DOING BUSINESS IN 2019

BHM LAW FIRM LLC

SKS PLAZA, 7TH FLOOR, 49 FUZULI STREET, 1014 BAKU, AZERBAIJAN Tel: +994 12 492 0357 Fax: +994 12 492 2883 Email: [email protected] Web: http://www.bhm.az

CONTENTS

1. Country Profile a. Government Structure b. People c. Geography d. e. Visiting Azerbaijan (E-visa) f. ASAN 2. Economic Overview a. Support to business i. Fastest growing economy, currency etc. ii. Licenses through “ASAN Services” iii. Suspension of inspections iv. Investment Incentive Certificate v. Credit Guarantee Fund vi. Decriminalization of economic crimes vii. Infrastructure b. Business overview and Foreign Investment i. Forms of business ii. Taxation iii. Accounting iv. Customs v. Banking Regulations vi. Securities Market vii. Insurance viii. Protecting Foreign Investment ix. Employment law and migration x. Land ownership xi. Intellectual Property Rights xii. Personal Data Protection c. Specific Regime for Non-Oil Industry i. Agriculture and Food ii. Industrial Parks iii. Free Trade Zones d. Legal System i. Courts ii. International arbitration iii. Mediation

COUNTRY PROFILE legal force in the territory of the Republic of Azerbaijan. According to provisions of As the largest country in the South the present Constitution, Azerbaijan is a for both its territory and democratic, secular, unitary presidential population, Azerbaijan has undergone republic where legislative, executive and enormous advancements both in economy judicial powers interact and are and in national legal framework. Those independent within the limits of their developments are ranging from the authority. significant changes in legislation, the establishment of centralized real estate and The legislative authority is exercised by movable property registries, the the Parliament of the Republic of establishment of e-government, the Azerbaijan, consisting of 125 members adoption of international standards for elected for a five-year period. Executive financial reporting and accounting, the authority belongs to the President of the establishment of special economic zones, Republic of Azerbaijan, which is executed as well as industrial and technological through the Vice Presidents, the Prime parks, and the introduction of one-stop- Minister and the Cabinet of Ministers shop (a single window) system for under the leadership of the President. As business registration, including the head of state, the President appoints the introduction of simplified procedures in Prime Minister subject to the approval of applying for work permits. the Parliament. The courts of the Republic of Azerbaijan exercise judicial power, It is noteworthy that Azerbaijan is ranked which will be described below. 25th among 190 economies in the ease of doing business, according to the World Population - As of 6 April 2019, Bank‟s annual ratings being improved population of Azerbaijan reached 10 from 57th in 2017. In fact, Azerbaijan has million. Majority of population are ethnic ranked 9th in "Business registration", 17th with 91,6 % and the in "Registering property", 22nd in "Getting minorities include Lezgins, Russians, credit", 2nd in "Protecting minority Talysh, Jews, Kurds, Georgians and others. investors", and 28th in "Taxation". Although, most of the population in According to Doing Business 2019 report, Azerbaijan is Muslim, Azerbaijan is a Azerbaijan has been included to the list of secular country recognizing equal rights of countries with the most noticeable all ethnic groups and religions. improvement in the economy. Main Cities Population As BHM team, we have contributed to this (thousand) year‟s Doing Business 2020 Guide with the intend to highlight some of the Baku 2245.8 principal issues in relation to establishing Ganja 331,4 and doing business in Azerbaijan providing Sumgait 339,0 key insights and useful tips to the legal and Mingachevir 103,2 business sphere in the national market. Nakhchivan 92,1

Government Structure – The Constitution of Azerbaijan Republic has the highest The official state language is Azerbaijani. through the embassy/consulate of the However, Russian and English (the latter is Republic of Azerbaijan abroad. mainly used among younger generations) are also widely spoken in the country. E-visa - A foreigner or a stateless person can apply online directly for single-entry Geography – The total area of the Republic electron visa (E-visa) valid for 30 days stay of Azerbaijan is 86,600 square km in the country. The payment is made online bordering the on the East, Iran and the applicant‟s physical presence or on the South and Russia on the North, as his/her passport is not required anymore. well as sharing border with Georgia, E-visas are issued by “ASAN visa” service Armenia and Turkey on the West. 20% of within 3 working days, while urgent visas its territory, (namely Nagorno-Karabakh are issued within 3 hours (not depending and seven adjacent districts) has been on non-working days) granting entry to occupied by Armenia. Azerbaijan. E-visa is available for the

citizens of 94 countries, the list of which is Climate – The climate of Azerbaijan can determined by the Ministry of Foreign be divided into three different climate Affairs. zones. It is rather continental climate with relatively cold and hot . As of 15th May, 2018 the issuance of entry Azerbaijan is surrounded by mountains, visas is enabled at Baku International namely, the Caucasus Minor in the West Airport via the self-service terminals. and the Great Caucasus in the North. Currently, citizens of 15 countries, namely Majority of the land in the country is Bahrain, UAE, South Korea, China, Iran, useful for agriculture. The main Israel, Indonesia, Kuwait, Qatar, Malaysia, agricultural products of Azerbaijan are Oman, Saudi Arabia, Singapore, Turkey cotton, tobacco, grain, rice, grapes, fruit, and Japan can benefit from this service. vegetables, potato, tomato and tea. “ASAN Service”- ASAN Service is a Visiting Azerbaijan (E-visa) – Since 2016, cutting-edge Azerbaijani public service there are two ways of applying for a visa to delivery model which gained high Azerbaijan: (a) apply for electron visas for recognition for its transparency and single-entry (E-visa); or (b) apply for visa functionality. in a traditional way for a multiple entry

