Your Tax and Legal Lighthouse

2018

Tax and Legal kpmg.az ii Your Tax and Legal Lighthouse

Baku

Dear reader, This guide has been prepared to provide a brief overview of Azerbaijan and its economy, as well as to introduce the tax and legal issues that are important for those planning to do business in Azerbaijan. In particular, there is a brief discussion of the benefits of investing in separate economic zones. Azerbaijani tax and civil legislation is continually developing and there is sometimes no clear answer to what might be considered a simple question. Therefore, court cases and practice are important sources for interpreting legislation. All information in this document was current as of June 2018. The information included herein is for informational purposes only, and may not reflect the most current legal developments, judgements, or settlements. The information should not be construed as constituting legal or any other advice on any particular matter. KPMG Azerbaijan (“the Firm”) and the contributing authors expressly disclaim all liability to any party in respect of anything, and in respect of the consequences of anything, done or omitted to be done wholly or partly in reliance on the whole or any part of the contents of the Firm’s Doing Business in Azerbaijan guide. No client or other reader should act or refrain from acting on the basis of any matter contained in this guide without seeking appropriate legal or other professional advice on the particular facts and circumstances. We would be pleased to provide you with updates on the material contained hereto, or with further information regarding a specific industry or area of Azerbaijani law in which you might have a particular interest.

About KPMG KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. The company employs more than 200,000 outstanding professionals who work together to deliver services in 154 countries worldwide. KPMG has been working for 27 years in the CIS and has 4,600 professionals working in 24 offices across nine CIS countries. KPMG has been operating in Azerbaijan since 1997 through a fully functioning office. In 2011 it completely renovated its office and recruited professionals that are experts in financial and advisory services in Azerbaijan. KPMG Azerbaijan has more than 130 professionals working for it, many of which have eight-to-twenty years’ audit and advisory experience in Azerbaijan, Russia, Germany, Turkey, Georgia, and other countries. In the CIS, KPMG now has offices in Baku, Moscow, Ekaterinburg, Kazan, Krasnoyarsk, Nizhny Novgorod, Novosibirsk, Perm, Rostov-on-Don, St. Petersburg, Almaty, Astana, Atyrau, Bishkek, Kyiv, Lviv, Tbilisi, and other regions, employing in total more than 4,000 people.

St. Petersburg Minsk Moscow Lviv Nizhny Novgorod Kiev Voronezh Kazan Perm

Ekaterinburg Rostov-on-Don Ufa Novosibirsk

Atyrau Krasnoyarsk Tbilisi Yuzhno-Sakhalinsk Astana

Baku

Vladivostok Tashkent Almaty

Bishkek

Baku

Introduction to Azerbaijan 7 Working weeks 20

Investment climate 7 Holidays 20 Living and working in Azerbaijan: Useful tips 7 Annual paid leave 20 Starting a business 9 Sick Leave 20 Overview of commercial legal entities 9 Maternity leave 20 Types of legal entities 9 Cost of employment 21 Representative offices and branches 9 Expatriate workers 21 Joint-stock company (“JSC”) 9 General tax information: Azerbaijan 22 An Azerbaijani subsidiary 11 Corporate income tax 22 Limited liability companies (“LLC”) 11 Annual depreciation rates 23 Additional liability companies (“ALC”) 11 Personal income tax 24 Partnerships 11 Value-added tax 25 Cooperatives 11 Property tax 26 Registration 11 Withholding tax 26 De-registration of companies 12 Social fund contributions 27 Registration of changes 13 Other taxes 27 Foreign investment 14 Customs 27 Investment promotion certificates 14 Double taxation treaties 28 Safeguards for foreign investors 15 Tax regimes for companies working under 28 production sharing agreements (PSAs) Bilateral investment treaties 15 Profit tax 28 Licensing requirements 15 Withholding tax 29 Land ownership 16 Value-added tax 30 Documents confirming ownership rights 16 Personal income tax (PIT) 30 Technology parks 17 Social fund contributions 30 Foreign trade 17 Import and export duties and taxes 31 Strategic road maps 17 Reporting requirements 31 Special economic zones 18 Investment certificates 32 Labour law 19 Miscellaneous 33 Minimum wage and the currency of salaries 19 Non-cash settlements 33 Employment agreements and procedures 19 Advanced tax rulings 33 Probationary periods 19 Accounting 35

Country facts

Country snapshot

Capital: Baku (population 2,262,600) Area: 86,600 square kilometres Population: 9.9 million President: Ilham Aliyev Currency: The manat (AZN) Neighboring countries: Russia, Iran, Armenia, Georgia, Turkmenistan, Kazakhstan, Turkey Titular nationality: Azerbaijani (92%) Ethnic minorities: Russian, Lezghi, Talysh, Tatar, Kurds, Avars, Tat Other main cities: Sumgait (population 341,000); Ganja (population 332,600) Autonomy: Nakhichevan Autonomous Republic (population 452,800)

Baku

Investment climate The Azerbaijani government has set as priorities the diversification of the economy, attracting foreign Azerbaijan is an oil-rich post-Soviet Union country investment, integrating with global markets, and situated in the Caspian Sea basin. It has oil & gas sustainable growth. Currency stability, crucial for investor reserves, a developing industrial sector, and fertile confidence, is supported by USD 5.5 billion in CBAR agricultural land. Heavy (aluminium mining and refining, reserves and USD 37 billion in oil fund reserves. metallurgy, oil extraction and refining, etc.) and light industries (textiles, food processing, etc.) dominate the In order to facilitate diversification, the government has market. The country had a nominal GDP of AZN 70135,1 established the National Entrepreneurial Support Fund million in 2017, mainly from oil & gas operations and non- of the Republic of Azerbaijan. The fund primarily works oil economy. The country enjoyed rapid growth between to provide entrepreneurs with low-interest loans. 64.5% 2007 and 2009, following completion of the Baku-Tbilisi- of its loans have been used to develop the agricultural Ceyhan oil pipeline in May 2006; other drivers of the sector, while the remaining 35.5% have be assigned to economy are the Baku-Novorossiysk and Baku-Supsa other, non-oil industries during the first quarter of 2018. pipelines. After completion of the Southern Gas Corridor In April 2016 the President of the Republic of Azerbaijan between Azerbaijan and Europe, revenues from gas signed an order to establish a Centre for the Analysis of exports are expected to increase. Economic Reforms and Communication. The main goals In February 2015 the fall in oil prices put pressure on of the centre are to analyse and assess macro- and micro- the foreign currency reserves the Central Bank of the economic activity and to provide solutions to improve Republic of Azerbaijan (CBAR). The CBAR subsequently overall economic stability in all areas by analysing and devalued the manat (AZN, the national currency), implementing best international practices and improving replacing a hard peg to the USD with a euro-dollar basket. existing domestic ones. The exchange rate has now stabilised at around 1 USD/1.7 AZN (for more information visit www.cbar.com). Living and working in Azerbaijan: A GDP surplus of 2.3% was witnessed in the first quarter Useful tips of 2018, driven by exports and imports. Non-oil exports rose by 2.9%, due to strong performance in the various Learn Azerbaijani. Azerbaijani language is the official fields of economy. language of Azerbaijan, however Russian is also commonly used, especially in large cities. Knowing The Azerbaijani economy is expected to expand from the second half of 2018, as a result of an increase in oil GDP Russian or Azerbaijani will not only help you in everyday revenue following the Shah Deniz-2 gas field coming on communications (many street vendors, waiters, and shop line. assistants do not speak English), but also when doing business. Even if you hold meetings in English or use an The policy “Strategic Road Maps for the Domestic interpreter, it can still be useful to know how things are Economy and the Main Sectors of the Economy” is expected to boost the development of the non-oil being translated and whether anything is being missed sector through fostering a sustainable and competitive out. environment, particularly in agriculture, logistics, and Cultivate personal relationships. Relationships are tourism. The policy was approved in December 2016 important when it comes to doing business. Supportive and its content is still being evaluated by experts, who and open business relations help build strong enterprises are ascertaining the best method of implementation. and long-lasting friendships. Long-term economic development will depend on the diversification of the economy and the non-oil sector, Personal safety should not be a concern. Baku and other to what extent gas exports can be increased, and what cities are safe or safer than many other major Western happens with global oil prices. cities. The national culture and traditions encourage The investment climate in Azerbaijan is developing respect and tolerance towards people, particularly the steadily, although considerable challenges remain. elderly and visitors. That said, it is inadvisable to walk The Nagorno-Karabakh conflict and a lack of foreign around unfamiliar areas of the country’s cities at night investment into the non-oil sector are dragging the without a guide. economy down. Another major issue is corruption, both in the public and private sectors, (a number of measures have been taken to combat this, such as the creation of ASAN – a one-stop window concept for government services and to improve the work of customs officials).

Mind the traffic!Expats who hire a Routine issues: local driver for themselves and their —— As an expat (except those with a children should choose individuals ‘highly qualified’ visa status), you that are competent and patient. must register and deregister each Expats who drive themselves, or time you travel abroad or away walk, should exercise caution, as from your place of residence in drivers in cities have a reputation for Azerbaijan. sometimes driving recklessly. —— To pay some bills, you must physically go to a bank and pay in Qualified medical services are cash. Fortunately, cash machines available. While there are many are widespread. qualified doctors in the country, expats often prefer doctors who —— Car registration can take one- speak English or their own native to-two days, or someone (a language. In general, medical legal representative) can do it personnel speak Russian and on your behalf if you grant them Azerbaijani, and in recent times a power of attorney (although private medical services have been this may come with a fee and widely introduced in the country. be time-consuming). The power of attorney can be granted for a Great cuisine. There are many good- period of one year. quality restaurants, both in Baku and While the above does not cover all throughout the country. aspects of living in Azerbaijan, it is sufficient to show that expats If you are coming to stay: can and do live safely, successfully, and happily in the country, often —— An exemption from customs with their families, and often over a duties is available for people lengthy period of time. bringing household goods into Azerbaijan, provided that the quantities are within prescribed Customs Union limits. —— Since 12 July 2016 tourists coming to visit Azerbaijan have been able to benefit from a tax- free system. —— Qualified (even English-speaking) domestic help can be easily found through other expats. —— English, French, and other foreign language schools cater for expat children in Baku (as well as some other cities), although you should be aware that the choice of school and the range of education on offer may not be as great as that in your home country.

