Doing Business In

Azerbaijan is a civil law system country with an emphasis on statutory law.

The major laws governing the establishment and operation of enterprises in Azerbaijan are:

• the Civil Code, effective as of 1 September 2000; and
• Law 560-IIQ on State Registration and the State Register of Legal Entities, dated 12 December 2003.

The Milli Meclis (Parliament) and the president of Azerbaijan draw up a mutually agreed annual plan for the preparation of draft laws.

Laws are drafted by a working group comprised of legal, financial and technical experts. A draft law should be agreed together with interested state bodies before being submitted to the norm-making body if:

• approval of the draft of a normative legal act is mandatory under Azerbaijan law; or
• a normative legal act contains normative instructions or tasks relating to other state bodies in the manner determined by Azerbaijan law.

Draft laws are considered by the Parliament in three rounds. They are executed by the president of Azerbaijan and become effective after publication.

The State Tax Service under the Ministry of Economy is responsible for enforcing:

• the provisions of the Civil Code relating to the establishment of companies; and
• the Law on State Registration.

Subsidiaries are generally established in the form of:

• a (closed or open) joint stock company (JSC); or
• a limited liability company (LLC).

A JSC is a company whose capital is divided into shares that are securities. In open JSCs, the number of shareholders is unlimited, while their shares may be freely traded. In closed JSCs, the number of shareholders is limited to 50 and shares are not freely traded.

An LLC is similar to a JSC in that LLC participants’ liability is generally limited to the amount of their contributions to a company. The differences are that:

• shares in an LLC are not securities; and
• the governance of an LLC is generally viewed as less sophisticated than that of a JSC (particularly an open JSC).

No minimum capital requirements are imposed on LLCs.

The minimum capital requirements for JSCs are:

• AZN 2,000 for closed JSCs; and
• AZN 4,000 for open JSCs.

Azerbaijan corporate law requires that business entities as well as branch and representative offices of foreign entities in Azerbaijan be registered with the state corporate registrar, the State Tax Service.

In order to register a legal entity, an application signed by the founder(s) or their duly authorised representative and notarised accordingly must be submitted to the state corporate registrar.

The following documents must be enclosed with the application:

• constitutional documents;
• a document confirming payment of state duty;
• notarised copies of the certificate of registration and charter, where the founder is a legal entity;
• a copy of the founder’s identification card, where the founder is an individual; and
• a power of attorney in the name of the legal representative.

Corporate and tax registrations are carried out simultaneously by the corporate registrar – that is, upon registration, a tax identification number is also assigned.

Azerbaijan corporate law does not define activities requiring registration; typically, these will include:

• acquiring premises;
• recruiting officers and employees; and
• obtaining telephone and similar listings in Azerbaijan.

The legal entity will be registered within two business days and the state duty for the registration is AZN 15.

Both LLCs and JSCs may be 100% foreign owned.

The following documents, in addition to those mentioned in question 2.3, must be submitted in order to establish a legal entity with 100% foreign capital:

• the resolution of the head office on its establishment; and
• the articles of association and other constituency documents of the head office.

There are several other such opportunities to do business in Azerbaijan, including:

• franchising;
• commercial concessions;
• trade agency; and
• joint ventures.

Franchising: The Civil Code defines a ‘franchise agreement’ as a long-term mutual undertakings whereby independent entities assist each other with respect to the production and sale of goods and the provision of services through the performance of specific duties, when required.

Commercial concession: A concession contract is a general agreement (uniform contract) between a producer or trader (the principal) and a person engaged in independent activity in the form of a craft (the concessionaire), based on which the concessionaire undertakes to:

• periodically purchase certain goods (contract goods) from the principal;
• sell these goods to another person on its own behalf and at its own expense; and
• sell contract goods in certain territories and/or to certain customers (contract territory and contract customers). The principal gives the concessionaire the exclusive right of sale (monopoly right), and the concessionaire must give a guarantee for the sale of the principal’s goods under its control.

Trade agency: Under a trade agency agreement, an independent trade agent concludes contracts with third parties on behalf and at the expense of the manufacturer (principal). Both individuals and legal entities can be trade agents.

Joint venture: The concept of an incorporated joint venture is not recognised under Azerbaijan law. Joint ventures exist only in non-incorporated form – that is, they are created through agreements concluded among the participating business entities.

Limited liability company (LLC): An LLC is defined under the Civil Code as a company:

• that is established by one or several individuals and/or legal entities; and
• whose charter capital is divided into participation interests established by charter.

