As the largest country in the South Caucasus for both its territory and population, Azerbaijan has undergone enormous advancements both in economy and in national legal framework. Those developments are ranging from the significant changes in legislation, the establishment of centralized real estate and movable property registries, the establishment of e-government, the adoption of international standards for financial reporting and accounting, the establishment of special economic zones, as well as industrial and technological parks, and the introduction of one-stop-shop (a single window) system for business registration, including introduction of simplified procedures in applying for work permits.
It is noteworthy that Azerbaijan is ranked 25th among 190 economies in the ease of doing business, according to the World Bank’s annual ratings being improved from 57th in 2017. In fact, Azerbaijan has ranked 9th in “Business registration”, 17th in “Registering property”, 22nd in “Getting credit”, 2nd in “Protecting minority investors”, and 28th in “Taxation”. According to Doing Business 2019 report, Azerbaijan has been included to the list of countries with the most noticeable improvement in the economy.
Government Structure – The Constitution of Azerbaijan Republic has the highest legal force in the territory of the Republic of Azerbaijan. According to provisions of the present Constitution, Azerbaijan is a democratic, secular, unitary presidential republic where legislative, executive and judicial powers interact and are independent within the limits of their authority.
Population – As of 6 April 2019, population of Azerbaijan reached 10 million. Majority of population are ethnic Azerbaijanis with 91,6 % and the minorities include Lezgins, Russians, Talysh, Jews, Kurds, Georgians and others. Although, most of the population in Azerbaijan is Muslim, Azerbaijan is a secular country recognizing equal rights of all ethnic groups and religions.
Geography – The total area of the Republic of Azerbaijan is 86,600 square km bordering the Caspian Sea on the East, Iran on the South and Russia on the North, as well as sharing border with Georgia, Armenia and Turkey on the West.
Climate – The climate of Azerbaijan can be divided into three different climate zones. It is rather continental climate with relatively cold winters and hot summers. Azerbaijan is surrounded by mountains, namely, the Caucasus Minor in the West and the Great Caucasus in the North. Majority of the land in the country is useful for agriculture.
Visiting Azerbaijan (E-visa) – Since 2016, there are two ways of applying for a visa to Azerbaijan: (a) apply for electron visas for single-entry (E-visa); or (b) apply for visa in a traditional way for a multiple entry through the embassy/consulate of the Republic of Azerbaijan abroad.
E-visa – A foreigner or a stateless person can apply online directly for single-entry electron visa (E-visa) valid for 30 days stay in the country. The payment is made online and the applicant’s physical presence or his/her passport is not required anymore.
E-visas are issued by “ASAN visa” service within 3 working days, while urgent visas are issued within 3 hours (not depending on non-working days) granting entry to Azerbaijan. E-visa is available for the citizens of 94 countries, the list of which is determined by the Ministry of Foreign Affairs.
ECONOMIC OVERVIEW
| Indicators | 2023 | Indicators | 2023 | |
| Population | 10127,1 | GDP – Agriculture: | 12 210,6 million manat | |
| Economical active population | 5194,4 thousand | GDP – Industry | 66 619,0 million manat | |
| Unemployment | 5.6 % | Export | 27 583,2 million USD | |
| GDP: | 123 005,5 million manat | Non-oil and gas | 3 348,0 mln USD | |
| GDP Per Capita: | 12 114,5 manat | Import | 17 285,3 million USD |
Support to Business
Azerbaijan enjoyed inflow of foreign investment due to its ample hydrocarbon resources. The Agreement of the Century signed in 1994 involving largest oil and gas companies has become a major oil agreement and a critical milestone to exploit its oil and gas resources. Under the main Production Sharing Agreement (PSA) operated by BP, a key oil production Platform is Azeri-Chirag-Guneshli (ACG) oilfield, oil of which is transported by Baku-Tbilisi-Ceyhan Pipeline (BTC).
In 2006, Azerbaijan was regarded as the world’s fastest growing economy, mainly due to its oil production industry. Supported by the favorable terms of trade and stabilized oil production, Azerbaijan’s economy expanded by 1.3% in the first half of 2018. As the effects of the 2015 depreciation faded away, annual inflation moderated to 2.3% in the first half of 2018.
