Doing Business and İnvesting in 14 14 14 14 14 14 14 16 16 16 16 17 17 17 17 17 17 17 17 18 18 18 18 19 20 21 21 21

12 Why invest in Azerbaijan?

Azerbaijan has substantial Azerbaijan boasts a highly educated hydrocarbon reserves and skillful workforce

Azerbaijan has significant agricultural potential due to its fertile climate, which spans nine of the eleven existing climatic zones

Azerbaijan lies at the heart of the international transport corridor between and Asia Doing Business and Azerbaijan enjoys favored trade status under an EU Partnership and Investing in Azerbaijan Cooperation Agreement

Our Doing Business Guide is intended to provide timely information about Azerbaijan’s business environment.

For more in-depth information on doing business in Azerbaijan, please contact us directly at PwC Azerbaijan in .

PwC Azerbaijan

The Landmark Office Plaza III, 12th Floor 90A Nizami Street, AZ1010 Baku, Azerbaijan www.pwc.com/az Email: pwc.az.com Telephone: +994 12 497 2515 Facebook: www.facebook.com/PwCAzerbaijan It is my great pleasure to present the 2014 PwC Guide on Doing Business and Investing in Azerbaijan, which describes the country’s geography, history, business and investment climate. I believe this guide will be helpful for everyone who is interested in doing business and investing in Azerbaijan.

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

This publication is sure to be an invaluable tool for both domestic and foreign investors, regardless of the type, size and character of the investment.

We hope this publication will make interesting reading for you and we welcome you to explore Azerbaijan business opportunities together with PwC Azerbaijan!

From our office in Baku, PwC Azerbaijan has been serving clients in Azerbaijan since 1995. We currently have a staff of over 100 dedicated professionals working with our clients across three main lines of service: Assurance, Tax and Legal, and Advisory.

PwC Azerbaijan in Baku offers the full spectrum of services which have been developed to meet the ever-growing expectations of our clients. This full service line has allowed us to take on and successfully complete some of the largest and most technically challenging projects in Azerbaijan to date.

Good luck!

Movlan Pashayev Managing Partner

Introduction regular updates of this guide as time History Modern-day Azerbaijan is a paradox. unveils new changes in legal, tax and The roots of Azerbaijan stretch back to Although it has relatively sophisticated business issues in Azerbaijan. Please approximately the fourth century BC communication and transportation contact us if you would like to obtain and Caucasian , intermittently infrastructure, as well as industrial, these updates. governed by the ancient Median and agricultural, educational, housing and Persian empires. Inhabitants of ancient healthcare sectors, the oil and gas Geography and climate Albania, also known as Arran in industry still accounts for the bulk of its Azerbaijan is located on the shore of Azerbaijani, adopted Zoroastrianism exports. Azerbaijan is continuing to the in Southwestern Asia, before switching to Christianity prior to develop its market infrastructure, between and , with a small incursions by Muslim Arabs and, more including legal, tax and banking European portion north of the importantly, Muslim Turks. As an systems and links to the international range. The Republic of Azerbaijan integral part of the Arabian Caliphate, business community. This paradox (including its non- contiguous exclave of the Seljuq Empire and the Persian presents a unique challenge to businesses Nakhchivan) shares common borders Safavid Empire, the population of entering Azerbaijan that wish to assess with the following countries: Armenia Azerbaijan underwent a mass the real business risks and make reality- – 787km (566km with Azerbaijan conversion to Islam. Turkish conquest based decisions rather than relying on proper and 221km with Nakhchivan); led to the Turkification of the nation and perceptions. Iran – 611km (432km with Azerbaijan the creation of the Azerbaijani language, proper and 179km with Nakhchivan); a close cousin of Turkish. Despite the after-effects of the global – 322km; Russia – 284km; and financial crisis, there now appears to be –9km (with Nakhchivan). Later, Azerbaijan was integrated into the a resurgence of interest in Azerbaijan Russian Empire during 1813-1918, until among foreign investors. Given the Baku is the capital of Azerbaijan. It is the fall of Romanov Tsarist rule. region’s significant potential, many located on the Absheron peninsula at Azerbaijan enjoyed a brief spell of around the world seem to be focusing the easternmost point of Azerbaijan, on independence until 1920, when it was more closely on the Caspian region as a the shore of the Caspian Sea. Azerbaijan overwhelmed by the Soviet forces and whole. falls within the Central European incorporated into the USSR. Time zone (GMT+4). Investors, whether they are Azerbaijan proclaimed its independence multinational oil companies or small The country covers an area of 86,600 sq on 18 October 1991. On 12 November trading companies, continue to weigh km and falls within nine climatic zones. 1995, the Constitution of independent the risks associated with investments Azerbaijan was adopted and received in Azerbaijan and are mindful of the The large flat Kura-Araz Lowland forms nationwide support in a referendum. impact that fluctuating commodity the approximate center of the country, prices, particularly for gas, can have with the Caucasus Mountains to the While ethnic Azerbaijanis are in the on this emerging economy that is north and Karabakh Upland to the west. majority, the country is home to many heavily dependent on natural resources. other nationalities. All minorities in The most populous cities in Azerbaijan Azerbaijan have the constitutional right This Doing Business guide outlines the are: to education, media and cultural various factors that foreign companies activities in their own language. should consider when looking at Minorities include Russians, Talysh, possible investments in Azerbaijan. Lezgins, Kurds, Mountain Jews, Rather than providing detailed coverage Georgians and Udines. of any topic, the details of which are constantly in flux, this guide strives to cover a spectrum of key issues that investors would include in their ”mission checklist” when going to Azerbaijan.

We hope you will enjoy the guide and 1 Source: Azerbaijan State Statistical Committee, fi n d t h e c o n t e n t i n f o r m a t i v e . W e i s s u e 01.01.2012 People The President is also the Supreme The Constitutional Court also considers According to the Government of Commander-in-Chief of Azerbaijan’s international treaties to which Azerbajan Azerbaijan statistics, the population of armed forces. is a signatory as a source of law. Azerbaijan was estimated at 9,356 Thus, international agreements take million as of 01.01.2013 The National Assembly of precedence over national law in case Azerbaijan (Milli Majlis) they contradict. Ethnic compostion The National Assembly (Milli Majlis) is the legislative branch of the government International time in Azerbaijan. The unicameral assembly Azerbaijan operates within a single time currently consists of 125 deputies zone. It is four hours (+4) ahead of elected for five-year term from GMT. International time in Azerbaijan is single seat constituencies. also subject to Daylight Savings Time alterations during the summer. The most recent legislative election was held in November 2010. The New Business hours Azerbaijan Party (YAP) currently holds Business offices are generally open from the majority of seats in Milli Majlis. 9:00 am to 6:00 pm, Monday through Friday. The Azerbaijani Labor Code Among the responsibilities of the Milli stipulates an eight-hour working day. Languages Majlis are composition of the Central Election Committee, the Accounts Chamber and the Auditing Chamber. Economy

Legal system Major industrial products The legal system of Azerbaijan is broadly • Oil and natural gas petroleum based on the civil law. products