The supreme body of the LLC is the general meeting of participants. If stipulated in the charter of the LLC, a board of directors (supervisory board) and/or an audit committee will be established. The day-to-day management of the LLC is conducted by the management board/executive director.

The powers/functions of the directors and executive director are established in the charter of the LLC.

Joint stock company (JSC): The supreme body of the JSC is the general shareholders’ meeting.

A board of directors is established in JSCs with more than 50 shareholders. If a board of directors has been established, its exclusive authorities should be defined in the JSC’s charter.

The executive body of the JSC can be collegial (board, management) or single-headed (director, general director). The executive body carries out the day-to-day management of the JSC.

In cases stipulated in the charter of an LLC and for all entities of public importance, an audit commission must be established by decision of the general meeting of participants in order to supervise financial activities.

In LLCs with more than 50 participants, an audit committee is established by decision of the board of directors to:

• prepare and conduct an internal audit policy and strategy; and
• conduct supervision accordingly.

An audit committee may be established in LLCs with fewer than 50 participants in cases stipulated in the charter of the LLC.

In JSCs with more than 50 shareholders, an audit (inspection) commission is established by decision of the general shareholders’ meeting in order to supervise financial activities. An audit (inspection) commission may be established in JSCs with fewer than 50 shareholders in cases stipulated in the charter of the JSC.

In JSCs with more than 50 shareholders, an audit committee is established by decision of the board of directors to:

• prepare and conduct an internal audit policy and strategy; and
• conduct supervision accordingly.

An audit committee may be established in JSCs with fewer than 50 shareholders in cases stipulated in the charter of the JSC.

Yes.

There are no restrictions, save that the following cannot be members of the board of directors:

• the sole director of a company;
• the head of the management board; and
• external directors.

A member of the board of directors (supervisory board) of the company must be a natural person. A person who is not a shareholder of the company can also be elected to the membership of the board of directors (supervisory board), unless otherwise stipulated in the charter.

The selection, appointment and premature termination of the authority of the company’s board of directors (supervisory board) or its members may be carried out by decision of the general meeting.

The company charter will specify:

• the number of members of the board of directors (supervisory board); and
• the requirements applicable to members.

These may also be determined by law.

If the composition of the board of directors (supervisory board) is reduced to half of the number stipulated in the charter:

• an extraordinary general meeting must be convened within 30 calendar days; and
• new members of the board of directors (supervisory board) must be elected.

The members of the board of directors are elected for a term not exceeding three years.

The board of directors (supervisory board) supervises the activities of the company’s executive body in the period between general meetings.

The board of directors (supervisory board) carries out general management and control over the company’s activities within the limits of its powers.

The exclusive powers of members of the board of directors must be established in the charter. Issues that are exclusively reserved to the board of directors cannot be delegated to the management board.

The legal duties of individual directors, as well as reporting requirements, are established in the charter.

In case of breach by a director of his or her duties, the director must pay compensation for the damage caused to the legal entity as a result of the breach at the request of participants with a combined holding of at least 5% in the authorised capital of the legal entity.

An individual director will be responsible for damage caused to the legal entity or the participant in the following instances:

• the payment of bonuses to members of the management bodies of the legal entity:
• • if the legal entity operates at a loss; or
  • in an amount that is disproportionate to the profit of the legal entity;
• expropriation or disposal of the property of a legal entity on terms and at a price that is significantly lower than market conditions;
• the conclusion of contracts with related parties which violate the requirements of law or endanger the interests of the legal entity;
• the purchase of goods (works, services) by a legal entity at a price that is significantly higher than their real value based on concluded contracts;
• the embezzlement or waste of property of the legal entity for the purpose of securing tangible and intangible property benefits and rights to such property for the director, related parties or other persons; or
• the conclusion of deals that are unfair or harmful to shareholders.

An individual director may be removed from his or her position by decision of the general meeting due to the damage caused to the legal entity.

Holding an individual director administratively or criminally liable does not release him or her from the obligation to provide compensation for the damage caused to the legal entity.

Individual directors can be subject to criminal liability in the form of, among other things:

• a penalty;
• limitation of freedom; or
• imprisonment.

No restrictions apply.

Each participant of a limited liability company has the right, among other things:

• to participate in the general meeting of participants;
• to elect the bodies of the entity;
• to be elected to those bodies; and
• to participate in voting.

Any agreement or action that restricts these rights is void. Each participant has a vote at the general meeting in proportion to its share in the company’s charter capital.

