**CHAPTER 3: LEGAL FRAMEWORK FORFOREIGN TRADE AND INVESTMENT**

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Legal measures taken by the Government of Azerbaijan toproduce an environment conducive to foreign investment include the Law onProtection of Foreign Investments (1992), and certain tax incentives thatreduce corporate taxes on foreign shares of profits. The Privatization Law(1993) allows for foreign participation in the privatization

 

The 1992 Law on Protection of Foreign Investments providesthe foreign investor with protection against nationalization (except inspecified cases, and then only with compensation), subsequent disadvantageouslegislation, and treatment less favorable than that accorded to Azerbaijanicitizens. This legislation is supported by a U.S.-Azerbaijani Bilateral Trade Agreementthat also provides for binational commercial dispute settlement in other forathan the Azerbaijani courts. Other laws passed since the inception of theRepublic include corporate laws (on joint stock companies and limited liabilitycompanies), employment, a new energy law (1999), and others. However, oldSoviet laws are still in force in some areas. Interpretations and/or wordingmay be unclear. There is no PSA law; the huge oil/gas contracts are ratifiedand passed as separate laws by the Legislature. 

 

A new tax code is in draft. Accounting standards and taxadministration lag international standards and are barriers to foreign tradeand investment. 

 

Foreign investors may do business and invest in Azerbaijanthrough simple sales, through the purchase of companies, buildings andsecurities, by acquiring rights to land and natural resources use, or throughthe establishment of: 

 

(1) Joint ventures with Azerbaijani partners, taking theform of open or closed joint stock companies (regulated by the law on jointstock companies), full or limited partnerships, or limited liability companies,or 

(2) Wholly foreign-owned companies in Azerbaijan, or

(3) Branch or representative offices. 

 

Tax and other treatment of these business types varies,mainly based on their status as resident versus nonresident, or profit-makingversus marketing and promotion.  

 

**CORPORATE LAW**

 

The laws on joint stock companies and limited liabilitycompanies define the types, status and rights of corporate vehicles for foreigninvestment. A foreign investor may establish on-site presence in Azerbaijanthrough a joint venture with an Azerbaijani partner, a wholly foreign-ownedAzerbaijani corporation, or a representative or branch office. Tax and otherregulations affecting these entities differ.

 

**Regulations forOpening an Office in Azerbaijan**

The Registration Department of the Ministry of Justice isresponsible for registering all Azerbaijani legal entities, including thosefully‑ or partly‑owned by foreign companies. 

 

# Registering a Branch or Representative Office

The Registration Department requires the following documentsfor registration by a foreign legal entity (FLE) of a company branch orrepresentative office:

(1) A letter from the FLE signed byits president and representative applying for registration (one copy); 

(2) A decision of the managementboard of the FLE stating its intention to open an office in Azerbaijan (twocopies);

(3) A notarized power of attorneyissued by the FLE to the head of the company's branch or representative office(2 copies);

(4) Two copies of the head'sidentification document (passport) and photo;

(5) Two copies of the charterdocument of the parent company and certificate of the company's registration.Both sets of copies must be certified by the consular section of theAzerbaijani Embassy in the U.S.;

(6) Bank statement from thecompany's bank (one copy);

(7) Basic principles of the branchor representative office signed and sealed by the head of the legal entity (5copies);

(8) Receipt for payment of thestate registration fee ‑Azerbaijan Manat 825,000 for a branch and U.S. $2,000for a representative office (payment should be made to the state budget fund atthe National Bank of Azerbaijan, account 30100062, code 501004);

            (9)Forms of the registering company's seal and stamps (two copies);

(10) Identification code; and

(11) A document certifying thecompany's legal address in Azerbaijan.

 

Documents 1 through 6 should be submitted in both Englishand Azerbaijani. Documents 7‑11 should be in Azerbaijani.

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*Registering a WhollyForeign‑owned or Joint Venture Company*

A company applying for registration of a wholly foreign‑ownedor joint venture company must provide documentation listed above in 1, 2, 5, 6,8‑11. In addition, these companies should also submit five notarized copies ofthe company's charter approved by the founder of the company. If there are twoor more entities establishing a company, then notarized copies of the minutesof the general meeting establishing the company, signed and sealed by eachfounder, are required.       For joint ventures, theRegistration Department also requires two copies of the founding contract.