Baku: Heydar Aliyev square

Representative offices Joint-stock company Starting and branches (“JSC”) Under Azerbaijani legislation, Under Azerbaijani legislation, JSCs branches and representative offices operate with the purpose of issuing of foreign legal entities are not securities. They can be in the form considered to be legal entities. of open and closed JSCs. a Business From a practical standpoint, branches and representative offices, Open joint-stock companies in terms of their legal nature, are An open joint-stock company (OJSC) very similar. Civil legislation defines is a company which has its charter Overview of commercial representative offices as divisions capital divided into a certain number legal entities of a legal entity that represent and of shares. OJSCs can be established protect the interests of that legal by one or more individuals or legal The procedures by which legal entity in another country. persons and have their shares openly entities are established in Azerbaijan However, a branch is a division of sold to the public and acquired by are mainly regulated by the Civil a legal entity that carries out all or third parties, without restrictions. 1 Code and the Law “On State some of the functions of that legal An OJSC’s shareholders are not Registration and the State Register entity in another country, including, liable for the company’s obligations; 2 of Legal Entities” . In order to but not limited to, representation in fact, the liabilities shareholders simplify the registration procedure and the protection of its interests. face in OJSCs are limited by their for commercial legal entities, as Consequently, under civil law, shares, meaning that their liabilities well as branches and representative representative offices cannot be can only extend to the amount that offices of foreign legal entities, engaged in commercial activities. they have contributed to the charter President Ilham Aliyev signed an capital. order in October 2007 according It should be noted that the An OJSC’s charter capital cannot be to which the registration of new Constitutional Court of the Republic less than AZN 4,000. The general commercial entities was simplified of Azerbaijan in its resolution on meeting of shareholders is the via the introduction of a one- this issue ruled that if a foreign supreme supervisory body of an stop shop principle. This allows legal entity’s charter allows its OJSC, and it must convene at least commercial entities to be registered representative offices in other once a year. within two business days under a countries to conduct commercial simplified application procedure. activities, then those representative The Charter / Acts of Incorporation The Ministry of Taxes is the offices can perform commercial of an OJSC must contain information authorised body that registers activities in Azerbaijan. Therefore, on: the name of the legal entity, its commercial legal entities in the in practice, representative offices address, its main activities, and country. can perform the same activities as the de-registration rules governing branches. the legal entity. It must also have Types of legal entities The relevant legislation does not information on the categories and distinguish between representative amount of its securities, and their Investors often encounter problems offices and branches. They are prices, along with the amount of when choosing the type of legal both subject to the same legal, charter capital. entity to establish in order to conduct tax, currency, and reporting business in Azerbaijan. Azerbaijan’s An OJSC is required to appoint an requirements. The salaries of civil legislation covers a number of independent auditor to audit its expatriate employees at branches types of commercial entity that can annual financial reports, and the and in representative offices can legally operate in the country. These annual financial reports of OJSCs be paid by the head office to their comprise: must be published. overseas accounts. —— representative offices and In recent years, Initial Public Branches are free of any requirement branches of foreign legal entities Offerings (IPO) have become more to have charter capital. In addition, popular for companies in Azerbaijan, —— joint-stock companies: open branches and representative offices and this has been one of the reasons (OJSC) and closed (CJSC) joint- cannot be re-organised (for example, behind the rise of the OJSC as a stock companies via a merger, division, favoured form of legal entity within —— an Azerbaijani subsidiary or acquisition). the business community —— limited liability companies (LLCs) in Azerbaijan. —— additional liability companies (ALC) 1 Civil Code of the Republic of Azerbaijan, effective as —— partnerships of 1 September 2000 —— cooperatives 2 Law “On State Registration and the State Register of Legal Entities”, effective as of 31.01.2004

Closed joint-stock companies interests. Another distinctive share fund in full prior to the state feature of this legal form is its registration of the cooperative. If at A CJSC shares a number of features exemption from a minimum capital the end of the fiscal year a cooperative with an OJSC, although there are requirement. reports financial losses, the members several distinctions between them as must cover them by making additional well. CJSCs differ because: Moreover, the sale of stakes in an LLC contributions no later than two to third parties can be limited by the —— Their shares are circulated among months after the date that the annual LLC’s charter. its shareholders and also within a balance sheet was approved. An pre-determined group Additional liability individual who joins a pre-existing —— The minimum amount of charter cooperative bears liability for the capital is AZN 2,000 companies (“ALC”) cooperative’s incurred obligations unless the charter of the cooperative An ALC is a legal entity that can be —— Shares in CJSCs can be sold to stipulates otherwise. Individuals are established by one or more persons, third parties if they are not bought informed of such obligations prior to with its charter capital divided into a by the CJSC’s other shareholders joining the cooperative. under pre-emptive rights specific number of stakes, as defined in its charter. An ALC shares similar A cooperative’s profit is divided —— CJSCs with more than features with an LLC, although the among the members of the 50 shareholders must be exposure to an ALC company’s cooperative in proportion to reorganised into an OJSC within liabilities for its members can exceed their contributions. In addition, a one year. their contributions, as regulated in cooperative’s profit may be distributed the charter. to the cooperative’s founders, used An Azerbaijani subsidiary to settle creditors’ debts or to pay Azerbaijani law does not provide Partnerships dividends, or used for other matters, any legal definition of a “subsidiary”, A partnership is a form of legal as covered by the cooperative’s although Azerbaijani legal entities entity established by one or more charter. established by foreign legal entities members either in general or are considered to be subsidiaries. limited types, with its charter capital Registration These subsidiaries, i.e. the divided into a certain number of LLC Azerbaijani legal entity, are most stakes. Such entities have several commonly registered as limited distinctive features compared to An LLC is established through liability or joint-stock companies. other types of legal entities, in the adoption of a resolution or Between these two, the former is accordance with the requirements via a founders’ agreement at an considered the most preferable of their founders, liabilities, and incorporation meeting. The meeting also approves and adopts its charter. choice for conducting business. corporate governance. Under the In order to operate as a legal entity, Civil Code, only entrepreneurs and/ LLCs must register with state Limited liability or commercial entities can establish authorities in Azerbaijan. To do this, companies (“LLC”) general partnerships. In addition, an application package containing partners in such entities continue to LLCs are one of the most widely used all required documents must be bear a liability towards it, even after submitted to Ministry of Taxes. types of company for performing leaving. Members (general partners) LLCs are registered within two commercial activities in Azerbaijan. are also jointly and severally liable working days after the submission An LLC is a legal entity that can be for the partnership’s liabilities. of all the required documents to the formed by one or more individual registration body. and/or legal entities. Members’ liabilities in LLCs are limited to Cooperatives Also, LLCs established by their stakes, which means that their A cooperative is a voluntary union Azerbaijani individuals, as well as liabilities can only extend to the of members that can be founded legal entities, can be registered in one day by submitting an amount of their contributions to the by at least five individuals and/or e-application. company’s charter capital. Moreover, legal entities with the purpose of while members of an LLC do not bear satisfying the material and other any liability towards its obligations, needs of the participants through JSC an LLC in turn does not have any consolidation of the participants’ A JSC is established through obligations towards its members’ material contributions. Cooperatives a meeting of incorporators, liabilities to third parties. An LLC is fall into various categories, including which adopts a resolution on the required to appoint an independent production cooperatives and establishment of the company as well auditor to verify its annual financial consumer cooperatives. as its charter. JSCs, together with reports. other commercial legal entities, are Membership of a cooperative The share capital of an LLC registered by the Ministry of Taxes in comprises assets that guarantee the Members of a cooperative must two working days after submitting all minimum amount of its creditors’ make respective contributions to the required registration documents.

As similar to the registration among other decisions, to appoint In addition, the Liquidator/ process for LLCs, to register JSCs a sole liquidator or a liquidation Commission must submit final tax in Azerbaijan the founder(s) should commission (the "Liquidator/ returns to the Ministry of Taxes submit an application form with Commission") and authorises it to within 30 days after the date that the certain other documents depending carry out all necessary steps to de- Liquidation Resolution was adopted. on whether the founders are register the company. In practice, a The final tax returns should cover all individuals or legal entities, and third party or parties are appointed activities, from the beginning of the foreign or local. However, unlike by the Liquidator/Commission to year until the liquidation date. LLCs, the full value of an JSC’s shares perform all relevant actions pertaining must be paid prior to its registration to the company’s de-registration. An application letter, together with (with the exception of cases where the Liquidation Resolution, must be The Liquidator/Commission can issue its charter specifies otherwise). submitted to the Social Protection to the third party(-ies) a power of Moreover, the shares of JSCs must Fund alongside with a request to the attorney to take all necessary actions be registered separately with the Ministry of Taxes for confirmation to de-register the company. Both the Financial Markets Control Chamber, that the company does not owe Liquidation Resolution and power and the JSC must also be registered any debt(s) to the Fund. Once it is of attorney should be notarised and within 30 business days at a central established that the company does apostilled if they were issued in a depository. not have any debts, the Fund will foreign country. issue a letter (a "Clearance Letter") Branches or representative The first stage of the de-registration which must then be submitted to the offices process also includes making Ministry of Taxes. an announcement in an official The process by which branches and The following procedures must be newspaper (the newspaper “Taxes”), representative offices are registered performed at any time between the which contains details about the is similar to that for legal entities: official liquidation announcement procedure and the timing for claims they are registered via the Ministry of (i.e. Stage 1) and the submission of by creditors. This must be done within Taxes’s one-stop shop principle within the final package of documents to the 10 (ten) days after the date that the two working days after all required Registration Body (Stage 2): Liquidator/Commission is appointed. documents are submitted. This information must be published —— the termination of employment It is important to note that branches on two more occasions at intervals contracts with existing employees, and representative offices function of 15-20 days. Thus, in practice, the which must be performed in on the basis of regulations that announcement gives the company’s accordance with labour law are similar to the charters of legal creditors an opportunity to claim —— the closure of bank accounts: entities. All documents issued the repayment of their loans (i.e. the after the company’s accounts outside Azerbaijan must be certified branch’s debt). Creditors have at least have been closed, a letter from and apostilled/legalised. However, 60 days to submit their claims from the relevant bank(s) should be the apostilles of some countries are the date of the first announcement. obtained confirming this fact not recognised in Azerbaijan (for Notifications must also be sent to all —— VAT de-registration example, Germany’s), therefore, known creditors at the same time as all documents that cannot be the announcement is made in Taxes. A tax audit is conducted by the apostilled must be legalised. Also, all Ministry of Taxes and/or State Social In addition to the above documents, documents issued abroad in foreign Protection Fund. the head of the company must create languages must be translated into an official document confirming the It may in practice take longer and Azerbaijani and notarised by the solvency of the company, or engage require more efforts than are notary public in Azerbaijan. an independent auditor to provide a stated above to secure a successful report on the solvency/insolvency of outcome to the audits, as the inspector(s) may challenge the De-registration of the branch at least 20 days prior to documents/payment orders/returns adopting the Liquidation Resolution. companies of the company, or require additional The process of liquidating and de- The company’s stamp and respective supporting documentation/evidence. registering companies in Azerbaijan application form must be submitted It can take several months to consists of two main stages. to the Ministry of Taxes (the complete an audit(s) and to finalise “Registration Body”), together with the de-registration process. Stage 1 above-mentioned documents. Upon the expiry of the 60 (sixty)- This involves adopting a decision Once these documents have been day period from the placement of to liquidate the company (passing submitted to the Registration Body, the announcement, the Liquidator/ a “Liquidation Resolution”) by the the latter must enter the submitted Commission will prepare and approve an interim liquidation founder(s) of the company. The information into the State Register of balance sheet reflecting information founder(s) of the company resolves, Legal Entities within five days. about the assets of the company