The owner of an ordinary share of a joint stock company (JSC) has the following rights:

• to participate in the management of the company in the manner determined by the Civil Code, other laws and the charter of the company, and to elect and be elected to its management and executive bodies;
• to receive information on the activities of the company and to receive its annual report and financial statements once a year;
• to demand the convention of a general shareholders’ meeting;
• to demand changes to the agenda of the general shareholders’ meeting and the addition of new issues to the agenda;
• to participate in the general shareholders’ meeting with a right to vote (with exceptions set out in the Civil Code) and to request a copy of its protocol;
• to request an audit of the company’s activities by an audit commission or an auditor;
• to receive dividends from the company’s net profits; and
• to receive a certain part of the company’s remaining property once:
• • its activities have terminated;
  • the demands of creditors have been fulfilled;
  • dividends have been calculated but not paid; and
  • the liquidation value of preferred shares has been paid. The rights of owners of preferred shares (for each type) of a JSC are determined by the Civil Code and the charter of the JSC.

The general meeting of the company’s participants must be convened by the executive body within the period specified in the charter, but not less than once a year. The general meeting on the results of the company’s annual activities is convened no later than four months after the end of the reporting financial year.

An extraordinary general meeting is convened in the cases and in the manner specified in the charter. An extraordinary general meeting may be convened:

• on the initiative of the executive body; or
• at the request of:
• • the board of directors (supervisory board);
  • the audit commission (inspector); or
  • participants with less than one-tenth of all votes.

The general meeting is authorised if participants holding more than 50% of the company’s shares participate in the general meeting of participants.

The appointment and termination of members of the board of directors are among the exclusive powers of the general meeting.

Shareholders are liable for the obligations of the company to the extent of their contributions in the company.

Please see question 4.5.

A JSC can increase its authorised capital by:

• increasing the nominal value of its shares; or
• issuing additional shares in accordance with the decision of the general shareholders’ meeting.

The rules on increasing the nominal value of shares of a JSC and issuing additional shares are determined by the Central Bank of the Republic of Azerbaijan.

Shareholders owning simple (ordinary) or other voting shares have a preferential right to purchase additional shares issued by the company in the manner specified in the company’s charter. A person that wishes to buy 50% or more of the company’s shares must formally submit an appropriate offer to all shareholders.

No. Information about the founders/shareholders and their relevant shares in the entity is considered a commercial secret.

Investment activity can be financed from the following sources, among others:

• equity financing (sale of shares/participation interests);
• debt financing (bank and budgetary loans, bonds and other funds);
• foreign investment;
• budgetary and non-budgetary subsidies;
• grants by business entities, organisations and citizens; and
• investors’ own proprietary and non-proprietary wealth, funds and business revenues (eg, profits, capital charges, deposits of individuals and legal entities, insurance payments).

Both equity and debt financing are widely used in Azerbaijan.

The most common vehicle for investors planning to engage in a project in Azerbaijan is a limited liability company. Normally, major decisions (save for decisions on reorganisation and winding-up, which require a unanimous vote) in such companies are made by the shareholders retaining a majority of the capital, which will effectively determine how the financing is ultimately used. As a result, investors may seek additional security measures to secure their financing, such as:

• unanimous decisions on business strategy;
• veto rights; and
• participation on the management bodies.

However, Azerbaijan law might not be sufficiently flexible to secure the involvement of minority participants in decision making (eg, quorum requirements cannot be agreed contractually).

Partners in joint ventures may freely dispose of their participation interest subject to a first refusal right of the co-partner(s).

The most common type of debt financing is mortgage financing. Asset-based financing is also available.

For a valid secured loan to finance real estate:

• a notarised security agreement (hypothec) must be made; and
• the security interest must be registered with the State Registry of Real Estate.

Unless the mortgage agreement provides otherwise, a mortgage over a land plot does not extend to any buildings or installations located on the plot. In case of enforcement, the mortgagor will retain the right (servitude) of use of the land necessary to secure its enjoyment of the title to the concerned buildings and installations. The terms of use of the land plot will be:

• defined in an agreement between the mortgagee and mortgagor; or
• imposed by the court if the mortgagee does not voluntarily agree on such terms.

The mortgagor is entitled to develop a building or structures on any undeveloped land without the mortgagee’s consent, in which case:

• the mortgage will extend to such buildings and structures; and
• the mortgagor will not be entitled to dispose of them unless the mortgage agreement provides otherwise.

The mortgage is not automatically terminated upon the sale of mortgaged property. This situation is not conducive to project development.

The Azerbaijan courts have exclusive jurisdiction in relation to claims concerning rights to real estate, including claims arising in connection with the grant of leases and security interests in such property.

