.
Recent amendments to the Tax Code made in November 2013 included a significant change with regard to the abovementioned
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matters. Pursuant to the amendments tax incentives and exemptions can only be identified in the Tax Code. Moreover, these incentives and exemptions can not be stipulated in other normative legal acts including production sharing agreements, similar agreements of this kind, as well as laws on special economic zones. This amendment contradicts over two decades of practice in production sharing agreements.
6.2 Administration of Taxes
The collection of taxes is administered by the Ministry of Taxes and its divisions; accordingly, tax control is exercised by the Ministry of Taxes. In certain cases, where a determination must be made as to the appropriate payment of customs duties, tax control is also exercised by customs authorities.
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”), and in certain other cases as specified under the Tax Code, must register with the tax authorities whether or not their activities are taxable in Azerbaijan.
6.3 Types of Tax
The most significant taxes levied at the state level are listed below.
6.3.1 Corporate Income (Profits) Tax
Azerbaijani legal entities are subject to a corporate income (profits) tax of 20 percent on their worldwide income. Certain types of payments due to such entities are taxed at the source of payment. For instance, dividends paid by resident enterprises (as defined in the Tax Code) and interest payable by a resident or PE or on behalf of a PE (except for interest payable to banks and leasing institutions in Azerbaijan) are subject to a 10 percent tax withheld at the source of payment. Enterprises that are not required to register for VAT purposes and whose taxable operations for all months during a
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consecutive 12-month period amount to AZN 120,000 or less may be subject to the ST, which is levied on the gross proceeds of a business and applied at a rate of 4 percent in Baku and 2 percent elsewhere.
Entities and persons involved in the transportation of passengers and cargo in Azerbaijan, as well as real estate developers and providers and operators of sports gambling games pay simplified tax at special rates.
Foreign legal entities operating in Azerbaijan are also subject to a 20 percent corporate income tax on profits earned through their PEs in Azerbaijan. Foreign legal entities are likewise subject to income tax withheld on dividends and interest (except for interest payable to nonresident banks and PEs of leasing institutions) at a rate of 10 percent, whether or not such income was obtained through a PE.
Similarly, tax is withheld from the income of a foreign entity obtained from a source in Azerbaijan other than its PE. Such income is typically subject to 10 percent tax, with communication and freight fees subject to 6 percent tax, insurance premiums subject to 4 percent tax, and rent and royalties subject to 14 percent tax.
The tax base for resident enterprises and PEs is gross annual income less allowable deductions. The aggregate annual income of a resident taxpayer includes all incomes irrespective of source. The income of a nonresident taxpayer consists only of Azerbaijani source income.
Deductions include all expenses connected with deriving income, including mandatory payments, bad debts, and depreciation. Deductions for business trips (the part of the expenses exceeding limits set by the Cabinet of Ministers of Azerbaijan), entertainment, and certain other expenses may be limited. Nonresidents may generally make deductions only for such items of income obtained through their PEs. Together with the 10 percent branch remittance tax, the overall effective rate of taxation of nonresidents operating in Azerbaijan through a PE is 28 percent.
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Expenditure on acquisition of capital assets may be depreciated at rates stated in the Tax Code.
6.3.2 Individual Income Tax
Individual income is taxed progressively, and employers are obliged to withhold income tax from employees’ salaries as well as from certain other kinds of monetary and other compensation. The effective progressive tax rate ranges from 0 percent for certain exempt income up to 25 percent for those in the highest tax bracket. Individuals who carry out their business activities without creating a legal entity (i.e. individual entrepreneurs) are subject to 20% income tax. Residents of Azerbaijan are obliged to pay income tax on worldwide income, while nonresidents are taxed only on income originating from sources in Azerbaijan. Different tax rates may apply to individuals engaged in entrepreneurship.
6.3.3 VAT
VAT is imposed on the turnover of most goods, work, and services in Azerbaijan and on the importation of goods. VAT is charged by the seller of goods, the provider of services or, in the case of imported goods, by customs officials. Input VAT, payable by a taxpayer for purchased goods, work and services, as well as for the importation of goods into Azerbaijan, represents a business expense and may be offset against output VAT collectable by a business from selling its own goods, work and services. The VAT rate is 18 percent of the price of goods, work, and services or of the customs value of goods.
Separate VAT registration is required under the Tax Code. The Tax Code also includes a reverse-charge VAT collectable by Azerbaijani tax residents, acting in the capacity of tax agents, when non-residents, which are not required to register as VAT payers in Azerbaijan, render services or work subject to local VAT. A VAT deposit single treasury account was introduced in 2008 as a measure for improving VAT administration and preventing abuses with VAT offsets and remittances.
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Import and turnover of certain goods (as well as work and services for certain purposes) are exempt from VAT, which means the refund of certain input VAT in the chain is not allowed. Financial services are an example of such an exemption. Certain other transactions are zero-rated, which is essentially an exemption with credit giving rise to the recovery of input VAT. The export of goods is an example of a zero-rated transaction.
From January 1, 2010, paper VAT invoices were substituted by electronic VAT invoices, the turnover of which is processed through a system administered by the Ministry of Taxes.
6.3.4 Subsoil Use Taxes
Companies engaged in the extraction of subsoil resources are subject to a subsoil use tax, the rate of which as stipulated in the Tax Code depends on the mineral extracted. Additionally (or, in some cases, alternatively), subsoil users may be subject to various payments, the method of calculation and application of which are stipulated by a contract between the companies undertaking such activities and the relevant state agency.
6.3.5 Excise
Excise is imposed on a consumption basis and is applied upon the departure of excisable goods from the production site or from the importation of excisable goods. Rates of excise vary according to the goods produced or imported and are subject to frequent changes. Excise paid for goods used for the production of other excisable goods can be offset against the excise charged for finished products. Alternatively, such excise can be reclaimed from the state budget. The export of excisable goods is subject to a rate of zero percent.
6.3.6 Highway Tax
Highway tax is imposed upon the entry of foreign-registered vehicles into the Republic of Azerbaijan, as well as on persons who own or use any type of vehicle, in an amount dependent on the type and weight of
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the vehicle, the distance to be traveled in Azerbaijan, the number of seats, engine capacity, axle load, and the nature of imported products. The highway tax is also applicable to vehicles used locally and is calculated according to engine displacement.
6.3.7 Property Tax
Property tax is assessed annually on the book value of fixed assets maintained by a resident or nonresident enterprise. Property tax is also levied on both resident and nonresident individuals owning properties in Azerbaijan. Rates differ depending on the type of asset and its value.
6.3.8 Land Tax
Land tax is imposed on the owners and users of land (defined under the Tax Code). The Cabinet of Ministers determines standard rates for agricultural land depending on the location, quality, and purpose of the land plot. The tax is payable by both resident and nonresident individuals, and resident and nonresident enterprises.
6.3.9 Social Taxes and Charges
All employers in Azerbaijan are required to make contributions to the State Social Protection Fund on the salaries and other qualifying income of their employees, including foreign employees (except foreign employees of companies operating under certain production sharing agreements or similar agreements, a list of which is set in law). The amount is based on the qualifying gross income paid to employees and is assessed at a general rate of 22 percent, payable by the employer at its own expense. Employees are also obliged to contribute, with employers withholding three percent of their qualifying gross income for this purpose.
Individuals working under service and similar agreements, and certain other categories of individuals, are subject to social tax at different rates (depending on the location in Azerbaijan where such persons are engaged in business, the type of business conducted, etc.).
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6.4 Double Taxation Treaties
Azerbaijan has entered into and implemented bilateral treaties for the avoidance of double taxation with 45 countries. These countries are listed in Table 3 below. As may be gleaned from the table, treaties with Jordan, Kuwait, Montenegro and Bosnia Herzegovina have been ratified by Azerbaijan but await exchange of ratifications.
Table 3: Double Taxation Treaties
Country
Date of Ratification by Azerbaijan
Date of Implementation
Dividends (not higher than)
Interest (not higher than)
Royalties (not higher than)
1
Great Britain
September 29, 1995
October 18, 1991
10/15
10
5/10
2
Norway
June 25, 1996
January 1, 1997
10
10
10
3
Pakistan
June 25, 1996
January 1, 1998
10
10
10
4
Uzbekistan
July 16, 1996
January 1, 1997
10
10
10
5
Kazakhstan
November 15, 1996
January 1, 1998
10
10
10
6
Turkey
December 27, 1996
January 1, 1998
12
10
10
7
Georgia
April 15, 1997
January 1, 1998
10
10
10
8
Poland
February 13, 1998
January 1, 2006
10
10
10
9
Russia
April 10, 1998
January 1, 1999
10
10
10
10
Moldova
December 8, 1998
January 1, 2000
8/15
10
10
11
Ukraine
March 24, 2000
January 1, 2001
10
10
10
12
Austria
October 24, 2000
January 1, 2002
5/10/15
10
5/10
13
Belarus
February 1, 2002
January 1, 2003
15
10
10
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Country
Date of Ratification by Azerbaijan
Date of Implementation
Dividends (not higher than)
Interest (not higher than)
Royalties (not higher than)
14
France
February 19, 2002
January 1, 2006
10
10
5/10
15
Romania
December 5, 2003
January 1, 2005
5/10
8
10
16
Lithuania
September 10, 2004
January 1, 2005
5/10
10
10
17
Belgium
October 26, 2004
January 1, 2007
5/10/15
10
5/10
18
Italy
October 26, 2004
January 1, 2011
10
10
5/10
19
Germany
March 1, 2005
January 1, 2006
5/15
10
10/5
20
China
June 14, 2005
January 1, 2006
10
10
10
21
Canada
December 30, 2005
January 1, 2007
15
10
0/10
22
Latvia
March 1, 2006
January 1, 2007
5/10
10
5/10
23
Czech Republic
March 1, 2006
January 1, 2007
8
10
10
24
Finland
April 21, 2006
January 1, 2007
5/10
10
5/10
25
Luxembourg
October 2, 2006
July 2, 2009
5/10
10
5/10
26
Switzerland
April 10, 2007
January 1, 2008
5/15
10
5/10
27
UAE
April 10, 2007
July 25, 2007
5/10
7
5/10
28
Qatar
October 19, 2007
March 11, 2008
7
7
5
29
Tajikistan
October 19, 2007
October 23, 2007
10
10
10
30
Estonia
December 18, 2007
November 27, 2008
5/10
10
10
31
Bulgaria
April 1, 2008
November 25, 2008
8
7
5/10
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Country
Date of Ratification by Azerbaijan
Date of Implementation
Dividends (not higher than)
Interest (not higher than)
Royalties (not higher than)
32
Japan
April 1, 2008
December 28, 1991
15
10
0/10
33
South Korea
May 18, 2008
January 1, 2009
7
10
5/10
34
Hungary
June 13, 2008
December 15, 2008
8
8
8
35
Jordan
October 2, 2008
Not implemented
8
8
10
36
Netherlands
December 16, 2008
December 18, 2009
5/10
10
5/10
37
Greece
April 3, 2009
January 1, 2011
8
8
8
38
Kuwait
April 28, 2009
Not implemented
5/10
7
10
39
Iran
April 28, 2009
January 1, 2011
10
10
10
40
Serbia
September 30, 2010
January 1, 2011
10
10
10
41
Slovenia
September 30. 2011
January 1, 2013
8
8
5/10
42
Croatia
May 22, 2012
January 1, 2014
5/10
10
10
43
Macedonia
June 21, 2013
January 1, 2014
8
8
8
44
Montenegro
May 24, 2013
Not implemented
10
10
10
45
Bosnia & Herzegovina*
December 28, 2012
Not implemented
N/A
N/A
N/A
* The text of the agreement is not available.