being liquidated and a list of the —— a document confirming that the be submitted to the within 40 (forty) claims creditors and debtors can distributed assets have been days after the date that the changes make within 10 (ten) days. provided to the participants of the were made. The respective changes Any outstanding Company company must be included in the application form submitted with the other obligations to creditors and to —— the original Certificate of documents certifying the changes. the state budget must be settled. Incorporation and the regulations/ The Liquidator/ Commission must charter of the company It should be noted that changes to the initiate bankruptcy proceedings if a documents of legal entities, branches company’s assets are insufficient to —— a stamp bearing the inscription or representative offices are binding settle creditors’ claims. “undergoing liquidation” once they are registered with the The Liquidator/Commission must —— clearance letters from the state. Legal entities, branches split the remaining assets between customs authorities and the or representative offices cannot the members (i.e. the founder(s)) of Social Protection Fund perform any activities based on the company) within 10 (ten) days changes that were not registered. after the final liquidation balance is The company’s de-registration adopted. decision must be adopted by the Recent legislative changes have Registration Body within 7 (seven) increased fines for the non- Stage 2 days after all required documents submission to the Ministry of Taxes The Liquidator/Commission must being submitted. within 40 days of applications submit the following documents to Registration of changes relating to changes to registration the Registration Body within 10 (ten) documents. Under the Code of days after the date that the assets Under the Law “On State Registration Administrative Offences, respective were shared among the founder(s) of and the State Register of Legal fines of between AZN 2,500 and AZN the company: Entities”, changes made to the 3,000 can be imposed. registration documents of legal —— the approved final liquidation entities, branches or representative balance offices must be registered with the —— a report outlining the asset Ministry of Taxes. The application distribution plan to register respective changes must

Baku: Heydar Aliyev International airport

The legal regime governing the foreign investor’s activity cannot be less favourable than that for Foreign Azerbaijani citizens and legal entities regarding their properties, property rights, and investment activities. investment Legislation may prescribe restrictions and prohibitions on the territorial scope of an investment project related Foreign investment in Azerbaijan is to defence, national security, or the primarily regulated by the Law “On protection of the environment and the Safeguarding Foreign Investment” public. and the Law3 “On Investment Activity4” A savings fund should be created, comprising 25% of the charter capital Foreign Investment from annual deductions. The size of the deductions and the currency are Foreign investors can engage in determined by the entity itself. any investment activity that is not prohibited by Azerbaijani law. Under the law “On Safeguarding Foreign Investment promotion Investment”, the following can act as certificates foreign investors: Under legislative amendments —— foreign legal entities made in April 20165 investors can, depending on the area of economic —— foreign citizens, stateless activity, the administrative territory, persons, and Azerbaijani citizens and the investment threshold, with permanent residence abroad receive various tax and customs only if they are duly registered to benefits through an investment perform economic activities in the promotion certificate. These include state where they are citizens or a 50% income tax exemption and a temporarily residents 100% property and land assets tax exemption, as well as exemptions —— foreign states from customs duties. The minimum —— international organisations investment requirements for each region can vary between AZN 0.5 and The following list provides the legal 10 million. forms that foreign investments can The main criteria for qualifying for a take: certificate are as follows: —— participating in entities —— an investment plan that contains established jointly with legal information on the investment entities and Azerbaijani citizens area, amount, and location —— establishing enterprises wholly —— confirmation of payment of 10% owned by foreign investors of the total investment amount —— purchasing enterprises, —— a tax registration certificate proprietary facilities, buildings, structures, shares in enterprises, The investor has the right to contact other shares, bonds, securities, the Ministry of Economy to check and other kinds of property which, compatibility with the other two criteria before investing the 10% under Azerbaijani law, may be amount, and the Ministry must owned by foreign investors respond within five business days. —— obtaining rights to use land and The ministry then informs the other natural resources, as well as Ministry of Taxes and the State other proprietary rights Customs Committee within three days prior to issuing the certificate. —— concluding agreements with legal Once issued, the certificate will entities and Azerbaijani citizens entitle the investor to the above tax that provide for other forms of benefits for a period of seven years. Istiglaliyyat Street in Baku foreign investment 3 Law “ On safeguarding foreign investment”, effective as of 15.01.1992 4 Law “On Investment Activity”, effective as of 13.01.1995

Safeguards for foreign 30% foreign investment can export meaning that it can be used by the manufactured products (works, licensee only. investors services) without a license. Online portal on “Licenses and Under Azerbaijani legislation the Property brought to Azerbaijan as part permits” has been recently following guarantees exist for foreign of foreign investor savings in a joint introduced giving opportunity of investments: venture or for an entity fully owned by receiving information on available —— Foreign investments enjoy full foreigners is exempt from tax duties. licences and permits, authorities legal protection in the territory issuing them, description of details, of the Republic of Azerbaijan. If Bilateral investment list of required documents, state there are any legislative changes fees, service fees, information for that worsen the investment treaties individuals and legal entities and climate, then the legislation that Azerbaijan has concluded over other information. was in force when the foreign 60 bilateral treaties on the mutual A license (or permit) must contain investment was made will apply protection of investments. And information on the name of the for a period of 10 years, and the in November 2002 it signed with issuing authority, its owner, and the new amendments will not apply. the OPEC Fund for International field of permitted activity. Licences are Development a multilateral treaty on —— The nationalisation of a foreign classified under general and special the mutual protection of investments, investment is forbidden by types, with the general type granting which was ratified on 9 December law, except in cases where a the right to engage in a commercial 2003. foreign investment has damaged activity without having to obtain the interests of the people Licensing requirements a separate license for each sub- and the state of Azerbaijan. category. Business activities that are licensable Nationalisation is possible only In contrast, the holder of a special in the Republic of Azerbaijan are through a resolution passed license will need to obtain a regulated by the Law “On Licenses by the National Assembly. separate license for each sub-type and Permits”5 and the Rules Confiscation is also possible; of activity stipulated in the license. “On the Issuance of Licenses”6. however, only under the The suspension or termination of These introduced a number of circumstances of a natural an activity indicated in a general simplifications to the licensing disaster, an epidemic, or any license does not serve as a basis for procedures under the ‘one stop shop’ other extraordinary situations terminating or suspending other principle. and following a decision by the activities contained in the license. Cabinet of Ministers. In cases Under the above law, a license is An application to renew a licence of both nationalisation and defined as an official document can be made upon there being confiscation, foreign investors which grants the right to legal entities changes in the field of activity of the must be compensated. and self-employed entrepreneurs entrepreneur, the re-organisation to engage in commercial activities. —— Foreign investors are entitled of an entity, or during the loss of the A permit is defined as an official to repatriate profits, revenues, issued licence within 15 days and other amounts received document providing rights to perform in connection with their relevant actions in connection Licences can also be suspended or investments, provided that all with conducting entrepreneurial terminated by the issuing authority if applicable Azerbaijani taxes have activity, which could be in the they are not used for their respective been paid. form of approvals, certifications, permitted purposes, and in other accreditations, etc. circumstances prescribed by law. —— The income gained by foreign investors can be reinvested in the Global recognition of Azerbaijani same currency that the original licences, as well as the recognition investment was made in, kept in of foreign licences in Azerbaijan, Azerbaijani banks, and spent on may be possible under international purchasing foreign currency in agreements. accordance with the rules of the The list of activities that requires a CBAR. license has significantly been reduced Entities that have received foreign in areas relating to state security, investment can form associations, natural reserves, the environment, concerns, consortiums, and other and public health. unions. An application for licences can be submitted electronically and is Legal entities that are fully owned 5 Law of the Republic of Azerbaijan “On licenses and by foreigners and those with a processed within 10 business days. permits”, effective as of 01 June 2016 charter capital comprising more than The license is non-transferable, 6 The Decree of the President of the Republic of Azerbaijan #713 on “Activities in the field of Licensing”, effective as of 23 December 2015

Presented below is a non-exhaustive list of activities that are licensable in the Republic of Azerbaijan, together with a corresponding list of the state authorities that are responsible for issuing the respective license:

Type of licensable activity Executive authority Toxic industrial waste: Ministry of Economy Recycling; neutralisation Collection of raw, wild medicinal plants Ministry of Economy Private medical activities Ministry of Economy Pharmaceutical activities: production; wholesale; retail Ministry of Economy Pharmaceutical precursors: production; import; export; transit Ministry of Economy Educational activities Ministry of Economy Communication services Ministry of Economy TV and radio operations; satellite broadcasting National Television and Radio Council Elevator installations; fire-fighting activities; individual hunting Ministry of Economy organisations; construction and installation works; private veterinary medical activities; mining works Manufacture of various types of seals and stamps Ministry of Economy Stock Exchange activity; joint-stock investment fund activities; Financial Markets Market Control Chamber Investment Company Activities; Clearing Organization Activities; Supervisory Authority Depository Activity of the Investment Fund; manufacture and sale issuance of securities blanks; Banking activities and; insurance activities Financial Market Supervisory Authority Financial Markets Control Chamber Audit activities Azerbaijan Chamber of Auditors of Azerbaijan of the Republic of Azerbaijan Private security activities Ministry of Internal Affairs; The Azerbaijan State Security Service of the Republic of Azerbaijan (depending on the scope) Activities in the area of related to the design and manufacture The Azerbaijan State Security Service of production of information protection; the Republic of Azerbaijan

Biometrics technologies and their maintenance of such technologies; The Ministry of Transport, the establishment of personal data information resources and creation Communications and Information High of information systems and, their maintenance Technology

Land ownership of income, growth, or any other Documents confirming form) ownership rights Under the Civil Code, ownership is a —— the right to dispose, defined as 7 subject’s right (i.e. a right belonging the legally protected possibility Under the Land Code , the granting to either to a individual or a legal of determining the legal fate of a legal entities or individuals of rights entity), recognised and protected by to land plots owned by the state or property (estate) the state, to own, use, and dispose of its municipalities is performed based property (estate), belonging to him/ The Civil Code categorises land plots on a decree from an appropriate her at his/her own discretion. Thus, as immovable property. In particular, executive power and based on an an ownership right is an aggregate of the code sets forth that land plots, agreement concluded between the the following rights: as well as separate bodies of water, parties. forests, long-standing harvested The transfer of all rights to land —— the right to own, defined as the farmland, buildings, installations, plots in private ownership from legally protected possibility of and other real estate items closely one person to another is performed taking possession of a property attached to land, are considered to based on agreements concluded —— the right to use, defined as the be immovable property. Under the between the parties. The agreements Civil Code the ownership rights to legally protected possibility of should be notarised. enjoying a property’s (estate’s) immovable property (including land useful features, and obtaining plots) must be registered. benefit from them (benefit from Under Azerbaijani law, foreigners can use may be expressed in the form only lease lands in Azerbaijan.

