Doing Business and Investing in Azerbaijan

www.pwc.com/az

Doing Business and Investing in Azerbaijan

2017 Edition Contents

Azerbaijan overview 5 Licensing 15

Introduction 6 Privatisation 16

Geography and climate 6 State Migration Policy 16

History 6 State Policy in Employment 16

People 6 Taxation 16

Currency 6 Statutory tax regime 16

Government structure 6 Corporate income taxation (CIT) 16

The National Assembly of Azerbaijan (Milli Majlis) 7 Dividend withholding tax 16

Legal system 7 Other withholding taxes 16

International relations 7 Transfer Pricing 16

Visa Regime 7 Value Added Tax (VAT) 17

Economy 8 Limitation of the cash settlements 17

Macroeconomic review 9 Interest and penalties 17

Oil and Gas 9 Mining tax 17

State Oil Company of the Azerbaijan Republic Excise tax 17 (SOCAR) 9 Property tax 17 State Oil Fund of the Republic of Azerbaijan (SOFAZ) 9 Land tax 17

Non-Oil sector 9 Road tax 18

Foreign trade relations 11 Employment taxes and contributions 18

Strategic roadmaps of national economy and Double tax treaties 18 its main sectors 12 Production Sharing Agreement(PSA) tax regime 18 Foreign investment 13 Customs regime 18 Investment climate 14 Labor and social relations 18 Registration of foreign investors in Azerbaijan 14 Accounting 18 Legal form of doing business by foreign investors 14 PwC Azerbaijan 20 Business entities 14 Assurance services 21 Types of commercial legal entities 14 Advisory services 21 Types of non-commercial legal entities 15 Tax and Legal services 21 Public legal entities 15 References 22 Why invest in Azerbaijan?

Azerbaijan lies at the heart of the Azerbaijan is growing international transport a highly educated and corridor between skilled workforce Europe and Asia The country has significant agricultural potential due to its fertile climate, which spans nine of the eleven existing climatic zones

Doing Business and Azerbaijan has Investing in Azerbaijan substantial hydrocarbon Our Doing Business Guide is aimed to provide timely information about Azerbaijan’s business reserves environment. The country enjoys favored trade For more in-depth information on doing business status under an EU in Azerbaijan, please contact us at PwC Azerbaijan Partnership and office in Baku. Cooperation Agreement PwC Azerbaijan

The Landmark Office Plaza III, 12th Floor 9oA Nizami Street, AZ1010 Baku, Azerbaijan www.pwc.com/az Email: [email protected] Telephone: +994 12 497 2515 Facebook: www.facebook.com/PwCAzerbaijan Foreword

It is my great pleasure to introduce the 2017 PwC Guide on Doing Business and Investing in Azerbaijan that describes the country’s geography, history, business and investment climate. I believe this guide will be helpful for everyone who is interested in doing business and investing in Azerbaijan.

In this changing environment, our Guide aims to provide comprehensive and up-to-date information on conducting business in the country. This includes briefing on general economic and business conditions and commentary on the latest legal developments, regulatory framework, major tax and investment incentives.

This publication is aimed to serve as a tool for both domestic and foreign investors. We hope it is informative and useful to you. If you have any suggestions for ways we may improve future editions, we would be pleased to receive them.

From our office in Baku, PwC Azerbaijan has been serving clients in the country since 1995. Having started with 10 people, PwC Azerbaijan now employs more than 130 staff, including four partners and selected group of international specialists from six countries. PwC Azerbaijan serves business organizations, government bodies and public associations bringing them the benefit of more than 15o years of expertise, high-end knowledge and practical experience accumulated in PwC globally.

The Firm offers a wide spectrum of professional services, which have been developed to meet the ever-growing expectations of our clients. This breadth of services has allowed us to take on and successfully complete some of the largest and most technically challenging projects in Azerbaijan to date. We would welcome the opportunity to help you explore and take advantage of the investment opportunities in Azerbaijan.

Good luck!

Movlan Pashayev Country Managing Partner Azerbaijan Overview

Doing business and Investing in Azerbaijan 5 Introduction Baku is the capital of Azerbaijan. It is The most populous cities in Azerbaijan as located on the Absheron peninsula at the of 1 January, 2016 are the following: Azerbaijan is a post-soviet country that easternmost point of Azerbaijan. regained independence in 1991. Since Cities Population1 1994, the country’s vast oil reserves have The relief of Azerbaijan creates quite been attracting foreign investment to the favourable conditions for the formation of a Baku 2,226 economy, which consequentially made warm mild climate on the most part of the the oil and gas sector the main target of country. Azerbaijan has the mildest winter Sumgait 336 foreign investments. The modern-day in the region. January is the coldest month Azerbaijan has managed to up-build of the year (air temperature is 0 C). Ganja 330 relatively sophisticated communication Azerbaijan operates within a single and transportation infrastructure, as well Mingachevir 102 time zone. It is four hours (+4) ahead of as industrial, agricultural, educational, GMT. In 2016 the Cabinet of Ministers housing and healthcare sectors, although Nakhchivan 91 of the Republic of Azerbaijan abolished the oil and gas industry still accounts for daylight time changes. Azerbaijan is a melting pot of nationalities, the bulk of its exports. cultures and religions. While ethnic Business offices are generally opened Azerbaijan continues to develop its Azerbaijanis are in the majority, the country from 9:00 am to 6:00 pm, Monday market infrastructure, including legal, is home to many other nationalities. through Friday. The Azerbaijani tax and banking frameworks and links to Minorities include Russians, Talysh, Lezgis, Labour Code stipulates an eight-hour the international business community. It Kurds, Mountain Jews, Georgians and working day. Most of shops and stores presents a unique challenge to businesses Udines. All minorities in Azerbaijan have are generally opened whole week entering Azerbaijan that wish to assess the constitutional right to education, media including weekends and public holidays. the real business risks and make reality- and cultural activities in their own language. Azerbaijan uses the metric International based decisions rather than relying on System. Azerbaijani is the official language of the perceptions. country. Russian is also spoken and taught History Given the region’s significant potential, widely throughout Azerbaijan. The English many around the world seem to be focusing The roots of Azerbaijan stretch back to language literacy has been significantly rising more closely on the Caspian region as approximately the fourth century BC - in the past 15 years along with German and a whole. Despite the after-effects of the the times of Caucasian Albania. Albania, French owing to the increasing number of global financial crisis, there now appears also known as Arran in Azerbaijani, international companies and popularity of to be a resurgence of interest in Azerbaijan adopted Zoroastrianism before switching overseas education. among foreign investors. to Christianity prior to incursions by Religion in Azerbaijan comprises different Muslim Arabs and, more importantly, The fluctuating commodity prices may religious trends spread among the people Muslim Turks. have a negative impact on the emerging and ethnic groups residing in the country. economy that is heavily dependent As an integral part of the Arabian Caliphate, Those include Muslim Azerbaijanis, on hydrocarbon resources. Most of the population of Azerbaijan underwent a Lezgis, Talyshs, Kurds; Christian Slavs investors in the Azerbaijani economy mass conversion to Islam. Later Turkish and European immigrants; Jews. should be aware of that and acknowledge conquests led to the Turkification of the Currency the risks associated with investments in nation and the creation of the Azerbaijani the country. language, a close cuisine of Turkish. Since 1 January, 1994, Manat is the Azerbaijan then was integrated into the National currency and the only payment The Doing Business and Investing Guide Russian Empire from 1813-1918. After the facility of the country. outlines the key factors that foreign fall of Romanov Tsarist rule Azerbaijan companies should consider when looking In January 2006, Azerbaijan denominated enjoyed a brief spell of independence until at possible investments in Azerbaijan. its currency into the New Azerbaijani Manat 1920, when it was overwhelmed by Soviet (AZN), which was pegged to the US Dollar Rather than providing detailed coverage forces and incorporated into the USSR. (US$) by the monetary policy of Central of any topic, the details of which are The country proclaimed its independence Bank of the Republic of Azerbaijan(CBAR) constantly in flux, the Guide strives in early 90’s, the Constitution of and exchange rate against the US Dollar to cover a spectrum of key issues that independent Azerbaijan was adopted in was maximum US$ 1 = AZN 0.78. Investors would include in their “mission 1995 and received nationwide support in checklist” when going to Azerbaijan. In February 2015, the CBAR abandoned a referendum. Manat’s hard peg to the US$ and replaced Geography and climate Since 1988, a conflict arose between by the US$-EUR basket due to the slump Azerbaijan is located on the shore of the Azerbaijan and Armenia because of in oil prices. Caspian Sea in Southwestern Asia, between invasion of the latter on Nagorno-Karabakh, In December 2015, there was the second Islamic Republic of Iran and Russian primordially Azerbaijani lands. War broke devaluation (circa 50%) of AZN. Average Federation. The Republic of Azerbaijan out in 1988 when Nagorno-Karabakh January - February 2017 AZN/US$ rate covers an area of 86,600 sq. km and tried to break away and annex itself to is AZN 1.81 per US$ 1, while average AZN/ shares common borders with Armenia, Armenia, and 30,000 died before a cease- EUR rate over the same period is AZN 1.94 Islamic Republic of Iran, Georgia, Russian fire agreement was reached in 1994. Final per EUR 1. Federation and Turkey. decision on the political status of Nagorno- Karabakh have yet to be determined. In January 2017, CBAR has dropped it There are two main forms of relief in 4% exchange rate corridor applied to Azerbaijan: mountains and plains. 40% of People commercial banks to allow the currency the country is covered by mountain ranges, to float freely. of which three major ones are Greater According to the State Statistics and Lesser Caucasus and the Talysh, Committee, the population of Azerbaijan Government structure surrounding the Kura-Araz lowland from was estimated at 9,802 thousand as of 1 the north, west and south-east areas. December, 2016. Azerbaijan is a presidential republic,