Religion The highest judicial authority in • Oilfield equipment Azerbaijan is the Constitutional Court. • Steel The Constitutional Court resolves • Iron ore disputes between the legislative, executive and judicial branches of • Chemicals/petrochemicals government and gives formal • Cement interpretations of the Constitution and other laws. • Textiles • Metal Government structure Unlike the common law-based judicial Azerbaijan is a presidential republic, systems of the United States and Great • Rubbor and plastic products with the President as the head of state Britain, Azerbaijan’s civil law-based and the Prime Minister as the head of system does not extensively or Major agricultural products government. Executive power rests with exclusively rely on case law or judicial • Cotton the President, the Prime Minister and precedent. The civil law of Azerbaijan the Cabinet of Ministers. Legislative considers the 1995 Constitution, acts • Grain power is vested in the parliament, the adopted via referendum, and legislation • Rice National Assembly (Milli Majlis) of passed by the Milli Majlis as the primary Azerbaijan. sources of law. • Tea • Tobacco Under the 1995 Constitution, the The Supreme Court, the Appellate executive, legislative and judicial Court, the Economic Courts and the • Livestock branches of government in the General Jurisdiction Courts are • Fruit Republic of Azerbaijan are separate subordinate to the Constitutional Court and independent from each other. and hear only those cases that are within • Wine their jurisdiction. • Grape • Sheep Overview oil and Kazakhstani oil, which is employment. Throughout the Soviet period, shipped across the Caspian to Baku. Azerbajan’s economy had always been Visa regime more industrially developed than The country’s non-energy economy The Consular Department of the neighboring Armenia and Georgia, posted double-digit growth in 2008, Azerbaijani Ministry of Foreign Affairs but was also less diversified as a result spurred by growth in the construction, (MFA) issues single, double and of low levels of investment in non-oil banking and real estate sectors. multiple entry visas for individuals sectors. Having a history of industrial However, the current global economic wishing to visit Azerbaijan. Single or development with more than 100 years, slowdown presents some challenges for double entry visas can be valid for Azerbaijan has proven to be an economic the Azerbaijani economy as oil prices periods from three days up to three powerhouse in the Southern Caucasus have plummeted since mid-2008 and months. Multiple-entry visas are valid region through the tumultuous local banks face a more uncertain global for up to one year. aftermath of the Soviet collapse in the financial environment. In October 2013 early 1990s up until the present days. direct investments in the oil sector of Foreign nationals travelling to Azerbaijan increased by 29.5% against Azerbaijan must have an Azerbaijani After Azerbaijan regained its September 2013 and reached 40% of all entry visa, regardless of the purpose of independence in 1991, the country investments, though investments in other the trip. Foreign nationals must obtain underwent a lengthy period of sectors collapsed by 28.3%. their visas abroad through the nearest transition from a Soviet-style command For January-October 2013 oil Azerbaijani embassy. economy toward a modern, market- investments made up 30.1% of all driven economy, concentrated on the investments and non-oil investments If they wish to extend their entry visas, production and export of its hydrocarbon 69.9%. For comparison, in 2012 the oil foreign nationals must inform the MFA resources. sector raised 23.8% of all investments in advance before the visa expiry date. A in country’s economy against 23.2% in letter of invitation, or an equivalent Hydrocarbons currently form the 2011, 30.3% in 2010, 27% in 2009 and hotel reservation, may be required for economic lifeblood of Azerbaijan’s 30.9% in 2008. foreign nationals entering Azerbaijan economic future – the country possesses for business, tourism or other purposes. an estimated 7 billion barrels of proven Azerbaijan still faces a number of oil reserves and 1 trillion cu m of proven challenges for its further development. Public holidays 2014 natural gas reserves. This makes Among those are the need taking into Azerbaijan a leading exporter of oil and consideration the existing opportunities natural gas, which accounted for about and resources to achieve sustainable 95% of its exports in 20122. In 2012 economic growth and social prosperity revenues of Oil exceded $ 22.6 billion. in Azerbaijan, ensure effective state More than US$ 60 billion was invested governance and rule of law. The ongoing in Azerbaijan’s oil industry by global oil conflict with Armenia over the Nagorno- majors operating in the BP-led Karabakh region, still poses risk to Azerbaijan International Operating economical stability of the country, and Company(AIOC) consortium. Oil the potential for a sharp downturn in production under the first Production the construction and real estate sectors. Sharing Agreements (PSAs) with AIOC began in November 1997. Currently, Trade with Russia and the other former Azerbaijan exports over 700,000 barrels Soviet republics is declining in (bbl) per day. importance, as Europe and Turkey increasingly become key trading Azerbaijan’s prospects for boosting its partners. The EU Russia and the U.S. oil exports brightened considerably in are key trade partners of Azerbaijan for May 2006, when the US$ 4 billion 20123. Baku-Tbilisi-Ceyhan (BTC) pipeline pumped its first oil from Baku to the Azerbaijan’s long-term prospects will Turkish port of Ceyhan on the depend on world oil and gas prices, the Mediterranean. The BTC pipeline discovery of new oil reserves and the was designed to transport 1 million development of gas pipelines in the barrels per day (bpd) at maximum region, as well as Azerbaijan’s ability to 2 Source: Central Bank of Azerbaijan discharge, with inflow from both manage its energy wealth to promote Azerbaijani-produced sustainable growth in non-energy 3 Source: The State Statistic Committee http://abc.az/eng/news/71087.html sectors of the economy and spur Weights and measures Azerbaijan uses the metric International System.

Foreign relations Azerbaijan is a member of the United Nations, the Organization for Security and Cooperation in Europe (OSCE), NATO’s Partnership for Peace, the Euro-Atlantic Partnership, the GUAM Organization for Democracy and Economic Development, the European Bank for Reconstruction and Development, the Council of Europe, the International Monetary Fund, the World Bank, CFE Treaty Organization of the Black Sea Economic Cooperation and the Organization of Islamic Cooperation.

Settling the Nagorno-Karabakh conflict is the priority of Azerbaijan’s foreign policy. Since the early 1990s, 16% of Azerbaijani territory has been occupied by Armenian troops. Azerbaijan and Armenia are still officially at war, although a ceasefire has been in place since May 1994. As a result of hostilities, 800,000 ethnic Azerbaijanis have been displaced from their homes.

Azerbaijan has longstanding cultural and historical links with Turkey, which accounts for approximately 13.35% (2011) of Azerbaijan imports. Through its national oil company(TPAO), Turkey has a 6.7% share in the AIOC, and hosts a major portion of the BTC oil as well as gas export pipeline.

Azerbaijan maintains good relations with the United States and the European Union, reflecting its desire for stronger trade and strategic ties with both political entities. A bilateral investment treaty (BIT) between the US and Azerbaijan has been in effect since 2001. Azerbaijan has also signed a Partnership and Cooperation Agreement with the EU, which is designed to harmonize Azerbaijani and European law. Azerbaijan became a member of the Council of Europe in 2001.