Rights to land plots (with the to traditional and new markets and —— A Strategic Roadmap for the exception of lease and usage rights to introducing to international markets Development of Heavy Industry land plots not exceeding goods produced in Azerbaijan. Under and Machine-building in the 11 months) are registered in the State a Presidential Order10 steps are to be Republic of Azerbaijan taken to achieve these goals, such as Registry of Immovable Property and —— A Strategic Road Map for the are formalised in a respective registry establishing a Digital Trade Hub of Development of a Specialised extract. Azerbaijan section in the online portal Tourist Industry in the Republic www.azexport.az. This portal assists In addition, the Land Code states of Azerbaijan that rights arising from the purchase persons registered as taxpayers in of land plots in state ownership or Azerbaijan in drafting and signing —— A Strategic Road Map for the owned by the state’s municipalities, documents and agreements in an Development of Logistics as well as rights obtained through the electronic format and conducting and Trade in the Republic of conclusion of deeds related to land trans-border electronic services in Azerbaijan plots and other immovable property, real-time, and establishing electronic —— A Strategic Road Map to Provide must be registered. services that enable exporters to Affordable Housing in the obtain the permits required to conduct Republic of Azerbaijan Technology parks export activities and export custom —— A Strategic Road Map on Technology parks have been declarations in electronic form. The Vocational Education and Training introduced to the Azerbaijan market to portal also issues payments of export in the Republic of Azerbaijan facilitate the sustainable development incentives from the federal budget to of the economy, expand the scope persons exporting non-oil goods, and —— A Strategic Road Map for the of information and communication issues ASAN Imza electronic signature Development of Financial technologies, conduct research, certificates. Services in the Republic of and discover new technologies. Azerbaijan Under a Presidential Decree, the Strategic road maps —— A Strategic Road Map High-Tech Park was established8 – The sustainable and competitive for the Development of a hub containing information and development of the non-oil sector Telecommunication and communication technologies, space in Azerbaijan is a priority within the Information Technology in and telecommunication technologies, country's economic policy. In this the Republic of Azerbaijan and infrastructure to create new regard, the President signed Decree and advanced technologies. Under No. 1897 on "Primary Areas of — A Strategic Road Map a Presidential Decree9, technology Strategic Road Maps for the Domestic for the Development of parks can be created independently Economy and the Main Sectors of Communal Services (electricity, or by a scientific and educational 11 the Economy" , to help ensure the heat, water, gas) in the Republic institution. The first educational and sustainability of economic policy and of Azerbaijan scientific institution to establish a reforms implemented in the country, Strategic road maps are made up of technology park was the Azerbaijan provide an in-depth analysis of the an economic development strategy National Academy of Sciences, and current state of the economy, and and action plan for 2016-2020, a another is set to be established in develop new economic strategies and long-term concept for the period up Mingachevir. In order to operate in a initiatives. Under the decree strategic to 2025, and a view of the post-2025 technology park, the legal entity or road maps have been drafted that period. Projects were openly individual engaged in entrepreneurial cover 12 main economic fields: debated and numerous comments activity should become a resident by —— A Strategic Roadmap for the and suggestions from stakeholders, obtaining a registration certificate, or including civil society organisations become a resident of a technology Domestic Economy of the Republic of Azerbaijan and citizens, were taken into business incubator, which are consideration when drafting the final involved in developing new technical —— A Strategic Roadmap for the document. projects and receive support from Development of the Oil & Gas a technology park. In addition, the Industry (including Chemical 7 Land Code of the Republic of Azerbaijan, approved on concept of a joint technology park Products) in the Republic of 25 June 1999 8 The Decree of the President of the Republic of has been introduced. These can be Azerbaijan Azerbaijan #736 on establishment of High-Technology created on state, municipal, or private Park, dated 05 November 2012 —— A Strategic Road Map for the land plots. 9 The Decree of the President of the Republic of Production and Processing of Azerbaijan #168 on the approval of “Exemplary Foreign trade Agricultural Products in the Regulations on Technology parks” Republic of Azerbaijan 10 The Order of the President of the Republic of In order to make the business and Azerbaijan #1255 on “Additional measures on —— A Strategic Roadmap for the strengthening of Azerbaijan’s position such as Digital investment environment of Azerbaijan Trade Hub and broadening foreign trade operations”, as efficient and convenient as Production of Consumer Goods effective as of 24 February 2017 possible, a number of reforms have in Small- and Medium-sized 11 The Decree of the President of the Republic of Enterprises in the Republic of Azerbaijan #1897 on "Primary Areas of Strategic Road been introduced, with the main focus Maps for the Domestic Economy and the Main Sectors on increasing exports of local goods Azerbaijan of the Economy", effective as of 17 March 2016

Special economic zones —— Customs duties and taxes do not apply to the export of goods New special economic zones have produced in the special economic been established in accordance zone with the Law “On Special Economic Zones”12, with a view to —— Customs duties and taxes do not strengthening Azerbaijan’s position apply to the import of goods from as a logistics and transport hub and a special economic zone that to create a multifunctional transport imported such goods from outside infrastructure. In these zones the customs zone of Azerbaijan. entrepreneurial activities benefit from —— Customs duties and taxes do a special, favourable legal regime. The not apply to goods produced or following activities are prohibited: processed in a special economic —— the production, preservation, or zone and which are temporarily sale of prohibited or restricted imported into the customs zone goods of Azerbaijan for the purpose of repairing, finishing, and exhibiting —— the extraction of minerals from samples of products and for other the earth similar purposes. —— the extraction and processing of —— Customs duties and taxes do precious metals, oil, oil products, not apply to goods imported and natural gas and exported between special —— broadcasting activities economic zones in Azerbaijan. —— the production of alcoholic drinks The favourable tax regime allows and tobacco products registered residents to pay 0.5% tax (simplified tax) on revenue earned In order to operate in a special from the sale of goods, performing economic zone, legal entities works, provided services, as well as and individuals should become non-sales income. residents by signing a memorandum The investments, revenue, and of association with the zone’s income of special economic zone administration, registering, and residents performing entrepreneurial receiving a certificate. activities are guaranteed by the Residents benefit from a favourable state, and residents can transfer customs regime; at the same time: abroad funds that have been legally obtained. When creating a special —— Import duties and VAT do not economic zone, the state guarantees apply to goods imported from that the special legal regime will be in outside the customs zone of effect throughout the entire period of Azerbaijan (except for excisable activity of the zone. goods). The first special economic zone of a —— Customs duties and taxes do not free trade zone type will be opened apply to the export of goods that in the Alat settlement of Azerbaijan, and will include the new Baku were imported from outside the International Sea Trade Port. customs zone of Azerbaijan to a special economic zone and then exported to outside the customs zone of Azerbaijan.

12 Law “On Special Economic Zones”, effective as of 06 June 2006

The employment agreement should contain mandatory provisions, such as: the full name and address Labour of the employee; identification document details of the employee; the employer’s name, the taxpayer identification number (TIN); the law insurer registration number (IRN); the legal address of the employer; the mutual obligations of the parties Introduction to the employment agreement; the employment contract’s term and other Labour matters in the Republic of mandatory provisions stipulated by Azerbaijan are regulated by the the Labour Code. Labour Code of the Republic of A labour book is a document that Azerbaijan (“Labour Code”) as well constitutes an official record of an 13 as other relevant legislation . The employee’s employment. Labour Code defines an employer An employer must make an as being an owner, or a person appropriate record in the labour appointed by an owner as the head of book of an employee if the person’s an enterprise, who has the authority employment lasts for longer than five to enter into, terminate, or amend days. The labour book plays a key employment agreements with role in establishing the employee’s employees. The working conditions rights to state-provided pension provided by an employer must not be benefits. Employees entering into an less favourable than those set forth in employment contract (except in cases labour legislation. where a contract is concluded for the first time) must provide the employer Minimum wage and the with their labour books. However, this currency of salaries requirement does not apply to forced migrants, refugees, foreigners, or An employee’s salary cannot be stateless persons. Also, the employer lower than the minimum monthly should create a labour book for the wage, which in 2018 stood at AZN 130 employee if it is the latter’s first job. (approximately USD 77). The Azerbaijani manat (AZN) is the Probationary periods official currency in Azerbaijan, and Probationary periods can be stated therefore all salaries are paid in this in employment contracts and cannot currency. exceed a period of three months. In some cases probationary periods Employment agreements do not apply, for example for and procedures employees who are younger than 18, employees that were appointed Under Azerbaijani law, in order to as a result of winning a competition, perform his activities within the scope pregnant women, women raising a of labour legislation an employee child under the age of three and men should sign an employment independently raising a child under agreement with an employer. the age of three, recent graduates Employment agreements are divided taking up their first position, persons into two categories in terms of elected to certain paid positions, and duration: for a fixed term and for an persons entering into an employment unlimited period. In case if the fixed agreement for a period of up to two term employment agreement lasts for months. a period of more than five years, then it should be deemed as agreement executed for an unlimited period.