Since 2014, Azerbaijan again became the center for significant foreign investment in the oil and gas fields. In fact, BP’s exploration of gas from Shah Deniz brought significant economic, political and regional advantages to the country. In order to export Shah Deniz gas from Azerbaijan to Georgia and Turkey, there was built The South Caucasus Pipeline (of which the shareholders are: BP, operator (28.8 per cent), AzSCP (10.0 per cent), TPAO (19 per cent), Petronas (15.5 per cent), Lukoil (10 per cent), NICO (10 per cent) and SGC Midstream (6.7 per cent), which follows the route of the Baku-Tbilisi-Ceyhan (BTC).
Striving to carry out deep institutional and regulatory reforms with the task of escaping the ‘resource curse’ by modernizing and diversifying the economy away from reliance on oil revenues, Azerbaijan developed 12 Strategic road maps for the national economy and main economic sectors aiming to define the country`s development goals and priorities and ensure their implementation.
Baku-Tbilisi-Kars rail route connecting Baku to Tbilisi in Georgia and Kars in Turkey is the biggest regional project after Baku-Tbilisi-Ceyhan pipeline. It is the latest effort in Azerbaijan’s drive to strengthen its role in connecting China directly to Western Europe along “silk road”. The first cargo train loaded with grain from Kazakhstan arrived to Kars on November 3, 2017. To this end, Baku International Sea Trade Port was recently modernized to become regional transport and logistics hub in Eurasia.
In 2017, the Agency for Development of Small and Medium sized Businesses (SMB) was established to support micro, small and medium sized businesses by rendering one stop shop services, coordinating services and policies of other state authorities towards entrepreneurship. The list of the services ranges from establishing legal entities, issuing licenses and permits, issuing credit guarantees, registration of patents and trademarks, customs clearances of goods and nearly hundred other related services from state authorities.
The SMB was delegated to deal with creation of new infrastructure, tax exemptions and other reforms for small and medium sized entrepreneurship and the Cabinet of Ministers is assigned to draft a law on development of small and medium sized entrepreneurship.
Since October 2017, foreigners and stateless persons can register limited liability companies (LLC) with foreign capital through electronic signature within two days. The relevant Regulation also revoked, among others, the requirement of having permanent registration. Electronic signatures are obtained based on temporary residence permit from ASAN and other relevant state authorities. LLC with foreign capital is defined as an entity established by foreigners and stateless person as well as legal entities registered in jurisdictions other than Azerbaijan.
Manat – national currency of Azerbaijan was denominated into the New Azerbaijani Manat (AZN) since January 2006. From February 2015, the Central Bank shifted manat to a floating regime.
BUSINESS OVERVIEW AND FOREIGN INVESTMENT
Forms of business – According to the Civil Code of the Republic of Azerbaijan, there are several forms of doing business in Azerbaijan, by establishing a legal entity or not establishing a legal entity (sole entrepreneurship). In fact, the laws stipulate the following types of commercial legal entities:
(i) General Partnership (GP) established by two or more individuals and/or legal persons. The Civil Code imposes “unlimited” liability to the owners of GP in terms of its obligations.
(ii) Limited Partnership (LP) established by two or more individuals and/or legal persons, its distinction from GP is that apart from having at least one participant bearing unlimited liability for the obligations of the LP, there also must be one or more participants liable only in the amount of share they have in LP and are not participating in the activities of LP.
(iii) Limited Liability Company (LLC) is the most widely-spread legal entity form in doing business in Azerbaijan due to flexible management, liability limits, simplified procedure for registration, etc. It is established by one or more individuals and/or legal persons and the charter capital is divided into authorized shares of its founders. In fact, the law doesn’t set any requirement regarding the minimum capital for establishing LLC. It is up to the discretion of the founders to determine the issued capital and required paid-up capital and its shareholders’ liability is limited to the amount of their shares in the LLC.
(iv) Additional Liability Company (ALC) unlike to LLC, in ALC the participants of an ALC may assume liability in excess of their contributions.
(v) Joint-Stock Company (JSC) can be either “open” or “closed”. In an “open” JSC its shares can be offered to public, while in a “closed” JSC its shares can be offered only among its shareholders.
The following steps shall be observed for registering a legal entity, namely: (i) Collection and notarization of all necessary documents, (ii) Submission of documents (iii) Obtaining a company seal and opening a bank account.