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6.5 Transfer Pricing
The adoption of the Tax Code introduced several detailed tests with regard to transfer pricing. While the presumption is that for tax assessment purposes the price agreed to by the parties to a contract is the “market price,” there are exceptions under which the tax authorities may exercise control over the contract price. Specifically, such control may be exercised in barter or import-export transactions, transactions between affiliated parties (as defined by the Tax Code), price fluctuations of more than 30 percent in transactions involving similar or identical goods, work, or services within 30 days, or where the assets of an enterprise are insured for a value exceeding their residual value.
The Tax Code also introduced certain anti-avoidance provisions, such as a limitation on the deductibility of interest payable between affiliated parties and taxation of income from controlled foreign operations.
6.6 Accounting
According to the Law on Accounting, which became effective June 2004, a phase-in process was underway at that time which aimed to bring accounting standards in Azerbaijan into compliance with International Financial Reporting Standards (IFRS). The timeline for completion of this process varied according to the area of activity. Small entrepreneurs had to transfer to either simplified accounting or, at their choice, National Accounting Standards for Commercial Entities starting from 2006, while “publicly important” commercial entities (banks, insurers, and other large businesses) started reporting under IFRS starting from 2008. Other commercial entities had to transfer to either IFRS or, at their choice, National Accounting Standards for Commercial Entities also starting from 2008. Municipal bodies, state budget organizations, and state off-budget funds and non-governmental organizations transferred to the National Accounting Standards for Budget Organizations and for Non-Governmental Organizations, respectively, starting from 2009.
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7. Currency Regulation
7.1 Introduction
The Azerbaijani manat (AZN) was introduced in 1992. Currency in Azerbaijan is regulated by the Central Bank of the Republic of Azerbaijan (the “CBA”; formerly the National Bank of the Republic of Azerbaijan). The manat was re-denominated in 2006, with one manat currently equal to approximately USD 1.27.
7.2 Foreign Exchange
Foreign exchange transactions are governed by the Law on Currency Regulation (the Currency Law).6 The CBA administers the overall enforcement of currency regulation. Various aspects of foreign currency regulation also cover precious metals, foreign securities, and other matters.
The currency regime of Azerbaijan was liberalized and clarified in 2001 with the adoption of amendments to the Currency Law. The liberalized provisions raised the thresholds for currency that could be taken out of and/or remitted from Azerbaijan. In furtherance of the amendments to the Currency Law, in 2002 the CBA replaced its regulations on currency transactions. Furthermore, in 2004, it got rid of the limitation on the amount of advance payments to overseas recipients for goods to be imported into Azerbaijan.
Azerbaijan’s currency control legislation distinguishes between “residents” and “nonresidents,” with residents being subject to Azerbaijani currency regulation prior to being subject to regulation under the laws of other jurisdictions. 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
6 Law No. 910 of the Republic of Azerbaijan, On Currency Regulation, dated October 21, 1994 (the Currency Law).
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entities established in Azerbaijan do not fall within the definition of resident.
Subject to compliance with certain procedures, resident entities may freely open accounts in and outside Azerbaijan. Nonresidents may freely open and operate foreign currency accounts at Azerbaijani banks.
Azerbaijani residents are allowed to make the following payments overseas without CBA permission: (1) for goods imported by or services imported or rendered by Azerbaijani nonresidents under export-import contracts with Azerbaijani residents; (2) for commissions on goods and services imported into Azerbaijan or payments under re-export contracts; (3) for refunds of amounts received by Azerbaijani residents under export-import contracts which have been subsequently terminated; (4) to representative offices, branches, and subsidiaries of Azerbaijani residents abroad; (5) for dividends to nonresidents; (6) for repayments of principal and interest on loans from nonresident banks to Azerbaijani residents or for the purchase of goods or services out of such loan proceeds outside Azerbaijan; (7) for repayments of principal and interest on loans from nonresident organizations to Azerbaijani residents; (8) for transfers by Azerbaijani residents of any amount earlier transferred to Azerbaijan; (9) for transfers by Azerbaijani residents of any amount brought into the country in cash and declared to Azerbaijani customs authorities; (10) for transfers of up to USD 1,000 per day for personal purposes and for transfers in any amount to close relatives residing abroad; (11) for medical treatment, education, social insurance, taxes and duties, participation in international conferences, litigation, arbitration, and other related costs; and (12) for transfers related to the export of capital from Azerbaijan, provided that such transfers are made for (i) equity investments, (ii) acquisition of securities, (iii) acquisition of ownership rights to land, subsoil, buildings, and equipment, as well as other rights to immovable property, and (iv) deposits to Azerbaijani residents’ accounts with foreign banks. All other offshore payments require an individual permit issued by the CBA.
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Both residents and nonresidents must comply with the following requirements:
• The manat is the only currency for payment under a contract for the sale and purchase of goods and services in Azerbaijan.
• The purchase, sale, and exchange of foreign currency in Azerbaijan must be carried out through authorized banks or authorized non-banking financial institutions. Transactions conducted outside these institutions are prohibited.
Currency operations are divided into routine currency operations and operations involving the movement of capital. Routine currency operations include:
• transfers for the 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 transfers of inheritance, wages, pensions, or alimony.
Operations involving the movement of capital include all other non-routine currency operations, for example:
• direct investment in entities for the purpose of deriving profit and obtaining control over the entity;
• purchase of securities;
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• payments for ownership and other rights to immovable property;
• import/export transactions under credit terms of more than 180 days; and
• any other currency operation not deemed a routine currency operation.
Currency operations involving the movement of capital must be performed by resident entities in the manner approved by the CBA. The CBA, however, has not yet established any procedure. In effect, no licensing of currency operations involving the movement of capital is required at present.
Foreign exchange regulations are less restrictive for nonresidents largely due to the fact that nonresidents’ bank accounts outside Azerbaijan are not regulated by Azerbaijani currency control rules.
7.3 Import/Export of Foreign Currency in Cash by Individuals
Resident and nonresident 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. Upon submission of supporting documents, individuals may freely remove foreign currency from Azerbaijan in an amount not exceeding the amount brought into the country and declared to the customs authorities (or otherwise legally imported).
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8. Employment
8.1 Introduction
Employment and labor matters in the Republic of Azerbaijan are regulated by the Labor Code, which became effective on July 1, 1999, as amended, together with other laws and regulations issued pursuant to the Labor Code. As defined by the Labor Code, an employer is an owner, duly authorized manager, or entrepreneur who has the authority to enter into, terminate, or amend employment agreements with employees.
8.2 Direct Employment
Individuals are guaranteed freedom of choice in employment, according to their desires, abilities, and training. It is possible for businesses operating in Azerbaijan to hire employees directly without having to go through intermediary agencies. Employment contracts may not stipulate less favorable working conditions than those provided for by statutory law.
8.3 Compensation in Foreign Currency
All salaries paid in Azerbaijan must be paid in AZN. In practice, due to currency control restrictions and practical difficulties with AZN transfers abroad, most foreign employees receiving their salaries abroad are paid in foreign currencies.
8.4 Work Books
An employer must make an appropriate entry in the work book of an employee for whom it is his or her primary place of employment for more than five days. A work book is a record of employment and is the key to establishing the employee’s rights to state-provided pension benefits. An employee entering into an employment contract (except in cases where a contract is concluded for the first time) must present the employer with his or her work book. However, this requirement
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does not apply to forced migrants, refugees, foreigners, or stateless persons.
8.5 Probationary Period
To be effective, a probationary period must be stated in an employment contract and may not exceed three months.
8.6 Minimum Wage
Employee remuneration may not be lower than the minimum monthly wage, currently AZN 105 (approximately USD 140).
8.7 Work Week
The regular work week is 40 hours, reduced for certain groups of people. As a rule, overtime may not be compulsory unless necessary for state defense, public safety, the guaranteed 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 of at least twice his or her normal hourly rate.
8.8 Holidays
The Labor Code provides for 19 official non-working days, 18 of which are public holidays and the other a day of mourning. If one of these official non-working days falls on a day off (Saturday or Sunday), the business day following the official non-working day is non-working. Election days are also non-working days. Work on official public holidays and other non-working days is compensated with higher pay.
The minimum paid annual leave is 21 calendar days, or more for certain groups of employees.
8.9 Sick Leave
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Compensation for the first 14 days of sick leave is provided by the employer. Compensation for the remaining days is provided by the State Social Protection Fund.
8.10 Maternity Leave
Women are entitled to paid maternity leave for 70 calendar days prior to childbirth and 56 days (70 in certain cases) after childbirth. Maternity allowances are paid by the State Social Protection Fund, not the employer.
8.11 Dismissal
The Labor Code provides the following grounds for dismissal: liquidation of an entity, downsizing, employee’s unsuitability for the position, and employee’s nonperformance or gross violation of his or her job duties. In cases of dismissal due to downsizing or employee’s unsuitability for the position, the employer must obtain the consent of the trade union of the company, if any. There are also certain restrictions covering the dismissal of certain categories of employees. In some cases an employer is required to report an employee’s dismissal to the appropriate state authorities.
8.12 Cost of Employment
Employers are required to pay social security contributions (see Section 6.3.9 above) on behalf of their employees.
From 2010, employers must insure their employees against occupational illness and workplace injury. Depending on the industry and occupational hazards, insurance premiums for this mandatory coverage vary from 0.2 to 2.0 percent of an employee’s annual gross salary.
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8.13 Income Tax
The employer is obliged to withhold income taxes for its employees (see Section 6.3.2 above) and certain social contributions as described in Section 6.3.9 (above).