6 Doing business and Investing in Azerbaijan with the President as the head of state International Relations and the Prime Minister as the head of the Government. Executive power rests Azerbaijan is a member of the United with the President, the Prime Minister Nations, the Organization for Security and and the Government (the Cabinet of Cooperation in Europe (OSCE), NATO’s Ministers). Legislative power is vested in Partnership for Peace, the Euro-Atlantic the parliament, the National Assembly Partnership, the GUAM Organization for (Milli Majlis) of Azerbaijan. Democracy and Economic Development, the Commonwealth of Independent Under the 1995 Constitution, the States (CIS), the European Bank for executive, legislative and judicial branches Reconstruction and Development, the of Government in Azerbaijan are separate Council of Europe, the International and independent from each other. Monetary Fund, the World Bank, CFE Treaty Organization of the Black Sea The President is also the Supreme Economic Cooperation, the Organization Commander-in-Chief of Azerbaijan’s of Islamic Cooperation, World Health armed forces. Organization (WHO), Non-Aligned The National Assembly of Movement, Parliamentary Assembly of Azerbaijan (Milli Majlis) Turkic-speaking Countries (TURKPA), the International Organization for Migration, Milli Majlis is the legislative branch of and the Asian Development Bank. The the Government in Azerbaijan. country has signed a bilateral investment The unicameral assembly currently treaty (BIT) with the US and Partnership consists of 125 deputies elected for and Cooperation Agreement with the EU. each five-year term from single seat Since the early 1990s, 20% of Azerbaijani Foreign expatriates intending to travel to constituencies. territory has been occupied by Armenian Azerbaijan should obtain the entry visa troops. Azerbaijan and Armenia are still through the nearest Azerbaijan embassies The most recent legislative election regardless the purpose of the trip. For was held in November 2015. The New at war, although a temporary ceasefire has been in place since May 1994. As some countries (for example Turkey), it is Azerbaijan Party (YAP) currently holds possible to obtain the visa directly in the the majority of seats in Milli Majlis. a result of hostilities, 800,000 ethnic Azerbaijanis have been displaced from airports. In case when expatriates intend Among the responsibilities of the Milli their homes. to stay in Azerbaijan for a period longer Majlis are composition of the Central than 3 days, they should be registered at Election Committee, the Accounts On 2 April 2016 Armenian troops broke the place of the stay upon their arrival. Chamber and the Auditing Chamber. the ceasefire. This unexpected conflict lead to the so called “Four Day War” Public Holidays 2017 Legal system between two countries. Settling the Nagorno-Karabakh conflict is the priority 1-2 January New Year’s Holidays The legal system of Azerbaijan is broadly of Azerbaijan’s foreign policy. based on civil law. 20 January Day of the Martyrs One of the main points of dispute in The highest judicial authority in international relations of Azerbaijan 8 March International Azerbaijan is the Constitutional Court. within seabed of the Caspian is precise Women’s Day The Constitutional Court resolves legal status of the latter, and particularly disputes between the legislative, executive the territorial rights of the littoral states, 20-24 March Novruz Bayram and judicial branches of Government is subject to dispute. A fundamental and gives formal interpretations of the disagreement over the demarcation 9 May Victory day Constitution and other laws. of territorial waters in the southern Over Fascism Unlike the common law-based judicial Caspian between Iran, Azerbaijan and systems of the United States and Turkmenistan continues to pose a 28 May Republic Day Great Britain, Azerbaijan’s civil law- strategic threat to the development of based system does not extensively or offshore oil and gas fields. 15 June Day of National exclusively rely on case law or judicial Visa regime Salvation precedent. The civil law of Azerbaijan considers the 1995 Constitution, acts Visa - an official document authorizing 26 June Armed Forces Day adopted via referendum, and legislation a foreigner or stateless person to enter passed by the Milli Majlis as the primary or to leave the Republic of Azerbaijan, 26-27 July Ramazan Bayram sources of law. by crossing its border checkpoints in defined way, and to stay temporarily in 1-2 September Gurban Bayram The Constitutional Court, the Supreme the country for the period indicated in Court, the Appellate Court, the the visa (CIS countries are exempt from 18 October National Administrative-Economical Courts visa regime). Independence Day and the General Jurisdiction Courts hear those cases that are within their The Consular Department of the 9 November Flag Day jurisdiction. Azerbaijani Ministry of Foreign Affairs (MFA) issues single and multiple entry 12 November Constitution Day The courts consider international treaties visas for individuals wishing to visit to which Azerbaijan is a signatory as a Azerbaijan. Single entry visas are issued 17 November National source of law. International agreements from 30 up to 90 days. Multi entry visa Restoration Day take precedence over national law in case is valid up to two years with duration not they contradict. more than 180 days. 31 December Solidarity Day