Economic forecast markets via Turkey. from Russia, Azerbaijan announced that Azerbaijan’s projected growth rate is it will stop the exports of Azeri oil expected to be driven by oil industry- In 1999 former Azerbaijani President through the Baku–Novorossiysk pipeline related construction and especially by Heydar Aliyev issued a decree creating starting from 1 January 2007. Although the oil export revenues as large fields the State Oil Fund of Azerbaijan SOCAR continued decreased oil supplies come on-stream and new pipelines boost (SOFAZ), which accumulates energy- through the Baku-Novorossiysk Pipeline, oil exports to Western markets. related windfalls and serves as the the Azerbaijan International Operating country’s macroeconomic stability fund. Company stopped using the pipeline In response to increased dependency on starting from 1 April 2007 and SOCAR oil revenues, the government is trying to Oil export issues became the new operator of the ensure that Azerbaijan develops a Prior to completion of the BTC pipeline Azerbaijani section. SOCAR diverse economy. Large amounts of in 2006, Azerbaijan suffered from temporarily stopped oil supplies through foreign investment in the oil sector have inadequate oil export routes. The t h e p i p e l i n e i n F e b r u a r y 2 0 0 8 d u e t o a precipitated rapid growth in others, existing pipeline infrastructure in the pricing disagreement with Transneft. particularly in the trade, construction C a s p i a n r e g i o n c o u l d n o t e f fi c i e n t l y Later that year, the disagreement has and service sectors. The agricultural handle exports of AIOC/Azerbaijan been resolved and SOCAR resumed and non-oil manufacturing had 6% and produced oil, as the daily discharge pumping oil on old agreement terms. In 8% increase rate in 2012 accordingly. capacity was too low, while the network August 2008, the transport of oil along According to the State Statistical itself was designed to link the Soviet the Baku-Novorossiysk pipeline was Committee, Azerbaijan’s foreign trade Union internally and route through radically increased due to sabotage in turnover amounted around US$ 39,5 Russia. AIOC has been exporting its oil Turkey and the conflict in Georgia billion , while GDP has steadily via the Northern and Western routes forcing a temporary shutdown of the increased by 25% each year during the since the end of 1997. rival Baku-Ceyhan and Baku-Supsa peak growth period between 2005 and pipelines. As of 2013, the Baku- 20074. GDP growth rate was 2.2% in Since the BTC launch, the problem of Novorossiysk pipeline remains 2012. limited export capacity has largely been operational, although the volume of oil alleviated, while spare pipeline capacity pumped through it is relatively low. Oil & gas is reserved for cross-Caspian oil Essentially, the pipeline is heavily reliant Azerbaijan’s proven crude oil reserves transport from . on Russian participation, once again were estimated at 7 billion barrels in tying European energy security to January 2013, according to the Oil and Oil export routes: The Northern route Russian transit. AIOC has also voiced Gas Journal (OGJ). In 2012, Azerbaijan The Northern route pipeline, more concerns over political instability in produced approximately 930,000 barrels commonly known as the Baku-Novorossi nearby Chechnya and Dagestan, which per day (bbl/d) of total oil and consumed ysk pipeline, runs from the Sangachal provide transit routes for the pipeline. about 85,000 bbl/d. The country was terminal south of Baku to the Russian Lastly, exporting oil via Novorossiysk among the 20 largest exporters of oil in Black Sea port Novorossiysk. Oil involves tankers traversing the crowded the world in 2012. transportation via the Northern route and environmentally sensitive Bosphorus pipeline began in 1997, when the State strait, making transit into the Azerbaijan is one of the world’s oldest Oil Company of Azerbaijan (SOCAR), Mediterranean expensive and inefficient. producing countries and has played a AIOC and Russia’s Transneft reached a significant role in the development of trilateral agreement. The maximum Oil export routes: The Western route today’s oil industry. The world’s first discharge of the pipeline is 5 million tons The Western route, more commonly paraffin factory was opened there in of oil per year - from January to known as the Baku-Supsa pipeline, runs 1823 and the first oil field was drilled in September 2013 State Oil Company of from the Sangachal terminal south of 1846. Azerbaijan was the site of the first Azerbaijan (SOCAR) shipped 1,327,517 Baku to the Supsa terminal on Georgia’s offshore oil field, the Neft Dashlary, in tons of oil from the Novorossiysk port via Black Sea coast. The 145,000 barrels per the shallow water of the Caspian Sea, the Baku-Novorossiysk oil pipeline, down day (at maximum discharge) pipeline is which still produces oil today. 7.5% against the same period last year, operated by BP and was commissioned reported SOCAR. In September 2013 in 1999. Currently, 150,000 barrels of With the well-developed SOCAR shipped 162,821 tons of oil is transported through Baku-Supsa Azeri-Chirag-Guneshli oilfield serving as Azerbaijani oil from the Novorossiysk Early Oil Pipeline. the country’s key oil production port. platform, Azerbaijan pumps up to 1 The pipeline recently underwent a series million bbl per day. The BTC pipeline, There are, however, a number of of large-scale upgrades, which were which can handle up to 1 million bbl per limitations to exporting oil via the finished in April 2008 following a “Northern” route. On 6 December 2006, day, is the region’s Main Export Pipeline 4 Source: U.S. Energy Information Administration and transports Azerbaijani oil to Western after dispute over natural gas supplies http://www.eia.gov/countries/cab.cfm?fips=AJ two-year hiatus in oil exports to Supsa. cost only about US $ 1.8 billion. the Astara-Hasankuli line. Azerbaijan With some old sections of the pipeline Azerbaijan, Georgia and Turkey and Turkmenistan have not signed the replaced, the Baku-Supsa route is now have signed and ratified the Host intergovernmental agreement on the fully operational and may see an Government Agreements, granting Caspian Sea bottom division yet. increase in capacity up to 300.000- considerable legal, tax and currency 600,000 bpd after further upgrades. In benefits to foreign investors. Natural gas 2009 the Baku-Supsa pipeline exported With the startup of the Shah Deniz 407,101.7 tons of SOCAR oil and The legal status of the natural gas and condensate field in late 250,774.8 tons of oil of the Azerbaijan Caspian Sea 2006, Azerbaijan became a natural gas International Operating Company5. The precise legal status of the still net exporter.Gas production amounted to Caspian Sea, and particularly the 17.9 billion cubic meters of tank gas in Oil export routes: The Main Export territorial rights of the littoral states, is 2013 compared to 17.24 billion cubic Pipeline (MEP) subject to dispute. A fundamental meters in 20126. Although historically an The Main Export Pipeline (MEP), or as disagreement over the demarcation of oil producer, Azerbaijan’s importance as of May 2006 the Baku-Tbilisi-Ceyhan territorial waters in the southern a gas producer and exporter is growing. (BTC) pipeline, was designed to be the Caspian between Iran, Azerbaijan and Most of the natural gas production key route for exporting Azerbaijani oil Turkmenistan continues to pose a comes from the Shah Deniz field, to European markets. The decision to strategic threat to the development of although some volumes of natural gas build a pipeline with a maximum offshore oil and gas fields. are produced alongside oil in the ACG discharge of 1 million bpd was primarily field. Natural gas plays a central role driven by AIOC’s estimates that the Prior to the collapse of the Soviet Union, domestically, and it likely will gain limited capacity of existing export the Caspian Sea was bordered by only importance in the future, particularly in routes would have prevented the two states – the USSR and Iran. Under the electric power sector7. There should consortium from reaping the maximum the Soviet-Iranian bilateral treaties of be noted that it is estimated to reach the benefit from increased oil production. 1921 and 1940, Iran agreed to divide the pick of oil production by 2014 when its With AIOC estimating annual production sea along the Astara-Hasankuli line, a annual production level will be around of 40 million bbl after 2010, BTC has straight median between the relevant 60 mln ton. This suggests that the growth proved to be the only export route with cities in modern-day Azerbaijan and in oil GDP will be lower. enough capacity to handle Azerbaijan’s Turkmenistan. However, with the daily oil output. emergence of Azerbaijan, Turkmenistan, In the absence of new oil and gas Kazakhstan and Russia as independent discoveries, non-oil sector seems to be Of three initial route options for the political entities, the territorial owner taking the role of the main driver of MEP, the Baku-Ceyhan route gained ship of the Caspian Sea has become growth in the next few years. As opposed strong political support from the West, subject to disagreement. to oil sector, the growth rate in the non- which was keen to build a pipeline oil sector has reached 8% in 2012 which bypassing Russian and Iranian territory, The situation is further complicated by was main driving force of GDP. thus boosting European energy security. uncertainty over whether the Caspian is Moreover, BTC solved the so-called legally considered a sea or a lake. Iran, However, there are several downside “Bosphorus problem”, so Azerbaijani oil having consistently insisted that the risks to non-oil sectors, reflected in the exports were routed directly to the Caspian is a lake, claims to possess an dynamics of investment. The main Mediterranean and bypassed the equal share (20%) of the seabed, well factor of concern is the trend in crowded Dardanelles. beyond the Astara-Hasankuli line. investments. The growth in the previous years was mainly driven by foreign Currently, ownership stakes in BTC are And while the division of the northern private investments, albeit to oil sector. held by: BP (30.1%), AzBTC (25.00%), Caspian seabed has been agreed by In 2004, private sector investments were Chevron(8.90%), Statoil(8.71%), TPAO Azerbaijan, Russia and Kazakhstan, the accounting for 90.7 % of total (6.53%), ENI (5.00%), Total (5.00%), status of the southern Caspian remains investments, and foreign investment Itochu (3.40%), INPEX (2.50%), uncertain. Although both Turkmenistan accounted for 73.1 %. However, since ConocoPhillips (2.50%) and ONGC and Iran have claims to 20% shares of 2005 domestic public investments have (2.36%). the seabed, these states remain in direct gained pace, while private and foreign conflict with each other as well as with investments have been decreasing. As a The total cost of the pipeline was Azerbaijan. 5 5 Source: BP estimated at about US $4 billion , http://www.bp.com/sectiongenericarticle.do?categoryId= making BTC a major investment in Currently, Azerbaijan and Iran are 9019153&contentId=7034855 expanding oil exports to global markets. locked into a dispute regarding the Alov 6 Source: U.S. Energy Information Administration http://www.eia.gov/countries/cab.cfm?fips=AJ In comparison, the Baku-Supsa pipeline field in the southern Caspian, just above 7 Source: SOCAR, Department of Marketing and Economic Operations http://www.news.az/articles/6035 result, private sector’s share in the total signed in Baku on December 17, 2013. own stakes of up to 50% in Azerbaijani investments decreased to 29.6 % and This long-awaited decision becomes a banks. All restrictions on withdrawing foreign sourced investment’s share major milestone for the diversification foreign currency in Azerbaijan were decline to 24.8 % by 2009 accordingly. of Europe’s energy supplies, opened a largely lifted in 2002. Since the global These declining trends in the foreign strategic door for stronger European economic crisis of 2008-2009, Azerbai and private investments pose serious energy security and turned Azerbaijan jan’s monetary policy has expanded, downside risks to growth rates in the into a strong player in the world gas with the refinancing rate cut from 15% next few years. While it is reasonable for market.8 to 2% and the reserve requirement ratio the public investments to increase in reduced sharply from 12% to 0 .5%. The order to compensate for the falling State Oil Fund of Azerbaijan CBAR continues to pursue exchange rate private investments during crisis years, (SOFAZ) stability by pegging the Azerbaijani especially given the fiscal capacity to do Created in December 2000, Azerbaijan’s currency, the Manat (AZN), to the US so, it is imperative to attract more State Oil Fund (SOFAZ) is an extra- Dollar. foreign and private investments in order budgetary fund designed to ensure to achieve sustainable and strong macroeconomic stability for the future economic growth. and promote investment in non-oil sectors of the economy. Shah Deniz Discovered in 1999 off the coast of the Another key reason for the establish southern Caspian Sea, the Shah Deniz ment of SOFAZ is to boost the field is the largest accumulation of transparency of oil revenue management. offshore gas in Azerbaijan. The gas field Currently, oil revenue profits from the covers an area of about 860 sq km and is development of new offshore oil fields estimated to hold 1.5-3 billion bbl of oil flow directly into SOFAZ. The assets of and 50-100 billion cu m of gas for SOFAZ as of January 1, 2014 has grown extraction. Shah Deniz is expected to be by 5.1% compared to the beginning of one of the primary sources for Europe’s 2013 ($ 34,129.4 million) and stood at $ future natural gas supplies, either via 35,877.5 million.9 the planned Nabucco pipeline or alternative routes. SOFAZ is also believed to be critical in dampening the negative effects of The Shah Deniz project is operated by substantial flows of oil revenue into the BP (25.5% stake). Other partners in the country’s economy. By withholding a PSA include Statoil (25.5%); SOCAR large share of total oil revenues from the (10%); Total (10%); LukAgip (an country’s immediate income flow, Eni-LUKoil joint venture, 10%); Naftiran SOFAZ helps to counter inflation as well Intertrade Co. (10%); and TPAO (9%). as produces other positive effects on local economy. The South Caucasus Pipeline (SCP) was completed in 2006 and operates to Banking transfer Shah Deniz reserves from Baku Azerbaijan’s financial sector has grown to Erzurum, Turkey, via Tbilisi. The rapidly and consolidated over the past Telecoms and IT maximum discharge of the pipeline is 20 few years. The Central Bank of Azerbai Coming into 2013 Azerbaijan’s mobile bcm per year as of 2012. jan (CBAR), serves as the banking sector subscriber numbers had passed the 10 regulator, monetary policymaker and million milestone (107% penetration). Shahdeniz 2: key facilitator of price stability. In 2009, After more than a decade of very strong The Shah Deniz Consortium - the government introduced a three-year growth, the rate of expansion had Azerbaijan’s state energy company tax exemption on capitalised profit moderated to around 10% per annum SOCAR, British BP and ’s Total which helped to strengthen the banking by 2011 and continuing in this mode in - has made the final investment decision sector. Although the CBAR has been 2012/2013. Operator Azercell continues (FID) on the second phase of offshore advocating consolidation in the banking to lead the market, but its earlier gas condensate field development. sector for many years, the number of dominance was being slowly eroded banks at the end of 2012 stood at 43 and market share had fallen to 43%, A final investment document on a project (compared with 44 in 2011). In recent to supply European buyers with gas from years, limits on foreign participation in 8 Source: Azernews Azerbaijan’s Shah Deniz-2 field was Azerbaijan’s banking sector were http://www.azernews.az/oil_and_gas/62613.html 9 Source: Trend reduced. Foreign investors may now http://en.trend.az/capital/energy/2110535.html down from the more than 50% it held in baijan, with a number of strong local 10.5%, sugar beet – 48.4%13. years past. The second and third ranked companies providing high-quality operators, Bakcell (33%) and relative services for diverse projects, including Azerbaijan continues to be strong in the newcomer Azerfon (24%) were both the development of residential areas, cultivation of specialized, often rare, throwing out a challenge to Azercell’s business offices, hotels, etc. crops. Aside from cotton, tea, tobacco number one ranking. and vegetable production, the country On 9 September 2012 the new Urban produces other potentially valuable Azerbaijan currently has 25 television Planning and Construction Code of the crops, including indigenous pink grapes, stations and 15 radio stations. Almost Azerbaijan Republic (the “Code”) was persimmon, and other rare crops. 70% in the country are Internet users. adopted and the new Code came Azerbaijan’s Internet country code into effect on 1 January 2013. Before Tourism domain name is “.az.” the Code, the construction rules were Business people currently account for set in separate laws. The codification of the majority of foreign visitors to In early 2013 Azerbaijan put its first the construction legislation has helped Azerbaijan. However, Azerbaijan offers telecommunications satellite into orbit. to bring together separate legal acts, substantial opportunities in tourism, The Azerspace-1 satellite was set to make the rules and requirements more with a number of international hotel provide communications coverage for precise and clearer. The Code comprises businesses, such as Hyatt, Excelsior, Azerbaijan, Central Asia, Europe and of 3 parts and 106 sections. Four Seasons, Hilton, Jumeirah, JW Africa over a designed mission life of 15 Marriott, Sheraton, Kempinski and years. It was designed to provide digital Agriculture Fairmont. broadcasting, internet access and data Azerbaijan has been one of the region’s transmission, among other services. The strongest agricultural centers since Azerbaijan has a number of attractive government subsequently announced pre-Soviet times. The country’s climatic historical sites, such as Shirvanshakh’s that Azerspace-2, the country’s second and ecological diversity allows for palace, the Walled City of Old Baku or telecommunications satellite, would be differentiation in crop cultivation. Sheki Khan Residence, while its launched in 201810. ecodiversity accounts for many natural Following the break-up of the Soviet resorts. The country’s nine climatic Construction Union in 1991 and the dissolution of zones offer the potential for developing Azerbaijan has a booming construction collectivized property, Azerbaijan has mountain ski resorts, beach resorts, and market. Driven by extensive revenues adopted a policy of deregulation and mineral baths and medicinal health from oil and natural gas exports, as well allowed up to 99% of its agricultural spas. A resort in Naphtalan offers as the increased demand for new homes, sector to be privatized. In 2011, treatments using unique indigenous Azerbaijan has become fertile ground agriculture accounted for 6% 5.5% of therapeutic oil. for the construction of new the country’s GDP, and employed 39% infrastructure, residential buildings, etc. 37.9% of labor force12.