13 Labour Code of the Republic of Azerbaijan, effective as of 1 July 1999

Working weeks The following days are holidays in the −−with two or more children aged Republic of Azerbaijan: under 14 and women with a The regular working week in disabled child: five additional Azerbaijan is 40 hours, although this —— New Year (1 and 2 January) calendar days can be reduced for some groups. For —— Women's Day (8 March) Employees aged under 16 are eligible example, employees aged under 16 —— Victory Day (9 May) for 42 calendar days’ holiday per year; should not work for more than 24 —— Republic Day (28 May) employees aged 16 to 18 are eligible hours a week, while employees in the for 35 calendar days. 16-18 age category, first- and second- —— Day of National Salvation of the degree disabled employees, as well as Republic of Azerbaijan (15 June) Legislation also prescribes annual pregnant women, women with a child —— Armed Forces Day of the Republic paid leave for such categories aged under 18 months, and single of Azerbaijan (26 June) of employees as teachers and researchers, persons who have parents raising a child under the age —— National Independence Day (18 shown exceptional courage in defence of three should not work for more October) of Azerbaijan, employees with than 36 hours a week. Employees —— Day of the National Flag of work in accordance with the schedule physiological ailments, and certain the Republic of Azerbaijan (9 professions within the entertainment indicated in their employment November) agreement and for not more than a industry and other establishments. total of 12 hours in one day. As a rule, —— Constitution Day (12 November) overtime cannot be enforced unless —— National Revival Day (17 Rules applying to annual November) it is necessary for the purposes of paid leave defending the state, public safety, —— Azerbaijan World Solidarity Day guaranteeing the supply of public (31 December) At the employee’s request and with the consent of the employer, vacation utilities, or for a select number of —— Novruz Bayram (five days) other situations. Overtime cannot time may be divided and granted in —— Gurban Bayram (two days) extend beyond the limits set forth segments, provided that at least one in the Labour Code. For each hour —— Ramadan Bayram (two days) of the segments consists of at least of overtime an employee must be two calendar weeks. An employee’s compensated at a rate that is at least Annual paid leave request for annual paid leave should double their normal hourly rate. In accordance with the Labour Code, be made at least five days before the annual paid leave is provided for each first day of the respective leave. Holidays working year of the employee, and Sick Leave The Labour Code provides with starts from the first working day, while 14 public holidays and one day of the right to annual paid leave starts The employer pays compensation mourning. If one of these official non- six months after a person has begun for the first 14 days of sick leave. working days falls on a day-off (a employment. Compensation for additional days is provided by the State Social Saturday or Sunday), then the first The minimum amount of annual paid Protection Fund. Sick leave is day of normal business following leave is 21 calendar days, although provided based on a respective the official non-working day is a non- some special categories of employees certificate issued by a doctor, and can working day. Work on official public are entitled to a minimum of 30 be extended for up to three (but no holidays and other non-working days calendar days per year. qualifies for higher pay. It is prohibited more than six) days (extensions are Additional annual paid leave is for an employee to work during public allowed in accordance with additional provided in a number of cases: holidays that are not a working day or procedures stipulated in law). during a National Day of Mourning. —— due to working conditions and Exceptions are employees performing the type of specified in legislation Maternity leave work that is necessary for national jobs: a minimum of six calendar Women are entitled to paid maternity defence purposes or to prevent or days of additional paid leave leave for 70 calendar days prior to immediately respond to a social —— for reasons of seniority: childbirth and 56 days (70 in cases of or natural disaster or an industrial −−seniority of five to 10 years: two the birth of more than one child and accident, and restoring order after additional calendar days for difficult births) after childbirth. there has been an accident; during −−seniority of 10 to 15 years: four Women working in the agricultural the performance of work that is vital additional calendar days field are entitled to a longer maternity for the public, such as the supply of −−seniority of over 15 years: six leave term, depending on the water, gas, heat, lighting, sewage additional calendar days conditions of childbirth. facilities; at production facilities where work cannot be interrupted; —— women with children A respective maternity allowance is transportation; public catering; −−with two children aged under paid by the State Social Protection communications and at other entities 14: two additional calendar Fund, not the employer. providing services. days

Cost of employment Panorama of Baku city On behalf of their employees employers are required to pay social security contributions at a rate of 22% of salaries. In addition, employers must insure their employees against occupational illness and workplace injury. Depending on the industry and the occupational hazards involved, insurance premiums for this mandatory coverage vary from 0.2 to 2.0 percent of an employee’s annual gross salary. On behalf of their employees an employer is obliged to withhold income taxes, as well as certain social contributions, at a rate of 3% of the employee’s salary. Additionally, based on the newly presented Law “On the unemployment insurance”, employer and employee are obliged to pay 0.5% of the calculated salary fund of the employer and 0.5% of the employee’s salary (through withholding by the employer) respectively. Also, if an employer signs a life insurance agreement with an insurer, the employer is exempt from the 22% social contribution from the employee’s salary. Expatriate workers Expatriates wanting to work in Azerbaijan are required to register at their residence address (within 10 days after arrival in the country) and to obtain a work permit. Work permits are issued by the State Migration Service for periods of three-to-six months or for up to one year. The heads of representative offices and branches of foreign legal entities (and their deputies) are not required to obtain work permits to work in Azerbaijan. In contrast to a work permit, a residence permit is compulsory for everyone wishing to live and work in Azerbaijan. Following amendments to the Migration Code in May 2016, the founders and deputy founders of local legal entities are also exempt from obtaining a work permit.

The Republic of Azerbaijan currently —— the performance of any other has three tax regimes in place: preparatory or auxiliary activities 1. A statutory (Tax Code) regime. Foreign companies not creating a PE are subject to withholding tax at the 2. A regime for companies (oil & source of payment on any taxable gas) working under production income from Azeri sources. sharing agreements (PSAs). 3. A regime for companies Tax base: The taxable base is operating under host government net profit that is income minus agreements (HGAs). deductible expenses. Tax rate: The profit tax rate in List of main taxes under statutory Azerbaijan is 20%. An additional regime: branch remittance tax of 10% applies —— corporate income tax to profit remittances from the branch —— personal income tax to the head office. The taxable base —— value-added tax is net profit after taxes. —— property tax Deductible expenses: Expenses resulting from entrepreneurial —— withholding tax activities, with the exception of non- —— social fund contributions deductible and/or limited expenses, —— other taxes can under the Tax Code be deducted from the gross income earned Corporate Income Tax from conducting these activities. Taxpayers: Both residents and non- Expenses not connected with residents are subject to income tax income-earning activities, personal in Azerbaijan. For Azeri residents, expenses, and entertainment their worldwide income is taxable. expenses are non-deductible. For non-residents, income generated Financial sanctions, administrative from sources in Azerbaijan is penalties, and calculated interest taxable. amounts stipulated by other Permanent establishments (PE): legislative and regulatory acts The Tax Code defines a PE as an (excluding interest, fines, and entity that conducts commercial payments for material damages activities for not less than 90 days, incurred due to the late fulfilment of cumulatively, in any 12-month obligations, and other similar fines period. However, in spite of this incurred via civil contracts) are non- definition, the Tax Code also deductible expenses. provides that entities solely The Tax Code also prescribes rules conducting any or all of the following and limitations for the following activities do not qualify as a PE in deductions: interest payments Azerbaijan: Tax Ministry of subject to limitations, bad and Azerbaijan Republic —— the storage and display of goods doubtful debts, insurance reserve —— the storage of goods for funds, scientific research and processing by another entity experimental design, depreciation of and subsequent export from fixed and intangible assets subject Azerbaijan to limitations, repairs subject to limitations, insurance payments, —— the procurement of goods and geological explorations, and the the collection of information extraction of natural resources.

Depreciation: All assets with residual These depreciation rates are applied Transfer prices can apply to values of over AZN 500 and with a to the residual value of their asset transactions between the following useful life of over one year should be categories. Depreciation may be persons: capitalised and expensed through applied at rates lower than the —— Azeri residents and related-party de¬preciation. The depreciation rates maximum rates listed above. The non-resident persons adopted by Azeri law depend on the leftover balance resulting from using category to which an asset belongs. the lower rate can be claimed in —— transactions between the PE The following are the maximum future periods. of non-residents of Azerbaijan depreciation rates by category for the and a non-resident, or any Payment and reporting: Taxpayers most common groups of assets: representative offices, branches, are required to make quarterly divisions of this non-resident in advance (current) tax payments, other countries Annual depreciation calculated either: —— transactions between an Azeri rates: —— at 25% of the previous year’s tax resident or the PE of a non- liability, or resident in Azerbaijan, and —— by multiplying the amount of their persons established (registered) Buildings, constructions, 7% income in the current quarter by in offshore zones the weighted tax coefficient of and installations If comparable data on separate the gross income for the previous transactions are unavailable and/or it year. The formula below explains is not possible to obtain information Equipment and this calculation in more detail: 20% from official sources on the price machinery Current (advance) profit tax = at which goods were provided, “current quarter’s gross income” the transfer price is determined by Hi-tech x (last year’s profit tax / last year’s referring to one of the following computers and 25% gross income). methods: servers An annual profit tax declaration is —— the subsequent sale price method due no later than by 31 March of Means of —— the cost-plus method 25% the following reporting year. This transport deadline can also be extended by —— the level of profit method three months, provided that the tax is —— the allocation of profit method Livestock 20% paid in full by the original due date. Transfer prices only apply to Transfer pricing: Transfer prices are operations with a value exceeding average prices, defined by dividing AZN 500,000. Individuals conducting Geological and the sum of the prices created in 25% such operations must submit to the exploration costs comparable transactions conducted tax authorities a relevant certificate under similar conditions between no later than by 31 March of the the parties (other than controlled following year. 10% or persons) by the number of the proportion- transactions. Intangibles ally to the useful life (if known) Baku

All other assets 20%

Assets purchased for state entities Rates over through a *40% federal budget investment

Personal income tax −−the individual will be resident in Non-residents: Azerbaijan if the individual has —— Diplomats, their family members, Taxpayers: Both residents and non- a permanent place of residence residents are subject to personal in Azerbaijan but not in another and the personnel of international income tax. country; or organisations registered in Azerbaijan (e.g. the UN), provided −−if the individual has a Azeri residents are taxed on their that they do not perform business worldwide income, while non- permanent place of residence in Azerbaijan and another activities in the country. residents are taxed only on their country, or has no permanent Azeri-sourced income. Tax on Azeri- —— Diplomatic representations, place of residence, the consulates, and other official sourced income is normally paid individual will be resident in representatives of foreign by deducting the tax at source, at Azerbaijan if the individual’s countries, international progressive rates. Income from place of main interest is in overseas sources is assessed on a Azerbaijan; or organisations, and branches and representative offices of foreign current-year basis for residents. −−if it is not possible to determine legal entities not performing where the individual’s place Residents: of main interest is located, the business activities. —— Physical persons staying in individual will be resident in —— Other persons not covered by the Azerbaijan for more than 182 days Azerbaijan if their normal place term “resident”. of residence is in Azerbaijan; or in the calendar year. PIT rates: −−if it is not possible to determine —— If the individual was present in where the individual’s place of Monthly taxable Azerbaijan for less than 183 days normal residence is located, Tax rates income in a calendar year and was not the individual will be resident present for more than 182 days in in Azerbaijan if they are an Up to AZN 2,500 another country: Azeri citizen (around USD 14% 1,470) AZN 350 + 25% of amounts Over AZN 2,500 exceeding AZN 2,500