Branches and Representative Offices – Foreign entities can also operate in Azerbaijan by merely establishing a branch or a representative office. Although under Civil Code they are not recognized as a separate legal entity, tax legislation of Azerbaijan treats a branch or representative office as a legal entity for the purposes of taxation. There is a distinction between a representative office and a branch office. While the former only represents interests of a legal entity, the latter may perform the commercial activities that the head office does. Registration requirements are identical for both a representative office and a branch.
Taxation – The Tax Code of the Republic of Azerbaijan is the main legislative act regulating taxation in the country. There are three different tax regimes: i) statutory tax regime; and ii) special tax regimes which are accordingly a) Production Sharing Agreements (PSAs) existent in the oil & gas sector, and b) Host Government Agreements (HGAs) regulating the agreements exclusively dealing with Baku-Tbilisi-Ceyhan and South Caucasus pipelines. The statutory tax regime applies to all legal entities with the exception of those that are governed by a PSA or HGA.
There are several types of taxes payable when conducting business in Azerbaijan:
Corporate Income Tax (CIT) – Both resident and non-resident entities (through their permanent establishment, such as representative or branch offices) are subject to CIT (profit tax) in Azerbaijan. Foreign legal entities who are present in Azerbaijan for more than 182 cumulative days during a calendar year shall establish a representative or branch office in Azerbaijan. Both local legal entities and the branches or representative offices of foreign legal entities in Azerbaijan are taxed on profit, which is determined as gross income from business activities minus deductible expenses, at a flat rate of 20%. The branches and representative offices are only taxed on the gross income from business activities conducted in the territory of Azerbaijan minus deductible expenses, while other legal entities are taxed on their worldwide income. In addition to CIT paid by a permanent establishment of a foreign legal entity, it will also be subject to branch profit tax at the rate of 10% for each amount repatriated by such permanent establishment from its net profit. CIT for non-resident entities which do not have their permanent establishment in Azerbaijan is taxed from their gross profit without deductions for expenses at the rate of 10% (“Withholding tax”).
The law sets a number of tax exemptions for the specific types of businesses Profit of micro or small entrepreneurship startup subjects operating as a legal entity is exempted from tax for three years. Under the provisions of Tax Law, a part of not more than 15 % of reporting period’s profit of taxpayer (excluding legal entities on behalf of the state and/or state) transferring to the enterprises and organizations, which operate in education, health, sport and culture and meet factors defined by relevant executive body, is exempted from tax for 5 years from January 1, 2024. The provisions of the mentioned reform covered the cashless payments only. Further, SME Cluster’s profit is exempted from tax for 7 years since inclusion in SME cluster companies’ registration. Moreover, capital expenditures by a legal entity, which is a participant of the SME cluster, from its profit obtained from provision of the goods (services) on the basis of an agreement with SME is exempted from tax for 7 years.
Simplified tax – legal entities or persons with annual turnover not exceeding AZN 200,000 can be registered as a simplified taxpayer. Pursuant to the new changes to the Tax Code, simplified tax rate is reduced to 2% of the gross income, and the entrepreneurs who does not render services and/or sell goods to the public but to the businesses (except transportation businesses), production businesses having more than 10 employees, wholesalers, businesses requiring licenses (except building construction and businesses providing services on compulsory insurance) are not eligible for the simplified tax anymore. The entrepreneurs who does not fall under the simplified taxpayer’s category, though having the same amount of income as simplified taxpayers will now pay 20 percent income tax. Nevertheless, they will pay taxes from 25 percent of income after deducting allowable costs.
Value Added Tax (VAT) – supply/import of goods and the provision of services in Azerbaijan are subject to VAT at the rate of 18% for each taxable operation. Legal entities and individuals with taxable transactions exceeding AZN 200,000 within a consecutive 12 month period shall register as VAT payers. Other companies carrying out business activities in Azerbaijan may voluntarily register. Only registered VAT payers may charge VAT or claim a credit for the VAT contribution. All VAT tax payers shall issue electronic VAT invoices in Automated Tax Information System.
Production Sharing Agreements (PSAs) – The Tax Code also recognizes the special tax regimes applicable to contracting and subcontracting parties in oil and gas production sharing agreements (“PSAs”) which provide for lower withholding tax rates (around 5% to 8%), exemption from VAT and customs duties, and simplified reporting and accounting procedures.