8.14 Foreign Workers in Azerbaijan
Foreign employees working in Azerbaijan, except for those who have entered into an employment contract with a legal entity of a foreign country in that country and fulfill their labor duties in an enterprise (branch, representative office) operating in Azerbaijan, are subject to Azerbaijani labor and employment law.
Generally, foreign nationals wishing to work in Azerbaijan are required to obtain a work permit. This requirement does not apply to certain foreign nationals (e.g. heads and deputy heads of branches and representative offices of foreign legal entities, people sent to Azerbaijan for certain business trip(s) for up to 90 cumulative days per calendar year, etc.). Work permits are issued by the migration authorities. A work permit may be issued for up to one year and may be extended an unlimited number of times (each extension may be for up to one year). Conclusion of employment contracts with foreign nationals prior to obtaining work permits for them is prohibited.
Foreign nationals, except for those from certain countries, coming to Azerbaijan must have visas.
The migration authorities may require foreign nationals to apply for a temporary residence permit. Unless a foreign national has obtained a temporary residence permit, on each visit lasting for more than three days he or she must be registered at his or her residence in Azerbaijan.
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9. Property Rights
9.1 Introduction
Legislation regulating land rights in Azerbaijan primarily consists of the Land Code of the Republic of Azerbaijan dated June 2, 1999 (the Land Code); the Law on Land Reform dated July 16, 1996 (the Land Reform Law); the Law on Land Lease dated March 17, 1999 (the Land Lease Law); the Law on the Land Market dated May 7, 1999 (the Land Market Law); the Law on Withdrawal of Land for Governmental Needs dated April 20, 2010; and other legislative acts. Land rights are also regulated by the relevant provisions of the Civil Code.
9.2 Limitations on Ownership
The Land Code recognizes state, municipal, and private ownership of land in Azerbaijan. All types of ownership rights are equal. Only Azerbaijani citizens and Azerbaijani legal entities (including enterprises with foreign investment) may legally own land in Azerbaijan. International organizations, foreign legal entities, stateless persons, 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.
Certain categories of land parcels are the exclusive property 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.
9.3 Use of Land
In addition to ownership, the Land Code recognizes perpetual and temporary land use rights, lease rights, and easements.
Perpetual or temporary land use rights are granted free of charge. Temporary land use rights are divided into two categories: (i) short term (up to 15 years) and (ii) long term land (up to 99 years). The terms of a temporary land use right may be extended appropriately
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either by the authorities that granted the right (if the land is under state or municipal ownership) or by a new agreement between the parties (if the land is under private ownership). Perpetual land use rights are granted for an indefinite period. The holder of such rights is liable only to land tax for the land use. Perpetual land use rights are granted to a limited number of persons listed in the Land Code for certain purposes, such as ensuring the rights of the population needed for their apartments to be viable. These persons may be entitled to a temporary land use right which is granted by the state and municipalities only in exceptional circumstances where the period of operation is known in advance. This rule does not apply to the construction of apartments.
Landowners may grant perpetual or temporary land use rights under an agreement with the land user. In this case, land use terms are defined by the agreement between the landowner and the land user.
Land lease is the use of land for a definite period and for a fee. Leases are concluded for a period agreed upon by the parties. Rental payments for the lease of privately held land parcels are freely negotiable. Rental payments for state or municipally owned land parcels are determined according to market conditions, but may not be less than specified statutory rents. With regard to agricultural land, discounts on statutory rents are available, depending on market conditions in the agricultural sector.
Landowners and holders of perpetual or temporary land use rights may, if the conditions of the land use so provide, lease land as lessors. Under the Land Lease Law, foreign individuals and legal entities may only be lessees or sub-lessees of land plots. Purchase option provisions in land lease agreements concluded with foreign individuals and legal entities, and with enterprises owned by foreign individuals and legal entities, are prohibited.
Lessees may sublease leased land parcels except where the lease prohibits this.
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An easement is a right to the restricted use of a third party’s land such as an access road, etc. It may be established by an agreement between interested parties or by a court. Generally, the easement holder must pay for the easement right, unless otherwise provided for by law. Easements established on agricultural land for enterprises or individuals engaged in agriculture are free. Easement rights remain in place upon the transfer of land and land use rights.
9.4 Land Transfers
Landowners have the right to transfer their land by sale, contribution to charter capital, mortgage, exchange, grant, or by other means, subject to certain restrictions established by law. A foreign owner must sell a land parcel within one year if such land parcel was transferred to the foreigner as an inheritance or gift or as result of foreclosure. State or municipal authorities, as the case may be, have the right to enforce a mandatory sale if a foreigner fails to comply with this requirement.
The state or municipality (depending on the status of the land) may transfer land parcels from the state or municipal fund, respectively, into the ownership or use of citizens and legal entities of Azerbaijan, with or without payment. For certain land parcels of state or municipal funds, transfer into private ownership is prohibited or, if it is allowed, requires that such transfer be made on a tender basis. Land users and lessees have the right to transfer their land use rights, subject to restrictions that may be imposed by the landowner.
The value of land set forth in land transactions must correspond to market value and, in any case, may not be less than the minimum statutory value fixed by law. All land-use rights, including easements and servitudes and transactions therewith, are subject to state registration. Land transactions are subject to notarization.
9.5 Registration of Immovable Property
All ownership rights to immovable property, including land rights, must be registered with the Service Holding the State Register of
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Immovable Property of the State Committee for Property Issues. Under the Law on State Registration of Immovable Property7 (the Immovable Property Law), ownership rights to land, subsoil plots, isolated bodies of water, and any other thing securely attached to a land plot, i.e., objects that may not be moved without causing disproportionate damage to their function, including forests, longstanding plantations, buildings, and structures, as well as ownership rights to premises under construction and lease and use rights, are also subject to state registration.
Under the Immovable Property Law, the mortgage of immovable property as well as of premises under construction must likewise be registered. The right to lease or to use immovable property needs to be registered if such right is going to last more than 11 months. Under Azerbaijani law, information contained in the Register of Immovable Property is not open to the public and is available only to the property owners.
On September 5, 2012, the President of the Republic of Azerbaijan affirmed a decree on the activity of the State Agency for Public Services and Social Innovations. The main objectives of the agency are to improve the services provided to citizens by State authorities, undertake integration of information databases of State authorities, and further the establishment of electronic public services in Azerbaijan.
ASAN Service centers were established as main structural divisions of the agency. The agency primarily operates through such centers. The agency has a range of responsibilities related to property registration issues such as:
• notarial services;
7 Law No. 713-IIQ of the Republic of Azerbaijan, On State Registration of Immovable Property, dated June 29, 2004.
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• registration of real estate transactions (issuance of extracts on real estate rights, as well as certificates on encumbrance of real estate issued from the state register); and
• issuance of cadastral certificates.
9.6 Mortgages
Mortgages are regulated by the Civil Code, the Law on Mortgage8 (the Mortgage Law) and the new supplementary regulations, which have broadened the mortgage market. Immovable property, including immovable property under construction, and movable property with registered proprietary rights, may be mortgaged and re-mortgaged.
The Mortgage Law introduces mortgage certificates as a type of security registered with the state registry. A mortgage certificate is issued by a mortgagee and certifies the holder’s: (i) mortgage and (ii) priority right to claim satisfaction without the need to produce additional evidence of the mortgagor’s underlying obligation, and (iii) right to claim seizure in the circumstances specified by the law.
8 Law No. 883-IIQ of the Republic of Azerbaijan, On Mortgage, dated April 15, 2005.
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10. Language Policy
Under the Constitution and the Law on Official Language, which became effective January 4, 2003 (the Official Language Law), the state language is Azerbaijani. The Azerbaijani alphabet is based on Latin script. Azerbaijani is the official language of administration, legislation, court proceedings, and recordkeeping in all state agencies, state-owned enterprises, organizations, businesses, and other entities in Azerbaijan.
All state bodies, local authorities, state agencies, political parties, non-governmental organizations (funds and public associations), trade unions, and legal entities (including their representative or branch offices) are required to use Azerbaijani in their official interactions and transactions.
Adult foreigners and stateless persons applying for a permanent residence permit in Azerbaijan must pass an interview organized by the government authorities to ascertain the foreigners’ and stateless persons’ Azerbaijani language proficiency.
As a rule, and unless otherwise established by the relevant law (such as that governing notaries), any notarization, legalization, registration, or other form of formalization of a foreign-language document requires translation into Azerbaijani with subsequent notarization of the translation.
Letterheads, signage, and other items of official paperwork, announcements, advertisements, price tags, labels, and certifications must be in Azerbaijani and, additionally, may be in other languages where necessary or desirable (such as in the case of goods exported from Azerbaijan, individual passports, etc.). For services rendered to foreigners, a foreign language may be used together with Azerbaijani.
The rules of Azerbaijani spelling are set out in the Rules of Azerbaijani Orthography approved by Resolution No. 108 of the Azerbaijani Cabinet of Ministers on August 5, 2004, which, as a rule,
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require that words from other languages using the Latin script be spelt in Azerbaijani. The State Language Commission was formed in 2001 to address the issues of official use of Azerbaijani.
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11. Civil Legislation
The Civil Code, adopted on December 28, 1999, and effective September 1, 2000, forms the basis of civil law in Azerbaijan. The Constitutional Law on Normative-Legal Acts9 provides for the supremacy of the Civil Code over other laws and codes that govern civil law agreements, transactions and acts. Further, Article 2.6 of the Civil Code establishes the general supremacy of the Civil Code over other legal acts adopted in furtherance of laws regulating civil law relations. The Civil Code does not generally regulate proprietary relationships based on administrative or other forms of subordination, including tax, financial, and administrative relationships.
The Civil Code consists of two parts: the General Part and the Special Part. The articles of the General Part include provisions applicable to persons (individuals and legal entities), property, and property rights; rules governing the enforcement of obligations; and the conclusion, validity, and termination of contracts.
Among the provisions applicable to legal entities are provisions regulating different types and organizational forms of legal entities, and the main principles of a legal entity’s establishment, state registration, management, activity, liquidation, and reorganization.
The Civil Code introduces detailed provisions on property rights as well as the distinctions between movable and immovable property. Immovable property transactions require both certification by a notary and registration in the state immovable property register. Similar requirements might apply to movable assets as prescribed by other acts.