Doing business and Investing in Azerbaijan 7 Economy

8 Doing business and Investing in Azerbaijan Macroeconomic review The geopolitically important Southern transporting oil, gas, gas condensate, Gas Corridor between Azerbaijan and marketing petroleum and petrochemical Throughout the 70-year Soviet period, Europe is expected to open another, products in domestic and international Azerbaijan’s economy had always been most albeit, smaller source of revenue from markets. SOCAR is also supplying industrially developed in the Caucasus. gas exports, however, this is unlikely to natural gas to industry and the public Azerbaijan’s high-level economic growth compensate for the revenues that the oil in Azerbaijan. SOCAR has trading has been attributed to large and growing sector has provided. companies in Switzerland, Singapore, oil and gas exports, but some non- and United Arab Emirates. BP operates the Shah Deniz project export sectors also featured double-digit (28.8% stake). Other partners in the PSA State Oil Fund of the Republic of growth, including construction, banking include TPAO (19%), Petronas (15.5%), Azerbaijan (SOFAZ) and real estate. SOCAR (10%), Lukoil (10%), Naftiran Established in December 2000, SOFAZ According to the State Statistics Committee Intertrade Co. (10%) and SGC Upstream 3 is an extra-budgetary fund designed to report as of 1 January 2017, 34.3 % of the (6.7%) . The South Caucasus Pipeline ensure macroeconomic stability for the country’s GDP share accounts for oil-gas (SCP) operates to transfer Shah Deniz future and promote investment in non- sector. GDP of US$ 34.7 bln, US$ 3597.5 reserves from Baku to Erzurum, Turkey, oil sectors of the economy. Another key per capita were produced by country via Tbilisi. The maximum discharge of reason for the establishment of SOFAZ residents in 2016. the pipeline is 20 bln cubic meters per year. Shah Deniz Stage 2, or Full Field was boosting the transparency of oil Decrease of production in the construction Development (FFD) is a large-scale revenue management. sector by 27.6 % was the main criteria project that will add a further 16 bcm Currently, oil revenue profits from the affecting decrease of gross domestic of gas production to the approximately development of new offshore oil fields product by 3.8% of the current year 9 bcm produced by Shah Deniz Stage 1. row directly into SOFAZ. The assets compared with previous year indicators. The project is planned to be launched in of SOFAZ as of 1 January, 2017 have Azerbaijan still faces a number of challenges late 2019 and is expected to supply 400 decreased by 1.27% compared to the for its further development. Among those bcm of natural gas to Europe and Turkey beginning of 2016 (US$ 33,574.1 mln.) 7 are the issues with effectiveness of the state while generating around 200 billion- and stood at US$ 33,147 mln . governance along with the problem of 4 dollar value in 25 years . By withholding a large share of total oil corruption and monopoly. So far, this is the biggest natural gas contract revenues from the country’s immediate Macroeconomic income, SOFAZ helps to counter inflation 2014 2015 20162 signed in the Caspian region. SOCAR and indicators as well as produces other positive effects Shah Deniz partners have also agreed terms GDP (US$ bln) 75.2 53 34.7 for extending the Shah Deniz Production on local economy.

Sharing Agreement up to 2048. This project Non-Oil Sector GDP per capita 7990.3 5558.7 3597.5 (current US$) plans to expand the SCP through Azerbaijan and Georgia, to construct the Trans The Azerbaijan`s economy is still Inflation 1.5% 4% 12.4% Anatolian Gas Pipeline (TANAP) across dependent on oil and gas exports, which causes a significant devaluation of the Unemployment Turkey and the Trans Adriatic Pipeline 4.9% 5% n/a rate (TAP) across Greece, Albania into Italy. The national currency in line with dropping TANAP shareholders are: SOCAR (58.0%), oil prices. Imports of goods BOTAS (30.0%) and BP (12.0%)5. The TAP and services 9.2 9.2 7.7 Diversification of the economy is one (US$ bln) shareholders are: SOCAR (20%), BP (20%), of the main priorities in the country’s Snam S.p.A (20%), Fluxys (19%), Enagas politics. Exports of goods (16%), Axpo (5%)6. and services 30.2 16.6 11.9 A number of significant steps has been (US$ bln) State Oil Company of the taken for the development of non-oil Agriculture, Azerbaijan Republic (SOCAR) industry and reducing its dependence on value added 5.3% 6.2% 5.6% (% of GDP) SOCAR is the main player in the Oil and the production and export of oil and gas. Gas market of Azerbaijan. Banking Oil and Gas It is involved in exploring oil and gas In 1991, Azerbaijan introduced legal and fields, producing, processing, and Hydrocarbons currently form the economic lifeblood of Azerbaijan’s future. With the well-developed Azeri- Chirag-Guneshli (ACG) oilfield serving as the country’s key oil production 400 352.8 platform, Azerbaijan pumps up to 856 300 thousand bbl. The main economic driver involves export through the: 200

• Baku-Tbilisi-Ceyhan Pipeline (BTC) 100 • Baku-Novorossiysk Pipeline - • Baku-Supsa Pipeline The level of oil production in Azerbaijan (100) -135 has been falling since 2010. As per the State (200) Statistics Committee report, the country -241.2 (300) produced 41.03 million tons of oil in 2016 -286.5 – 1.4% less than in 2015. Efforts to boost -308.4 (400) Azerbaijan’s gas production are underway. 2012 2013 2014 2015 2016

Doing business and Investing in Azerbaijan 9

February 2017 PwC 2 institutional framework for national Almost 65% in the country are Internet Azerbaijan (the “Code”) came into effect. banking system and the Central Bank users. Fibre Optic Broadband, which is Before this Code, the construction rules of the Republic of Azerbaijan (CBAR) currently being implemented, will cover were set in separate laws. was established in 1992. CBAR is the approximately 60% of the country’s Recently, due to the fall in oil prices only regulator of monetary policy in the internet market by 2017. there is an observable slowdown in the country and regulation of banking and In early 2013, Azerbaijan has launched payment systems. Currently there are 32 construction sector in Azerbaijan. its first telecommunications satellite banks operating in the country. into orbit. Azerspace-1 satellite was Agriculture Azerbaijan`s financial sector remains set to provide digital broadcasting, Azerbaijan has been one of the region’s relatively small and undeveloped internet access and data transmission strongest agricultural centres since pre- with limited institutional and capital for Azerbaijan, Central Asia, Europe and Soviet times. The country’s climatic resources. Moreover, performance of Africa over a mission life of 15 years. and ecological diversity allows for majority of lending institutions was The government subsequently differentiation in crop cultivation. affected by constraints stemming announced that Azerspace-2, the from weak lending capabilities, risk country’s second telecommunications Following the break-up of the Soviet management and corporate governance. satellite, is to be launched in 20189. Union in 1991 and the dissolution of CBAR devalued the local currency twice collectivized property, Azerbaijan has - in February and December 2015. The Construction adopted a policy of deregulation and AZN devaluation substantially increased allowed up to 99% of its agricultural The construction business has evolved the cost of the banks’ foreign-currency sector to be privatized. liabilities, which exceed overall foreign into a very competitive sector in assets. It has also reduced the quality of the Azerbaijan, with a number of strong Following the privatization of farm domestic foreign-currency-denominated local companies providing high-quality properties, the focus of Azerbaijani loan portfolio. Weakening economic services for diverse projects, including agriculture has shifted to producing uncertainty and AZN devaluation also the development of residential areas, profit-yielding crops and increasing self- affected the public confidence in banking business offices, hotels, etc. sufficiency. For instance, rice fields were replaced by grain fields in the 1990s, that has been resulted in drastic decline Remarkable performance of this sector resulting in a rise in grain production in local currency deposits. can be explained by low base effect and up to 1.5 mln tonnes per year. According government’s anti-crisis measures. As The government introduced its large- to State Statistic Committee, in 2016 a result of the global financial crisis, scale support programmes to selected 3,065,100 tonnes of grain, 902,400 construction had contracted by 8.2% in banks in tackling these challenges. tonnes of potato, 1,269,300 tonnes of 2009. However, measures directed to In 2015, the government announced vegetable, 883,700 tonnes of fruit and increase liquidity in the local market, special loan restructuring package for berry, 464,600 tonnes of water-melon slow recovery of mortgage system and the International Bank of Azerbaijan and melons, 134,500 tonnes of grape, Government’s investments into the (IBA) the state owned bank contributing 3598 tonnes of tobacco, 321,300 tonnes sector helped to rebound construction to over 30% of total banking assets in of sugar beet, 1015.7 tonnes of green tea by 20.3%. Approximately US$ 1,73 bln the country. Meanwhile, high risk and leaf were gathered in Azerbaijan. non-performing loans from IBA were was used for the implementation of transferred to special purpose state- construction works in the country in Azerbaijan continues to be strong in owned entity, Agrarkredit. Subsequently, January – February 2014, a 7.9% year on the cultivation of specialized, often rare, IMF recorded almost 19% decline in year rise compared to the corresponding crops. Aside from cotton, tea, tobacco 10 total assets in period of July-October period in 2013 . and vegetable production, the country produces other potentially valuable 2015, signaling significant write-offs On 1 January 2013, the new Urban crops, including indigenous pink grapes, in banking sector. In addition, IBA’s Planning and Construction Code of the liquidity has been supported by US$ 600 persimmon, and other rare crops. mln injection in capital by the state. Simultaneously, CBAR has been relaxing capital-adequacy requirement in banking from 12% to 10% and introducing 100% deposit insurance coverage to bolster public confidence in financial sector and to reduce dollarization of the national 7.7% economy. Telecoms and IT Coming into 2016 Azerbaijan’s mobile 37.4% 26.6% subscriber numbers had passed the 10 mln milestone (110% penetration). The well-developed infrastructure of communication services covers about 99% of the country. 2.4% At present, Azerbaijan has three major 5.6% mobile operators – Azercell (with 10.3% 40% market share), Bakcell (33%) and 10.0% Azerfon (25%) - covering almost the entire territory of the country excluding the occupied territories. Industry Agriculture Construction Trade Tourism Taxes Other