The World Bank reported the growth in Following the privatization of farm 10 Source: Budde Comm 2010 after decline the year before. properties, the focus of Azerbaijani http://www.budde.com.au/Research/Azerbaijan-Telecoms- Remarkable performance of the con agriculture has shifted to producing Mobile-Broadband-and-Forecasts.html struction sector can be explained by low profit-yielding crops and increasing 11 Source: State Statistics Committee http://www.azernews.az/business/46656.html base effect and government’s anticrisis self-sufficiency. For instance, rice fields 12 Source: Azstat.org 2011 – State Statisctical Committe measures. As a result of the global were replaced by grain fields in the 13 Source: State Statistics Committee http://en.apa.az/news_azerbaijan_increases_producer_prices_ financial crisis, construction had 1990s, resulting in a rise in grain of__182795.html contacted by 8.2% in 2009. However, production up to 1.5 million tonnes per measures directed to increase liquidity year. In 2012, 2,800,400 tonnes of in the local market, slow recovery of grain, 968,300 tonnes of potato, mortgage system and Government’s 1,190,400 tonnes of vegetable, 665,100 investments into the sector helped to tonnes of fruit and berry, 427,700 tonnes rebound construction by 20.3 %. The of water-melon and melons, 124,700 volume of construction work in tonnes of grape, 4,200 tonnes of Azerbaijan increased by 30.9 % as of tobacco, 98,400 tonnes of sugar beet, early November 2012 compared to the 550,300 tonnes of green tea leaf were same period of last year, reported the gathered in Azerbaijan. Grain rose 14%, State Statistics Committee11. cotton –16.8%, tobacco – 19.7%, potato – 3.3%, fruit and berry – 8%, grape – The construction business has evolved 8.4%, green tea leaf – 7.1%, vegetable into a very competitive sector in Azer – 0.5%, watermelon and melon slipped