For other assets (movables), a security interest is perfected by way of pledge.

The main routes for the return of proceeds include:

• transfer of the unused grant (donation) amount – no withholding tax applies;
• payment of dividends – subject to the provisions of an applicable double tax treaty, a 10% withholding tax applies;
• the transfer of funds previously brought to Azerbaijan by a non-resident entity either in cash or via bank transfer – no withholding tax applies;
• the transfer of the remaining amount transferred for specific purposes or an amount which has been wrongfully transferred by the head office to its local branch (representative office) – no withholding tax applies;
• the repatriation of investment – subject to the provisions of an applicable double tax treaty, a 10% withholding tax applies; and
• income from investments and other amounts, including payment of compensation and damages – subject to the provisions of an applicable double tax treaty, a 10% withholding tax applies.

The foreign investment regime is regulated by:

• Law 551-VIQ on Investment Activity, dated 22 June 2022;
• Law 878-IQ on Privatization of State Property, dated 16 May 2000 (‘State Privatisation Law’); and
• the Second Programme of the Privatisation of State Property 2000.

Foreign investors can invest in Azerbaijan by:

• participating in entities established together with legal entities and citizens of Azerbaijan;
• establishing entities that are wholly owned by foreign investors;
• acquiring enterprises, property complexes, buildings, structures, participations, shares, bonds and other securities in business entities, as well as other property that can be owned by foreign investors in accordance with the laws of Azerbaijan;
• acquiring land use rights and rights to use other natural resources, as well as other proprietary rights; and
• concluding agreements providing for other forms of investment with legal entities and citizens of Azerbaijan.

Foreign investment may be restricted or prohibited for the purposes of:

• defence;
• national security; and
• the protection of the environment and the nation.

Under the State Privatisation Law, the following, among other things, cannot be privatised:

• subsoil reserves, forests, water reserves, state borders and property located thereon, air and the Azerbaijan sector of the Caspian Sea;
• conservation areas;
• patent services;
• irrigation facilities and installations;
• state and local automobile roads, railways, bridges and tunnels;
• defence facilities;
• state education institutions (with the exception of pre-school institutions);
• state institutions and organisations on social protection; and
• state institutions engaged in curing psychological, psychoneurological, oncological and sexually transmitted diseases.

The properties that have been privatised by decision of the president include:

• state-owned properties that are located abroad;
• entities and facilities that serve defence facilities;
• ports and port installations and facilities;
• entities in the chemical, petrochemical and biochemical industries;
• telecommunications entities, state information and telegraph agencies;
• television and radio broadcasting centres;
• entities in the construction and construction materials industry of importance to the state; and
• state commercial banks and insurance organisations.

Under Law 910 on Currency Control, dated 21 October 1994, currency transactions are split into:

• routine currency transactions, which include:
• • remittances to and from Azerbaijan of interest, dividends and similar proceeds; an
  • remittances of salaries and other non-commercial funds; and
• capital movement transactions – that is, non-routine currency transactions such as:
• • equity investments;
  • the purchase of securities; and
  • payments under export-import transactions.

Residents and non-residents are equally allowed to make cross-border remittances in performing the above transactions by observing the terms specified by the Central Bank.

Specifically, the Central Bank has authorised remittances, among other things, to:

• pay for imports;
• make advances for supplies deferred for up to two years;
• pay refunds for unexecuted imports;
• pay dividends and distributions to overseas offices;
• repay loans and pay interest and fees on them;
• take abroad (by non-resident investors) revenues derived from investment, including damages (subject to payment of taxes or submission of proof of an exemption proof) and repatriation of investments; and
• pay salaries to expat employees.

None of those remittances will be subject to the exchange controls. The rules passed by the Central Bank specify the proofs to be procured in any type of remittance. Hence, in the case of imports of goods, the following should be submitted to the account bank that processes a remittance:

• an import contract;
• a commercial invoice; or
• other documents, including information on the designation of payment, its amount and the imported goods; and
• proof that the goods were imported (ie, a customs declaration).

With regard to payments for services, remittance requires:

• a service contract or notice;
• a commercial invoice; or
• other documents, including information on the designation of payment, its amount and the service; and
• proof of delivery of the services.

Employees play a crucial role in the day-to-day operations of businesses in Azerbaijan by contributing their skills, knowledge and labour to ensure the smooth functioning of the company.

Although pensioners do not directly shape business operations, their spendings foster economic growth in general.

Creditors such as banks and other financial institutions provide businesses with the necessary capital and credit. Their involvement in shaping business operations is mainly through:

• lending decisions;
• interest rates; and
• repayment terms.