10 Doing business and Investing in Azerbaijan

February 2017 PwC 3 Actual value of agricultural output in Azerbaijan amounted to AZN 3369,6 mln in 2016. Though agriculture employed over 36% of economically active 1,132,820 population of Azerbaijan in 2016, it Turkey 1,181,578 accounted for only 5.6 % of the country’s 409,273 Russian Federation 1,641,809 GDP. 1,559,980 Italy 332,186 610,831 Tourism German 399,192 271,516 The uniqueness of Azerbaijan as a China 703,905 796,881 touristic attraction is its natural location Taiwan 13,465 664,113 which creates different landscapes with Israel 15,622 493,644 own climate, flora and fauna. France 150,411 57,240 The cultural diversity of Azerbaijan, United Kingdom 495,215 80,650 caused by centuries of foreign United States of … 471,578 437,185 intervention by different nations, formed India 59,846 343,419 the country’s image of the “European Georgia 51,469 charm of the Orient”, which implicates a 44,405 Ukraine 289,773 mix of Islam, ancient Caucasian culture Czech Republic 214,366 and elements of European culture. 101,943 233,539 Croatia 51,183 Business people currently account for the majority of foreign visitors to Azerbaijan. Export Import In 2016, local hotels greeted a huge flow of tourists coming from various country’s climatic zones offer the potential countries in January-November, 2016.February 2017 PwC 4 countries like Russia, Georgia, Iran, for developing mountain ski resorts, 36.2 % of trade turnover was share of EU UAE, etc. Azerbaijan offers substantial beach resorts, mineral baths and special countries, 13% of CIS member countries, opportunities in tourism, with a number unique medical health spas, like resort in and 50.8% of other countries. Foreign of international hotel chains, such as Naftalan, which offers treatments using trade turnover on January-November, Four Seasons, Fairmont, Marriott, indigenous therapeutic oil. 2016 made US$ 21,650.8 mln taking Sheraton, Hilton, Jumeirah, Holiday into account value of statistically Foreign trade relations Inn, Park Inn, Hyatt. estimated exported crude oil and natural According to State Customs Committee gas registered in the customs agencies Azerbaijan has a number of attractive in January-November, legal and natural but customs formalities of which not historical sites, such as Shirvanshakh’s entities of the Republic of Azerbaijan completed, including export value – US$ palace, the Walled City of Old Baku, Sheki realised trade relations with 186 world 13,118.4 mln, import value – US$ 8,532.4 Khan Residence, while its eco diversity countries, export of products was made mln and positive trade balance reached accounts for many natural resorts. The to 116 countries and import from 177 to US$ 4,586 mln.

Doing business and Investing in Azerbaijan 11 Strategic roadmaps of national stage is to speed up the diversification of and to develop export possibilities. economy and its main sectors the economy, to maintain the high pace of the development of the non-oil sector Taking this priority into account, 12 The primary goal of development of in the future regardless of the level of oil strategic roadmaps were approved. Azerbaijan`s economy on the current revenues, to increase competitiveness

Strategic Roadmaps

Strategic Roadmap on perspectives of Strategic Roadmap on development the national economy of Azerbaijan of logistics and trade in Azerbaijan

Strategic Roadmap on development Strategic Roadmap on of oil and gas industry (including development of housing at chemicals) in Azerbaijan affordable prices in Azerbaijan

Strategic Roadmap on production and Strategic Roadmap on development processing of agricultural products in of professional education and Azerbaijan education in Azerbaijan

Strategic Roadmap on production of Strategic Roadmap on development consumer goods in Azerbaijan at the level of financial services in Azerbaijan of small and medium-sized enterprises

Strategic Roadmap on development Strategic Roadmap on development of of heavy industry and engineering in telecommunication and information Azerbaijan technologies in Azerbaijan

Strategic Roadmap on development Strategic Roadmap on development of specialized tourism industry in of public utilities (electric and heat Azerbaijan energy, gas and water) in Azerbaijan