Investment climate Foreign investment The government is expected to continue In 2012, the stock of foreign direct Azerbaijani law is evolving in its policy of supporting privately held investment (FDI) in the Azerbaijani accordance with the government’s enterprises, including those with foreign economy exceeded US$ 8.3 billion with strategic goal of creating a welcoming capital and owned or operated by investment in the oil and natural gas environment for foreign businesses. foreign nationals. sector constituting more than 80% of Foreign investments are thus protected the total amount. The World Bank by guarantees provided under law. These There are no general trade barriers or reports on per capita FDI inflows rank include: embargos for the import of goods into Azerbaijan near the top among CIS and Azerbaijan. Exports are not subject to Eastern European countries. According • Guarantee against deterioration of customs duties or restrictions. to the WB, in 2004, private sector legislation: According to the general Regulations exist only for the export of investments were accounting for 90.7 % rule, a foreign investment is subject strategic commodities such as electricity, of total investments, and foreign to the legislation in effect at the time petrol, cotton and non-ferrous metals. investment accounted for 73.1 %. it is made. Thus, the foreign investor However, since 2005 domestic public is assured that the laws governing its General regime for foreign investments investments have gained pace, while investment will remain in force for Foreign investments are generally private and foreign investments have a period of 10 years from the initial defined as all types of tangible and been decreasing. As a result private investment; intangible rights, including intellectual sectors share in total investments have • Guarantee against nationalization and property rights, contributed by foreign decreased to 29.6 % by 2009 and foreign requisition:foreign investments are investors to entrepreneurial and other sourced investment’s share decline to not subject to nationalization (except types of activities for the purpose of 24.8 %. Azerbaijan’s average annual in cases of harm to the population and making a profit. They include, among economic growth rate was about 10% the state) and requisition (except in other things, participation interest and over the past few years. In 2009, despite cases of natural disaster, epidemics, shareholding in Azerbaijani companies, the global financial crisis, Azerbaijan’s accidents, emergencies). Foreign acquisition of immovable property, rapidly developing economy grew by investors are guaranteed immediate, acquisition of securities and other assets 9.4% and has continued its rapid adequate and effective compensation liable for purchase by foreign investors expansion. In 2007, at the peak of in case of nationalization and under Azerbaijani law, and contractual economic growth, the country’s GDP requisition. Compensation should be agreements with Azerbaijani individuals rose by an unprecedented 25%. GDP commensurate to the amount of the and legal entities that provide for other 14 growth rate was 2.2% in 2012 . investment at time of nationalization forms of foreign investments. or requisition, payable in foreign Foreign reform currency and freely transferrable Definition of a foreign investor There are no restrictive licensing abroad; regulations for foreign businesses in The following entities and individuals • Guarantee of compensation of Azerbaijan, although exceptions for may be considered as foreign investors in damages: foreign investors are certain businesses (primarily telecom Azerbaijan: entitled to compensation for damages, munications, construction, etc.) do including compensations for lost • Foreign legal persons; exist. profits resulting from the illegal acts of • Foreign citizens, stateless persons, state authorities; As of 2011, 82% of the economy has and citizens of Azerbaijan with a been privatized. However, while the • Guarantee of profit repatriation: permanent residence abroad subject privatization of Azerbaijan’s largest foreign investors are entitled to to registration in their country of “blue chip” state enterprises began back repatriate profits derived from foreign residence for engaging in economic i n 2 0 0 2 , t h e p r o c e s s i s s t i l l i n c o m p l e t e . investments subject to applicable taxes activity; and duties. • Foreign states;

14 Source: IMF and World Bank • International organizations.

Registration of foreign investors in Azerbaijan All companies operating in Azerbaijan are required to be registered. Without formal registration, a company may not do business in Azerbaijan (e.g., maintain a bank account, clear goods through customs, etc.). As a part of the ongoing business law reforms, a “One Window” principle was introduced from 1 January, 2008. The registration procedures involving several governmental bodies (Ministry of Justice, tax authorities, Social Insurance Fund and Statistics Committee) have been eliminated, obligating businesses to register only with the Ministry of Taxes.

A considerable number of documents are required to register a company with the Ministry of Taxes. Some must bear an apostil (or other form of legalization) from the investor’s country of incorporation.

The established period for state registration with the Ministry of Taxes is officially set at three days for commercial organizations.