ECONOMIC OVERVIEW

Indicators 2018 Indicators 2018 Population 9923.9 GDP - 6580,0 million Agriculture: manat Economical active 5081,8 thousand GDP - Industry 39555,4 million population manat Unemployment 5% Export 18.9 billion USD GDP: 79,8 billion manat Non-oil and gas 5948,9 mln USD GDP Per Capita: 8126,2 manat Import 10.3 billion USD

SUPPORT TO BUSINESS until 2018, reaching an all-time low of 71 in 2012 and a record high of 25 in 2018. Azerbaijan enjoyed inflow of foreign investment due to its ample hydrocarbon Striving to carry out deep institutional and resources. The Agreement of the Century regulatory reforms with the task of signed in 1994 involving largest oil and escaping the „resource curse‟ by gas companies has become a major oil modernizing and diversifying the economy agreement and a critical milestone to away from reliance on oil revenues, exploit its oil and gas resources. Under the Azerbaijan developed 12 Strategic road main Production Sharing Agreement maps for the national economy and main (PSA) operated by BP, a key oil economic sectors aiming to define the production Platform is Azeri-Chirag- country`s development goals and priorities Guneshli (ACG) oilfield, oil of which is and ensure their implementation. transported by Baku-Tbilisi-Ceyhan Pipeline (BTC). According to the new regulation adopted in the end of 2015, the licenses are issued In 2006, Azerbaijan was regarded as the through internet & “ASAN Service”. The world‟s fastest growing economy, mainly same regulation has also eliminated the due to its oil production industry. requirement of licensing for certain type of Supported by the favorable terms of trade business such as tourism (hotels), retail of and stabilized oil production, Azerbaijan‟s alcohol and tobacco etc. economy expanded by 1.3% in the first half of 2018. As the effects of the 2015 In 2017, the Agency for Development of depreciation faded away, annual inflation Small and Medium sized Businesses moderated to 2.3% in the first half of 2018. (SMB) was established to support micro, small and medium sized businesses by Since 2014, Azerbaijan again became the rendering one stop shop services, center for significant foreign investment in coordinating services and policies of other the oil and gas fields. In fact, BP‟s state authorities towards entrepreneurship. exploration of gas from Shah Deniz The list of the services ranges from brought significant economic, political and establishing legal entities, issuing licenses regional advantages to the country. In and permits, issuing credit guarantees, order to export Shah Deniz gas from registration of patents and trademarks, Azerbaijan to Georgia and Turkey, there customs clearances of goods and nearly was built The South Caucasus Pipeline (of hundred other related services from 31 which the shareholders are: BP, operator state authorities. (28.8 per cent), AzSCP (10.0 per cent), TPAO (19 per cent), Petronas (15.5 per The SMB was delegated to deal with cent), Lukoil (10 per cent), NICO (10 per creation of new infrastructure, tax cent) and SGC Midstream (6.7 per cent), exemptions and other reforms for small which follows the route of the Baku- and medium sized entrepreneurship and the Tbilisi-Ceyhan (BTC). Cabinet of Ministers is assigned to draft a law on development of small and medium It is quite notable that, the rank sized entrepreneurship. of Azerbaijan improved to 25 in 2018 from 57 in 2017. Ease of Doing Business in Since October 2017, foreigners and Azerbaijan averaged 56.64 from 2008 stateless persons can register limited liability companies (LLC) with foreign promoting “Made in Azerbaijan” brand to capital through electronic signature within increase export, supporting tourism, two days. The relevant Regulation also stimulating entrepreneurs and providing revoked, among others, the requirement of guarantees to foreign investors. having permanent registration. Electronic signatures are obtained based on temporary Enjoying government subsidies, a residence permit from ASAN and other centerpiece of the agrobusiness sector was relevant state authorities. LLC with foreign production of cotton, tobacco, silk, tea, capital is defined as an entity established tomato, paddy, etc. by foreigners and stateless person as well as legal entities registered in jurisdictions Manat - national currency of Azerbaijan other than Azerbaijan. was denominated into the New (AZN) since January 2006. From Since November 1, 2015, Government February 2015, the Central Bank shifted extended suspension of inspections of manat to a floating regime. businesses until 2021 with exceptions of In the last two years exchange rates were tax audits, quality inspections of medicines as follows: and food products. Foreign 2018 2017 By passing the Presidential Decree dated currency January 18, 2016, endorsing regulations on AZN AZN 1.7230 stimulating investment in Azerbaijan using US Dollar 1.7020 investment certificates foreign individuals 1 and legal entities are granted tax and Euro 1 AZN AZN 1.9423 customs privileges (through confirmation 1.9206 of payment at least 10 % of the statutory Pound AZN AZN 2.2160 minimum investment under the investment Sterling 1 2.2152 project and submitting its business plan supplemented with a copy of a taxpayer Profit of micro or small entrepreneurship registration certificate. Government startup subjects operating as a legal entity initiated issuance of Investment Incentive is exempted from tax for three years. Certificate to investors who make Under the provisions of Tax Law, a part of investments beyond determined thresholds not more than 10% of reporting period‟s on production of products related to profit of taxpayer (excluding legal entities, agriculture, pharmaceuticals and with 51% or more stakes owned directly or construction. indirectly by public legal entities established on behalf of the state and/or Due to decreased demand and low oil state) transferring to the enterprises and prices, GDP growth decelerated from an organizations, which operate in education, average 13% in 2004-2013 to average health, sport and culture and meet factors 0.1% in 2014-2016. As a result of the defined by relevant executive body, is declined oil output Azerbaijan furthered exempted from tax for 10 years from diversification of the economy and targeted January 1, 2019. The provisions of the to drop the economy‟s dependence on mentioned reform covered the cashless hydrocarbon revenues placing a special payments only. emphasis on the agribusiness sector, Further, SME Cluster‟s profit is exempted including the companies with foreign from tax for 7 years since inclusion in capital and owned by foreign nationals. Up SME cluster companies‟ registration. to date, exports are not subject to customs Moreover, capital expenditures by a legal duties or restrictions and also there are no entity, which is a participant of the SME general trade barriers or embargos for the cluster, from its profit obtained from import of goods to Azerbaijan. There is provision of the goods (services) on the only certain regulations applying for the basis of an agreement with SME is export of strategic commodities as oil, exempted from tax for 7 years. cotton, electricity etc.