12 Doing business and Investing in Azerbaijan Foreign investment

Doing business and Investing in Azerbaijan 13 Investment climate • Guarantee against deterioration stock company, limited or additional of legislation: a foreign investor is liability company, partnership, or any Azerbaijan’s average annual economic assured that the laws governing its other structure that is consistent with growth rate was about 10% over the past investment will remain in force for Azerbaijani law. few years. In 2009, despite the global a period of 10 years from the initial financial crisis, Azerbaijan’s rapidly investment. Business entities developing economy grew by 9.4% • Guarantee against nationalization Subsidiary and has continued its rapid expansion. and requisition: foreign investors According to Global Intelligence report, A subsidiary is an Azerbaijani legal entity are guaranteed immediate, adequate in 2016 GDP growth rate was at (-3.73)%. with foreign ownership, which can be and effective compensation registered as a limited liability company As of 2014, almost 80% of the economy in case of nationalization and or joint-stock company. Although had been privatized. In 2015, the stock requisition. Compensation should be such an enterprise may be owned by of foreign direct investment (FDI) in the commensurate to the amount of the foreign nationals, it is considered as Azerbaijani economy amounted from investment at time of nationalization or an Azerbaijani legal entity for tax, $7-7.5 billion with investment in the requisition, payable in foreign currency currency accounting, reporting and other oil and natural gas sector constituting and freely transferrable abroad. requirements. 88.5% of the total amount13. The World • Guarantee of compensation of Bank reports on per capita FDI inflows damages: foreign investors are Representative Office (RO) rank Azerbaijan near the top among entitled to compensation for A RO is the locally registered presence of CIS and Eastern European countries. damages, including compensations a foreign legal entity and has the “non- According to the WB, in 2004, private for lost profits resulting the illegal resident” status in regard to Azerbaijani sector investments were accounting acts of state authorities; tax, legal and currency regulations. If for 90.7% of total investments, and • Guarantee of profit repatriation: RO’s activities are strictly limited to foreign investment accounted for 73.1%. foreign investors are entitled to providing representative services to its However, since 2005 domestic public repatriate profits derived from head office, it is not subject to any profit investments have gained pace, while foreign investments subject to taxes. A RO is responsible for the timely private and foreign investments have applicable taxes and duties. payment of all other applicable taxes been decreasing. The government is expected to continue to the tax authorities, such as personal Foreign investment its policy of supporting privately held income tax and social fund payments from employees. Definition of a foreign investor enterprises, including those with foreign capital and owned or operated by foreign Branch The following entities and individuals nationals. may be considered as foreign investors in The relevant legislation does not Azerbaijan: There are no general trade barriers or distinguish between a RO and a Branch. embargos for the import of goods to They are both subject to the same • Foreign legal persons; Azerbaijan. Exports are not subject legal, tax, currency and reporting • Foreign citizens, stateless persons, to customs duties or restrictions. requirements. Branches are free of the and citizens of Azerbaijan with a Regulations exist only for the export of requirement to have a charter fund and permanent residence abroad subject strategic commodities such as electricity, are able to channel income into overseas to registration in their country of petrol, cotton and non- ferrous metals. accounts, provided these accounts residence for engaging in economic are duly registered with authorities activity; Registration of foreign investors in Azerbaijan. State duty for both • Foreign states; in Azerbaijan Branch and RO registration is AZN 220 • International organizations. All companies operating in Azerbaijan (approximately US$ 127). General regime for foreign investments are required to be registered. Without formal registration, a company may not Types of commercial legal Foreign investments are generally defined do business in Azerbaijan (e.g., maintain a entities as all types of tangible and intangible bank account, clear goods through customs, The Azerbaijani Civil Code stipulates the rights, including intellectual property etc.). As a part of the ongoing business law following legal forms for doing business rights, contributed by foreign investors reforms, a “One Stop Shop” principle was in the country: to entrepreneurial and other types of introduced effective 1 January, 2008. The General Partnership (GP) activities for the purpose of making a registration procedures involving several profit. They include, among other things, governmental bodies (Ministry of Justice, An enterprise established by two or participation interest and shareholding Ministry of Taxes, Social Insurance Fund more physical and/or legal persons. The in Azerbaijani companies, acquisition of and Statistics Committee) have been owners of a GP have “unlimited” liability immovable property (except land plot), eliminated, obligating businesses to for the obligations of the GP. acquisition of securities and other assets register only with the Ministry of Taxes. Limited Partnership (LP) liable for purchase by foreign investors The established period for state registration under Azerbaijani law, and contractual with the Ministry is officially set at three An LP may be established by two or agreements with Azerbaijani individuals days for commercial organizations. more physical and/or legal persons, with and legal entities that provide for other Registration of non-commercial legal at least one of the participants bearing forms of foreign investments. entities is conducted by the Ministry of unlimited liability for the obligations Azerbaijani law is evolving in accordance Justice. of the LP and not participating in entrepreneurial activity. with the government’s strategic goal of Legal forms of doing business creating a welcoming environment for by foreign investors Limited Liability Company (LLC) foreign businesses. Foreign investments are thus protected by guarantees The law stipulates that any company An LLC is an enterprise which is provided under law. These include: with foreign investment operating in established by one or more physical Azerbaijan must be organized as a joint- and/or legal persons. The legal fund