In Azerbaijan, financial institutions offer discounted financing to small and medium-sized businesses, which contributes to the overall business development in the country.

Customers have a significant influence in shaping business operations in Azerbaijan. Their purchasing decisions, feedback and demands drive:

• product development;
• marketing strategies;
• pricing; and
• overall customer satisfaction.

Suppliers play a crucial role in the supply chain and operations of businesses in Azerbaijan. They provide the necessary raw materials, components and services required for production. The relationship between businesses and suppliers can impact the quality, cost and availability of goods and services.

Priority spheres of business include:

• the modernisation of the oil and gas sector and the petrochemical industry;
• the diversification and development of the non-oil industry;
• the expansion of opportunities to use alternative and renewable energy sources;
• the development of the agrarian sector;
• the strengthening of food security;
• the expansion and development of trade and types of services; and
• the improvement of foreign trade and investment.

Under Law 716-IIQ on Accounting, dated 29 June 2004, commercial entities:

• must prepare their financial statements in compliance with the National Accounting Standards for Commercial Entities; or
• alternatively, may prepare their financial standards in accordance with International Financial Reporting Standards.

For commercial entities registered before 1 October, the reporting period starts on the date of registration and lasts until 31 December (inclusive). For commercial entities registered after 1 October, the reporting period starts on the date of registration and lasts until 31 December of the following year (inclusive). For all other entities, the financial year is 1 January to 31 December.

The body established by the charter of the commercial entity is responsible for the preparation, submission and publication of the financial and consolidated statements.

The provision of accounting services is organised by the head of the accounting entity by:

• creating an appropriate structural unit; or
• involving other business entities on the basis of a contract.

The chief accountant is responsible for:

• the accounting;
• the preparation of financial, tax and other reports based on the accounting;
• the establishment of accounts; and
• the maintenance of accounting documents.

Commercial organisations that receive a loan with a state guarantee or that participate in projects relating to the expenditure of the state debt, or that receive subsidies, subventions, grants or budget funds from the budget in connection with the fulfilment of certain powers, must submit:

• annual financial statements and combined (consolidated) financial statements as defined by law; and
• the accompanying auditor’s opinion.

If the accounting documents contain information that is considered a commercial secret, this information is disclosed in accordance with the Law on Commercial Secrets.

State bodies have the right to familiarise themselves with all documents used in accounting in the cases and in the manner established by law.

An auditor has the right to familiarise itself with all accounting documents in the manner established by law.

Executive compensation is not regulated by Azerbaijan law.

Executive compensation can be laid down in the charter of the company or in a labour agreement with an executive.

No disclosure requirements apply.

The procedures for monitoring and managing executive performance can be established in the charter of the company.

Executive performance and compensation are not regulated by Azerbaijan law.

There is an equal opportunities regime in Azerbaijan.

The Azerbaijan labour legislation provides for:

• a 40-hour work week; and
• an eight-hour workday.

However, in certain areas (eg, healthcare, the service industry), employees may work for 12-hour shifts, provided that weekly hourly limits are not exceeded.

The law provides for:

• 21 days’ paid annual holiday for unskilled employees; and
• at least 30 days’ paid holiday for skilled employees.

Employees are also entitled to additional holidays based on factors such as:

• work experience; and
• various social circumstances.

Yes. Trade unions are recognised in Azerbaijan. However, they are not common in practice.

In general, the Azerbaijan labour legislation is employee friendly, meaning that an employer cannot dismiss an employee without valid grounds.

The following authorised grounds for the dismissal of employees are provided by Azerbaijan law:

• liquidation of an entity;
• company downsizing;
• the employee’s ‘unsuitability’ for the position; and
• the employee’s underperformance or gross violation of job duties.

In the case of dismissal due to downsizing or an employee’s unsuitability for the position, the employer must obtain the consent of the relevant trade union (if any). In certain cases, the employer must also report an employee’s dismissal to the appropriate state authorities.

There are certain groups of employees who cannot be dismissed under any circumstances, including:

• pregnant women and women with a child under the age of three;
• temporarily disabled employees; and
• single parents with a child of pre-school age whose only source of income is from the company where they work.

In general, an employee must be notified about his or her dismissal in advance. Thus, in case of downsizing, the notice period will depend on the employee’s length of service: employees with longer service will need more notice than employees with shorter service.

Moreover, during the notification period, an employee is entitled to one day off per week in order to enable him or her to search and apply for another job.