Legal forms of doing business by foreign investors The law stipulates that any company with foreign investment operating in Azerbaijan must be organized as a joint-stock company, limited or additional liability company, or partnership, or any other structure that is consistent with Azerbaijani law. Business entities Types of commercial legal entities The Azerbaijani Manat is the legal The Azerbaijani Civil Code stipulates the tender of the Republic of Azerbaijan. Subsidiary following legal forms for doing business Payment for all goods, work and services A subsidiary is an Azerbaijani legal in the country: sold in Azerbaijan must be made in entity with foreign ownership, which Manats, except where the payee holds a can be registered as a limited liability General Partnership (GP) special license issued by the CBA. company or joint-stock company. An enterprise established by two or Although such an enterprise may be more physical and/or legal persons. The Foreign exchange regulations allow owned by foreign nationals, it is owners of a GP have “unlimited” liability residents and non-residents to transfer considered as an Azerbaijani legal entity for the obligations of the GP. foreign currency from Azerbaijan in for tax, currency accounting, reporting certain situations (e.g. re-payment of and other requirements. Limited Partnership (LP) loans, royalties, franchising fees, etc.). An LP may be established by two or Representative Office (RO) more physical and/or legal persons, with In January 2006, Azerbaijan An RO is the locally registered presence at least one of the participants bearing denominated its currency into the New of a foreign legal entity and has the unlimited liability for the obligations of Azerbaijani Manat (AZN), which is “non-resident” status in regard to the LP and not participating in entrepre pegged to the US Dollar by the CBA’s Azerbaijani tax, legal and currency neurial activity. monetary policy. Currently, the exchange regulations. If an RO’s activities are rate against the US Dollar is maximally 1 strictly limited to providing Limited Liability Company (LLC) USD = 0.78 AZN representative services to its head office, An LLC is an enterprise which is estab it is not subject to any profit taxes. An lished by one or more physical and/or Licensing RO is responsible for the timely payment legal persons. The legal fund of an LLC Banking activities, including the of all other applicable taxes to the tax is divided into authorized shares as acceptance of deposits, maintenance of authorities, such as personal income specified in its charter. The shareholders correspondent accounts, cash opera- tax and social fund payments from of an LLC have limited liability commen tions, money transfers and lending, are employees. surate with their shares in the LLC. subject to licensing. The CBA has the exclusive right to grant banking Branch Additional Liability Company (ALC) licenses. The relevant legislation does not The legal status of an ALC is similar to distinguish between an RO and a that of an LLC, with the exception that Licenses are still required for banking, Branch. They are both subject to the the participants of an ALC may assume insurance, auditing, transportation, same legal, tax, currency and reporting liability in excess of their contributions. securities dealing and other types of requirements. Branches are free of the activity. Foreign individuals, legal requirement to have a charter fund and Joint-Stock Company (JSC) entities and their branches and repre- are able to channel income into overseas A JSC’s structure is similar to that of an sentative offices engaged in licensable accounts, provided these accounts are LLC. JSCs may be established either as activities in Azerbaijan, must be licensed duly registered with authorities in “open” or “closed” business entities. An according to the legally prescribed Azerbaijan. “open” JCS is able to offer its shares to procedure. A license’s term of validity is investors, while a “closed” JSC can only usually five years with the right to Oil Production Sharing Agreements redistribute its shares among its founder extend it. (PSA) and Host Government Agree shareholders and other predetermined ments (HGA) persons. State duties for licenses come up to AZN Azerbaijan has to date signed and 22,000 (about US$ 28,000). ratified over 30 PSAs and HGAs for oil Under the Privatization Law, foreign and gas production and transportation. investors may participate in Azerbaijan’s Privatisation Some of them have been terminated or mass privatization program by acquisi Under the Privatization Law, the remain dormant. Each PSA and HGA is tion of the state privatization options. following are considered to be foreign subject to its own exclusive tax and investors: accounting regime. PSAs and HGAs Currency regulations • Foreign legal entities and their provide for a more favorable legal and Foreign exchange transactions are subsidiaries; tax regime (e.g. simpler reporting governed by the Law on Currency regime, deductibility of expenses, fixed Regulation of 21 October 1994. The • Azerbaijani legal entities with rate of Profits Tax, exemption from Central Bank of Azerbaijan set foreign participation of foreign investment in certain taxes and duties, etc.) for its exchange policy and issues regulations excess of 50% charter capital share; participants, contractor parties and relating to foreign exchange controls. subcontractors. 1416 • Foreign nationals; According to the State Statistics in the process of privatization since 1998, Committee, approximately 82% of all but 50.2% of the shares still remain in • Stateless persons. Azerbaijani enterprises had been state hands. In December 2011, it was privatized as of 2010. The private sector officially reported that the consulting Privatization of state property began continues to expand its share of the consortium PwC and Dentons finalized with the First Privatization Programme Azerbaijani economy. the first preparatory stage of the project (1995-1998). Four methods of of privatization of the state share in the privatization were then authorized: Since 2002, the privatization of large authorized capital of IBA. The second privatization of small enterprises; enterprises has been under way, with phase will involve the final preparation privatization of medium and large-scale approximately 2,000 medium to large of necessary documentation for the enterprises; privatization of banks; enterprises having been privatized. The privatization of the bank and final and sale of specialized investment fund International Bank of Azerbaijan (IBA), determination of a list of potential shares. In this first stage, 167 JSCs were the largest bank in the country, has been buyers15. founded.

In 2000, the second phase of the privatization programme was approved by the president to allow privatization of the country’s remaining large-scale enterprises, as well as strategic holdings in the oil and gas, chemical, petrochemical, infrastructure and metallurgy sectors.

After experiencing a lengthy crisis in agriculture, Azerbaijan launched the Farm Privatization Project (FPP) in 1997. Originally conceived as a pilot project to improve land use, the FPP was aimed at restructuring selected former collective and state farms, and transfer- ring their assets to the local population. The scheme is expected to reduce poverty through private sector growth, off-farm job creation, and the provision of community-based services.

Since 1998, the privatization process in Azerbaijan has slowed down, and sales of medium and large-scale firms have dwindled. Based on the reports of the World Bank, IMF and EBRD, structural reforms, good governance, moderniza tion of infrastructure, and adequate access to financing are necessary to boost private sector development.

Currently, agricultural land is largely privatized (almost 99%) with landowners gaining the right to grant land shares and receive land titles. The State Committee of Land and Mapping was established to supervise the development of a market in land. 15 Source: State Committee on Property http://www.contact.az/docs/2012/Economics&Finance/090300009723en.htm#.USXGd6VBPTQ

15 Taxation Corporate taxation Simplified tax This tax is intended to ease the tax Tax regimes Profits Tax burden for small enterprises and is Broadly speaking, Azerbaijan currently The Tax Code applies the same tax rate levied in the place of general Profits Tax. has three different tax regimes: 1) the and principles of taxation to all types of Simplified Tax is charged at the statutory tax regime; 2) Production legal entities with a registered presence following rates on the taxpayer’s gross Sharing Agreements (PSA) and 3) Host in Azerbaijan. All those who pay profit revenue: Government Agreements (HGA), which tax are legal entities (including foreign • Operation in Baku 4% are exclusively for the BTC and South legal entities) engaged in business Caucasus pipelines. The statutory tax activity in Azerbaijan. • Operation outside Baku 2% regime applies to all legal entities (both local and foreign) with the exception of Profit tax is computed on the basis of an From 1 January 2013, legal entities and those that are governed by a PSA or enterprise’s taxable profit. individuals with annual turnover of up HGA, each of which has its own tax rule. to AZN 120,000 (approximately The PSA/ HGA tax regimes also Taxable profit is generally determined US$ 152,000) are eligible to be generally apply to relevant oil operating on the basis of gross realization registered as Simplified Tax payers. companies, foreign investors serving as (receipts), minus deductible expenses, Those paying Simplified Tax are also contractor parties and all foreign service which are defined as any costs related to exempt from VAT, Profits Tax and companies working with such parties. generating profits. Property Tax. Simplified tax is levied on a quarterly basis. The following sections outline the From 1 January 2010 the tax rate on statutory and PSA/HGA tax regimes in enterprise profit was reduced from 22% Dividend withholding tax detail. to 20%. A 10% Dividend Withholding Tax applies to both domestic and foreign Statutory tax regime An enterprise’s Profit Tax should be shareholders and is levied in the Azerbaijan adopted a new Tax Code in reported on annual basis, although currency in which the dividend is paid. 2001, which introduced 220 new current payments shall be made Double taxation treaties (DTT) may articles and abolished a number of old quarterly. reduce the rate at which dividend tax tax laws. applies. In addition to Profit Tax paid by the All foreign legal entities doing business non-resident’s permanent establishment, Other withholding taxes in Azerbaijan through a “permanent each amount transferred from the net Foreign legal entities without a perma- establishment” must register with the profit of the permanent establishment is nent presence in Azerbaijan are subject tax authorities regardless of whether its taxed at the rate of 10%. to Withholding Tax on income, which is activities are subject to profits taxation. derived from the following sources: Tax registration of a Representative From 1 January 2013 profit of the Office or a Branch should take place residents of the industrial and within one month from the start of technological parks is exempt of profit operations. Termination of an RO’s or a tax for the period of 7 years since Branch’s activities should be reported to registration as resident of the industrial the authorities one month before the and technological park. cessation of operations. The major taxes applicable under the statutory tax regime are outlined below.