Ganja

The portion of employment income accounts. Only VAT payments made equivalent to the minimum living through these accounts can be wage is exempt from taxation if the credited against output VAT. This VAT monthly income of the individual is then claimable by the payer of the Baku: Flame tower gained at the principal place of work VAT (subject to the fulfilment of other is less than AZN 2,500. The minimum requirements). legal living wage in Azerbaijan in Failure to remit VAT later than the day 2017 was AZN 155. of payment of the principal amount The taxable income of individuals for the goods (services, works) is engaged in entrepreneurial activities subject to financial sanctions of 50% is subject to tax at a rate of 20%. of the overdue VAT amount. Declaration and payments: If a Electronic VAT invoices: All payers of taxpayer’s only income is from Azeri VAT are required to issue electronic sources, and if these sources are VAT invoices. The general format, subject to withholding tax at source, details, and requisites of these, then the individual is not required to as well as the issue procedures, complete an income tax declaration. amendments, and invoice cancellations, are specifically set Both residents and non-residents forth in the Rules on Electronic VAT must complete and file income tax invoices. declarations no later than by 31 March of the following tax year. Tax Output VAT: Once an entity is payments must be made by the filing registered as a VAT payer, it is deadline. required to charge VAT for its goods, performed work, or services The deadline for income tax rendered in Azerbaijan. VAT charges declarations can be extended by should be made on electronic VAT three months, provided that the invoices. respective tax is paid in full by the original due date. The place of sale of goods is considered to be the place where the Value-added tax goods are passed to the purchaser. Commercial activities carried out in For goods that require transport, the Azerbaijan and the import of goods place of supply is considered to be and certain services provided by where the transport journey of the non-residents to Azeri residents are goods began. subject to VAT. The Tax Code defines the place of Rate: The standard rate is 18%, the provision of services for some although some transactions are service types. For advertising and exempt or carry a rate of zero. consulting services, as well as data processing and similar services, Registration: Taxpayers must the place of provision of services is register for VAT purposes if turnover defined as the place of incorporation in a consecutive 12-month period or location of the entity receiving the exceeds AZN 200,000. Furthermore, work or services. if the total value of one transaction or contract exceeds AZN 200,000, Input VAT: In general, Input VAT paid the taxpayer must register for VAT to customers (and reverse charge purposes before commencing its VAT) can be credited against output activities. The Tax Code also permits VAT. voluntary VAT registration. Excess VAT: (the positive difference Where services are provided by between input and output VAT) may non-resident entities that are not either be refunded or offset against VAT registered in Azerbaijan, the other taxes. Tax refunds are difficult resident must self-assess a reverse- to receive in practice, although charge VAT and remit it to the federal offsetting against other taxes (e.g. budget. profit tax) is usually allowed by the tax authorities. VAT deposit account: All payers of VAT are required to make their VAT payments through designated bank accounts called VAT deposit

Declaration and payments: —— properties belonging to —— 10%: payments to entities educational, health, sport, and established in countries or Declarations should be filed and VAT cultural institutions used only for territories with a beneficial should be remitted monthly, by the officially designated purposes taxation regime 20th of the following month. Output VAT is recognised on an accrual Declaration and payments: Parties making the above payments basis, while input VAT is recognised Taxpayers are expected to submit to non-resident entities are required on a cash basis. VAT on imported declarations by no later than 31 to withhold taxes at the above rates goods is paid separately at the point March of the following year. The and then remit the taxes to the Azeri of customs clearance. tax due is payable in quarterly federal budget. instalments by the 15th of the second Withholding tax returns are month of the calendar quarter, at a Property tax submitted on a quarterly basis by rate of 20% of the property tax due Property tax is levied at the rate of the 20th of the month following the for the previous year. 1% on the average annual residual reporting quarter. value of fixed assets, including Withholding tax buildings, machinery, and equipment Branch tax (a tax on the net (excluding vehicles). The taxable A foreign legal entity that is not a profit of a non-resident’s PE): In base is calculated as the average of taxpayer in Azerbaijan is subject to addition to the profit tax paid by the value at the beginning and end withholding taxes on income derived the non-resident’s PE, each amount of the year. For profits tax purposes, from sources in Azerbaijan at the transferred from the PE’s net profit to property tax is deductible. following rates: that non-resident is taxed at a rate of 10%. The following are specifically exempt —— 4%: insurance payments from property tax: —— 6%: telecommunications and Income received in countries with —— facilities that are used for international transport services; a beneficial taxation regime: freight income environmental preservation, Moreover, if a resident directly or fire protection, or civil defence —— 10%: dividends indirectly holds more than 20% of purposes —— 10%: interest the charter capital or has more than —— product-conveying pipelines, 20% of the voting shares of a non- railways and motorways, —— 14%: lease payments resident entity earning income in communication and power —— 14%: royalties countries with a beneficial taxation transmission lines, and irrigation regime, such income of the resident —— 10%: other income from Azeri system facilities is included in its taxable income in sources Azerbaijan. —— vehicles discussed under the “Road Tax” section

Countries or territories that have a beneficial taxation regime are listed below: —— Andorra —— Hong Kong (China) —— Nauru —— Anguilla —— Cayman Islands —— Niue —— Antigua and Barbuda —— Cook Islands —— Panama —— Aruba —— Costa Rica —— Palau —— The Netherlands Antilles —— Guernsey —— Seychelles —— Bahamas —— Grenada —— Saint Kitts and Nevis —— Bahrain —— Liberia —— Samoa —— Bermuda —— Liechtenstein —— Saint Vincent and the Grenadines —— British Virgin Islands —— Maldives —— Saint Lucia —— Belize —— Isle of Man —— Turks and Caicos Islands —— Barbados —— Marshall Islands —— Vanuatu —— Gibraltar —— Montserrat —— Virgin Islands (US) —— Jersey —— Monaco —— Dominica —— Macau (China)

The above list is updated by the respective executive authority each year.

Social fund contributions Road tax - Legal entities engaged Customs in the production or import of Employers and employees are automobile fuel, diesel fuel and Import taxes: Three main types of responsible for making payments liquid gas and expatriates are obliged calculation exist for import taxes: to the social insurance fund. The to pay road tax. The road tax rate Ad valorem – Calculated as a employer pays 22% of an employee’s varies, depending on the vehicle percentage of the cost of imported gross salary, with the employee engine volume, weight carried, and goods. This rate can vary between paying 3% of their gross salary. This wholesale fuel price per litre. 0% and 15%, depending on the type 3% is withheld from the gross salary of goods. by the employer. Simplified tax - This tax is mostly aimed at small enterprises, as well as Specific – Calculated at a fixed rate Other taxes construction sector entities. Persons paid per imported unit. not registered for VAT purposes and Mining tax - Legal entities and Combined – Calculated as a whose volume of taxable income individuals engaged in the recovery combination of both. for 12 consecutive months is AZN of minerals, crude oil, and natural 200,000 or less are entitled to pay Depending on the value of gas in Azerbaijan are required to pay simplified tax. Simplified tax is imported goods, customs may mining tax. The rate varies for crude charged at the following rates on the charge from AZN 10 to AZN 550 oil, natural gas, and minerals, from gross revenue of small enterprises: in customs processing fees. In 3% to 26% of the wholesale price, addition, depending on the goods —— 4% on operations in Baku and non-minerals from AZN 1 to AZN imported, certain seasonal and 10 per each m2. —— 2% on operations in other regions special/anti-dumping import taxes Excise tax - Excise goods produced Also, a different rate of tax is applied may apply. Any goods on which in or imported into Azerbaijan are for the following activities: a tax may apply must be declared subject to excise tax, unless the verbally or in writing (either a full —— 6% for trade activities goods are specifically exempt. or short declaration). If the customs —— 8% for public catering services authorities determine that the The following goods are excisable declared value of goods does not and are subject to excise tax: —— 1% for cash withdrawals from bank accounts by legal entities correspond to the value of identical —— spirits, beer, and all other types of and individual entrepreneurs goods, then it may be necessary to alcoholic beverages recalculate the tax. For persons engaged in the —— tobacco products construction of buildings, residential Export taxes: Exports of most goods —— petroleum products and non-residential areas of building are exempt from custom duties; under construction (except for those however, a list of goods exists to —— passenger vehicles (with the which export tax applies. exception of special-purpose owned by the state), including areas motor transport with special of detached private, individual Currently, there are various markings and equipment) residential and holiday home amendments to customs legislation premises, intended for sale, are to ease the customs clearance —— leisure and sports yachts, as well subject to simplified tax. Under the process, automate customs as other vessels designated for Tax Code, the total area of each floor procedures, etc. the above purposes of a constructed building is subject to —— all imported jewellery, together taxation. with products made from Persons engaged in constructing precious metals and processed, buildings and persons selling Sweets and desserts sorted, framed and fixed residential and non-residential areas diamonds under their ownership should pay —— fur/leather products simplified tax at the rate of AZN 45 and AZN 15, respectively, per square Land tax - Land tax is calculated as a metre of the taxable item, multiplied fixed payment for land, irrespective by the rates set by the Cabinet of of the results of the economic activity Ministers, which are determined by of the landowners and users. city and district zones. Resident and non-resident physical Taxpayers qualifying for simplified persons, as well as Azeri and foreign tax must submit to the tax authorities companies, can be registered after a declaration on the amount of tax obtaining documents proving their due no later than by the 20th of right to own or use land plots. each month following the reporting period, and make tax payments to the federal budget within the same period.