Since 7November 2017, according to the BUSINESS OVERVIEW AND amendments to the Criminal Code, certain FOREIGN INVESTMENT economic and financial breaches committed for the first time, including the Forms of business – According to the Civil avoidance of customs and tax payments are Code of the Republic of Azerbaijan, there not considered crime anymore if damage is are several forms of doing business in indemnified. On the other side, the law Azerbaijan, by establishing a legal entity or brings alternative pre-trial detention and not establishing a legal entity (sole electronic monitoring as opposed to entrepreneurship). In fact, the laws incarceration. stipulate the following types of commercial legal entities: Baku-Tbilisi-Kars rail route connecting Baku to Tbilisi in Georgia and Kars in (i) General Partnership (GP) established by Turkey is the biggest regional project after two or more individuals and/or legal Baku-Tbilisi-Ceyhan pipeline. It is the persons. The Civil Code imposes latest effort in Azerbaijan's drive to “unlimited” liability to the owners of GP in strengthen its role in connecting China terms of its obligations. directly to Western Europe along “silk road”. The first cargo train loaded with (ii) Limited Partnership (LP) established grain from Kazakhstan arrived to Kars on by two or more individuals and/or legal November 3, 2017. To this end, Baku persons, its distinction from GP is that International Sea Trade Port was recently apart from having at least one participant modernized to become regional transport bearing unlimited liability for the and logistics hub in Eurasia. obligations of the LP, there also must be one or more participants liable only in the On 18 January 2018 the President signed amount of share they have in LP and are an order on promotion of investment not participating in the activities of LP. activities and protection of rights of foreign investors in Azerbaijan. The order (iii) Limited Liability Company (LLC) is is mainly covering the planning of a new the most widely-spread legal entity form in law on investment activity including state doing business in Azerbaijan due to guarantee to investor's rights, rules on flexible management, liability limits, alternative dispute resolution and simplified procedure for registration, etc. It indemnification. So that the government is is established by one or more individuals expected to strengthen its policy of and/or legal persons and the charter capital supporting privately held enterprises, is divided into authorized shares of its founders. In fact, the law doesn‟t set any of a legal entity, the latter may perform the requirement regarding the minimum commercial activities that the head office capital for establishing LLC. It is up to the does. Registration requirements are discretion of the founders to determine the identical for both a representative office issued capital and required paid-up capital and a branch. and its shareholders‟ liability is limited to the amount of their shares in the LLC. Taxation – The Tax Code of the Republic of Azerbaijan is the main legislative act (iv) Additional Liability Company (ALC) regulating taxation in the country. There unlike to LLC, in ALC the participants of are three different tax regimes: i) statutory an ALC may assume liability in excess of tax regime; and ii) special tax regimes their contributions. which are accordingly a) Production Sharing Agreements (PSAs) existent in the (v) Joint-Stock Company (JSC) can be oil & gas sector, and b) Host Government either “open” or “closed”. In an “open” Agreements (HGAs) regulating the JSC its shares can be offered to public, agreements exclusively dealing with Baku- while in a “closed” JSC its shares can be Tbilisi-Ceyhan and South Caucasus offered only among its shareholders. pipelines. The statutory tax regime applies to all legal entities with the exception of The following steps shall be observed for those that are governed by a PSA or HGA. registering a legal entity, namely: (i) Collection and notarization of all necessary There are several types of taxes payable documents, (ii) Submission of documents when conducting business in Azerbaijan: (iii) Obtaining a company seal and opening a bank account. According to the recent Corporate Income Tax (CIT) – Both amendments to the Law on State resident and non-resident entities (through Registration of Legal Entities adopted on their permanent establishment, such as 30 October 2018, application for state representative or branch offices) are registration of legal entity shall be signed subject to CIT (profit tax) in both by founder(s) and legal Azerbaijan. Foreign legal entities who are representative(s) of legal entity, or by the present in Azerbaijan for more than 182 person(s) appointed by them. As per the cumulative days during a calendar year new amendments, a commercial legal shall establish a representative or branch entity shall provide information on its legal office in Azerbaijan. Both local legal address only. entities and the branches or representative offices of foreign legal entities in Branches and Representative Offices – Azerbaijan are taxed on profit, which is Foreign entities can also operate in determined as gross income from business Azerbaijan by merely establishing a branch activities minus deductible expenses, at a or a representative office. Although under flat rate of 20%. The branches and Civil Code they are not recognized as a representative offices are only taxed on the separate legal entity, tax legislation of gross income from business activities Azerbaijan treats a branch or representative conducted in the territory of Azerbaijan office as a legal entity for the purposes of minus deductible expenses, while other taxation. There is a distinction between a legal entities are taxed on their worldwide representative office and a branch office. income. In addition to CIT paid by a While the former only represents interests permanent establishment of a foreign legal are also exempt from income and profit tax entity, it will also be subject to branch for three years from the date of “Startup” profit tax at the rate of 10% for each certificate. amount repatriated by such permanent establishment from its net profit. CIT for Unless otherwise specified in the double non-resident entities which do not have taxation treaties which Azerbaijan is a their permanent establishment in party to, foreign legal entities with no Azerbaijan is taxed from their gross profit permanent presence in Azerbaijan are without deductions for expenses at the rate subject to the withholding tax on their of 10% (“Withholding tax”). following income from Azerbaijani sources: The law sets a number of tax exemptions for the specific types of businesses. Since Dividends – 10% ; Interest – 10% ; Rent January 2013, Tax Code established few and royalties – 14%; Telecommunication concessions for the residents of the and transport services – 6%; Risk industrial and technological parks by insurance and re-insurance fees – 4%; exempting them from profit tax for the Income received from performing works period of 7 years starting from the and rendering services – 10%; and Other registration as a resident of the industrial income – 10%. and technological park. According to the Simplified tax – legal entities or persons recent amendments to the Tax Code which with annual turnover not exceeding AZN are effective from the 1st of January 2019, 200,000 can be registered as a simplified new categories of entrepreneurs are taxpayer. Pursuant to the new changes to specified. The law provides tax exemptions the Tax Code, simplified tax rate is for income, profit and property taxes reduced to 2% of the gross income, and the including for salaries to reduce tax duties entrepreneurs who does not render services of businesses and introduces reduced and and/or sell goods to the public but to the unified simplified tax while excluding businesses (except transportation simplified tax for certain category of businesses), production businesses having entrepreneurs. The new categories of more than 10 employees, wholesalers, entrepreneurs are the micro and small businesses requiring licenses (except entrepreneurs. Basically, 75% of income building construction and businesses and profit of micro entrepreneurs are providing services on compulsory exempt from tax as well as they are exempt insurance) are not eligible for the from property tax and allowed apply 2 simplified tax anymore. The entrepreneurs coefficients for amortization. As per the who does not fall under the simplified new amendments, micro entrepreneurs are taxpayer‟s category, though having the sole entrepreneurs and legal entities (i) same amount of income as simplified having medium annual employees between taxpayers will now pay 20 percent income 1- 10 people and (ii) annual income not tax. Nevertheless, they will pay taxes from more than AZN 200,000. Small 25 percent of income after deducting entrepreneurs are sole entrepreneurs and allowable costs. legal entities (i) having employees between 11-50 people and (ii) annual income Value Added Tax (VAT) – supply/import between AZN 200,000 – 3 mln. In addition of goods and the provision of services in to micro and small entrepreneurs, startups Azerbaijan are subject to VAT at the rate of 18% for each taxable operation. Legal which provide for lower withholding tax entities and individuals with taxable rates (around 5% to 8%), exemption from transactions exceeding AZN 200,000 VAT and customs duties, and simplified within a consecutive 12 month period shall reporting and accounting procedures. register as VAT payers. Other companies carrying out business activities in Other taxes: Property tax – Companies are Azerbaijan may voluntarily register. Only levied with property tax at the rate of 1% registered VAT payers may charge VAT or on average annual value of fixed assets. claim a credit for the VAT contribution. Non-residents with permanent All VAT tax payers shall issue electronic establishment (PE) in Azerbaijan are also VAT invoices in Automated Tax subject to property tax on the average Information System. annual value of fixed assets connected with the PE. Transfer Pricing – The rules on transfer pricing are applicable to the related party Land tax – Except for agricultural lands, a transactions which exceed AZN 500,000 land tax is imposed on legal entities or within a calendar year. These rules apply individuals owning or using land plots, the to the transactions concluded between rate varying between 0.1-20 AZN, which following persons: (i) resident of depends on the purpose of use and location Azerbaijan and non-resident in a related of the land. party relationship; (ii) permanent Production of excisable goods in and/or establishment of non-resident in import of those goods to Azerbaijan are Azerbaijan and that non-resident or its any subject to excise tax. representative office, branch office or other unit located in other countries; (iii) resident Legal entities and individuals involved in of the Azerbaijan and (or) permanent extracting mineral in Azerbaijan shall pay establishment of non-resident in mining tax at rates from 3% to 26% of its Azerbaijan and legal entities incorporated total wholesale price. in countries with favorable tax All individuals producing or importing regimes. Any of the above persons must petrol, diesel and liquefied gas in submit a certificate in a form determined Azerbaijan are subject to road tax. Rates by the Ministry of Taxes regarding the for the road tax vary depending on vehicle transaction exceeding AZN 500,000 engine, number of axles, weight carried annually no later than 31 March following and how long the vehicle is supposed to be the reporting year. in the country.