Foreign specialists can be employed once they have obtained a work permit. To this end, an employer must provide a grounded justification explaining why a foreign specialist must be hired, including details of:

• the work to be performed;
• the employee’s duties; and
• his or her relevant experience and qualifications.

In general, employment contracts are conducted for indefinite periods. Fixed-term employment contracts can be concluded in specific circumstances, such as:

• for the performance of seasonal work or work of a temporary nature; or
• to replace a temporarily absent employee.

Moreover, as was mentioned in question 8.2, an employer cannot terminate employees without valid grounds.

Tax in Azerbaijan is regulated by:

• the Tax Code, effective 11 July 2000 (as amended), which:
• • establishes the statutory tax regime; and
  • defines the applicable tax regimes in industrial and technological parks; and
• other relevant legislative acts.

The Tax Code is divided into two main parts – General and Special:

• The General Part:
• • describes the tax system;
  • lists defined terms used in the Tax Code;
  • discusses the powers and duties of the tax authorities;
  • provides penalties for non-compliance with the tax laws;
  • sets out procedural rules for taxpayers to appeal actions taken by the tax authorities; and
  • addresses general issues of tax payment and collection.
• The Special Part deals with the various taxes imposed by the Tax Code:
• • individual income tax;
  • profit (corporate income) tax;
  • value added tax (VAT);
  • excise;
  • property tax;
  • land tax;
  • highway tax;
  • subsoil use tax; and
  • simplified tax.

Azerbaijan legal entities are subject to profit (corporate income) tax on their worldwide income at a rate of 20%. Certain types of payments due to such entities (eg, dividends and interest) can be taxed at a rate of 10% at the source of payment.

Foreign legal entities operating in Azerbaijan also are subject to profit tax at:

• a rate of 20% on income earned by their taxable permanent establishments (PEs) in Azerbaijan; and
• a 10% branch (PE) tax.

This brings the total effective rate of the foreign entity’s income taxation to 28%.

Tax is also withheld from the income of a foreign entity obtained from an Azerbaijan source other than a PE. This is typically subject to tax at a rate of 10%.

Entities that have obtained an investment promotion certificate (ie, a document providing for tax benefits) may avail of the following benefits:

• an exemption from profit tax for 50% of their income for a seven-year period;
• an exemption of imports of technological equipment and installations from VAT for a seven-year period;
• an exemption from property tax for a seven-year period; and
• an exemption from land tax for a seven-year period.

Special tax treatment is also available for residents of industrial and technological parks. Under Section 13.2.52 of the Tax Code, a ‘resident of an industrial park’ is a legal entity, or an individual engaged in entrepreneurial activities without forming a legal entity, that:

• has obtained a certificate of registration in the industrial park in the manner prescribed by the relevant executive authority; and
• operates in the industrial park.

Under Section 13.2.53 of the Tax Code, a ‘resident of a technology park’ is a legal entity, or an individual engaged in entrepreneurial activities without forming a legal entity, that:

• has obtained a certificate of registration in the technology park in the manner prescribed by the relevant executive authority; and
• operates in the technology park.

Legal entities which are residents of industrial and technological parks may avail of the following benefits:

• Their income is exempt from profits tax for a 10-year period after their registration of in the industrial or technological park;
• Imports of technological equipment and installations for the purpose of production are exempt from VAT for a 10-year period after their registration in the industrial or technological park; and
• They are exempt from property and land taxes for a 10-year period after their registration in the industrial or technological park.

Foreign entities may operate through third parties – that is, by subcontracting them. In doing so, however, the risk of creating a PE must be assessed.

A PE of a non-resident entity in Azerbaijan is a place through which the non-resident wholly or partly engages in entrepreneurial activity/business – whether independently or through an authorised person – for a period of not less than 90 days in total during any 12-month period.

A PE can be deemed to have been created if activities are conducted through a ‘dependent agent’. ‘Dependent’ status means that the agent:

• is legally and economically dependent on the principal; or
• if independent, does not act in the usual course of its own business.

An agent will be regarded as a PE of the principal if it:

• is dependent on the principal;
• represents it; and
• has the authority to prepare or sign agreements on its behalf, and habitually exercises such authority.

A PE requires registration.

The key provisions applicable to mergers and acquisitions are set out in the Civil Code.

One of the key requirements to be considered during M&A activity is the right of first refusal.

During M&A deals, evidence of exercise of the right of first refusal must be procured.

M&A transactions must be notified to the Anti-monopoly Authority if two tests are satisfied – the transaction:

• would restrain competition in the relevant Azerbaijan market; and
• meets the thresholds stipulated in the anti-monopoly laws.