16 Exemption of individuals from personal Taxpayers will not be able to recover • Leisure and sports yachts, as well as income tax on interest from bank input VAT paid into any other account other floating transportation vehicles deposits and dividends was extended till (i.e., not the VAT deposit account). stipulated for the aforementioned the end of 2013. purposes. Failure to remit VAT into the VAT deposit Value Added Tax (VAT) account is subject to a 50% penalty of Property tax Generally, VAT is charged at the rate of the unpaid VAT amount. Companies operating in Azerbaijan are 18% for each taxable operation and for required to pay property tax at the rate of the value of each taxable import. There All VAT-registered taxpayers must issue 1% of the fixed assets’ average annual are detailed requirements for electronic VAT invoices in AVIS residual value. registration and accounting for VAT, with (Automated Tax Information System) penalties for non-compliance. instead of paper ones. Land tax Land Tax is levied as a fixed payment. From 1 January 2013, legal entities and Interest and penalties The economic activity level of the land’s individuals with taxable transactions Interest and penalties are applicable for tenant/owner does not influence the exceeding an annual threshold of failure to comply with tax legislation. Land Tax payment. AZN 120,000 (approximately US$ Interest on outstanding tax liabilities is 152,000) must register as VAT payers. currently being accrued at a rate of 0.1% Individuals and/or entities who own or Other companies carrying out business per day. Penalties vary from 50% up to use land within Azerbaijan are subject to activity in Azerbaijan may register 100% of the amount of tax due. Land Tax. voluntarily. Only registered VAT payers Administrative penalties may be applied may charge VAT and claim credit for for failure to file declarations, register a The Land Tax rate is between AZN 0.1 input VAT. taxpayer with the authorities, notify the and AZN 10 per 100 sq m of a plot. The authorities of a change of address, etc. rate varies depending on what the land VAT is also applied to goods imported is used for – e.g., industry, construction, into Azerbaijan at customs unless Tax law violations have a three-year transportation, etc. exempt or 0% rated. There is also the statute of limitation. self assessment of VAT (reverse-charge) Road tax for the services rendered by unregistered Mining tax Legal entities and foreign nationals are non-residents in Azerbaijan. In general, Legal entities and individuals involved subject to Road Tax. The Road Tax rate VAT paid on purchases (i.e., input VAT), in the recovery of minerals in Azerbaijan varies depending on vehicle engine is recoverable against the output VAT are obliged to pay the Mining Tax. The volume, number of axles, weight that is charged on the sale of rate depends on the type mineral carried, and how long the vehicle will be manufactured goods or the provision of extracted and varies from 3% to 26% of in Azerbaijan (for foreign vehicles). services in Azerbaijan. its total wholesale price. Employment taxes and From 1 January 2013, equipment, Excise tax contributions imported by residents of industrial and Excise goods produced in or imported technology exempt from VAT for the into Azerbaijan are subject to Excise Income tax period of 7 year.The VAT exemption is Tax, unless said goods are specifically From 1 January 2013, the maximum also applicable to goods imported into exempt. rate of Personal Income Tax is reduced special economic zones (excluding those to 25% starting from AZN 2,500 per that are subject to an excise tax). The following goods are considered month. Income Tax in Azerbaijan is Additionally, certain categories of excisable goods: hence charged at progressive rates of imported goods are exempt from VAT as • Spirits, beer and all types of alcoholic 14% or 25% of gross income. defined by the Cabinet of Ministers. beverages; Taxable income of individuals engaging All registered VAT taxpayers must pay • Tobacco products; in entrepreneurial activity is subject to the value of the goods (work, services) • Petroleum products; tax at 20%. excluding VAT, to a normal bank account • Light vehicles (with the exception of of the vendor, and the VAT amount Social insurance fund motor transport means for special (input VAT) must be remitted to the VAT Employers and employees must make purposes, with special markings and deposit account, a treasury account payments into the Social Insurance equipment); created for the allocation of VAT. Fund. The employer pays the equivalent

17 of 22% of an employee’s gross salary, Foreign companies operating as PSA exported without substantial changes to and employees pay 3% of their gross subcontractors in Azerbaijan are their form/structure. salary (withheld from their salary by the referred to as foreign subcontractors employer). (FSC), and are subject to a simplified tax Goods imported into Azerbaijan are regime (withholding of tax in place of subject to imports duties (ranging from All payroll taxes and withholdings Profits Tax). This simplified corporate 0% to 15% per metric unit). Excise Tax should be paid to the relevant state income tax regime does not apply to applies to certain types of goods (e.g., budget bank accounts. This should be Azerbaijani legal entity subcontractors. tobacco and alcohol products). done no later than the 20th day of the According to the destination VAT month following the net (take-home) Value Added Tax (VAT) and customs principle, VAT in Azerbaijan is payable salary month. duties (subject to an applicable customs VAT (both input & output) and customs regime) on the declared value of the Foreign citizens, except from foreign duties for activities conducted under the goods (including assessed import duties employees working under the PSA/HGA PSA regime are charged at a rate of 0%. and Excise Tax). Certain categories and tax regime, are also subject to social Exemption certificates must be obtained types of goods are exempt from import insurance contributions. from the tax authorities and the State duties and are subject to 0% VAT. Customs Committee to confirm this tax Double tax treaties relief. A customs clearance fee up to AZN 550 Azerbaijan has ratified treaties to cease is applicable to nearly all imports/ double taxation with 42 countries. Foreign subcontractor tax exports. Exports are exempt from Generally foreign subcontractors are customs duties, except for certain types In the meantime, due to administrative subject to Withholding Tax (from 5% to of metals and metal products. Under a barriers imposed by the Azerbaijani tax 8%, depending on the PSA regime) on PSA regime, contractors, their agents authorities, the benefits of double tax the gross payments received for goods and subcontractors are entitled to treaties have not been fully utilized. The and services supplied within Azerbaijan. import and re-export goods used in tax authorities require that the majority Withholding Tax satisfies all FSC tax hydrocarbon activities free from import of types of taxes due be paid before the obligations. The only exception is duties. Imports under a PSA regime are taxpayer lays a treaty claim. Following Personal Income Tax for FSC employees. subject to 0% VAT. A similar regime the submission of the full payment, a Personal Income Tax for FSC employees applies under HGAs. non-resident enterprise may file a may be subject to the tax residency and refund/offset claim for overpaid taxes. tax deduction benefits. Labor and social relations

As the process of gaining a refund or an Some PSAs envisage the application of Labor law offset is tedious, lengthy, requires filing the statutory profit tax regime for FSCs Labor relations in Azerbaijan are a great deal of paperwork and involves during the PSA’s development and covered extensively by the 1999 Labor the risk of a tax audit, few taxpayers production period. Code, which comprises legislation have chosen to file a treaty claim. different from the early 90s with a Customs regimes number of later lower-tier regulatory Production Sharing Agreement Azerbaijani law recognizes several acts expanding the general code’s (PSA) tax regime customs regimes pertinent to goods provisions. There are currently 22 ratified PSAs and imported into Azerbaijan. Such proce- 2 ratified HGAs, with an exclusive tax dures as transit, customs storage, A standard working week is 40 hours. regime for each one. The PSA tax bonded warehouse, temporary import, Overtime and work performed on days regimes are applicable to each contractor and processing in/outside of customs off (Saturdays, Sundays, public holidays party (signatory to the PSA), the territories may be of interest to foreign and one mourning day) must be com- operating company, and the subcontrac investors. pensated at double the daily rate. tors (in particular, foreign subcontractors). Additionally, tax If the import is temporary, no customs Employment relations are established by protocols that provide guidance on duties may be applied it, and it must be the employment contract, which, in paying taxes and filing reports are exported from Azerbaijan within a most cases, does not necessarily indicate negotiated with the Azerbaijani certain period of time. The deadline for a fixed term of employment. government. exporting a temporary import is established by the customs authorities. An employer must give an employee two The PSAs ratified by the Milli Majlis and Goods brought into Azerbaijan under months’ notice of termination in the granted the force of law have their own the temporary import regime should be separate tax regime in Azerbaijan.