Other taxes: Property tax – Companies are levied with property tax at the rate of 1% on average annual value of fixed assets. Non-residents with permanent establishment (PE) in Azerbaijan are also subject to property tax on the average annual value of fixed assets connected with the PE.
Land tax – Except for agricultural lands, a land tax is imposed on legal entities or individuals owning or using land plots, the rate varying between 0.1-20 AZN, which depends on the purpose of use and location of the land. Foreign citizen can buy any property in Azerbaijan, except the land.
Production of excisable goods in and/or import of those goods to Azerbaijan are subject to excise tax.
Legal entities and individuals involved in extracting mineral in Azerbaijan shall pay mining tax at rates from 3% to 26% of its total wholesale price.
Employment taxes and social contributions – Personal Income Tax is exempted for the salaries up to AZN 8,000 and any amount exceeding this threshold will be taxed at the rate of 14%.
Specific Regime for Non-Oil Industry
Due to decreased demand and low oil prices, GDP growth decelerated from an average 13% in 2004-2013 to average 0.1% in 2014-2016. As a result of the declined oil output Azerbaijan furthered diversification of the economy and targeted to drop the economy’s dependence on hydrocarbon revenues placing a special emphasis on the agribusiness sector, promoting “Made in Azerbaijan” brand to increase export, supporting tourism, stimulating entrepreneurs and providing guarantees to foreign investors.
Agriculture and Food – Being one of the most attractive fields for potential investment in the economy of Azerbaijan, the agricultural sector is one of the priority sectors for diversification of the economy. On account of perfect climatic conditions, minimal unit productions costs, its high quality and the extended growing season, agricultural production covers a large variety of crops, fruits (apples, grapes, olives, cherries, melons, lemons, persimmons, peaches, pomegranates, watermelons, plums, raspberries and strawberries), vegetables (tomatoes, onions, cucumbers, carrots, potatoes, cabbage and greens), grains (barley, maize), hazelnuts and tea leaves which became recognizable brand in the post-Soviet market.
Tax benefits – The government stimulates a significant growth in the agriculture and food-processing sector by means of various measures such as import substitution, tax exemptions and subsidies of pesticides, fertilizers and machinery. 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 2027. Import and sale of wheat, production and sale of flour and bread, including sale of poultry are exempt from VAT for three years until 01 January 2027. In addition, import and sale of seeds and seedlings; breeder animals; mineral fertilizers, pesticides; equipment for seed breeding, poultry and beekeeping, veterinary preparations for preventions, diagnostics and treatment of livestock animals and poultry breeding, as well as laboratory equipment and machines for cleaning, sorting or calibration of seeds, grains and legumes; direct agricultural irrigation and other facilities, vehicles, equipment and techniques are not subject to VAT.
Industrial Parks – The government has established a number of industrial parks in order to ensure sustainable development of the economy, preferably in various non-oil industry spheres and has offered tax incentives for the residents of industrial parks, alongside with different infrastructure opportunities. The crucial industry spheres are the following mainly focusing on (i) machinery (Neftchala Industrial Park, Masalli Industrial Park); (ii) eco-industry (Balakhany Eco-Industrial Park); (iii) chemical industry (Sumqayıt Chemical Industrial Park);(iv) shipbuilding (Garadag Industrial Park); (v) textile (Mingachevir Industrial Park); (vi) pharmaceutical (Pirallahı Industrial Park); (vii) high technologies (High Technologies Park, Mingachevir High Technologies Park, High Technologies Park under the Azerbaijan National Academy of Sciences).
Tax benefits – Special incentives, exemptions and privileges have been applied to the residents of the industrial and technological parks. Hence, the residents of these parks are free from property and profit taxes for the period of seven years since their registration. Machinery, technological equipment and plants imported by the residents of the industrial and technological parks for the construction of production facilities of industrial or technological parks, the research and development works are not subject to import VAT within ten years from the date of registration of the resident in the industrial or technological parks. VAT exemptions have been applied for all types of goods imported by the residents of industrial parks for the purposes of their activities for the period of ten years until 1 May 2026 based on a document issued by the relevant executive authority. Machinery, technological equipment and plants imported by the residents of the industrial or technological parks for the construction of production facilities of industrial or technological parks, research and development works are free from import VAT for 10 years from the date of registration of the resident in the industrial or technological parks.