In general, the Azerbaijan anti-monopoly laws apply to local-to-local transactions. However, if a specific transaction would impair competition in the relevant Azerbaijan market, they will also apply to local-to-foreign and foreign-to-local transactions.

In rare circumstances, the Azerbaijan anti-monopoly laws also apply to foreign-to-foreign transactions which would lead to the restraint of competition in Azerbaijan. Typically, this involves the test of whether either or both parties to the foreign-to-foreign transaction are present in the Azerbaijan market; if only one party is present, it could be argued that competition is not restrained.

To restrain competition in Azerbaijan, foreign companies must have a ‘presence’ in Azerbaijan. In determining whether this exists, the supply of goods and services in Azerbaijan (whether directly, through independent third parties or otherwise) and the generation of revenues should be considered.

If restraint of competition is established, the transaction must meet the filing criteria applicable to:

• mergers – typically, >35% of a relevant market; and
• acquisitions – typically:
• • >20% of shares; or
  • >10% of assets.

During an ownership change in an entity, only the following personnel can be dismissed:

• entity heads and their deputies;
• the chief accounting officer; and
• other employees holding managerial positions.

All other employees will retain their jobs.

Share sale and purchase agreements executed as a part of an M&A deal must be duly notarised. If such agreements are executed before an Azerbaijan notary, the share purchase price must be paid in Azerbaijan manats through the notary’s deposit account.

However, if one of the parties to the share sale and purchase agreement is a foreign party (ie, it does not have a locally registered entity), payment and receipt of the relevant amount become problematic in practice, since notaries in Azerbaijan do not maintain bank accounts in foreign currencies. Consequently, foreign persons must engage an agent in Azerbaijan in order to conclude the relevant share sale and purchase agreements before the Azerbaijan notary.

Alternatively, share sale and purchase agreements can be executed abroad before a foreign notary; and thereafter a notarised and legalised (apostilled) copy of the agreement can be submitted for registration in Azerbaijan.

The main laws regulating money laundering and other forms of financial crime are:

• Law 781-VIQ on Combating the Legalisation of Properties Acquired from Criminal Activities and Financing Terrorism, dated 30 December 2022;
• Law 782-VIQ on Targeted Financial Sanctions, dated 30 December 2022; and
• the Criminal Code, effective 1 June 2000.

Financial institutions must not:

• open accounts under fictitious names or anonymously;
• accept documents and property under fictitious names or store them anonymously (in special rooms or safe deposit boxes);
• issue anonymous certificates of deposit; or
• provide anonymous bank books.

The subjects of financial monitoring must apply customer compliance measures in the following cases:

• before establishing business relations;
• before any one-off transaction of at least AZN 20,000;
• where a series of related transactions which individually are below the AZN 20,000 limit collectively exceed the limit;
• before a one-off electronic transfer of financial funds or a transaction involving virtual assets, in accordance with the rules established by the Central Bank on the electronic transfer of funds and transactions with virtual assets;
• in all cases where property is suspected to have been obtained through crime or used to finance terrorism; and
• in case of doubts about the accuracy or relevance of the obtained information and documents.

Accordingly, entities that are subject to financial monitoring must, among other things:

• identify the customer (regardless of whether its services are used regularly or irregularly, and whether the customer is a natural or legal person, or a foreign legal entity); obtain the customer’s identification information and documents from reliable, independent sources; and perform verification and other customer compliance measures based on this information;
• determine whether the person has the authority approved by law to act on behalf of the customer or another person; identify that person; and verify such identification based on information and documents obtained from reliable, independent sources; and implement other client compliance measures;
• identify the beneficial owner and take reasonable steps to verify the identification information of the beneficial owner based on information and documents obtained from reliable, independent sources; and
• clarify the purpose and nature of the business relationship; and obtain information and documents from the client.

The following entities must conduct a mandatory annual audit to verify the annual financial statements:

• limited liability companies; and
• open joint stock companies.

Exceptions apply to:

• micro entities with up to 10 employees or an annual income of up to AZN 200,000; and
• small entities with between 11 and 50 employees or annual income of between AZN 200,000 and AZN 3 million.

A person that wishes to become an independent auditor must satisfy the following requirements:

• be an Azerbaijan citizen;
• not have:
• • been deprived of the right to hold certain positions or engage in certain activities in the field of financial and economic relations by a court order; or
  • a conviction relating to this type of punishment;
• have:
• • a higher education in specialties of accounting, finance, economics or law; and
  • at least three years’ experience in the relevant field; and
• pass the independent auditor exams.