Administrative penalties may be applied Employment taxes and social contributions for noncompliance with tax legislation – Personal Income Tax is exempted for the which vary from 50% up to 100% of the salaries up to AZN 8,000 and any amount amount of taxes due. exceeding this threshold will be taxed at the rate of 14%. Production Sharing Agreements (PSAs) – The Tax Code also recognizes the special Accounting – the Law “On Accounting” tax regimes applicable to contracting and sets the general requirements on financial subcontracting parties in oil and gas reporting and accounting: production sharing agreements (“PSAs”) 1. IFRS Standards – It is a mandatory prepared by the “Trade Facilitation requirement to follow IFRS Standards Centre”, Azerbaijan has stated new for public interest entities, more measures on facilitation of the relations of specifically, credit organizations, the entrepreneurs with foreign partners by insurance companies, private pension providing mutual recognition of signatures funds and legal entities with stock and e-purses. Under the provisions of the market share listings. Entities same state program, there has been with: (a) revenue of AZN 120 integrated the new “One Stop Shop” mln; b) an average of 1,500 employees, Export Support Centre, by which the and c) a total balance sheet of AZN provision of cross-border electronic 300 mln are also considered as public services are granted. Entrepreneurs interest entities. implementing the export procedures may 2. National Standards – Commercial acquire the following certificates by entities must either follow IFRS or the spending and exchanging fewer National Accounting Standards for information resources: Commercial Organizations (NAS) which are largely drafted according to  international veterinary certificate IFRS. (for animals, animal products and 3. Simplified Accounting Rules – Small raw materials exported); and medium sized entities (SME) are  phytosanitary certificate; allowed to follow simplified  certificate of quality for export of accounting rules approved by the food products to the EU ; Ministry of Finance. Besides, they can  certificate verifying the country of also choose to follow NAS. origin;  certificate for export of endangered Customs – Import and export tariffs are species of wild fauna and flora; predominantly calculated based on  certificate for protection of cultural commodity nomenclature of foreign assets (for export of cultural economic activity and methods of assets); evaluating price of goods. Nomenclature  permit for export of religious of commodities in foreign-economic literature and other informational activity of the Azerbaijan Republic is materials with religious content; defined and updated by the Cabinet of Ministers of the Azerbaijan Republic in “One Stop Shop” Export Support Centre is accordance with world practice of also applying the unified control with Food commodities classification. Since 2018, Safety Agency on veterinary, phytosanitary Azerbaijan has adopted new regime on and other customs inspections at the border simplification of the import rates by checkpoints and accordingly electronic including only three rates of 0%, 5% and submission of information is used when 15%, depending on the import subject. The submitting customs declarations to the new regime was designed to support the customs authorities for food products. program of import substitution for the development of local production. In 2018, the customs audit has been included into the list of the inspections in Within the new state program named as the field of entrepreneurship which are still “Digital Trade Hub” which has been to be conducted during suspension period allowed to accept deposits, issue loans and (till 1 January 2021). make money transfers, non-bank credit organizations are not allowed to accept In 2016, "Green Corridor" gating system deposits. Postal service is also allowed to was formed. The main goal of the new render banking services, including gating system is the creation of more accepting deposits, issuing credit cards and favorable conditions for enabling importers making money transfers. Banks, non-bank and exporters to submit their documents credit organizations and postal services are (especially, declarations) electronically. licensed by the Financial Markets The applicants of the new system are Supervisory Authority (FMSA). The granted with “permanent use right”, by license is granted on a perpetual basis. which they may ensure faster crossing of Minimum charter value requirement for the goods through customs control gates by Banks is AZN 50 million. priority pass. The registration procedure for the mentioned gating system consists of FMSA is the quasi-state supervisory three steps: the individual submits the organization on revision of the financial application electronically to the State statements, accounting books and any Customs Committee; the Committee other records of banks. FMSA is also evaluates the application within one authorized to demand explanations on month; the Applicant is granted with the matters relating to the accounts and permanent user status from “Green financial statements of the banks, to Corridor» gating system. demand prior written notification for any purchase which will cause the purchaser‟s On 21 December 2018, the President of the shares to become equal or exceed the Republic of Azerbaijan approved the new threshold of 20% of the charter capital. Rules “On obtaining, suspension, Further, any person who wishes to become termination and restoration of the rights of a major shareholder of a bank in foreign trade participants for permanent Azerbaijan or to create a bank holding use of the “Green Corridor” customs must obtain a prior written consent from clearance system”, by which the importers the FMSA. Operations of foreign banks in were categorized as (1) high, (2) medium the form of branch and representative and (3) low risk groups. Relevantly, the office are licensed by the FMSA. importers with low or medium risk category were granted with the benefit on Within the last 3 years the Ministry of usage of the “Green Corridor” customs Taxes, FMSA and the banks themselves clearance system. have taken a number of measures for Other main advantages of the new customs boosting the rate of the non-cash payments. control system are examination of goods in So that, since 2017 entrepreneurs' cash priority order, less physical inspection, operations have been restricted to certain holding the customs clearance in places limits defined by the Law of the Republic other than the customs offices. of Azerbaijan “On non-cash payments.” Relevantly, payments of administrative Banking Regulations – Basically, loans are fines, taxes, customs duties, pensions and issued by banks and other micro-finance others have been transferred to non-cash organizations named as “non-bank credit basis. Entrepreneurs withdrawing cash organizations”. Unlike banks which are from their bank accounts became subject to tax payment at the rate of 1% (one percent) Since 2015, changes to the Civil Code and of the total withdrawal amount. As the adoption of the new Law on Securities result of the mentioned measures, the funds Market brought many changes in the in banks has impressively increased and structure of securities market. Under the such measures also founded the new Civil Code securities are a document ground for the issuance of new loans as recognizing contractual relations between well. the issuing company and the owner. Securities can be uncertified and registered Notwithstanding with the fact that FMSA electronically. is the main regulatory authority of the credit organizations, the Central Bank of Investment securities are issued publicly or the Republic of Azerbaijan fulfills privately. Public offering is an offer to functions of a state bank and implements more than 50 people or offer through state monetary policy, maintains cash media. Initial Public Offering of circulation and regulates foreign exchange investment securities is subject to approval rate of manat. by the FMSA. Initial Public Offerings and public offerings of derivatives are to go After the inspections in the field of through stock exchange. customs audit were added to the Law “On suspension of inspections in the field of Securities are registered at the National entrepreneurship”, as one of the Depository Centre under the FMSA. exceptional inspections which would not Trading with the securities in the primary be suspended, the inspections have been and secondary markets is subject to change broadened in the field of financial markets of register at the National Depository as well. The inspections on financial Centre. markets are conducted by the FMSA, which investment funds, insurance Both in primary and secondary markets, organizations, controls securities market, securities can be traded through investment credit organizations, currency exchange companies. Investment companies are and payment systems. organized in the form of joint stock companies and licensed by the FMSA. Manat (ISO 4217 code of manat - “AZN” and the logo of manat - “ ₼”) is the name Insurance – Under the Law on Insurance of the official currency of Azerbaijan Activity, insurance companies are Republic. All local and foreign companies established as life insurance or non-life and individuals may have accounts both in (general) insurance local and foreign currencies at all local companies. banks. All the transactions and settlements Insurance companies must be established within the territory of Azerbaijan Republic as open joint stock companies and must be (including the payment of an employee‟s licensed by the FMSA. Apart from the salary) has to be made in AZN, with a few licensing, insurance companies are exceptions stipulated by law. required to get separate permits for any type of insurance activities such as Securities Market – Under the Civil Code, voluntary insurance, compulsory insurance stocks and bonds are investment securities and reinsurance. which are principally traded in primary and Under the law on Compulsory Insurances, secondary markets. owners or holders of the property must SPECIFIC REGIME FOR NON-OIL have the following insurances: INDUSTRY