14 Doing business and Investing in Azerbaijan of an LLC is divided into authorized Office in Azerbaijan Republic. elimination of misconduct addressed shares as specified in its charter. The to competition restrictions in the shareholders of an LLC have limited Public Legal Entities market); and liability commensurate with their shares Recently established law on Public • analysis of regulatory body influence in the LLC. Legal Entities governs procedures (analysis is made by the body issuing on establishment, operation and licenses and covers evaluation of Additional Liability Company (ALC) organization of public legal entities. impact of new laws on licensing The legal status of an ALC is similar to According to the law, public legal and permits on entrepreneurship; that of an LLC, with the exception that entity, being not a state or a municipal evaluation of achievement of the the participants of an ALC may assume body, may be established only either goals set by the new laws). liability in excess of their contributions. by the state, 0r by a municipality for Law defines “permit” as an official the purposes of carrying common Joint-Stock Company (JSC) document granted by the authority state or publicly important activities in issuing permits to exercise certain A JSC’s structure is similar to that of an Azerbaijan. A public legal entity has its business activities or actions. Law LLC. JSCs may be established either as own charter, property and charter capital contains an explicit list of 87 types “open” or “closed” business entities. An formed by property contributed thereto of activities requiring obtainment “open” JCS is able to offer its shares to by its founder(s). State and municipal of permits. Applications for license investors, while a “closed” JSC can only property contributed to the public legal obtainment shall be made via Electronic redistribute its shares among its founder entity may be used only for the purposes Portal on License and Permits, which will shareholders and other predetermined indicated in its charter. Neither the state, enable to conduct all operations related persons. nor municipalities are responsible for to licensing (e.g. obtainment of licenses, obligations of the public legal entity; they Under the Privatization Law, foreign their duplicates, and amendments carry the risk for the damages caused in thereto, renewal, suspension, resumption investors may participate in Azerbaijan’s accordance with activity of the public mass privatization program by and termination thereof). Period of legal entity to the extent of the value of issuance of licenses and permits has been acquisition of the state privatization the property contributed by them to options. decreased to ten working days for license the charter capital of the public legal obtainment and seven working days for Types of non-commercial entity. Incorporation, re-organization permit obtainment. Licenses are granted legal entities and liquidation of the public legal entity to an undefined period. Law reduced the Public Association is regulated by the Civil Code of the list of licensable activities from 58 to 29 Republic of Azerbaijan and its respective (including activities related to national Public Association is a non-profit charter. security). organization established by individuals or legal entities to engage in activities Licensing State duties for licenses now vary from of their common interest. Members The new Law on Licenses and Permits is AZN 220 (about US$ 127) to AZN 11,000 of public association do not have any aimed to create a favorable environment (about US$ 6,360). ownership rights over property or for the devolvement of business by Privatisation membership contributions allocated simplifying the process of license and to an association. Public association permits obtainment. Law shed lights Under the Privatization Law, the does not carry any responsibility for its to previously obscure aspects of license following are considered to be foreign members, and so do its members. obtaining by setting out criteria for investors: activities requiring license or permits; Foundation • Foreign legal entities and their list of authorities granting licenses and subsidiaries; Foundation is a non-membership permits and their powers and functions; • Azerbaijani legal entities with organization established by individuals rules of obtaining, renewal and participation of foreign investment in and/or legal entities on the basis of termination of license; validity periods excess of 50% charter capital share; their voluntary material contributions of licenses or permits, as well as amounts • Foreign nationals; and aimed at social, charitable, cultural, of state duties payable for that. Law • Stateless persons. educational and other socially useful introduced notion of Electronic Portal purposes. Foundation’s establishers are not on Licenses and Permits and a Single Privatization of state property began with it members. Thus, they do not participate Registry for Licenses and Permits. the First Privatization Programme (1995- in its management and all managerial 1998). Since 2002, the privatization of Law brought new principles of state decisions are made through governing large enterprises has been under way, control over licenses and permits such as: bodies determined by its charter. with approximately 2,000 medium to large enterprises having been privatized. Union of legal entities • a “One Stop Shop” principle; • notion of silent consent in regard The International Bank of Azerbaijan Union can be established by commercial to issuance, renewal, suspension, (IBA), the largest bank in the country, or n0n-commercial entities to promote resumption and cancellation of has been in the process of privatization their business and non-business licenses and permits (in case if since 1998, but 50.2% of the shares still activities. Union is not responsible for license issuing body does not respond remain in state hands. In December 2011, its members, however, members are to license or permit application it was officially reported that PwC was a responsible for union’s obligations at within time frame established by the part of the consulting consortium which the amount of their contributions to the Law, such application will be treated finalized the first preparatory stage of union’s charter. as consented, and information the project of privatization of the state regarding new license or permit shall share in the authorized capital of IBA. Branch and RO of foreign NGO automatically be added to the Single The second phase would involve the final According to Azerbaijani laws, any foreign Registry for Licenses and Permits); preparation of necessary documentation non-governmental organization is able to • proportionality of interests of for the privatization of the bank and establish its Branch or a Representative entrepreneurs, society and state final determination of a list of potential when issuing license and permits (for buyers14. Doing business and Investing in Azerbaijan 15 State Migration policy Azerbaijan has to date signed and Persons rendering trade and catering ratified over 30 PSAs and HGAs for oil services (e.g. restaurants, coffee shops, Adoption of Migration Code on 1 August and gas production and transportation. etc.) with annual turnover exceeding 2013 was one of the measures aimed to Some of them have been terminated AZN 200,000 may choose to be a implement the state policy in the sphere or remain dormant. Each PSA and of migration. simplified taxpayers. Simplified tax rate HGA is subject to its own exclusive for them is 6% for trading and 8% for The new Migration Code clarified tax and accounting regime. PSAs and catering services. grounds, terms and procedure of HGAs provide more favourable legal obtaining work permits, residence and tax regime (e.g., simpler reporting A special rate of simplified tax is set: permits, visas. A number of restrictions regime, deductibility of expenses, fixed a) for the persons involved in regarding of extension of these permits is rate of Profits Tax, exemption from residential and non-residential housing removed. certain taxes and duties, etc.) for its construction at a fixed amount of AZN participants, contractor parties and 45 per square meter multiplied by an subcontractors. applied coefficient; The following sections outline the b) for the persons selling residential and statutory and PSA/HGA tax regimes in non-residential premises (except for detail. premises of individuals where he/she has been residing for at least 5 years) at a Statutory tax regime fixed amount of AZN 15 per square meter By law foreign legal entities must multiplied by an applied co-efficient; the register their representative or branch applied co-efficient being determined by offices before conducting activities in the regional executive authorities. Azerbaijan. A special rate of simplified tax is set for If a representative office or a branch operators of gambling games at a rate of 6% halts its commercial activities, such from gross receipts from game participants representative office or branch should and for the sellers of such games at a rate file a notification to the tax office no of 4% from gross commission paid to the later than the date of cessation of the sellers by the operators. operations. The major taxes applicable Dividend withholding tax under the statutory tax regime are Government sets the list of severe outlined below. A 10% Dividend Withholding Tax penalties caused by failure to comply applies to both domestic and foreign with requirements of Migration Code. Corporate income taxation shareholders and is levied in the State policy in employment (“CIT”) currency in which the dividend is paid. Double taxation treaties (DTT) may Recent changes to the Labour Code of CIT taxpayer might be either legal reduce the rate at which dividend tax Azerbaijan set new procedure regarding entities or representative or branch applies. verification of employment contracts. offices of foreign legal entities. As per new rules employment contracts, CIT is computed on the basis of an Other withholding taxes amendments and termination takes entity’s taxable profit. Taxable profit Foreign legal entities without a effect after entering information into the is generally equal to gross realization permanent presence in Azerbaijan are e-system of the Ministry of Labour and (receipts), minus deductible expenses, subject to Withholding Tax on income, Social Protection. which are defined as any costs incurred which is derived from the following in generating of income. The entity Taxation sources: tax currently is 2o%. CIT should be Tax regimes reported on annual basis, although Interest 10% The Tax Code of the Republic of current tax payments shall be made Azerbaijan adopted in 2001, currently quarterly. Rent and royalty 14% has 223 articles and a number of old tax In addition to CIT paid by the laws were abolished from it. Freight income 6% non-resident entity’s permanent Briefly speaking, Azerbaijan currently establishment, each amount repatriated Telecommunications has three different tax regimes: 1) the by such permanent establishment from services 6% statutory tax regime; 2) Production its net profit is subject to branch profit Sharing Agreements (PSA) and 3) Host tax at the rate of 10%. Financial leasing Government Agreements (HGA), which and insurance payment 4 % From 1 January 2013 profit of the are exclusively for the BTC and South residents of the industrial and Caucasus pipelines. Payments to an electronic wallet 10% technological parks is exempt of profit The statutory tax regime applies to all legal tax for the period of 7 years since Other income 10% entities (both local and foreign) with the registration as resident of the industrial exception of those that are governed by and technological park. From 1 January 2016 annual interest a PSA or HGA, each of which has its own Simplified tax income of individuals on bank deposits tax rules. The PSA/ HGA tax regimes also placed in all banks in Azerbaijan, as generally apply to relevant oil operating From 1 January 2016, persons with well as dividends, discounts and interest companies, foreign investors serving as annual turnover of up to AZN 200,000 income on investment securities paid by contractor parties and all Foreign Service (approximately US$ 115,600) are the issuer, are exempt from withholding companies working with such parties. eligible to be registered as Simplified taxes for 7 years. Tax payers.

16 Doing business and Investing in Azerbaijan There is also the self-assessment of taxpayers must issue electronic VAT VAT (reverse-charge) for the services invoices in AVIS (Automated Tax rendered by unregistered non- residents Information System) instead of paper in Azerbaijan. In general, VAT paid on ones. purchases (i.e., input VAT), is recoverable against the output VAT that is charged Interest and penalties on the sale of manufactured goods or the provision of services in Azerbaijan. Interest and penalties are applicable for failure to comply with tax legislation. From 1 January 2013, equipment, imported by residents of industrial and Interest on outstanding tax liabilities is technology is exempt from VAT for the currently being accrued at a rate of 0.1% period of 7 years. The VAT exemption per day. Penalties vary from 50% up to is also applicable to goods imported 100% of the amount of tax due. into special economic zones (excluding Administrative penalties may be applied those that are subject to an excise tax). for failure to file declarations, register Additionally, certain categories of a taxpayer with the authorities, notify imported goods are exempt from VAT as the authorities of a change of address, defined by the Cabinet of Ministers. etc. Tax law violations have a three-year Starting 1 May 2016, all types of goods statute of limitation. imported based on relevant supporting Mining tax documents by the residents of the industrial parks shall be exempted from Legal entities and individuals involved VAT for the period of 5 years. in the recovery of minerals in Azerbaijan are obliged to pay the Mining Tax. The rate depends on the type of mineral extracted and varies from 3% to 26% of its total wholesale price. Excise tax Excise goods produced in or imported to Azerbaijan are subject to Excise Tax, unless said goods are specifically exempt. All registered VAT taxpayers must pay The following goods are considered the value of the goods (work, services) excisable goods: excluding VAT, to a normal bank account of the vendor, and the VAT amount • Spirits, beer and all types of alcoholic (input VAT) must be remitted to the VAT beverages; deposit account, single treasury account • Tobacco products;