The Civil Code specifically incorporates the principle of freedom of contract pursuant to which parties are free to enter into and agree the terms of contracts, including those not governed in the Special Part of
9 Dated December 21, 2010; came into force on February 21, 2011
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the Civil Code. Under the Civil Code, parties must nevertheless comply with the mandatory provisions of the Civil Code and other laws. The Special Part of the Civil Code contains rules governing particular types of contracts. Apart from types of contracts regulated under the previous Civil Code (sale and purchase, lease, loan, commission, transportation, storage and supply), the current Civil Code regulates certain “new” types of contracts, such as franchises and concessions. It also regulates inheritance and reimbursement for damage caused through non-contractual relationships, as well as general aspects of various forms of securities transactions.
The current Civil Code (unlike its Soviet-era predecessor) addresses intellectual property rights only in general terms and does not address conflict of laws in international transactions; these have been left to specific legislative acts for detailed regulation.
In civil transactions with a foreign element (e.g., where one of the parties is a foreign person), the parties to an agreement may choose a foreign law as the governing law. While there are certain exceptions typical for many jurisdictions, under Azerbaijan’s conflict of laws rules10, courts in Azerbaijani must respect and uphold choice of law.
10 Primarily, Law No. 889-IQ, of the Republic of Azerbaijan, On Private International Law, dated June 6, 2000.
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12. Banking
12.1 Description of the Banking System
Banking in Azerbaijan is regulated by the law On Banks,11 the law On the Central Bank of the Republic of Azerbaijan,12 and normative acts of the Central Bank of the Republic of Azerbaijan (“CBA”; formerly the National Bank of the Republic of Azerbaijan). Both banks and non-bank credit organizations are classified as credit organizations. However, while banks are allowed to conduct all types of banking operations, under the law On Non-Bank Credit Organizations13, non-bank credit organizations may conduct only certain types of banking operations, such as extending loans, selling and purchasing debt obligations (factoring, forfeiting), financial leasing, issuing guarantees, etc., and are expressly prohibited from accepting deposits.
Azerbaijan has a two-tiered banking system, with the CBA making up the first tier and the remaining banks making up the second.
The CBA is an independent state authority that operates as the central banking authority, and has supervisory control over the banking sector. The main objective of the CBA is to establish and implement state monetary and currency policy. Maintaining the domestic and external stability of the manat is one of the most important elements of current monetary policy.
As the banking supervisory authority, the CBA issues licenses to banks and non-bank credit organizations and establishes minimum charter capital, net worth, and other prudential requirements for them. It also issues regulations on professional qualifications for the senior
11 Law No. 590-IIQ of the Republic of Azerbaijan, On Banks, dated January 16, 2004, as amended.
12 Law No. 802-IIQ of the Republic of Azerbaijan, On the National Bank of the Republic of Azerbaijan, dated December 10, 2004.
13 Law No. 933-IIIQ of the Republic of Azerbaijan, On Non-Bank Credit Organizations, dated December 25, 2009.
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management and accounting personnel of commercial banks, including branches of foreign banks.
The CBA reports to the President of Azerbaijan. Upon nomination by the President, the National Assembly appoints the seven-member board of the CBA. The President appoints the CBA chairman from among the board members, approves annual reports, appoints auditors, and has the right to demand any information related to the CBA’s activity.
As of the end of the third quarter of 2013, there were 43 banks registered in Azerbaijan, including 22 banks with foreign participation.
Banks in Azerbaijan must be established by at least three individuals and/or legal entities in the form of an open joint stock company. Political parties, social unions, funds and other non-commercial organizations may not be shareholders in banks.
In addition to core banking operations (such as accepting deposits, issuing loans, and transferring funds), a bank may engage in other operations (such as factoring, clearing, professional activity on the securities market, and other activities) if its license so provides.
In 2012, the CBA increased the aggregate capital requirement for banks by approving on July 25, 2012 the new Rules on the Calculation of Bank Capital and Its Adequacy. Pursuant to the these rules, beginning January 1, 2015, the minimum aggregate capital requirement for banks will be 50 million manats; until then it will remain 10 million manats.
12.2 Licensing
All banking activities, including the acceptance of deposits, maintenance of correspondent accounts, cash operations, money transfers, and lending, are subject to licensing. Only the CBA has the right to grant and revoke licenses for banking activity, and to permit
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the establishment of a bank’s subsidiaries, branches, and representative offices.
Bank licenses are issued for an indefinite term and are effective as of the date of issuance by the CBA. Bank licenses may not be transferred to third parties.
12.3 Standards for Domestic Banks
The CBA establishes prudential regulations for banks (including requirements for minimum capital as well as the monetary and non-monetary proportions of a bank’s capital) and reserve fund requirements.
The senior management of all banks (board members, chief accountant and his or her deputies, internal audit director and head and chief accountant of each branch) is subject to certain compulsory standards and is certified by the CBA, which also certifies all persons authorized to sign documents in the name of a bank and its branches.
12.4 Banks with Foreign Participation
Foreign banks may operate representative offices, branches, joint ventures, and wholly owned subsidiaries in Azerbaijan.
Foreign individuals and foreign entities registered in offshore areas specified by the CBA, as well as foreign banks and foreign bank holding companies, may not be founders or shareholders of local banks or founders of local subsidiary banks, branches, or representative offices.
Foreign individuals and foreign entities that are not banks may set up, operate, and acquire shares in banks in Azerbaijan. Azerbaijani law does not define the term “bank with foreign participation,” so this term may be broadly construed to embrace virtually all banks with foreign capital, regardless of the extent of foreign ownership.
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Banks with foreign participation are subject to the same restrictions as domestic banks, as well as certain additional restrictions. For example, at least one of the members of the board of a subsidiary of a foreign bank or foreign bank holding company operating in Azerbaijan and at least one of the managers of a branch of a foreign bank must be a citizen of the Republic of Azerbaijan.
12.5 Liquidation and Reorganization of Banks
Banks may be liquidated or reorganized upon revocation of their licenses by the CBA, by court order (mandatory liquidation), or by a voluntary decision of the bank (voluntary liquidation). Revocation of a banking license by the CBA will initiate general liquidation procedures as provided for by corporate law.
12.6 Non-Banking Activity of Banks
Banks are prohibited from the following activities:
• Wholesale and retail trade;
• Production;
• Transportation;
• Agriculture;
• Mining;
• Construction; and
• Insurance.
With the exception of insurance, banks may not engage in the activities above as an affiliate, shareholder, or partner.
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13. Intellectual Property
13.1 Introduction
Since 1996, the Republic of Azerbaijan has implemented a national system for the 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, geographic names, and domain names) and copyright and related rights. Current legislation pertaining to intellectual property includes the Law on Copyrights and Related Rights14 (the Copyright Law), the Law on Trademarks and Geographic Designations15 (the Trademark Law); the Law on Patents16 (the Patent Law), the Law on Topology of Integrated Microcircuits,17 the Law on Unfair Competition18 (the “Unfair Competition Law”) and the Law on Securing Intellectual Property Rights and Combating Piracy (the “Anti-Piracy Law”)19.
13.2 State Patent Issuing Agencies
There is currently no central state agency specifically responsible for the protection of intellectual property rights in Azerbaijan. Under existing legislation, the Cabinet of Ministers is empowered to authorize various state agencies to register and protect intellectual
14 Law No. 438-IQ of the Republic of Azerbaijan, On Copyrights and Related Rights, dated October 8, 1996.
15 Law No. 504-IQ of the Republic of Azerbaijan, On Trademarks and Geographic Names, dated June 12, 1998.
16 Law No. 312-IQ of the Republic of Azerbaijan, On Patents, dated June 10, 1997.
17 Law No. 337-IIQ of the Republic of Azerbaijan, On Topology of Integrated Microcircuits, dated May 31, 2002.
18 Law No. 1049 of the Republic of Azerbaijan, On Unfair Competition, dated June 2, 1995
19 Law of the Republic of Azerbaijan, On Security of Intellectual Property Rights and Combating Piracy, dated May 22, 2012
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property rights in various areas. The State Agency for Standardization, Metrology and Patents was established by Presidential Decree No. 623 dated December 27, 2001, for patent issuance and trademark registration purposes. Pursuant to Presidential Decree No. 53 dated November 19, 2008, this institution was transformed into the State Committee for Standardization, Metrology and Patents (the “Patent Committee”). The Copyright Agency of the Republic of Azerbaijan is responsible for the registration of copyrights. On December 7, 2011, pursuant to a decision of the Cabinet of Ministers, the Center for Protection of Intellectual Property Rights under the Copyright Agency was established.
13.3 International Conventions
Azerbaijan is a party to several international agreements concerning the protection of intellectual property including the Berne Convention for the Protection of Literary and Artistic Works, the Convention Establishing the World Intellectual Property Organization, the Performances and Phonograms Treaty of the World Intellectual Property Organization, the Copyright Treaty of the World Intellectual Property Organization, the Paris Convention for the Protection of Industrial Property, the Madrid Agreement Concerning the International Registration of Marks, the Protocol regarding the Madrid Agreement Concerning the International Registration of Marks, the Patent Cooperation Treaty, and the Eurasian Patent Convention.
13.4 Registration
Azerbaijan is a “first to file” and not a “first to use” jurisdiction, meaning early filing and registration of intellectual property rights is essential in ensuring protection.
13.5 Patent Protection, Utility Models, and Industrial Design
Patent protection is granted to an invention if it is novel, inventive, and useful. The maximum duration of protection for an invention
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patent is 20 years. If the subject matter of an invention patent is a product or process subject to administrative procedures, then the validity term may be extended for five years.
Utility models are inventions which are granted patent protection if they are new and “industrially applicable.” The term of utility patents is 10 years.
An industrial design right is characterized by an artistic and structural form which determines its external appearance. Patent protection is granted if an industrial design is novel or original. The validity term is 10 years, which may be extended for another 5 years at an application of the patent owner.
Patents may be assigned and/or licensed by their owner(s) to individuals or legal entities. However, an assignment must be registered with the Patent Committee to be valid. Patent infringement can result in civil, criminal, and administrative charges.
13.6 Trademarks and Geographic Designations
The right to a trademark is based on registration with the Patent Committee. Trademark registration is granted for a term of 10 years, renewable repeatedly. Assignments and licenses for trademarks and geographic designations must also be registered.
Legal protection is given to the appellation of the origin of goods based on registration with the relevant state agencies, and to trademarks either existing under international agreements upon the registration thereof, or bearing the status of a well-known trademark. Violation of intellectual property rights can result in civil, criminal, and administrative charges.
13.7 Domain Names
There is no separate law regulating domain names as such. However, under the amendments made to the Trademark Law dated April 3, 2009, several provisions regulating domain names came into force.
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Accordingly, under the Trademark Law, if domain names are identical to trade names and trademarks covering identical goods and services and used for commercial purposes, then they will be deemed to infringe the rights of the trademark owner.