Free Trade Zones – (Alat free-economic zone) –The establishment of the free trade zones will play pivotal role in non-oil trade, which accelerates the development of entrepreneurships and will have significant impact to the economy of the Republic of Azerbaijan. According to the Law of the Republic of Azerbaijan “On Special Economic Zones”, which became effective on 14 April 2009, provides a preferential tax and customs regime applicable to residents of special economic zones (however no such zones were established until now). The following tax benefits shall be applied to the companies operating in special economic zones:
- Zero (0% ) rate VAT;
- 0.5% tax levied on overall turnover from supplied goods, performed services, or works;
- customs exemptions.
On 18 May 2018 the Law on Alat free economic zone was adopted. Under the provisions of this Law, the legislation of Alat free economic zone will be effective in the territory of Alat free economic zone and in case of any conflict with the domestic law, the legislation of Alat free economic zone will be applied. In addition, Free Zone Competent Authority, Free Zone administrative offices, Free Zone legal entities and their employees, Free Zone residents are exempted from all taxes and customs. Following relevant orders of the President of Republic of Azerbaijan (dated 4 June 2018 & 29 January 2019, etc.) to provide legal compliance of all legal acts with the Law on Alat free-economic zone, this issue is now on agenda of the Parliament of the Republic of Azerbaijan and is expected to be finalized soon in order to put this lawinto effect.
It is worthy to note that Alat settlement is located in Garadagh district of Baku (65 km south of the capital) where Azerbaijan intends to build a major trading hub as a tax-free zonecovering the territory of the Baku International Sea Trade Port, with such components as Truck Parking, International Logistics Centre and Domestic Logistic Centre, as part of a special economic regime. The Port will act as a major logistics hub in the Caspian region, serving both European and Asian markets, as well as being part of an extensive international logistics network linking Europe and Asia.
Foreign Investment. Being the another step forward to diversification of national economy and following the Strategic Roadmap of the National Economy Prospects signed by the President of the Republic of Azerbaijan in December 2016, presidential decree on some actions regarding the promotion of the investment activities and protection of the rights of foreign investors was signed earlier last year. The new Law of the Azerbaijan Republic On Investment Activity in on force since 2022.
Under the current legislation, the Law on Investment Activity, the Law on Privatization of State Property (including the “Second Privatization Program”) the individuals and legal entities including foreign entities, governments, international organizations, and individuals permanently residing outside Azerbaijan may carry out any business activities not prohibited by Azerbaijani law. The law recognizes the following forms of foreign investment including both tangible and intangible rights, as well as intellectual property rights: (i) participation in interest and shareholding with Azerbaijani legal entities and citizens; (ii) establishment of legal entities with full foreign investors; (iii) acquisition of enterprises, immovable properties, buildings, structures, and other kinds of property allowed by law.
It should be stated that the bilateral investment treaties (BITs) ratified by Azerbaijan, the number of which is currently about 50), prevail over domestic law regulating the same issue (except for the Constitution and acts adopted by referendum).
Overall, foreign investors provided with “not-less-favored” regime. It means that in similar situations, foreign investors and their investments are subject to a regime (national regime) that is no less favorable than the regime applied to domestic investors and their investments.
LEGAL SYSTEM
The Legal system of Azerbaijan is based on civil law.
Courts – The court system is three-tiered, consisting of the first instance courts (District (city) courts, administrative-economical courts, military courts, courts on grave crimes), the courts of appeal and the Supreme Court, which all hear the cases within their competence respectively. Pursuant to the amendments made to the Civil Procedure Code (effective as of January 1, 2017), any statements of claim and complaints as well as any other documents in economic disputes may be submitted to the courts either in written form or via an electronic cabinet established within the Electronic Court system. Additionally, any court notices to the parties using electronic cabinet can be served by means of placing the notices into the electronic cabinets.
International arbitration. Investment disputes may be resolved with the dispute resolution procedures agreed by the parties. International arbitration in Azerbaijan is regulated in accordance with the Law on International Arbitration. Azerbaijan has ratified the New York Convention on Enforcement of Arbitral Awards as well as the Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which provides for arbitration at the International Centre for Settlement of Investment Disputes (ICSID).
Mediation. On April 3, 2019, by the adoption of the new Law “On Mediation”, mediation is used as the main alternative dispute resolution method of social relations. The mentioned Law mainly determines the principles, goals, implementation rules of mediation and the status of mediators in Azerbaijan.