 

If there is any problem with a company's submittedapplication materials, the Registration Department must issue a letter withinfive working days describing the problem. Otherwise, the application of thecompany goes directly to the board of the Ministry and should be approved atthe next registration board meeting. Following board approval, the Ministrywill issue a registration certificate.

              Registration Contact: Chief ‑ Registration Department

              Ministry of Justice

              Tel: +994 (12) 988‑223

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**TAXATION**

 

The current tax burden falls heavily on the larger,state-owned firms, and including highly visible  taxes owed to the central government include: 

 

– Corporate profit taxes levied on all legal entitiesregistered in Azerbaijan and levied on taxable income - 32 percent

– Dividend withholding tax - 15 percent applied to foreigninvestors when dividend transferred out of Azerbaijan

– Taxes on other income: management fees and lease payments20 percent; interest 15 percent and freight revenue 6 percent.

– Property tax .5 percent

– Personal taxes: graduated, levied on foreign permanent residents(present 183 days), and for others on income received from Azerbaijani sources12-40 percent

– VAT - 20 percent, and excise taxes on selected luxurygoods

– Royalties on natural resources recovery

– Employment and employee social fund contributions

 

Local taxes are:

– Land 3,000-186,000 manats/hectare

– Road tax .03 percent

– Vehicle registration 2 percent, and for legal entities anownership tax annually based on engine size.

 

Oil consortia under the PSAs are subject to a separateregime as defined in the Tax Article of a given PSA and negotiated TaxProtocols defining the procedures for filing and payment. These regimes applyto the operating companies, the contractor parties, and also addresssubcontractors

 

Azerbaijan has no Double Taxation Avoidance Treaty with theUnited States, also taxation by contract applied through the PSAs and in otherinstances can address this issue.

 

Tax laws are currently ambiguous leaving the Tax Police widelatitude for interpretation. Local inspectors are not always aware of specialprovisions. 

 

**REGULATION OF FOREIGNTRADE**

 

Azerbaijan’s foreign trade regulation are based on theDecember 17, 1996, decree "On Further Development of Foreign TradeRegulation," which replaced a number of earlier laws and regulations, andprohibits other restrictions on foreign trade beyond those mentioned in the

text of the decree. The decree addresses four key areas oftrade regulation: imports, exports, barter trade, and controlled goods. Itattempts to shield Azerbaijani companies from the less scrupulous foreign firmsthat sometimes prey on less‑experienced local companies. The new rules makedoing business in Azerbaijan easier than before, but patience is stillessential.

 

**IMPORT OPERATIONS**

 

Azerbaijani companies are prohibited by the decree frommaking advance payments to foreign

partners for the importation of goods or services. Thisrequirement is intended to protect local companies from unscrupulous foreignsuppliers who take payment "in advance" and then fail to deliver therelevant goods in return.

 

Importers are required to open an irrevocable letter ofcredit with a local bank to effect payment for foreign goods. The Ministry ofForeign Economic Relations (MFER) can authorize advance payments forexceptional cases that are not defined in the text of the decree. A number oflocal

and foreign banks perform trade finance services.

 

All import operations not requiring special licensing or theuse of state guarantees can be processed at local customs offices. MFER generalimport price regulations establish maximum and minimum prices for many importedgoods, and the decree requires importers to observe these prices. MFER mustapprove import contracts whose prices exceed these limits. Importers purchasinggoods and services on consignment terms may convert local currency into foreignexchange at local exchange bureaus for subsequent payment to the consignor.

 

**Import Documentation**

Importers are required to provide customs authorities with:(1) a signed import contract; (2) a customs declaration specifying what isbeing imported; (3) an invoice for the imported goods; (4) permission from therelevant Ministry if imports include pesticides, medicines, or weapons andammunition; (5) the bill of lading; (6) a certificate of origin; and (7) a certificateof quality for the imported merchandise.

 

Poultry products: The State Veterinary Committee ofAzerbaijan and the U.S Government are working toward an acceptable exportcertificate for poultry products entering Azerbaijan.

 

**Import Duties**  

Azerbaijan announced on June 16 [?] that it was unifying itscustoms rates, in accordance with Azerbaijan's IMF agreement. According toCabinet of Ministers Decree #62, all imported goods are subject to a 15 percentimport tariff, unless specifically identified as dutiable at 5 or 0 percent.Customs authorities have eliminated most previously allowed exemptions. Theseregulations entered into force on July 1, 1997.