13.8 Copyright
The Copyright Law regulates activities connected to the creation and use of works of science, literature, and the arts (copyrights), as well as stage productions, phonograms, programs broadcast by radio or cable, and computer programs and databases (related rights). Copyright protection is normally granted to the author without registration requirements. The right to use a copyrighted work may be assigned by the author. A copyright provides protection for the lifetime of the author and normally for a period of 70 years following his or her death. Azerbaijani copyright law imposes civil, administrative and criminal sanctions for violation of copyrights and related rights.
13.9 Computer Programs and Databases
Rights to computer programs, databases, and topologies of integrated microcircuits are protected under the Copyright Law and the Law on Topology of Integrated Microcircuits. The unauthorized re-creation (copying) of computer programs, alteration of existing programs, and unlawful accessing of legally protected computer information are criminal offenses.
13.10 Anti-Piracy
On October 8, 2012 the new law On Securing Intellectual Property Rights and Combating Piracy came into effect in the Republic of Azerbaijan. The law introduces the following key features:
• a clear distinction between the legal notions of counterfeit and pirated goods, where pirated goods are defined as copies of audiovisual works, phonograms, computer programs, information collections and books manufactured (produced) or distributed without the consent of the rights owner;
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• methods for assessment of the rights owner’s losses caused by the infringement;
• the rights owner’s right to information, which is aimed at facilitating the calculation of incurred damages;
• openness of court decisions, which will be published on a special website and may be distributed at the expense of infringers;
• provisional measures that may be adopted by courts to secure a civil claim, and which are aimed at preventing the manufacture and distribution of infringing goods and protecting evidence.
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14. Product Liability
14.1 Background
Product liability is an emerging legal concept in Azerbaijan principally governed by the new Civil Code and the Law on Consumer Protection dated September 19, 1995 (the Consumer Protection Law). The Consumer Protection Law addresses basic consumer issues governing the right to enter into agreements to purchase goods and services, the quality and safety of goods and services, information concerning goods and services, and the right to protect consumer rights in court and to be reimbursed for damage caused by any defects, including moral (psychological) harm.
Both the Civil Code and the Consumer Protection Law recognize implied warranties similar to implied warranties of merchantability and implied warranties of fitness for a particular purpose (or use) and satisfactory quality. A seller or supplier of merchandise, however, is liable for defects in his or her merchandise covered by a warranty only within the warranty period specified by the contract. Notwithstanding this, if the warranty period is less than two years, the buyer can still assert his or her claim due to defects in goods within two years of receiving the goods, provided that the buyer is able to prove that the defects existed in the goods before they were purchased. If merchandise is sold to a buyer without any warranty, the seller of such merchandise would be liable for any latent defects in the merchandise for a “reasonable time” after purchase, but not later than two years from the date the merchandise was transferred to the purchaser.
Sellers and manufacturers may not, directly or indirectly, restrict any consumer protection rights guaranteed under the Civil Code and the Consumer Protection Law. Provisions of agreements restricting such rights are void. Sellers and manufacturers are obliged to ensure the proper quality of products and have a duty to inform the consumer of any possible defects.
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A consumer may claim compensation from a seller and/or manufacturer where a defect exists, where the consumer has received unreliable or incomplete information concerning the product, or where the product has caused injury to health, life, or property. The Civil Code imposes liability on manufacturers and sellers for the death, personal injury, and, to some extent, damage to the property of end users regardless of who is at fault. The Consumer Protection Law obliges a court to consider the issue of compensation for moral harm when satisfying consumer claims.
14.2 Product Quality
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. Advertising and distribution of goods without such certification are prohibited.
14.3 Protection from Unfair Competition20
In accordance with legislation pertaining to competition and monopolies, the following activities constitute unfair competition:
• Spreading false or incorrect information about the goods and services of a competitor;
• Misleading customers as to the function, place of origin, features, usefulness, or quality of goods;
• False advertising;
• Unfair comparison of goods in advertising;
20 A draft Competition Code is currently under discussion.
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• Unauthorized use of trademarks, names of companies or other branding, as well as copying the shape, packaging, or appearance of the goods of another legal entity;
• Unauthorized receipt, use, or disclosure of confidential information, including trade secrets;
• Unauthorized receipt, use, or disclosure of confidential research and development, production, or trade information (including commercial secrets) without the consent of the owner;
• Price fixing and other acts designed to limit competition;
• Mergers of companies designed to limit competition; and
• Restriction of consumers’ rights by sole distributors of a product, by virtue of their market position.
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15. Specific Industries
15.1 Oil and Gas
15.1.1 Introduction
Subsoil resources such as oil and gas are the sole and exclusive property of the Azerbaijani state. Rights to engage in subsoil activity may be granted to Azerbaijani citizens and legal entities, as well as to foreign individuals and legal entities.
The main legislation regulating subsoil use in Azerbaijan is the Law on Subsoil Resources dated February 13, 1998 (the Subsoil Law),which governs the exploration, use, protection, safety, and supervision over the use of subsoil reserves located both within Azerbaijan and on the Azerbaijani sector of the Caspian Sea. But at the same time, the Subsoil Law is not applicable to use of subsoil with regard to energy matters, such as oil and gas. The energy field is regulated by the Law on Energy dated November 24, 1998 (the Energy Law). The Energy Law outlines its scope by providing a list of energy products. The list includes all types of gas but is limited to oil/crude oil and oil/crude oil products extracted from bitumen rocks only.
15.1.2 Oil and Gas Legislation
In the absence of legislation specifically related to oil and gas, the main legal instruments regulating the oil and gas industry in Azerbaijan remain the Subsoil Law, the Energy Law and production sharing agreements (PSAs). A draft Law on Oil and Gas was under review by working groups within the Government and the industry in previous years; this process, however, has ceased at present.
Azerbaijan is a signatory to the Energy Charter Treaty.
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15.1.3 A special permit
Under the Energy Law, no person or legal entity may engage in oil or gas exploration, exploitation, production, transportation, distribution or use without a special permit and an energy contract.
15.1.4 Contracts
The Energy Law provides that production rights to a specified lot (block) shall be granted on the basis of an “energy contract.” Energy contracts are signed between an authorized state body and a supplier which has obtained a special permit.
Under the Energy Law, there are five types of energy contracts:
• Exploration Contracts;
• Development and Production Contracts;
• Contracts on Basic Energy Transportation;
• Contracts on Energy Distribution; and
• Contracts on Subsoil Warehouses.
The law sets different terms for each of these contracts.
Exploration contracts are concluded between a contractor and the Ministry of Energy of the Republic of Azerbaijan (the Energy Ministry) or the State Oil Company of the Republic of Azerbaijan (“SOCAR”). According to the Energy Law, the initial period of an exploration contract shall not be more than 2 (two) years. This period may be prolonged for an additional 1 (one) year by mutual agreement of the parties.
Development and Production contracts are concluded between a contractor and the Energy Ministry or SOCAR for the exploitation of oil and gas fields. The exploitation term is divided into development
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and production periods. Pursuant to the Energy Law, the development period may be divided into several periods and be prolonged not more than 8 (eight) years from the contract date. There is no limitation for the production period.
Energy contracts in the production period may be assigned to third parties or a derivative contract may be executed by a contractor with the special consent of the Energy Ministry and come into force after registration.
Energy contracts may be terminated in the following circumstances:
• Discovery of material evidence that provide a basis for termination of the contract;
• Breach of obligations by the contractor; or
• Contractor’s failure to properly use rights granted under the contract.
All major oil and gas projects to date have been undertaken on the basis of production sharing agreements (PSAs). While regulations of the Energy Ministry suggest that control of oil and gas matters is generally vested in this ministry, SOCAR continues to play an important role in such matters.
Once a contract with a contractor is signed, the contract is submitted to the National Assembly, which adopts a law on approval of the contract. This procedure is outlined in the Foreign Investment Law, which underpins the regulatory framework for PSAs.
15.1.5 Export of Oil and Gas Infrastructure and Expertise
The law On the Application of a Special Economic Regime to Export Oil and Gas Operations dated February 2, 2009 (the Oil and Gas Operations Export Law) was enacted in an attempt by the Azerbaijani Government to promote the exportation, especially to Caspian littoral states, of oil and gas infrastructure technology and expertise which
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have accumulated in Azerbaijan over the past years. The law, however, does not apply to activity performed under PSAs, pipeline agreements and/or similar agreements and laws. It is not applicable to the performance of works, services and import-export in relation to oil and gas operations in Azerbaijan and on the Azerbaijani sector of the Caspian Sea, either.
The Oil and Gas Operations Export Law applies to the exportation of oil and gas expertise (activity) by qualified contractors and subcontractors and specifies a separate tax regime applicable to contractors’ and subcontractors’ exported oil and gas operations. Moreover, contractors and subcontractors are exempt from paying customs duties and VAT on goods (works and services) imported into Azerbaijan in connection with their export oil and gas operations, and may open and operate bank accounts outside Azerbaijan with a notification (as opposed to the consent presently required in other industries) to the Central Bank of the Republic of Azerbaijan and relevant authorities on their open and closed bank accounts.
Due to elements in the law that differ from the general regime currently in effect, issues are expected to arise in the practical implementation of the law.
15.2 Power
15.2.1 Legislation
The main legislative acts regulating the power sector are the Law on Use of Energy Resources (the Energy Resources Law) dated May 30, 1996; the Law on Electric Energy (the Electricity Law) dated April 3, 1998; and the Law on Electricity and Heat Power Stations (the Power Station Law) dated December 28, 1999. To satisfy the public’s need for electricity and gas, the President adopted the State Program on Development of the Fuel-Energy Complex of Azerbaijan (2005-2015).
To address the growing global concern over air-polluting emissions, in 2004 the President of Azerbaijan approved the State Program on the Use of Alternative and Renewable Energy Sources in Republic of
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Azerbaijan. Additionally, the Government has announced its intention to grant certain benefits to companies wishing to engage in this business, although specific benefits have yet to be specified in governmental regulations. In 2009 the President created by decree the Agency for Alternative and Renewable Energy Resources at the Energy Ministry, to oversee and facilitate the development of the alternative energy industry in Azerbaijan21. Further, on December 29, 2011, the President of Azerbaijan issued a decree directing the agency to develop a national strategy for the use of energy derived from alternative and renewable resources during the period 2012-2020.
Legislation on the Azerbaijan power sector has not yet been fully implemented. Many provisions of these laws merely outline the intentions of the state with respect to restructuring the power sector of Azerbaijan and do not reflect its present, true condition.