 Compulsory insurance of Agriculture and Food – Being one of the real property; most attractive fields for potential  Compulsory civil liability investment in the , insurance associated with the agricultural sector is one of the priority use of real property; sectors for diversification of the economy.  Compulsory civil liability On account of perfect climatic conditions, insurance of motor vehicle minimal unit productions costs, its high owners; quality and the extended growing season,  Compulsory personal agricultural production covers a large accident insurance of variety of crops, fruits (apples, grapes, passengers olives, cherries, melons, lemons, persimmons, peaches, pomegranates, Among other compulsory insurances, all watermelons, plums, raspberries and employers are required to obtain strawberries), vegetables (tomatoes, compulsory insurance against loss of onions, cucumbers, carrots, potatoes, professional work capacity of employees cabbage and greens), grains (barley, as required by the Labor Code and the maize), hazelnuts and tea leaves which relevant law. became recognizable brand in the post- Until 20th day of the month following the Soviet market. end of each quarter insurers (also In fact, the crucial areas in the agricultural reinsurers) are obligated to report on fixed and food processing field are the assets of legal entities, their branches and following: representative offices insured by them.  Milk and dairy production; Since 1 January 2019, new social insurance  Fruit and vegetable growing, contribution rates for nonpublic sector and including viticulture; for non-oil and gas sector have been determined as follows:  Meat and meat foods production;  Apiculture production;  Individuals with gross taxable  Fish and fish products; monthly income below AZN 200 –  Alcoholic and non-alcoholic 3% to be withheld from employee beverages production and 22% from employer;