 

Decree #62 supersedes earlier regulations that provided forduty‑free entry of capital and intermediate goods. The earlier regulationlacked transparency and was open to abuse because there was no defined list ofgoods subject to duty‑free treatment. Duty‑free treatment was based on theintended use of goods as determined by the customs inspector. This new decreewill lead to some enterprises, including U.S. investors, making higher tariffpayments on imports of capital goods and inputs. Foreign investors are stillrelatively favored, however, compared to domestic   investors, because of the duty‑free treatment of theircharter capital.

 

**VAT and Excise Taxes**

A value-added tax (VAT) of 20 percent is imposed on certainimports. Exemptions to VAT include certain foodstuffs, salts, crude oil,nonorganic chemicals, pharmaceuticals, fertilizers, detergents, rubber‑basedtechnical and surgical products, tannery raw materials, paper related rawmaterials, children's clothes, ceramic items, certain ferrous and nonferrousmetal articles, and certain industrial machinery. In addition, capitalequipment for foreign direct investment is generally exempt from the VAT.

 

Excise duties are levied on beer and wine - 90 percent,tobacco products - 50 percent, and liquor - 65 percent.

 

**EXPORT OPERATIONS**

 

Selected goods can only be exported for cash includingpetroleum and petroleum products, electrical energy, nonferrous metals, and rawcotton. Credit and consignment agreements are prohibited for trading in thesegoods. For unlisted goods, an entity may export on a credit or consignmentbasis after filing a contract with MFER or the local customs agency. No exportwill be allowed without either full advance payment or the opening of anirrevocable letter of credit at a designated bank for the full export valueunless specific instructions are provided in the text of the contract(consignment, barter, credit exports).

 

Firms that are 30 percent or more state‑owned must submitexport contracts to MFER for registration; other entities may file with theirlocal custom offices. For consignment contracts, both state‑owned and privateexporters are required to complete sales, including collection of all debts,within 180 days or recover all of the exported product. If a state‑owned firmproduces the consigned goods and a non‑state firm exports them, however, theexporter must pay the contract value of the export to the producing firm beforeexport can occur.

 

**Export Duties**

As of January 1, 1997, all products exported from Azerbaijanare exempt from export duties. However, an export duty of 70 percent is leviedon oil and oil products, high pressure polyethylene, sulfonyl, caustic soap,aluminum, steel pipe, iron concentrate, bronze products, raw cotton and caviar.According to Article 3 of the Foreign Investment Law, goods produced fromforeign materials as well as goods produced by foreign investors in Azerbaijan,are exempt from the duty. 

 

The following commodities/transactions are exempt from theexport duty: commodities exported under intergovernmental agreements; export ofprocessed products made from imported raw materials (re‑export operations);export of raw materials for processing abroad and subsequent re‑import intoAzerbaijan.

 

**Barter**

Firms that conclude barter contracts must both register thecontracts with MFER and file them with their local customs office. Theprincipals establish a 90‑day time limit for barter transactions. If a bartertransaction is not completed within this period, the Azerbaijani party mustinsure return of the resources in monetary form to a bank in Azerbaijan. If thefull value of the export is not returned to Azerbaijan in monetary or commodityform within 90 days, the Azerbaijani party will be liable as a legal entity forconcealing income from the state in accordance with the laws of Azerbaijan.

 

**LICENSING AND OTHERDOCUMENTATION**

 

Transactions involving a number of goods must be cleared bythe Cabinet of Ministers before an export contract can be legalized. Othergoods and services require MFER approval and registration before a foreigntrade contract can be signed. MFER will coordinate with the appropriateministries and state agencies in making its decision. No credit or consignmentagreements are allowed for export of these goods. 

 

U.S. companies exporting to Azerbaijan must submitcertificates of origin, quality, and identity for the product exported toinsure prompt processing of the trade authorization. The decree stipulates thatfollowing document submission, MFER must complete the registration procedurefor the contract in three days and the local customs agency must process thecustoms authorization within 24 hours. Companies trading in alcoholic beverages‑‑exceptbeer‑‑and tobacco products must apply to MFER for a license.