Under the Electricity Law, the energy system of the Republic of Azerbaijan should consist of the following:
• The State Electrical Enterprise,22 which operates transmission lines of more than 110 kV; dispatch centers; and energy production enterprises. The State Electrical Enterprise purchases energy produced by energy producers for distribution through its transmission network, and conducts cross-border electricity exchanges.
• Energy suppliers, which are legal entities that purchase electricity from the State Electrical Enterprise or independent energy producers, and sell it to consumers.
21 Presidential Decree No. 123, dated July 16, 2009, On the Establishment of the Agency for Alternative and Renewable Resources at the Ministry for Industry and Energy
22 Currently, the functions of the State Electrical Enterprise are performed by the state-owned Azerenerji JSC.
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• Independent energy producers belonging to the state, various economic entities and private enterprises, which are not part of the common state electrical energy system. These producers generate energy for direct supply to consumers through their own distribution networks or via the State Electrical Enterprise or energy suppliers. These entities may also export their excess power to other countries.
Within the framework of the Memorandum of Understanding on Strategic Partnership between EU and Republic of Azerbaijan in the Field of Energy, signed on November 7, 2006, the European Union provides support to Azerbaijan at various levels aimed at the gradual convergence of the European Union’s and Azerbaijan’s energy legislation and at the integration of their respective energy markets.
15.2.2 Elimination of the State Monopoly in the Power Sector
Some distribution networks of Azerbaijan were operated by private companies under long-term management contracts until recently, when all of these contracts were terminated. In general, privatization of state property began with the First Privatization Program (1995-1998) and in 2000, the second phase of the privatization program was approved by the President to allow privatization of the country’s remaining large scale enterprises. Reforms in Azerbaijan’s energy sector have also included large-scale privatization. The privatization of distribution networks, however did not bring the expected results and currently distribution networks are managed by state-owned companies.
The Azerbaijani power sector is a vertically integrated, publicly owned monopoly. Except for several small private hydropower stations, the state currently owns all generating facilities and transmission lines of more than 110 kV through Azerenerji JSC.
In an effort to eliminate subsidies for electricity, the Government intended to permit independent power producers (IPPs) to build and operate new power stations in Azerbaijan, and negotiated with several
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major private players on the international power market. The Power Station Law grants favorable conditions for power projects of “national importance,” including state guarantees for the construction of foreign-owned independent power stations, and guarantees the purchase of power produced from renewable energy resources. The Cabinet of Ministers exempted the import of wind power devices from VAT.
Currently the building and reconstruction of power stations are financed from the state budget, while multinational and foreign banks finance power sector restructuring and reconstruction.
15.2.3 Licenses
Under the Energy Law, a foreign investor wishing to enter the power market must first obtain a permit to do so, and then must conclude a contract with authorized state agencies to carry out the planned energy-related activities.
As a general rule, special permits to carry out activity in the power sector are granted, and the contractors determined, on a competitive basis. The Electricity Law requires that individuals and legal entities obtain special permission to conduct activities for the generation, transmission, distribution and sale of electricity if not otherwise determined by law. In certain cases permission may be issued without a tender by decision of the Energy Ministry.
The Electricity Law also prohibits the construction and operation of high-voltage installations without prior special permission unless otherwise provided by law.
All power projects and production, technological processes, services, facilities, and devices connected with or related to the use of energy resources and their production, transmission, and consumption are subject to mandatory certification, i.e., confirmation of compliance with ecological, sanitary, fire, construction, and health and safety standards. Additionally, major projects, as defined in the Energy Resources Law, require a feasibility study.
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Pursuant to a resolution of the Cabinet of Ministers, special permits are granted to engage in the design, construction and operation of the following types of alternative energy facilities23:
i. small hydroelectric stations (50 to 10,000 kilowatts),
ii. geothermal power stations,
iii. power stations with a capacity exceeding 10 kW in which the electricity is derived from wind, sun or biomass.
15.2.4 Consumption and Distribution
Current Azerbaijani law provides that consumers have the right to choose any energy supplier regardless of its location. Energy is supplied under agreements between consumers and energy suppliers. Agreements on the sale and purchase, transmission, and exchange of electricity and heat must comply with the Rules on Use of Electricity.24 Energy consumption is subject to mandatory metering.
The procedure for disconnecting consumers from the network (or termination of power supply) is regulated by the Rules on Use of Electricity, as well as agreements with consumers. The suspension of, or the disconnection from, the power supply of certain types of consumers is prohibited. The list of such consumers is determined by an authorized state agency.
Under the Energy Resources Law, independent power generation facilities are granted the right to use the state-owned energy supply system for transmission of electricity. Distribution network enterprises are obligated to grant such access through tariffs and under conditions established by law on a nondiscriminatory basis. These enterprises,
23 Resolution No. 95, dated May 20, 2010, On the Issuance of Special Permits for Activities in Alternative and Renewable Energy
24 The rules On Use of Electricity, approved by Decision of the Cabinet of Ministers No. 18 dated February 2, 2005.
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however, have the right to refuse to connect a consumer to the network in exceptional circumstances.
In order to transport and distribute electricity and heat to consumers within a certain area, an agreement with the local executive authorities is required, in addition to obtaining permission. Such an agreement specifies the particular area within which the distributor has the right to operate. Termination of operations specified in the agreement (without the consent of the state authorities) is prohibited.
15.2.5 Antimonopoly Regulation
Entities and facilities in the unified energy system engaged in power production, transmission, distribution, and supply are considered to be natural monopolies, and their activities are regulated by the state. The state may take a number of measures to regulate the activity of natural monopolies.
The methods of regulating the activities of natural monopolies include setting prices and tariffs, determining which customers the natural monopolies must serve or are required to provide with minimum power supplies, reviewing investments made by natural monopolies, and issuing permits for effectuating certain types of transactions. The particular methods are determined and chosen by the state with respect to each of the natural monopolies.
The following prices for electricity and heat are subject to state regulation:
• Tariffs for the purchase of electricity/heat by producers;
• Wholesale electricity/heat tariffs;
• Retail electricity/heat tariffs; and
• Import-export electricity tariffs.
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The Electricity Law requires that tariffs cover all costs connected with the generation, transmission, and distribution of power, and that they ensure the profitability of power enterprises and the development of the energy sector. Major chemical and aluminum producers and steel smelters enjoy discounts when they consume electricity beyond a certain threshold.
Tariffs are calculated by the power enterprises, set by the Tariff (Pricing) Council, and approved by the relevant state authorities.
15.3 Telecommunications
Telecommunications is an area of great potential growth in Azerbaijan. The Law on Telecommunications25 (the Telecoms Law) is the main legislative act regulating the industry. Additionally, the Law on Television and Radio Broadcasting was enacted on June 25, 2002,26 and the Law on the Postal Service was enacted on June 29, 2004.27
Telecommunications services must be licensed. The Ministry of Communications and Information Technologies (the “Ministry of Communications”) is the agency authorized to issue licenses for express courier services and specific types of telecommunications services including provision of fixed line telephone communication services, cellular (mobile) telephone communication services, 3G mobile communication services, radio-trunk and wireless communication services, administration of local and international telecommunication channels, IP-telephony communication services.
25 Law No. 927-IIQ of the Republic of Azerbaijan On Telecommunications, dated 14 June 2005.
26 Law No. 345-IIQ of the Republic of Azerbaijan On Television and Radio Broadcasting, dated June 25, 2002.
27 Law No. 714-IIQ of the Republic of Azerbaijan On the Postal Service, dated 29 June 2004.
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The Ministry of Communications continues to act as a policy maker and national regulatory authority in the area of telecommunications, although there have been some initiatives in recent years to establish an independent regulatory authority.
Generally, foreign legal entities and individuals must obtain a license to provide express courier services or licensed telecommunications services on an equal footing with Azerbaijani nationals. However, the licenses issued for foreign legal entities, their branches or representative offices or to foreign individuals can be recognized in Azerbaijan and subsequently this requirement may be waived on the basis of existing international agreements. Licenses are issued for a period of five years.
Under the Telecoms Law, the state has exclusive ownership of all radio frequencies. The Telecoms Law provides that the allocation and use of radio frequencies are subject to state regulation. The State Radio Frequencies Commission is authorized to issue radio frequency use permits to telecommunications businesses. The rules and procedures for obtaining such permits and for operating at various frequencies are prescribed by the Cabinet of Ministers.
The Telecoms Law also recognizes the right of foreign individuals and legal entities to own and operate networks and devices in Azerbaijan. Such devices must be jointly certified by the Ministry of Communications and the Azerbaijan State Standards Agency and their subordinate bodies, as well as by accredited test laboratories.
The Telecoms Law requires equal treatment of all telecommunications operators, providers, users, and subscribers. Specifically, the law provides that all telecommunications operators and providers, without regard to their ownership structure, operate on an equal footing.
Pursuant to the Telecoms Law, the interconnection of telecommunications networks is conducted under interconnection agreements concluded between operators. An operator is obliged to conclude such agreements with other operators within two months -
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the law is, however, unclear on when this period starts - seemingly from the moment when the operator is empowered to conduct its telecommunications business.
The Telecoms Law introduces the concept of telephone numbering resources and establishes certain rules for their allocation to telecommunications providers and operators, as well as to legal entities and individuals. Specifically, it requires that the Ministry of Communications make such allocations on the basis of a contract with the Ministry of Communications and payment of the tariffs approved by the Tariff Council of the Republic of Azerbaijan. The Ministry of Communications has approved specific rules on the allocation and use of numbering resources with its Resolution No. 01 dated 3 September 2012.
Foreign capital inflow into the telecommunications industry has evolved primarily in the form of joint ventures with entities subordinate to the Ministry of Communications, which acts as both the ultimate partner and the supervising authority. Such joint ventures are engaged in the production of telecommunications equipment and the operation of telecommunications facilities. However, under Presidential Instructive Order On the Privatization of Certain Enterprises and Facilities of the Ministry of Communications of the Republic of Azerbaijan, dated March 29, 2001, the Government announced its intention to privatize the state-owned share of joint ventures in which the Ministry of Communications and its subordinate enterprises and institutions have participated. In implementation of said order the state share in two major GSM operators has been privatized.
Three cellular communication providers operate in Azerbaijan, the first of which started its activity in 1994. All three provide modern technology services including EDGE. There are a number of cable TV providers and independent TV and radio channels currently operating in Azerbaijan. Internet service provider (ISP) services are not subject to licensing and there are currently around 40 ISPs in Azerbaijan.
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The existing telephone network is being upgraded significantly. The provision of Internet services and communication at affordable prices has been developing at a rapid pace.