created for the allocation of VAT. • Petroleum products; • Light vehicles (with the exception of Taxpayers will not be able to recover motor transport means for special input VAT paid into any other account purposes, with special markings and (i.e., not the VAT deposit account). equipment); Failure to remit VAT into the VAT deposit • Leisure and sports yachts, as well as account is subject to 50% penalty of the other boats vehicles stipulated for the unpaid VAT amount. All VAT-registered aforementioned purposes. Since the 1 January 2015, all imported jewellery and household products made from precious metals, as well as Value Added Tax (VAT) processed, sorted, framed and fixed Generally, VAT is charged at the rate of diamonds are included into the list of 18% for each taxable operation and for goods subject to excise tax. the value of each taxable import. There Property tax are detailed requirements for registration and accounting for VAT, with penalties Companies operating in Azerbaijan are for non-compliance. required to pay property tax at the rate of 1% of the fixed assets’ average annual Starting 1 January 2016, legal entities residual value. and individuals with taxable transactions exceeding an annual threshold of AZN Land tax 200,000 (approximately US$ 115,600) must register as VAT payers. Land Tax is levied as a fixed payment. Individuals and/or entities who own or Other companies carrying out business use land within Azerbaijan are subject activity in Azerbaijan may register to Land Tax. Except for agricultural voluntarily. Only registered VAT payers lands, the land tax rate per 100 square may charge VAT and claim credit for meters of a land plot varies between 0.1- input VAT. VAT is also applied to goods 20 AZN depending on the purpose of imported into Azerbaijan at customs the land - e.g., industry, construction, unless exempt or 0% rated. transportation, etc. - and its location. Doing business and Investing in Azerbaijan 17 The economic activity level of the land’s Double tax treaties assessed import duties and Excise Tax). tenant/owner does not influence the Certain categories and types of goods Azerbaijan has ratified treaties to avoid Land Tax payment. are exempt from import duties and are double taxation with 48 countries. In subject to 0% VAT. the meantime, due to administrative From 1 April 2016, land tax rate for barriers imposed by the Azerbaijani tax A customs clearance fee up to AZN 550 agricultural land is 10 AZN for every authorities, the benefits of double tax (approximately US$ 367) is applicable to 100 square meters and must be paid to treaties have not been fully utilized. The nearly all imports/ exports. Exports are state budget except, agricultural lands tax authorities require that the majority exempt from customs duties, except for which are used for purposes or other of types of taxes due be paid before the certain types of metals and metal products. agricultural lands which are not used taxpayer lays a treaty claim. Following Under a PSA regime, contractors, their for its intended purpose because of the submission of the full payment, agents and subcontractors are entitled irrigation, land reclamation and other a non-resident enterprise may file a to import and re-export goods used in agro-technical reasons. refund/offset claim for overpaid taxes. hydrocarbon activities free from import Road tax As the process of gaining a refund or an duties. Imports under a PSA regime are offset is tedious, lengthy, requires filing subject to 0% VAT. A similar regime Since the 1 January 2015, all individuals a great deal of paperwork and involves applies under HGAs. engaged in production or import of the risk of a tax audit, few taxpayers have Labour and social relations vehicle gasoline, diesel fuel and liquefied chosen to file a treaty claim. gas to Azerbaijan are road taxpayers. Labour law Vehicle owners (excluding the road tax Production Sharing Agreement Labour relations in Azerbaijan are on transit) are expected to indirectly (PSA) tax regime covered extensively by the 1999 Labour pay the road tax within the price of fuel. There are currently 24 ratified PSAs Code, which comprises legislation The Road Tax rate varies depending and 2 ratified HGAs, with an exclusive different from the early 90s with a on vehicle engine volume, number of tax regime for each one. The PSA number of later lower-tier regulatory acts axles, weight carried, and how long the tax regimes are applicable to each expanding the general code’s provisions. vehicle will be in Azerbaijan (for foreign contractor party (signatory to the vehicles). A standard working week is 40 hours. PSA), the operating company, and the Overtime and work performed on Wholesalers - road tax rate for vehicle subcontractors (in particular, foreign days off (Saturdays, Sundays, public gasoline, diesel fuel and liquefied gas subcontractors). holidays and one mourning day) must be manufactured in Azerbaijan and directed Foreign companies operating as PSA compensated at double daily rate. to the national consumption (wholesale) subcontractors in Azerbaijan are referred is AZN 0.02 on wholesale price (including Employment relations are established by to as foreign subcontractors (FSC), and VAT and excise) for each litre of these the employment contract, which, in most are subject to a simplified tax regime mentioned items. cases, does not necessarily indicate a fixed (withholding of tax in place of Profits Tax term of employment. An employer must Importers - for vehicle gasoline, diesel - 5% to 8%). This simplified corporate give an employee two months’ notice of fuel and liquefied gas imported into income tax regime does not apply to termination in the event the employee Azerbaijan, road tax is calculated at AZN Azerbaijani legal entity subcontractors. is made redundant. However, certain 0.02 on the customs value, but not lower VAT (both input & output) and customs exceptions to this rule are available (e.g., than wholesale market price (including duties for activities conducted under the in the case of a gross violation of the VAT and excise), of each litre of the PSA regime are charged at a rate of 0%. employee’s duties). An employee can mentioned items. terminate their employment contract Employment taxes and Customs regime at any time but must give one month’s contributions Goods imported into Azerbaijan are notice. Income tax subject to imports duties (ranging from Accounting 0% to 15% per metric unit). From 1 January 2013, the maximum rate Accounting regulations are set out in of Personal Income Tax is reduced to 25% Azerbaijani law recognizes several the Law of the Azerbaijan Republic “On starting from AZN 2,500 (approximately customs regimes pertinent to goods Accounting” (March 1995). In 2004, the US$ 1,667) per month. Income Tax imported into Azerbaijan. Such Azerbaijani government took steps to in Azerbaijan is hence charged at procedures as transit, customs storage, improve the transparency of financial progressive rates of 14% or 25% of gross bonded warehouse, temporary import, reporting and accelerate the economy’s income. Taxable income of individuals and processing in/outside of customs integration into the global financial engaging in entrepreneurial activity is territories may be of interest to foreign system, as well as modernize the national subject to tax at 20%. investors. If the import is temporary, no accounting system and reporting with customs duties may be applied it, and Social insurance fund respect to the international standards it must be exported from Azerbaijan by implementing the International within a certain period of time. The Employers and employees must make Financial Reporting Standards (IFRS) deadline for exporting a temporary payments into the Social Insurance in organizations involved in commercial import is established by the customs Fund. The employer pays the equivalent activities. of 22% of an employee’s gross salary, authorities. and employees pay 3% of their gross All public interest entities in Goods brought into Azerbaijan under salary (withheld from their salary by the Azerbaijan must adhere to IFRS. Public the temporary import regime should be employer). interest entities are defined as credit exported without substantial changes organizations, insurance companies, to their form/structure. According to Foreign citizens, except from foreign private pension funds and legal entities the destination VAT principle, VAT employees working under the PSA/ HGA with stock market share listings. in Azerbaijan is payable (subject to tax regime, are also subject to social Entities that meet at least two of the an applicable customs regime) on the insurance contributions. following criteria are also considered declared value of the goods (including

18 Doing business and Investing in Azerbaijan as public interest entities: 1) revenue National Accounting Standards for Alternatively, they may choose to of AZN 30 mln (approximately US$ Commercial Organizations (NASCO). follow NASCO. 20 mln); 2) an average of 1,200 Small businesses (with fewer than NASCO regulations are largely based on employees, and 3) a total balance sheet 40 employees and annual turnover IFRS. However, their intention is not of AZN 100 mln (approximately US$ less than AZN 200,000) are allowed to duplicate IFRS, but to simplify the 66,7 mln). Commercial organizations to follow simplified accounting rules principles for implementation. must either follow IFRS, or the approved by the Ministry of Finance.