Double taxation treaties Double taxation treaties with the Tax regimes for following countries have been The rate of withholding tax varies signed, but are not as yet effective: companies working under existing double taxation treaties, depending on the contents — Spain, signed on 23 April 2014 under production sharing of a particular treaty. The maximum — Jordan, signed on 5 May 2008 agreements (PSAs) rates of withholding tax under existing double taxation treaties are — Israel, signed on 13 December PSAs were ratified by the Parliament shown in the table below. 2016 of Azerbaijan as law, with their provisions overriding the provisions of the statutory legislation of Tax rate for Tax rate for Tax Rate for Double Tax Treaties Azerbaijan where this legislation Dividends (%) Interest (%) Royalties (%) contradicts or is inconsistent with Austria 5/10/15 0/10 5/10 the provisions of the PSAs. Each PSA and its tax protocols set forth specific Belgium 5/10/15 5/10 0/10 taxation rules. Below we outline the Belarus 15 0/10 10 taxation rules under Azeri, Chirag, Bosnia and Herzegovina 10 0/10 10 and Gunashli PSA. Bulgaria 8 0/7 5/10 Currently, 22 ratified PSAs and two Canada 10/15 0/10 5/10 ratified HGAs exist, with each having China 10 0/10 10 an exclusive tax regime. PSA tax Croatia 5/10 10 10 regimes can be applied to every Czech Republic 8 0/5/10 10 contractor party (signatory to the Estonia 5/10 0/10 10 PSA), operating companies, and Finland 5/10 0/10 5/10 subcontractors (especially foreign France 10 0/10 5/10 subcontractors). Furthermore, tax protocols providing guidance Georgia 10 0/10 10 on paying taxes or filing reports Germany 5/15 0/10 5/10 are negotiated with the Azeri Greece 8 8 8 Government. PSAs have their own Hungary 8 8 8 separate tax regime in Azerbaijan in Iran 10 10 10 cases where they were ratified by the Italy 10 10 5/10 National Assembly and granted the Japan 15 10 10 force of law. Kazakhstan 10 0/10 10 Korea 7 0/10 5/10 Profit tax Kuwait 0/5/10 0/7 0/10 The individual liability of a contractor Latvia 5/10 0/10 5/10 party for profit tax is based on the contractor party's separate share Lithuania 5/10 0/10 10 of items of income and deductions, Luxembourg 5/10 10 5/10 consolidated with the profits or Macedonia 8 0/8 8 losses of its PE in the Republic of Moldova 8/15 10 10 Azerbaijan. Montenegro 10 0/10 10 Profit tax is imposed on the taxable Netherlands 5/10 10 5/10 profit of each contractor party for a Norway 10/15 10 10 calendar year, at a fixed rate of 25%. Pakistan 10 10 10 Taxable profit/(loss) for a calendar Poland 10 10 10 year is calculated for each contractor Qatar 7 0/7 5 party as follows: Romania 5/10 0/8 10 —— sales income Russia 10 0/10 10 Saudi Arabia 5/7 7 10 —— other income Serbia 10 0/10 10 —— expenses Slovenia 8 0/8 5/10 Switzerland 5/15 0/5/10 5/10 —— amortisation Tajikistan 10 0/10 10 —— interest costs Turkey 12 0/10 10 —— balance profit/(loss) UK 10/15 10 5/10 Ukraine 10 10 10 —— brought forward losses United Arab Emirates 5/10 0/7 5/10 —— taxable profit/(loss) Uzbekistan 10 0/10 10 Vietnam 10 0/10 10

In calculating balance profit/loss, and administrative overhead costs calendar quarters during such a sales income is defined as the of the central services of each calendar year are credited against the amount of income derived from contractor party and affiliates final profit tax as calculated on the sales of petroleum produced during working for the contractor party, profit tax return. Any overpayment hydrocarbon activities by the located abroad, and indirect costs is refunded to the contractor party contractor party during the calendar incurred by the central services within 10 days after submitting its year. In the event that petroleum abroad for the contracting party. final PTR for such a calendar year is exchanged or swapped, then The allocable portion of such costs (or, if the contractor party chooses, the sales income is defined as the with respect to this contract for each credited against the following amount of income derived during contractor party for the calendar year calendar quarter's or quarters' the calendar year by the contractor is equal to the amount determined estimated profit tax payment (s)) party from the sale of the petroleum using the designated formula. and any underpayment is paid by received in the exchange or swap. the contractor party within 10 days Amortisation deductions are For the purpose of calculating after submitting the final PTR. In calculated as follows: balance profit/loss, sales income any event, the final profit tax for a is determined by applying, for —— Equipment and all capital assets calendar year, as calculated in the arm's-length sales, the actual price other than those assets described PTR, is payable no later than by 25 achieved by the contractor party below - 25% per calendar year on April of the following calendar year. declining balance basis; Other income does not include Withholding tax amounts received from the sale of —— Permanent office - 2.5% per petroleum or immovable assets, calendar year on a straight line Payments to foreign subcontractors loans received, tax refunds, and basis; (FSC) for work and services amounts received that are not freely at the disposal of and do not increase —— Temporary office - 5% per A foreign subcontractor is a subcontractor that is (i) an entity or the wealth of the contractor party. calendar year on a straight line organisation incorporated, legally Expenses are deducted in full in basis. created, or organised outside the the calendar year in which they Each contractor must, beginning Republic of Azerbaijan, or (ii) a are incurred. This includes the in the first calendar year in which it physical person or individual that is full amount of wages and other estimates that it will earn a taxable a citizen of a country other than the amounts paid to all employees, all profit, pay an estimated profit tax Republic of Azerbaijan. social insurance contributions, all for each calendar quarter, based exploration and appraisal costs, Under the Protocol on the Taxation on its estimate of its taxable profit of Foreign Subcontractors, FSCs are all costs associated with drilling for the quarter and the preceding dwells, all pipeline tariffs incurred, obliged to withhold tax from gross calendar quarters in the calendar taxable payments (less reimbursable all payments made under a lease year. The estimated profit tax is paid agreement, all insurance costs, and expenditure) to corporate foreign not later than 25 days after the end sub-contractors in respect of work all personnel training costs. This of the relevant calendar quarter and also includes an allocable portion, in or services provided to them by the is accompanied by a calculation in a corporate foreign sub-contractor in light of services rendered in respect respective form. of hydrocarbon activities, of wages the Azeri Republic at rates of from 5 and salaries paid to managers and Upon filing the final PTR (profit tax to 10 percent. employees abroad, and the general return) for a calendar year, estimated profit taxes paid with respect to the

Baku: Heydar Aliyev Centre

Reimbursable expenditure is The zero rate of VAT applies to both 90 days in a calendar year, and expenditure that does not create input and output VAT (i.e. supplies are liable to pay Azeri personal profit when separately reflected in made by or to the FSC under the income tax on all taxable income a contract or payment document. PSA). directly earned from employment These expenses include expenditure To confirm the zero VAT rate, the FSC in Azerbaijan, including taxable on travel and accommodation, should apply and obtain a zero rate income earned during their first and they must be supported by VAT certificate from the Azeri Tax 90 days of employment in the provisions in contracts and/or Authorities. The Tax Ministry issues original receipts or copies of original country. certificates within 30 days after receipts. receiving an application from a FSC. Each local employee’s and tax- In the above protocol, work and resident foreign employee’s Azeri personal income tax liability is services means any activity Personal income tax performed in Azerbaijan by any calculated at the tax rate set forth legal entity for any other legal (PIT) in the Azeri Republic’s Tax Code, as outlined below: entity (including the provision of In general, in accordance with PSAs, raw materials and the elements resident expatriate employees are PIT rates: necessary for the performance of subject to Azeri personal income The same PIT rates as under the work and services which, as a result, tax only on income received as a cease to be independent units and statutory regime apply (see above for direct result of being employed in details). are no longer provided separately). Azerbaijan. Work and services include the Reporting / payment requirements following activities: design works, Under the Protocol of the Azeri geological research, exploration, Chirag Gunashli (ACG) PSA on the Operative companies, contractor production, drilling, extraction, Taxation of Employees and Physical parties, and FSC are liable to modernisation, construction, Persons, the tax residency of withhold and pay personal income engineering and various types expatriate employees is determined taxes on behalf of each tax-resident of technical activities; leasing based on the following criteria: expatriate employee and to remit them to the Azeri State Budget no immovable property; administrative, —— “Ordinary Business Purpose” technical, legal, bookkeeping, and later than 10 days following the end Expatriate Employees. The above advertising; transport, procurement, of the reporting month. protocol does not define the term logistics and communications; Operative companies, contractor “ordinary business purpose”, but IT support and security services; parties, and FSC must also submit consulting and financing activities; these employees are understood quarterly declarations for its tax- and training and other similar to be persons with a primary resident expatriate employees within activities. Work and services do not place of employment outside of 20 days after the end of a reporting include goods or separately provided Azerbaijan. This person becomes quarter. raw materials. a tax resident in Azerbaijan if Goods means any tangible or they are present in the Azeri Social fund contributions intangible property (asset), including Republic for a period exceeding According to the PSA, operative electricity and thermal energy, gas, 30 consecutive or 90 cumulative companies, contractor parties, and water. days in a calendar year. They are and FSC are required to make liable to pay Azeri tax on their contributions to the Azeri State social Value-added tax taxable income as a result of insurance fund, together with similar Exemption from VAT (that is, a zero being employed in Azerbaijan payments (including contributions rate of VAT) on all goods, work or for time periods exceeding 30 to pension, recruitment, social services performed under PSAs consecutive or 90 cumulative insurance, employment, and medical funds), only for employees that apply to FSCs, as PSAs stipulate that, days (i.e. on income earned on are Azeri citizens. Thus operative “Sub-contractors are exempt (zero the 31st or 91st day onwards). (0) percent rate) from value-added companies, contractor parties, tax in connection with Hydrocarbon —— “Rotators” are defined as and FSC are liable for payments to Activities”. This applies to the persons that are present in the social insurance fund for their following: Azerbaijan “on a routine basis employees that are Azeri citizens. for regularly scheduled periodic Operative companies, contractor —— goods, works, or services parties, and FSC pay 22% of a employment as their primary supplied to or by it citizen’s gross salary, while the citizen place of employment and which pays 3% of their gross salary. —— exports of petroleum and all employment is not incidental products processed or refined to the exercise of that primary from such petroleum place of employment outside of —— imports and acquisitions of goods Azerbaijan”. These individuals are (excluding tobacco, foodstuffs, considered to be tax resident if and alcohol), works, and services they are present in Azerbaijan for periods cumulatively exceeding