15.4 Construction
15.4.1 Legislation
The main laws regulating construction are the Code on Urban Planning and Construction, dated June 29, 2012 (the Construction Code), the Law on the Fundamentals of Urban Construction dated June 11, 1999, and the Civil Code. Other legislation regulating construction includes legislative acts of a general nature such as property, land, safety, environmental protection, fire and sanitary regulations; construction rules, norms, and standards; and legislative acts regulating specific sectors where structures or facilities are constructed. Many construction rules and standards of the USSR (GOST and SNIP) are still effective in Azerbaijan.
15.4.2 Foreign Contractors
Foreigners and foreign legal entities may engage in urban construction works in Azerbaijan only in conjunction with Azerbaijani nationals or legal entities. However, they may conduct other construction works independently in accordance with the Construction Code.
15.4.3 Construction Permit
With the exceptions stipulated by the laws, the owner needs a permit to commence construction works. The application of the owner to the relevant local authority for a permit shall contain following documents:
(a) document confirming ownership, use or lease rights over the land parcel;
(b) project documentation; and
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(c) if the owner is a legal entity, an extract from the state register of legal entities.
The local authority shall check the application for completeness within 5 days. If any documents are missing the local authority shall notify the applicant of this. The applicant must provide the missing documents within 10 days.
The local authority shall take into account the opinions of the relevant state authorities, such as the Ministry of Emergencies, the State Committee for Urban Construction and Architecture etc. and the interested persons. Moreover, the local authority shall obtain an expert opinion of the General State Department for Expert Examinations under the Ministry of Emergencies (the ME) for the permit proceedings. The local authority must consider the application within three months.
If the application is successful the local authority provides the applicant with an order granting the permit, with a special sign/notice, which is the basis for commencement of the construction works, and the technical conditions for the construction.
If the construction is not commenced within three years of the date of the permit, or if the construction is suspended for three years, the permit loses its effectiveness.
Finally, one can not use a completed construction without an exploitation permit. The owner of the construction must apply to the local authority with following documents for an exploitation permit:
(a) originals or notarized copies of the construction documentation; and
(b) if stipulated by the urban construction and construction normative acts, documents confirming the inspection of the construction, sections thereof or engineering-communication systems before usage.
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The local authority must respond to the application within 30 days. It may either reject the application or grant the permit for exploitation of the construction.
Apart from the usual permits, construction works in certain areas (such as cultural and historical reserves) require additional authorization from state authorities.
15.4.4 Suspension and Demolition of Construction
The Ministry of Emergencies (the ME) has special powers in the construction sphere. Among others, it has the power to suspend construction and/or to demolish buildings. The Construction Code lists certain grounds for the suspension of construction works.
The Construction Code establishes certain rules for demolishing complete or incomplete constructions. The decision on demolition may be issued either by the ME or by the courts.
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16. The Judicial System
The Civil Procedural Code28 (“CPC”), Criminal Procedural Code29 (“CrPC”), Administrative Procedural Code30 (“APC”), the Law on Enforcement31 (the “Enforcement Law”), the Law on Courts and Judges32 (the “Courts Law”), the Law on the Constitutional Court and the Law on the Judicial-Legal Council are the principal laws governing the dispute resolution process in Azerbaijan.
16.1 Courts
The Republic of Azerbaijan has a three-tiered court system, consisting of the trial courts, appellate courts and the Supreme Court of the Republic of Azerbaijan (the “Supreme Court”). Appellate courts and the Supreme Court have civil, criminal, administrative-economic and military panels. Along with this, Azerbaijan has a Constitutional Court, which is separate from the three-tiered court system. Civil proceedings at the trial and appellate courts take three months respectively, while at the Supreme Court the timeframe is two months. Decisions of trial courts may be appealed at the appellate courts; decisions of the latter, in turn, may be appealed at the Supreme Court. The decisions of the Supreme Court are final and binding. In limited cases, the decisions of the Supreme Court may be appealed at the Plenum of the Supreme Court. The admissibility of these appeals is discretionary, however, and depends on the Plenum. All judgments of
28 Civil Procedural Code of the Republic of Azerbaijan, dated December 28, 1999.
29 Criminal Procedural Code of the Republic of Azerbaijan, dated July 14, 2000.
30 Administrative Procedural Code of the Republic of Azerbaijan, dated June 30, 2009.
31 Law No. IIQ-243 of the Republic of Azerbaijan On Enforcement, dated December 27, 2001.
32 Law No. IQ-310 of the Republic of Azerbaijan On Courts and Judges, dated June 10, 1997.
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the Supreme Court and appellate courts must be published within one month of issuance and disseminated electronically.
The Constitutional Court has the authority to review laws and court judgments for compliance with the Constitution. Decisions of the Constitutional Court are published. They are binding upon other courts and must be taken into account when other courts are rendering their decisions.
16.2 Judges
The judges of the Constitutional Court, the Supreme Court, and appellate courts are appointed by the Milli Majlis on the recommendation of the President. All other judges are appointed by the President on the recommendation of the Judicial Council. The recommendations of the Judicial Council are based on examinations and interviews conducted with the nominees. All judges are appointed for a five-year term for the first time. Afterward, this term is either prolonged until the judge is 65 years old, or else the judge retires after the first five-year term expires. With a recommendation from the Judicial Council, a judge’s term of service may be extended until the judge is 70 years old.
16.3 Enforcement of foreign court judgments
The procedure for the recognition and enforcement of foreign judgments in Azerbaijan is established by the CPC. The Supreme Court deals with recognition and enforcement issues. While recognizing and enforcing foreign court judgments in Azerbaijan, the Supreme Court must be guided by domestic laws as well as by international treaties to which Azerbaijan is party. Foreign court judgments are recognized based on the reciprocity principle.
Azerbaijan has entered into several bilateral treaties (principally with neighboring states) to facilitate the enforcement of foreign judgments. It is a party to the 2004 CIS Convention on Mutual Legal Assistance in Civil, Family and Criminal Cases (the “Kishinev Convention”). The Kishinev Convention applies to both individuals and legal entities.
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Under this convention, citizens and residents of a contracting state are exempt from court and notarial fees and associated costs, and are entitled to receive free legal assistance.
In addition, Azerbaijan is a party to the Convention on Resolving Business Disputes, dated March 20, 1992 (the “Kiev Convention”). The Minsk Convention on Mutual Legal Assistance in Civil, Family and Criminal Cases, dated January 22, 1993, is no longer effective.
There is no specific timeframe within which foreign court judgments must be enforced. In practice, consideration and issuance of a decision on recognition and enforcement takes up to three months.
16.4 International arbitration
Foreign investors may rely on the provisions of the CPC and the Law on Protection of Foreign Investments dated January 15, 1992 (the “Foreign Investment Law”) pursuant to which investment disputes may be resolved either by Azerbaijani courts or in accordance with the dispute resolution procedures agreed by the parties. This may include international arbitration, either in Azerbaijan or abroad.
International arbitration in Azerbaijan is conducted in accordance with the rules prescribed by the Law on International Arbitration dated November 18, 1999 (the “Arbitration Law”). Under these rules, the parties may select independent arbitrators of any nationality, proceedings may be conducted in any language chosen by the parties, the applicable substantive law (except for those matters that must be exclusively resolved under Azerbaijani legislation) and procedural law may be chosen by the parties, and, in general, the parties may stipulate other terms of the arbitration. Where no such terms are stipulated by the parties, the Supreme Court of the Republic of Azerbaijan may resolve such omissions.
Azerbaijan has acceded to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards dated June 10, 1958. On September 19, 1992, Azerbaijan acceded to the 1965
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Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which provides for arbitration at the International Centre for Settlement of Investment Disputes (ICSID). Azerbaijan has also ratified the European Convention on Foreign Commercial Arbitration dated April 21, 1961.
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17. Climate Change
17.1 General
The Republic of Azerbaijan is a signatory to the United Nations Framework Convention on Climate Change, which entered into legal force for Azerbaijan on August 14, 1995 (the “Convention”). Similarly, the Kyoto Protocol to the Convention (the “Kyoto Protocol”), effective from February 16, 2005, was ratified by the Republic of Azerbaijan on July 18, 2000.
The Republic of Azerbaijan is also a party to the Vienna Convention for the Protection of the Ozone Layer, dated March 22, 1985 (the “Vienna Convention”). On June 12, 1996, the Republic of Azerbaijan ratified the Montreal Protocol on Substances that Deplete the Ozone Layer, which aims to eliminate the production of certain substances believed to be responsible for ozone depletion; furthermore, Azerbaijan has acceded to some of the subsequent amendments made to the Montreal protocol.
In 1997, the State Commission on Climate Change, composed of representatives of all relevant ministries and institutions, was established. Azerbaijan has adopted numerous legal acts and state programs regarding the Vienna Convention and other related international documents.
17.2 Greenhouse Gas Emissions
In recent years, environmental protection and natural resource issues have become widely discussed topics in Azerbaijan.
According to Azerbaijan’s Second National Communication to the United Nations Framework Convention on Climate Change, the main sources of carbon dioxide (CO2) emissions in the Republic of Azerbaijan are the energy and industrial sectors. While in the energy sector CO2 emissions come from the burning of fuel (production of energy, oil and gas extraction, transport, and human settlements, etc.),
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the largest sources of CO2 emissions in the industrial sector have been mineral materials production and metallurgy.
Methane is emitted by most, if not all, sectors of the Azerbaijani economy.
Nitrous oxide emissions in Azerbaijan have declined significantly since 1990, when levels were measured at 992 GtCO2; by 2005 emissions had decreased by 64%.
Emissions of the halogen substances perfluorocarbon, hydrofluorocarbon and sulfur hexafluoride are not found at significant levels in Azerbaijan.
The Republic of Azerbaijan is a non-Annex I member of the Convention, and therefore does not have any binding obligations to reduce emissions of greenhouse gases (GHG). No concrete policies or laws on carbon market issues have been established to date for implementing the Kyoto Protocol. However, Law No. 109-IIQ of the Republic of Azerbaijan On Protection of Atmospheric Air, dated March 27, 2001, requires a special permit/license from the Ministry of Ecology and Natural Resources of the Republic of Azerbaijan (MENR) for the emission of hazardous materials into the atmosphere. This emissions permit is the only emissions allowance issued in Azerbaijan.
To achieve the purposes of the Kyoto Protocol, the Republic of Azerbaijan has entered into memorandums of understanding with the Federal Republic of Germany and the Kingdom of Denmark on expanding vegetative cover and on capacity-building towards a reduction in GHG emissions.