18 event the employee is made redundant. the applicable rates and procedures have S m a l l b u s i n e s s e s a re d e fi n e d a s s u c h However, certain exceptions to this rule not been established to date. Holes in with respect to the size of the business are available (e.g., in the case of a gross the current legislation make the Law in the exclusive sphere of their operations. violation of the employee’s duties). An “On Medical Insurance” practically For instance, for industry and employee can terminate their employ - non-operational. construction, an entity with fewer than ment contract at any time but must give 40 employees and an annual turnover of one month’s notice. Accounting less than AZN 200,000 is considered a Accounting regulations are set out in the small business. Termination of employment contracts Law of the Azerbaijan Republic “On with certain categories of employees Accounting” (March 1995). In 2004, the NASCO regulations are largely based on (e.g. pregnant women, women with Azerbaijani government took steps to IFRS (2006 release). However, their children under three years of age) is improve the transparency of financial intention is not to duplicate IFRS, but to prohibited. reporting and accelerate the economy’s simplify the principles for implementation. integration into the global financial Upon making employees redundant, or system, as well as modernize the The use of IFRS and NASCO standards upon the company’s liquidation, the national accounting system and became compulsory for commercial employer must provide the affected reporting with respect to the entities and public interest entities on 1 employees with severance pay, which international standards. January, 2008. These standards have must be a total of up to three months of also been in force for non-commercial the employees’ regular salary. The Law “On Accounting”, adopted in organizations since January 2009. June 2004, stipulates the The Azerbaijani Labor Code’s implementation of the International The transition period is specified as one procedures for employment and Financial Reporting Standards (IFRS) year for small businesses, two years for employment termination should be in organizations involved in commercial Public Interest Entities, and three years followed very closely, as employees tend activities within Azerbaijan. The Law for non-commercial and non-governmental to be favored in legal disputes with their defines the types of organizations liable entities. The Civil Code contains general employers. to various accounting standards. provisions on financial reporting and audit requirements for legal entities. JSCs and Obligatory social insurance Public interest entities are defined as limited liability companies are required to Employers and employees are required credit organizations, insurance use an independent auditor to audit their to make payments into the social companies, private pension funds and annual financials (JSCs must also insurance fund. Employers must ensure legal entities with stock market share publish their annual accounting reports that social insurance contributions are listings. Entities that meet at least two of and balance sheets). Depending on the paid into the relevant state bank the following criteria are also considered value of the assets on the balance sheet accounts on time. Thus, employers are as public interest entities: 1) revenue of or annual revenues, companies are required to withhold employee contribu- AZN 30 million (approximately US$ 24 required to have their balance sheet tions (3% of an employee’s gross salary), million); 2) an average of 1,200 audited. along with employee income tax, and employees, and 3) a total balance sheet transfer these amounts to the state. This of AZN 100 million (approximately must be done on the behalf of employees. US$ 80million). All public interest entities in Azerbaijan must adhere Employers are also required to make to IFRS. Commercial organizations monthly social insurance contributions must either follow IFRS or the in the amount of 22% of its employees’ National Accounting Standards for salary fund. Commercial Organizations (NASCO). Small businesses are allowed to follow Registered individual entrepreneurs are simplified accounting rules approved by required to pay social insurance the Ministry of Finance. Alternatively, contributions at a rate of 4% of the they may choose to follow NASCO. minimum monthly wage (AZN 30 or approximately US$ 33).

Azerbaijani law also provides for obligatory medical insurance. However,

19 20 PricewaterhouseCoopers Global (PwC) PwC Azerbaijan has the vast experience • ERP implementations is one of the world’s most extensive in the oil and gas industries, banking and . networks of professional services financial services, and firms, and the largest of the Big Four. telecommunications and consumer Tax and Legal services In its current form, the network of products sectors. We are thus ideally We are organized around different firms was established in 1998 through positioned to service all elements aspects of tax and law, reflecting the the merger of Price Waterhouse and of the evolving Azerbaijani business need for in-depth specialist knowledge Coopers & Lybrand, both of which were environment, with clients including in each key area. headquartered in London. PwC posted leading foreign companies and important revenues of US$ 26.2 billion for fiscal indigenous businesses. However, in many cases, knowledge of year 2012 (year ended June 2010) tax and law must be embedded in a US$31.5 billion. 2011(June 2012). PwC Assurance services thorough understanding of industry. Global employs over 180,500 people in PwC Azerbaijan’s Assurance group This is why we have developed 158 countries. provides assurance on the financial specialized teams along industry lines, performance and operations of your allowing us to quickly assemble a team PricewaterhouseCoopers (PwC) business. We can also help your business with the required tax and legal skills, as Azerbaijan, established in 1995, is one of improve its external financial reporting well as the relevant industry knowledge. the country’s first international and adapt to new regulatory Our servises include: professional services firms. Over the past requirements. Our servises include: • Tax treaty relief 19 years, the Firm has made significant • Financial statements audit and/or • Special tax regimes, Production investments in the local economy and review community and will continue to do so. SharingContracts and Tax Having started with just 10 staff, PwC • IFRS transition Protocols Azerbaijan now has more than 100 • Financial accounting • Indirect taxes and customs partners and staff, including a select • International tax structuring group of international specialists, all • Corporate reporting improvement • Tax management and accounting committed to the goal of excellence in • Risk assurance services serving our clients. services • Internal audit • IFRS transition and tax adjustments Our firm is key part of Eurasia region of • Client training • Tax aspects of M&A PwC Central and Eastern Europe(CEE), PwC CEE is a fully integrated Advisory services • Tax advice on inbound and outbound organization comprised of nearly 7500 We help organizations to work smarter assignments professionals in 29 countries with 53 and grow faster. We consult our clients • Developing an efficient tax function offices that in turn is an integral part of to build effective organizations, innovate and a tax strategy the global PwC network. & grow, reduce costs, manage risk & • Tax risk management regulation and leverage talent. Our aim PwC Azerbaijan’s wide range of skills is to support you in designing, managing • Company establishments and and experience, along with local and and executing lasting beneficial change. dissolutions international expertise, allow us to offer Our servises include: • M&As: due diligence, legal opinions, our clients the highest levels of service pre- and post-transactional advice and professional excellence. We provide • Strategy and operations the full spectrum of client services, • Financial effectiveness • Drafting investment and shareholders’ developed to be commensurate with agreements • Managing performance evolving client expectations. This • Corporate finance, assets and real comprehensive service line has enabled • Governance, risk and compliance estate acquisitions us to accept and successfully complete • Liquidity management some of the largest, most technically- • Security agreements challenging projects undertaken in • IT effectiveness • Contracts, loan/credit agreements, Azerbaijan to date. Our firm is widely • Creating a sustainable business guarantee deeds recognized as a leader in its sector, and stakeholders regard PwC as the firm • Strategic cost reduction • Dispute settlement, arbitration and that sets the professional standard. Our mediation • Transaction services opinions on matters of public policy are • Drafting employment agreements, • Valuations sought-after and highly regarded. labour law advice • Mergers and acquisitions

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

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