 Individuals with gross taxable Tax benefits - The government stimulates monthly income above AZN 200 – a significant growth in the agriculture and 10% of the amount exceeding AZN food-processing sector by means of 200 plus 6 AZN to be withheld various measures such as import from employee and 15% of the substitution, tax exemptions and subsidies amount exceeding AZN 200 plus of pesticides, fertilizers and machinery. AZN 44 to be paid by employer According to the Tax Code of the Republic of Azerbaijan, the agricultural producers do not pay property tax, profit tax and VAT for ten years until 01 January 2024. Import and sale of wheat, production and sale of flour and bread, including sale Machinery, technological equipment and of poultry are exempt from VAT for three plants imported by the residents of the years until 01 January 2020. In addition, industrial and technological parks for the import and sale of seeds and seedlings; construction of production facilities of breeder animals; mineral fertilizers, industrial or technological parks, the pesticides; equipment for seed breeding, research and development works are not poultry and beekeeping, veterinary subject to import VAT within seven years preparations for preventions, diagnostics from the date of registration of the resident and treatment of livestock animals and in the industrial or technological parks. poultry breeding, as well as laboratory VAT exemptions have been applied for all equipment and machines for cleaning, types of goods imported by the residents of sorting or calibration of seeds, grains and industrial parks for the purposes of their legumes; direct agricultural irrigation and activities for the period of five years until 1 other facilities, vehicles, equipment and May 2021 based on a document issued by techniques are not subject to VAT. the relevant executive authority. Machinery, technological equipment and Industrial Parks – The government has plants imported by the residents of the established a number of industrial parks in industrial or technological parks for the order to ensure sustainable development of construction of production facilities of the economy, preferably in various non-oil industrial or technological parks, research industry spheres and has offered tax and development works are free from incentives for the residents of industrial import VAT for 7 years from the date of parks, alongside with different registration of the resident in the industrial infrastructure opportunities. The crucial or technological parks. Furthermore, zero industry spheres are the following mainly (0%) rate VAT shall be applied to the focusing on (i) machinery (Neftchala provision of goods, performance of works Industrial Park, Masalli Industrial Park); and services for the purposes of the same (ii) eco-industry (Balakhany Eco-Industrial activities by contractors to the residents of Park); (iii) chemical industry (Sumqayıt these industrial parks, or by subcontractors Chemical Industrial Park);(iv) shipbuilding to the contractors of such residents for the (Garadag Industrial Park); (v) textile period of 5 years until 1 May 2021. (Mingachevir Industrial Park); (vi) pharmaceutical (Pirallahı Industrial Park); Free Trade Zones - (Alat free-economic (vii) high technologies (High Technologies zone) –The establishment of the free trade Park, Mingachevir High Technologies zones will play pivotal role in non-oil Park, High Technologies Park under the trade, which accelerates the development Azerbaijan National Academy of of entrepreneurships and will have Sciences). significant impact to the economy of the Republic of Azerbaijan. According to the Tax benefits – Special incentives, Law of the Republic of Azerbaijan “On exemptions and privileges have been Special Economic Zones”, which became applied to the residents of the industrial effective on 14 April 2009, provides a and technological parks. Hence, the preferential tax and customs regime residents of these parks are free from applicable to residents of special economic property and profit taxes for the period of zones (however no such zones were seven years since their registration. established until now). The following tax benefits shall be applied to the companies operating in special economic zones: Protection of Foreign Investment. Being (a) Zero (0% ) rate VAT; the another step forward to diversification (b) 0.5% tax levied on overall turnover of national economy and following the from supplied goods, performed Strategic Roadmap of the National services, or works; Economy Prospects signed by the (c) customs exemptions. President of the Republic of Azerbaijan in