Doing business and Investing in Azerbaijan 19 PwC Azerbaijan

20 Doing business and Investing in Azerbaijan PricewaterhouseCoopers Global (PwC) Firm and be focusing on the execution requirements and adapt our audit is one of the world’s most extensive of the global and local strategy and approach to address the needs of small networks of professional services firms. working with select priority clients of and large, private and state-owned, start- In its current form, the network of the Firm. Petko Dmitrov is continuing ups and mature, local and international firms was established in 1998 through as the Assurance leader. businesses. Our audits draw on the full the merger of Price Waterhouse and breadth and width of our global network Coopers & Lybrand, both of which With these appointments, PwC in virtually any industry. were headquartered in London. PwC Azerbaijan now has four territory posted revenues of US$ 35,9 billion for partners representing all lines of our We audit under the International fiscal year 2016. service of assurance, advisory and tax Standards of Auditing (ISA) providing and legal. an internationally required opinion PwC Global employs 223,468 people in which helps our clients both access 157 countries. PwC Azerbaijan’s wide range of skills international financing and expand the global horizons. With us, our and experience, along with local and clients can improve their external and international expertise, allow us to internal financial reporting to match offer our clients the highest level of the information requirements of any service and professional excellence. stakeholders: owners, banks, financiers, debtors, creditors, employees, We provide the full spectrum of Government and society. We also client services, developed to be help our clients to make a successful commensurate with evolving client transition to comply with new regulatory expectations. This comprehensive requirements and strengthen corporate service line has enabled us to accept governance procedures. and successfully complete some of the largest, most technically- challenging Advisory services projects undertaken in Azerbaijan up to date. Our firm is widely recognized as We have a team over 20 individuals a leader in its sector, and stakeholders providing IT-related, management regard PwC as the firm that sets the consulting and deals services to the professional standard. Our opinions public and private sectors in Azerbaijan. on matters of public policy are sought- With a range of experience and after and highly regarded. expertise, this team can deliver projects locally and, where it will add value to PricewaterhouseCoopers (PwC) PwC Azerbaijan has the vast experience our clients, in collaboration with other Azerbaijan, established in 1995, is in the oil and gas industries, banking and specialists from the PwC global network. one of the country’s first international financial services, telecommunications professional services firms. The Firm and consumer products sectors. We We thereby deliver the best solutions has made significant investments in help organizations and individuals to our clients from strategy and the local economy and community and create the value they are looking for market advice and business and IT will continue to do so. by delivering quality in assurance, improvement through to execution, tax, legal and advisory services. PwC’s including deals support and ERP system In addition to the quality of the services, clients range from the world’s leading implementation. we provide to our clients, we are fully multinational companies to new committed to the development of our and growing enterprises, from large Tax and Legal services people. In the past 20 years, we have family businesses and governments Consisting of 39 tax specialists and trained and developed a large number to NGOs, and private individuals. We lawyers at the top of their profession, of high quality professionals, many aim to create trust in society and solve our Tax and Legal practice is the largest of whom are still with us, and some important problems. team in Azerbaijan. of whom have moved on to increase Assurance services the level of expertise in the business We are organized around different community here in Azerbaijan. aspects of tax and law, reflecting the We have a team of around 45 strong need for in-depth specialist knowledge specialists in Assurance, 5 out of them PwC Azerbaijan employes 130 in each key area. We recognize that, holding ACCA qualifications and local people, including selected group of in many cases, knowledge of tax and statutory auditing certification. We also international and local professionals law must be embedded in a thorough have a local team of 4 risk management from 6 countries led by four partners. understanding of industry. We have specialists, whom we supplement, if therefore developed specialized teams needed, with international experts to In 2016 PwC Azerbaijan announced along industry lines, allowing us quickly meet our clients’ project needs. Our about the appointment of two new assemble a team with the required tax clients number oil and gas upstream and partners: Michael Ahern, leading the and legal skills, as well as the relevant downstream, insurance, construction, Tax and Legal Practice, and Emin industry knowledge. Shikhgayibov, leading the Advisory manufacturing and service companies, banks as well as Government entities. practice. Movlan Pashayev, the We provide tailored assurance solutions Country Managing Partner of PwC to fit the clients’ individual business Azerbaijan, will continue leading the

Doing business and Investing in Azerbaijan 21 References

1 page 6 State Statistics Committee (2017), http://www.stat.gov.az/source/demoqraphy/ indexen.php

2 page 9 State Statistics Committee (2017), http://stat.gov.az/xeber/index.php?id=3461; Central Bank of Azerbaijan(2017), http://www.cbar.az/

3 page 9 British Petroleum, http://www.bp.com/en_az/caspian/operationsprojects/Shahdeniz. html

4 page 9 Natural Gas Europe, http://www.naturalgaseurope.com/bp-joins-tanap-pipeline- project,

5 page 9 http://www.hydrocarbons-technology.com/projects/trans-anatolian-natural-gas- pipeline-project-tanap/

6 page 9 Trans Adriatic Pipeline, https://www.tap-ag.com/about-us/our-shareholders

7 page 9 State Oil Fund, http://www.oilfund.az/en_US/hesabat-arxivi/ rublukh/2016_1/2016_1_3/

8 page 9 State Statistics Committee (2017), http://stat.gov.az/xeber/index.php?id=3461

9 page 10 Budde Comm, http://www.budde.com.au/Research/Azerbaijan-Telecoms-Mobile- and-Broadband.html

10 page 10 World Cemenet, http://www.worldcement.com/europe-cis/07042014/Azerbaijani_ construction_sector_helps_to_boost_economic_growth_1/

11 page 10 State Statistics Committee (2017), http://stat.gov.az/xeber/index.php?id=3461

12 page 11 State Statistics Committee (2017), http://www.stat.gov.az/source/trade/indexen.php

13 page 14 Euromoney Institutional Investment Company, https://www.emis.com/blog/ azerbaijan-attracts-75-billion-fdi-2015

14 page 15 Contact.az, http://contact.az/docs/2012/Economics&Finasnce/090300009723en. htm#.VPMiCvmUeIA,

22 Doing business and Investing in Azerbaijan Be with the best

Contacts

PwC Azerbaijan The Landmark Office Plaza III 12th floor, 90A Nizami Street AZ1010 Baku, Azerbaijan Tel: 99412 497 2515 Fax: 99412 497 7411 www.pwc.com/az

Movlan Pashayev Country Managing Partner Email: [email protected]

Emin Shikhgayibov Partner, Advisory Leader Email: [email protected]

Michael Ahern Partner, Tax & Legal Leader Email: [email protected]

Petko Dimitrov Partner, Assurance Leader Email: [email protected]

Arif Guliyev Director, Tax Services Email: [email protected]

Fahri Mustafayev Director, Assurance Services Email: [email protected]

Samir Hadjiyev Director, Legal Services Email: [email protected]

Zarina Zeynalova Director, Advisory Services Email: [email protected]

Doing business and Investing in Azerbaijan 23 © 2017 PwC. All rights reserved. The material contained in this alert is provided for general information purposes only and does not contain a comprehensive analysis of each item described. No representation/warranty is given as to the accuracy or completeness of the information in the publication. Before taking (or not taking) any action, readers should seek professional advice specific to their situation. No liability is accepted for acts or omissions taken in reliance upon the contents of this alert.

PwC Azerbaijan provides industry-focused assurance, tax, legal and advisory services to various industries. Over 130 professionals from 6 countries working in PwC office in Baku, Azerbaijan share their thinking, experience and solutions to develop fresh perspectives and practical advice for our clients. At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 223,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com/az