Import and export duties Industrial and science parks and taxes Following the success of oil & gas Baku: City Hall projects, the government announced Contractor parties and subcontractors have the right, tax policies to develop the non-oil free, to import into and re-export sector. In 2013 Azerbaijan recorded from the Republic of Azerbaijan a more than 10-fold increase in the all equipment, materials, and total value of foreign investment goods in relation to its activities compared with 2001. conducted under the PSA. Such The Sumgait Technology Park imports and exports are subject only (STP), launched by Azeri President to the following customs service (procedural)/documentation fees: Ilham Aliyev in December 2011, is a groundbreaking project in this area. Declared Value The STP is a complex of factories and of Shipment in Duty plants manufacturing various types Dollars of products, and which benefit from USD0- pooled know-how and resources. 0.15% of value USD100,000 The STP is a unique project in the USD150 plus region, and is capable of meeting USD100,001 - 0.10% of any the demands of both domestic and USD1,000,000 value over foreign markets. USD100,001 More than 4,500 are currently USD1,050 plus USD1,000,001 - 0.07% of any employed in production and USD5,000,000 value over construction/installation activities at USD1,000,001 the STP, and once all of the planned USD3,850 plus plants have been launched over USD5,000,001 - 0.05% of any 10,000 more are expected to be USD10,000,000 value over employed, significantly improving USD5,000,001 living standards. USD6,350 plus Over 0.01% of any Another important development, the USD10,000,000 value over High-Tech Park (HTP), was launched USD10,000,000 as part of the development concept Azerbaijan 2020: Vision of the Future, In order to enjoy the above customs which aims to transform the oil- exemptions, contractor parties and based economy into a knowledge- subcontractors should apply for and obtain an import/export exemption based one, through developing certificate from the State Customs a sustainable and competitive Committee. environment for information and computer technology firms. The Reporting requirements HTP is wholly owned by the Azeri Once the FSC has registered with the Government, and reports to the Tax Ministry, the PSA requires that it Ministry of Communications and submit the following reports: Information Technology. —— value-added tax returns The Sumgait Chemical Industrial (quarterly) Park (SCIP), overseen by the Ministry of the Economy, includes territories —— reports on withholdings earmarked for the production of from foreign sub-contractors agricultural, medical, consumer, (quarterly) construction industry, electronics —— statistical committee reports and automotive chemicals, (monthly, quarterly) polymers, and industrial equipment. —— social funds reports (quarterly) The residents (legal entities or —— personal income tax declarations individuals) of industrial and science (quarterly and annually) parks (Parks) created in accordance Should the FSC be engaged in with decrees from respective activities other than those agreed executive bodies are exempt from in the PSA, then the FSC will be the following taxes for periods required to submit a separate set of reports for each of the activities.

© 2018 KPMG Azerbaijan Limited. All rights reserved. 32 Your Tax and Legal Lighthouse Baku: Maiden tower of seven years from the date on which —— In addition, 50% of profit they are registered in the Parks: generated by individual —— profit tax for profit generated by entrepreneurs who have obtained legal entities in Parks investment promotion certificates are exempt from income tax for —— property tax applicable to assets a period of seven years from the located in Parks date on which the certificates were —— land tax obtained. —— import VAT on the import of —— Exemption from profit tax: various equipment (including the profit of entities that have technical equipment) for the obtained investment promotion development and construction certificates is exempt from 50% of of infrastructure and production income tax for a period of seven areas, as well as scientific research years from the date on which the and conducting experiments and certificate was obtained. construction activities —— Exemption from VAT: any entity or The executive organisation and individual entrepreneur that has operators of Parks are exempt from obtained an investment promotion the following taxes: certificate is exempt from VAT —— profit tax: the amount of taxable for a period of seven years from profit invested in the construction the date on which the certificate and maintenance of infrastructure was obtained upon the import in Parks of equipment, technological —— import VAT on the import of equipment, and devices which various equipment (including have been approved by the technical equipment) for the relevant executive authority. development and construction —— Exemption from property tax: any of infrastructure and production entity or individual entrepreneur areas, as well as scientific research that has obtained an investment and conducting experiments / promotion certificate is exempt construction-related activities from property tax for a period —— property tax applicable to assets of seven years from the date on located in Parks which the certificate was obtained. —— land tax —— Exemptions from land tax: any entity or individual entrepreneur —— customs duties on imported that has obtained an investment equipment, etc. upon confirmation promotion certificate is exempt documents issued by the relevant from property tax for a period state authority being presented of seven years from the date on In addition, the income of physical which the certificate was obtained. persons (that have not registered as —— Technology and technical legal entities) carrying out activities in equipment imported by entities a Park is exempt from taxation (with and individual entrepreneurs the exception of personal income tax, engaged in investment activity, which applies to salaries). as well as by resident entities Investment certificates and individual entrepreneurs in industrial or science parks Exemptions and privileges related to for the purpose of constructing personal income tax: Annual interest production areas within industrial income paid from the deposits of or science parks, and for individuals in local banks and the conducting scientific research and branches of foreign banks in the development work in accordance Republic of Azerbaijan, as well as with various official approvals, dividends paid by the issuers of are exempt for a period of seven investment securities, discounts, and years. interest are exempt from income tax for 3 (three) years from 1 February 2016.

Non-cash settlements —— 20% of the amount exceeding the limits, if the violation is occurring The Azeri Law “On Non-Cash for the second time Settlements” was introduced in early 2 0 1 7. —— 40% of the amount exceeding the limits, if the violation is occurring Non-cash settlements for the third and more times

—— Settlements made via a transfer Non-cash settlements of payments from one person’s bank account to another person’s bank account via —— payments of taxes, customs duties, a payment tool (payment cards, administrative penalties and orders, etc.) and payment means financial sanctions levied by the (mobile phones, computers, authorities etc.). For a transfer between tax- —— payments of debts related to registered parties to qualify as a leasing transactions and loans non-cash settlement, the transfers —— salaries, pensions, scholarships, must be made using this method financial aid, benefits, only. compensation, and indemnity —— Settlements carried out via paid by individuals (with the payment terminals. exception of individuals with —— Settlements made by a direct taxable operations of less than AZN cash transfer to the vendor’s bank 200,000 in any month during account. a consecutive 12-month period) —— payments of stationary phone Limits on cash settlements services and utility expenses —— Taxpayers registered for VAT —— payments and reimbursements of purposes and taxpayers engaged funds bearing no interest (with the in trading or catering services exception of cases where the funds whose taxable turnover exceeds are provided by the individuals not AZN 200,000 in any month registered as taxpayers) and other during one consecutive 12-month allocations period are eligible to make cash settlements for up to AZN 30,000 Advanced tax rulings during a calendar month. This limit An advanced tax ruling refers to the is effective from 1 January 2017. advance determination by the tax —— Other taxpayers are eligible to authorities of potential tax liabilities make cash settlements of up to and the legal results arising from AZN 15,000 during a calendar the application of tax legislation to month. The limit is effective from operations. 1 April 2017. In order to benefit from an advanced tax ruling, an application form along Financial sanctions for violation of with all applicable documents should cash settlement limits be submitted to the tax authorities. The official duty to be paid is AZN Taxpayers are subject to the following 500 and the decision is valid for three financial sanctions in the event of years. violating the Azeri law on “Non-Cash Building with clock transactions”: Baku —— 10% of the amount exceeding the limits, if the violation is occurring for the first time

A decision on an advanced tax ruling The decision on the application can be rejected in the following for an advanced tax ruling for the cases: stated operation is legally binding on both the taxpayer and the tax —— the information declared in the authority, provided that the taxpayer application form and documents performs the respective operation. is incompliant with legislation However, the taxpayer is not obliged —— the taxable operation declared in to perform the operation for which the application form has already the decision on the application of an been completed, or the tax advanced tax ruling is adopted. authorities or a court has made a decision on this operation —— the cost of the taxable operation is less than AZN 10,000,000

Central park of the Baku city

Accounting regulations are set The Cabinet of Ministers of the forth in the March 1995 law “On Republic of Azerbaijan has not yet Accounting”. In 2004 the Azeri set criterias determining entities’ Government took steps to improve classification such as micro, small, the transparency of financial medium and large. Nevertheless, reporting, accelerate the economy’s micro and small businesses are integration into the global financial allowed to follow accounting rules, system, and bring the national as approved by the Ministry of reporting and accounting system up Finance. to international standards. Alternatively, they may choose to The June 2004 law “On Accounting” follow IFRS for SMEs (Small and prescribes the implementation of Medium-Sized Enterprises). Middle International Financial Reporting and large businesses should follow Standards (IFRS) in organisations IFRS for SMEs, whereas, upon their engaged in commercial activities discretion, large businesses may in Azerbaijan, envisaging state’s choose to follow IFRS, meanwhile control and regulation in it. This law middle businesses may choose to defines the types of organisations follow either IFRS or IFRS for SMEs. that are required to adopt various According to the law, lead accounting standards, dividing the accountant is a person responsible subjects of this law on micro, small, for providing accounting of the medium and large group of subjects entity, as well as preparation of in accordance with the recent financial, tax and other statements. amendments. The lead accountant of entities, Public interest entities are defined such as the ones with controlling as credit organisations, insurance stake belonging to the state, public companies, investment funds and interest entities except the ones their and management of these listed in securities market, large funds, non-state (private) social entrepreneurial subjects, budget funds, licensed entities of the organisations and public legal securities market, private pension entities publishing annual financial funds, and legal entities with stock and combined (consolidated) market share listings. Entities that statements, should be professional meet at least two of the following accountants - the professionals who criteria are also considered to be have successfully passed the exams public interest entities: and received the certificate proving their status, acting as a member —— tthey have revenue of or of professional accountants’ exceeding AZN 120 million organization. (approximately USD 71 million) Open JSCs and limited liability —— they have an average headcount companies are required to use an of at least 1,500 persons independent auditor to audit their —— they have a total balance sheet annual financial statements (open JSCs are also required to publish of or exceeding AZN 300 million annual accounting reports and (around USD 176 million) balance sheets).

Oleg Goshchansky Murat Karakas Chairman and Managing Partner Managing Partner KPMG in Russia and the CIS KPMG in Azerbaijan

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Mikhail Orlov Mushfig Aliyev Head of Tax and Legal Partner, KPMG in Russia and the CIS Head of Tax & Legal Partner KPMG in Azerbaijan

T: +7 (495) 937 44 77 T: + 99412 404 89 10 F: +7 (495) 937 44 99 F: + 994 12 404 89 14 E: [email protected] E: [email protected]

Sean Tiernan Farid lsayev CIS Head of Advisory Director KPMG in Russia and the CIS Legal Services Partner KPMG in Azerbaijan

T: +7 (495) 937 44 77 T: + 99412 404 89 10 F: +7 (495) 937 44 99 F: + 994 12 404 89 14 E: [email protected] E: [email protected]

Kirill Altukhov CIS Head of Audit KPMG in Russia and the CIS Partner

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