December 2016, presidential decree on On 18 May 2018 the Law on Alat free some actions regarding the promotion of economic zone was adopted. Under the the investment activities and protection of provisions of this Law, the legislation of the rights of foreign investors was signed Alat free economic zone will be effective earlier last year. The document aims in the territory of Alat free economic zone attraction of the foreign investments into and in case of any conflict with the the economy and envisages drawing up of domestic law, the legislation of Alat free new laws on investment activities and economic zone will be applied. In addition, protection of foreign investments reflecting Free Zone Competent Authority, Free the international best practices. The new Zone administrative offices, Free Zone laws are expected to be adopted this year. legal entities and their employees, Free Zone residents are exempted from all taxes and customs. Following relevant orders of Under the current legislation, including the the President of Republic of Azerbaijan Law on Protection of Foreign Investment, (dated 4 June 2018 & 29 January 2019, the Law on Investment Activity, the Law etc.) to provide legal compliance of all on Privatization of State Property legal acts with the Law on Alat free- (including the “Second Privatization economic zone, this issue is now on Program”) the individuals and legal entities agenda of the Parliament of the Republic including foreign entities, governments, of Azerbaijan and is expected to be international organizations, and individuals finalized soon in order to put this law into permanently residing outside Azerbaijan effect. may carry out any business activities not prohibited by Azerbaijani law. The law It is worthy to note that Alat settlement is recognizes the following forms of foreign located in Garadagh district of Baku (65 investment including both tangible and km south of the capital) where Azerbaijan intangible rights, as well as intellectual intends to build a major trading hub as a property rights: (i) participation in interest tax-free zone covering the territory of the and shareholding with Azerbaijani legal Baku International Sea Trade Port, with entities and citizens; (ii) establishment of such components as Truck Parking, legal entities with full foreign investors; International Logistics Centre and (iii) acquisition of enterprises, immovable Domestic Logistic Centre, as part of a properties, buildings, structures, and other special economic regime. The Port will act kinds of property allowed by law. as a major logistics hub in the Caspian region, serving both European and Asian It should be stated that the bilateral markets, as well as being part of an investment treaties (BITs) ratified by extensive international logistics network Azerbaijan, the number of which is linking Europe and Asia. currently about 50), prevail over domestic law regulating the same issue (except for enhanced electronic signature and sending the Constitution and acts adopted by of electronic information about it to the referendum). employer. Labor Code of the Republic of Azerbaijan provides general rights and Overall, foreign investors provided with obligations, including vacation rights, “not-less-favored” regime, with certain wage system and methods, grounds for guarantees, including profit repatriation termination of employment contract for guarantee; deterioration (assurance that both employee and employer (related legal even when Azerbaijani legislation will guarantees and financial consequences) change in a manner adversely affecting an and other matters. investment, the application of that change will not come into force for a period of ten Employees must be provided with years of the initial investment); guarantees compulsory insurance for occupational and against nationalisation and requisition professional disability resulting from (foreign investors are entitled to prompt, industrial accidents and occupational effective, and adequate compensation in diseases, unemployment insurance in a case of nationalisation and requisition). manner provided by laws. Medical insurance (which is voluntary now) shall Employment law and migration. be mandatory starting from January 1, Employment contract is the ground for 2020. formation of employment relations. In general, employment contract, as well as The table below illustates the rates on its termination and any amendments, shall social insurance payments in accordance enter in force after registration of notice of with the latest amendments to the Law on an employment contract entered into the Social Insurance amendments: special electronic information system using № Monthly Compulsory social Compulsory social insurance (employer)* income insurance (employee)*