Both SOCAR, the national oil company, and Azerenerji, the state monopolist for power generation and electricity transmission, are implementing GHG emission projects. This has mostly eliminated the need for central GHG emission plans and targets, since the World
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Bank reports that in Azerbaijan, almost all GHG emissions are generated in the energy sector.
17.3 Designated National Authority
Pursuant to Presidential Decree No. 727, dated April 1, 2005, the Climate Change and Ozone Center of the MENR was appointed as the Designated National Authority for the purposes of the Kyoto Protocol.
17.4 Clean Development Mechanism
Being a country not listed in Annex B of the Kyoto Protocol, Azerbaijan does not participate in joint implementation or emissions trading mechanisms. Azerbaijan, however, is entitled to sell credits from certified emissions reductions generated from clean development mechanism projects.
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18. Insurance
18.1 Introduction
The legal basis for the Azerbaijani insurance system was first established by the law On Insurance33 dated January 5, 1993, subsequently replaced by another law of the same name34 dated June 25, 1999. The introduction of a new chapter dedicated to insurance, Chapter 50, into the Civil Code35, and the adoption of a new law, On Insurance Activity, effective March 16, 200836 (the Insurance Law) superseded most of the previous insurance laws. Currently insurance in Azerbaijan (except for social insurance) is regulated primarily by these legal acts. In addition to this core legislation, various insurance-related issues, including compulsory insurance, are regulated by separate laws and regulations.
The Civil Code sets forth concepts and mandatory terms for insurance contracts, rights and obligations of the parties, rules for changing the parties and beneficiaries in insurance contracts, rules for termination, and other fundamental insurance-related regulations. The Insurance Law provides a general description of the organization of the Azerbaijani insurance market, establishes classes of insurance, and stipulates requirements for the establishment, licensing, operation and liquidation of insurance businesses, including regulation of other participants in the market. In October 29, 2013, a number of amendments were made to the Insurance Law, which will come into force between March 1, 2014 and January 1, 2015.
33 Law No. 436 of the Republic of Azerbaijan On Insurance, dated January 5, 1993.
34 Law No. 696-IQ of the Republic of Azerbaijan On Insurance, dated June 25, 1999.
35 Approved by Law No. 520-IIIQ of the Republic of Azerbaijan, dated December 25, 2007, and effective March 14, 2008.
36 Law No. 519-IIIQ of the Republic of Azerbaijan On Insurance Activity, dated December 25, 2007.
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The Azerbaijani insurance system consists of:
• the State Insurance Supervision Service of the Ministry of Finance of the Republic of Azerbaijan (the “SISS”); and
• professional participants, including insurers, re-insurers and insurance intermediaries, actuaries, independent auditors and experts, and insurance auxiliaries;
• insured persons and beneficiaries.
The SISS is Azerbaijan’s insurance regulatory authority, with supervisory control over the insurance sector. It issues and revokes licenses, establishes minimum capital and reserve fund requirements and prudential standards including solvency and financial stability standards, and maintains the Register of Professional Participants of the Insurance Market (the “Insurance Register”) among other functions.
Currently, there are 28 insurance companies and one re-insurance company registered in Azerbaijan, of which 25 insurers engage in non-life (general) insurance activity and the other three provide life insurance. In 2012, the total amount of insurance premiums collected in Azerbaijan was over AZN 342 million, while total insurance claims were over AZN 93 million. The amount of both insurance premiums and insurance proceeds increased in 2013, with insurance premiums reaching over AZN 369 million37 and insurance proceeds reaching AZN 110 million.38
18.2 Establishment and Licensing
Only an Azerbaijani legal entity in the form of an open joint stock company may become an insurer in Azerbaijan.
37 More specifically, AZN 368,879,546.39
38 More specifically, AZN 110,482,986.84
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Any person (excluding stateless persons, political parties, non-governmental bodies, international organizations other than international financial institutions in which Azerbaijan participates) may be a founder or shareholder of an Azerbaijani insurer.
Engaging in insurance activities in Azerbaijan requires an SISS-issued license. This license specifies the types of insurance that the insurer is authorized to offer. There is also a specific license for reinsurance. Prior to the amendments made to the Insurance Law in 2013, an insurance license gave the license holder a right to provide reinsurance services. Since the amendments an insurance license holder must obtain a separate license to provide reinsurance services.
Once initial approval is issued, an insurer must proceed with registration at the Ministry of Taxes, the Azerbaijani corporate registrar, as an open joint stock company. Following corporate registration, the insurer files a second application for final SISS approval and issuance of the license.
Licenses are issued for an indefinite period unless a (re)insurance license is issued for the first time (e.g., to a newly established insurer), in which case the term is five years. Licenses may be prolonged, suspended and, in the case of serious or repeated violations of insurance regulations, licenses may be withdrawn, resulting in termination. Licenses are not transferable or assignable to third parties.
The state fee for obtaining an insurance license is AZN 22,000 (approximately USD 28,000).
18.3 Regulation
Only a duly licensed Azerbaijani insurer may insure property interests related to property located or present in the Republic of Azerbaijan.
Insurance in Azerbaijan may be voluntary or compulsory. While the rules, terms and types of compulsory insurance are established by law,
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insurers authorized to offer voluntary insurance may establish the rules and types of voluntary insurance themselves.
There are a number of laws governing specific types of compulsory insurance. In particular, the Azerbaijani Law On Compulsory Insurance, dated June 24, 2011, provides for mandatory real estate insurance, as well as third-party liability insurance for real estate (belonging to legal entities and/or physical persons engaged in entrepreneurship without creating a legal entity) and automobiles.
Azerbaijani insurers may either provide life insurance or non-life insurance (general insurance). Insurance providers offering life insurance must have the word “life” in their corporate name.
Life insurance has the following types:
• Death insurance;
• Straight life insurance;
• Annuity insurance;
• Disability insurance;
• Terminal illness insurance.
Non-life insurance includes:
• Personal Insurance: accident insurance, medical insurance, travel insurance and other insurance;
• Property insurance: property interests relating to the stability, use or disposal of property (including title insurance);
• Civil liability insurance;
• Credit insurance; and
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• Compound financial risks insurance;
• Legal expenses insurance.
To arrange for reinsurance, insurers can make reinsurance pooling arrangements on the basis of joint operating agreements.
Apart from its main activity, an insurer may engage in insurance-related activities not requiring a license, as permitted by the insurance law.
18.4 Foreign Elements in the Insurance Sector
Foreign insurers are not allowed to offer insurance directly in the Azerbaijani market. New amendments to the Insurance Law create an exception by enabling risks related to international sea and air transport, as well as space flights, transport and installations (including satellites) for commercial purposes to be insured with foreign insurers. The property interests connected with an insured item located or present in Azerbaijan, however, may be reinsured by foreign insurers directly or through local or foreign brokers. Both foreign insurers and brokers involved in such transactions must comply with the requirements of Azerbaijani insurance law and be registered in the Insurance Register. The SISS specifies the terms, procedure, timing and documentation necessary for such registration.
Foreign insurers may operate representative offices, joint ventures and wholly-owned subsidiaries in Azerbaijan; however, the establishment of branch offices of foreign insurers is prohibited.
Azerbaijani law imposes a quota on foreign capital in the aggregate capital of insurers operating in Azerbaijan. Currently this quota is set at fifty percent for legal entities and at thirty percent for individuals provided that the shares of one foreign individual in an insurer’s charter capital do not exceed ten percent. Nevertheless, recent amendments allow hundred percent foreign capital ownership in Azerbaijani insurance companies to international financial institutions
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in which the Republic of Azerbaijan participates, foreign insurers, as well as foreign institutional investors (bank and credit organizations, pension funds, investment funds).
18.4.1 Foreign Direct Shareholding
Direct or indirect possession of significant control (20% or more shares) or a majority shareholding (50% or more shares) in an Azerbaijani insurer requires the SISS’s prior written approval. This requirement applies to both resident and nonresident shareholders of the Azerbaijani insurer.
Under the Tax Code, foreign legal entities without a permanent establishment in Azerbaijan are subject to four percent withholding tax on income derived from insurance premiums.
18.4.2 Representative Offices
A foreign insurer may open a representative office in Azerbaijan but not a branch. Since a representative office39 is not considered a separate legal entity under Azerbaijani law, the representative office only represents and protects the interests of the foreign insurer, without acting as an insurer. Therefore, foreign legal entities’ representative offices are not subject to licensing in Azerbaijan. This notwithstanding, the representative offices of foreign insurers must be registered in the Insurance Register, just as other professional participants of the Azerbaijani insurance market.
18.5 Domestic standards
18.5.1 Capitalization and Surplus Requirements
The minimum charter capital for Azerbaijani insurers is currently AZN 5 million. Similarly, the minimum charter capital for Azerbaijani reinsurers is AZN 10 million.
39 See Chapter 3 (Establishing a Legal Presence) for the status of foreign legal entities’ representative offices in Azerbaijan.
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The Ministry of Finance has issued a number of legal acts governing reserves, such as the type of compulsory reserves, methods of calculation, assets which can be used for secure reserves, asset structure, investment rules and requirements. Reserve requirements vary depending on the type of insurance (life or non-life insurance).
Since January 1, 2009, insurance and re-insurance companies have been exempt from profits (corporate income) tax on funds used to increase their charter capital over three consecutive years.
18.5.2 Corporate Structure and Executives
The general meeting of shareholders, board of directors, management board and audit commission are the governing bodies of an Azerbaijani insurer.
The members of the board of directors, management board and audit commission, head of the internal audit service, chief accountant, and responsible actuary are deemed an insurer’s executives. The Insurance Law establishes the minimum qualifications for insurance executives. Apart from other requirements, all executives must have a higher education, professional experience (except for actuaries) in certain sectors as provided for by the Insurance Law, have no criminal record, and undergo attestation at the SISS (except for members of the board of directors). Before their appointment, the SISS must approve all insurance executives.
The board of directors, management board and audit commission each consist of an odd number of members (not less than three), appointed for a term not exceeding three years. At least one of the members of the board of directors and the audit commission must be independent.
18.6 Insurance Intermediaries
In the Azerbaijani insurance system, there are two types of insurance intermediaries: (i) insurance brokers, and (ii) insurance agents. Insurance intermediaries can be either individuals or legal entities.
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Insurance brokers are fully independent and have no ties to any insurer/reinsurer.
To be an insurance broker or insurance agent, individuals and legal entities must first obtain a license from the SISS and be entered into the Insurance Register.
Currently there are 782 insurance agents (730 individuals, 52 legal entities) and 17 insurance brokers (10 individuals, 7 legal entities) registered in Azerbaijan. In addition, there are 65 foreign insurance brokers registered in the Insurance Register.

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