A foreigner who has the right to provide auditor services in his or her home country can exercise that right in Azerbaijan with the official permission of the Chamber of Auditors.

Independent auditors and auditor organisations provide audit services based on a licence issued by the Chamber of Auditors for a period of five years.

An audit licence can be recalled or cancelled in the following cases:

• The auditor conducts three poor-quality audits during a calendar year;
• The auditor grossly breaches provisions of law during an audit:
• A court issues an order depriving the auditor of the right to hold certain positions or engage in certain activities in the field of financial and economic relations, or convicting him or her of a crime committed for the purpose of greed;
• It is discovered that the auditor provided incorrect information when applying for the audit licence;
• The auditor discloses to third parties information obtained during the audit without relevant consent; or
• The auditor conceals the provision of audit services to restricted persons (eg, relatives, entities in which the auditor has a personal interest).

Yes. An auditor organisation is a legal entity that provides audit services in Azerbaijan based on a licence issued by the Chamber of Auditors, whose only field of activity (prescribed by its charter) is the provision of audit services.

No such restriction applies to individuals who provide audit services as independent auditors.

This does not apply to audit organisations; and there is no cap on the remuneration of independent auditors.

A company can temporarily suspend its activities (by becoming dormant) for a period of up to five years. The main advantage of this process is that it takes a few minutes to complete and afterwards only pending filings need be filed. Upon the expiry of this period, the company becomes active and becomes subject to all reporting requirements. However, it can be made dormant again for another five years.

One of the main disadvantages of a dormant company is that a court case can be filed against it.

A company can completely terminate its activities by filing for liquidation. The liquidation process must be completed within one year and involves a number of formalities that the company must comply with, such as:

• settling debts with creditors; and
• disposing of its assets.

Once the company has been liquidated:

• it loses its legal capacity (all its rights and obligations); and
• no court claims can be filed against it.

As a liquidation process must be completed within one year, it is advisable to ‘prepare’ the company for liquidation in advance.

Thus, it is recommended to:

• reach mutual agreements with all employees on the termination of their employment contracts;
• terminate and settle all commercial contracts with existing contractors and suppliers; and
• dispose of all movable and immovable assets.

Any disputes that arise during the liquidation process may significantly hinder the process and it thus may not be possible to complete the process within the prescribed timeframe.

Once the above actions are completed and the company has no ongoing activities, it may commence the liquidation process.

The Azerbaijan legal market is evolving in accordance with the strategic goals of the government, which welcomes foreign business. Foreign investments are protected by certain guarantees provided by the government and by law, including:

• a guarantee against adverse changes in legislation, which provides that where a change in Azerbaijan law would adversely affect an investment, the application of that change will be subject to a 10-year moratorium;
• a guarantee against nationalisation and requisition, which provides that foreign investments in Azerbaijan are not subject to nationalisation, except where they would cause damage to the people or state interests of Azerbaijan;
• a guarantee of compensation of damages, which recognises the right of foreign investors to seek compensation for losses, including lost profits, as a result of acts of state bodies or officials that contravene Azerbaijan law; and
• a guarantee of repatriation of profits.

In recent years, Azerbaijan has been ranked by the World Bank as one of the top countries in terms of ease of starting and doing business. A number of ongoing state programmes are aimed at improving Azerbaijan’s ranking and government officials and industry experts are actively working towards achieving this goal.

One major new development is the introduction of a minimum charter capital requirement for entities with at least one foreign participant (shareholder) that are seeking to obtain a residence permit for their chief executive officer (CEO). As from 16 May 2023, an exemption from work permits and entitlement to a residence permit are available for a CEO or a shareholder with at least a 51% stake in the charter capital of a company:

• with a paid-in capital above the established minimum amount, i.e. AZN 50,000 (the capital requirement does not apply to entities that hold investment promotion certificates, among other things); and
• that has at least one participant from among foreign persons.

Azerbaijan can be a great place to do business, but there are certain things to bear in mind. First, it is vital to understand the country’s culture of respect and hospitality. One key issue to consider when doing business in Azerbaijan is the importance of building and maintaining strong relationships. In Azerbaijan culture, trust and personal connections play a significant role in business transactions.

Taking the time to establish a rapport and showing genuine interest in your potential partners or clients can go a long way towards fostering successful business relationships. Additionally, it is important to be aware of local customs and traditions, as they can greatly influence business practices. By demonstrating respect for the local culture and adhering to these customs, you will not only earn the respect of your business counterparts but also increase your chances of success in the Azerbaijan market.