1 Up to 200 3 per cent 22 per cent AZN

2 Over 200 6 AZN + 10 per cent 44 AZN + 15 percent from the amount over 200 AZN from the amount over AZN 200 AZN

Migration - migration procedures must be The foreigners shall be exempted from complied with by foreign nationals who work permit requirement if they hold want to work and stay in the Republic of position of the head or deputy head in: Azerbaijan. Azerbaijan has a less - a subsidiary or representative office restrictive admittance policy for highly of a foreign legal entity in the skilled workers. Republic of Azerbaijan; - a legal entity incorporated in the Republic of Azerbaijan and the founder or at least one of the founders of which is a foreign legal Azerbaijan Republic, but have force under entity or individual. the international treaties which the Azerbaijan Republic is a party to, or are Limits on land ownership. Foreign citizen well-known, are granted protection as well. can buy any property in Azerbaijan, except the land. Pursuant to the Land Code, Patent Protection, Utility Models, and foreigners, stateless persons, foreign legal Industrial Design - A standard patent entities, international communities and generally has a term of 20 years from the organizations as well as foreign states may date on which the application was filed be parties to land transactions by observing with the respective body of executive restrictions provided with legislation. power. If the subject matter of an invention Thus, in accordance with Article 48 of the patent is a product or process subject to Land Code, foreigners may obtain a land administrative procedures, the validity only by rent. term may be extended for five years. Unlike patent, utility model should not Intellectual Property Rights (IPR). The meet the requirement of inventive step. In Law on Copyrights and Related Rights, case the invention is new and “industrially Law on Trademarks and Geographic applicable”, it shall enjoy 10 years Designations, Law on Patents, the Law on protection under the law of the Republic of Unfair Competition and the Law on Azerbaijan. Art-constructive solutions Securing Intellectual Property Rights and determining outward appearance of an Combating Piracy, Customs Code are the article refers to industrial design. Industrial main legal acts in the field of IPR in design can be constituted as a picture or a Azerbaijan. model or in a combination of those features. If the industrial design meets the Copyright - Generally, the right is criteria of novelty and originality, it can protected throughout the lifetime of the enjoy the protection for the term of 10 author and for 50 years after his death. No years. formalities are required for protection to exist, and this protection also applies in Personal Data Protection. The Law on other countries. Personal Data aims to protect the right to privacy of the person, recognized both in Trademarks and Geographical indications - Constitution of the Republic of Azerbaijan In order for a trademark to be protected in and Article 8 of European Convention for Azerbaijan it has to be registered at the the Protection of Human Rights and Intellectual Property Agency of the Fundamental Freedoms which Azerbaijan Republic of Azerbaijan. The term of the is a contracting party to. It is noteworthy trademark protection is 10 years from the that Azerbaijan has ratified the European date on which the respective body of Convention for the Protection of executive power received the application Individuals with regard to Automatic for registration. The term of the Processing of Personal Data. However, registration may be renewed for further Additional Protocol to this Convention periods of 10 years at the request of the regarding supervisory authorities and owner of the trademark, subject to a state transborder data flows is not adhered yet. fee. Trademarks and geographical indications, which are not registered in the The data enabling to identify, directly or Civil Procedure Code (effective as of indirectly, the person shall be considered January 1, 2017), any statements of claim as personal data, including such categories and complaints as well as any other as public (surname, given name and documents in economic disputes may be patronymic is regarded as public data); and submitted to the courts either in written data of specific category (data related to form or via an electronic cabinet race or nationality, family life, religion and established within the Electronic Court religious belief, health or conviction). system. Additionally, any court notices to the parties using electronic cabinet can be Except the cases provided by law, served by means of placing the notices into including information systems in respect of the electronic cabinets. the persons who are in labor relationships with the owner or operator of the system or International arbitration. Pursuant to the required for their access to the working Civil Procedure Code and the Law on territory, the information systems of Protection of Foreign Investments, personal data are subject to the state investment disputes may be resolved with registration. the dispute resolution procedures agreed by the parties. International arbitration in Collection, processing, dissemination and Azerbaijan is regulated in accordance with transfer of personal data is allowed with the Law on International Arbitration. written consent of the person only. The Azerbaijan has ratified the New York consent could be in the form of electronic Convention on Enforcement of Arbitral document with reinforced electronic Awards as well as the Washington signature or on the basis of written data Convention on the Settlement of submitted by the person that shall meet the Investment Disputes between States and requirement set out in the Personal Data Nationals of Other States, which provides Law. Regardless of level of legal for arbitration at the International Centre protection of personal data in the country for Settlement of Investment Disputes to which data is transferred cross-border (ICSID). transfer is possible with the written consent of the person. Mediation. On April 3, 2019, by the adoption of the new Law “On Mediation”, mediation will be used as the main LEGAL SYSTEM alternative dispute resolution method of social relations. The mentioned Law The Legal system of Azerbaijan is based mainly determines the principles, goals, on civil law. implementation rules of mediation and the status of mediators in Azerbaijan. Courts – The court system is three-tiered, consisting of the first instance courts According to the provisions of the new (District (city) courts, administrative- law, mediation applies to: (1) civil cases economical courts, military courts, courts and (2) economic and commercial on grave crimes), the courts of appeal and disputes; (3) dispute arising from family the Supreme Court, which all hear the relations; (4) labor disputes; (5) disputes cases within their competence respectively. on administrative law relations. The Pursuant to the amendments made to the mediation shall also apply to the economic disputes with a foreign element. The Law mainly, invites the parties of following disputes to attend an initial pre-court mediation session before going to the court. The provisions concerning the pre- court mediation session shall enter into force from July 1, 2020.