GILS Corporate law: Azerbaijan

AZERBAIJAN 

(1) Forms of doing business and Establishment

1.1. What are the options for establishing a company's presence in a country (branch, representative office, subsidiary, etc.), and what are their key advantages and limitations?

The Civil Code of the Republic of Azerbaijan determines incorporation of the companies by foreign entities in different forms: 

1. a Branch Office; 

2. a Representative Office; 3. a Cooperative; 

4. a Partnership (general and limited); 

5. an Additional Liability Company; 

6. a Limited Liability Company; 

7. a Closed Joint-Stock Company; 

8. an Open Joint-Stock Company. 

To carry on business operations in Azerbaijan, the most frequently chosen forms by foreign companies are followings: 

1. a Limited Liability Company; 

2. a Branch Office; 

3. a Representative Office. 

According to Article 53.3 of the Civil Code, a branch and a representative office are not considered legal entities. 

It should be noted that the most suitable option for a non-resident founder is to establish an LLC, since: 

1. the founder is liable for all debts only by a share in the charter capital; 

2. contribution of any property in the form of shares to the charter capital of an enterprise, except for imported property (unless the contribution of property in the form of shares is directly related to the acquisition of other property in exchange for it) is not subject to VAT (Article 164.1.5 of the Tax Code); 

3. LLCs are authorised to carry out any activity not prohibited by the laws of the Republic of Azerbaijan and certain activities after obtaining the appropriate licence. In this regard, it should be noted that

   а. branches are authorised to perform all or part of the functions of the foreign founder, including business activities, representation and protection of its interests, and 

   b. representative offices are authorised to represent and protect the interests of the founder and are not allowed to engage in profit-making activities in the territory of the Republic of Azerbaijan; 

4. may participate in tenders in which an LLC or a company with a 4..legal form other than a branch or representative office is preferred. 

1.2. What is the process for creating a legal entity or another form of presence in the country, including the laws to follow, legal entities to be considered, documents required, stages and terms for registration? 

As a matter of practice, the timeframe for setting up both an LLC and a Branch/Representative Office takes up to 5 days after the submission of the necessary documents to the registration authority. State fee for incorporation is AZN 15 for an LLC and AZN 300 for a Branch or Representative Office. The incorporation process consists of following steps: 

1. preparation and issuance of necessary documents abroad; 

2. translation and notarization of documents received from the founders; 

3. preparation of application forms; 

4. submission of the entire package of documents to the registration authority; 

5. registration; 

6. collecting the corporate documents of a new entity; 

7. ordering company seal, electronic signature, opening bank accounts. 

A foreign company needs the following documents for the establishment of a new entity: 

• corporate documents of the foreign company - extract from the Chamber of Commerce/Registration Certificate, Articles of Association;
• power of attorney issued by the parent company to the representatives (GRATA team) for representing and registering the new entity in the Republic of Azerbaijan;
• shareholder resolution to incorporate a new entity in the Republic of Azerbaijan, charter/regulations of the new entity, application forms, receipt approving the payment of the charter capital (there is no threshold defined for the charter capital except for a few cases);
• scan copy of the passport of the head/director of the new entity;
• power of attorney issued by the director of the new entity that authorises the representatives to register him/her as a director of the entity;
• in case the chosen form of the entity is a branch or representative office – a power of attorney issued by the parent company in the name of the director of the new entity.

Depending on a particular type of the company, additional documents may also be needed. Documents issued by a foreign country shall be legalised/apostilled in order to be recognized in the Republic of Azerbaijan. The documents issued by the parent company such as the resolution or power of attorney shall be notarized and legalised/apostilled, the notary must certify both the identity and the authority of the signee(s). For some of CIS countries, notarized copies are sufficient. Meaning that apostille or legalisation is not required. Shareholder resolution, application form and charter/regulations of the new entity can also be signed here in Azerbaijan based on a PoA issued by the parent company.

As a general rule, there is no requirement for a minimum amount of charter capital in relation to an LLC (except for certain types of activities, such as activities of non-bank credit organisations, etc.). Therefore, any amount may be determined as the company's charter capital if the company is established as an LLC.

If the charter of the entity does not provide for payment of the charter capital within a certain period of time, the shareholders are obliged to pay the charter capital in full before the state registration of the entity. If the charter of the entity does not provide for payment of the charter capital within a certain period of time, this period may not exceed 3 months after the incorporation of the entity.

It should be noted that branches and representative offices do not have charter capital.

1.3. What additional authorizations/approvals are required to create a legal entity or start operations, and how do they vary depending on the type of business (if any)? 

Obtaining a licence. 

Entities such as LLCs, CJSCs and OJSCs may perform any activities not prohibited by the laws of the Azerbaijan Republic. However, performance of certain activities as determined by law subject to holding a special permit (licence). For this purpose, it is necessary to apply with an application and documents to the licensing authority. Licences are issued for an indefinite period of time, except for the licence to perform activities to render cellular (mobile) communication services. 

1.4. What are the most common types of Legal Entities in your country and the differences between them in terms of taxation, liability, and management?

   1.4.1. What are the shareholder structures of these types of legal entities? 

   1.4.2. What is the Shareholders’ responsibility in these types of legal entities? 

   1.4.3. What is the responsibility of the representatives in these types of legal entities? 

   1.4.4. Briefly, what are the characteristics of the other types of Legal Entities? 

As mentioned above, to carry on business operations in Azerbaijan, most frequently chosen forms by foreign companies are followings: 

1. Limited Liability Company; 

2. Branch Office; 

3. Representative Office. 

Management 

The Head of the Representative Office/Branch is appointed by a foreign legal entity and operates on the basis of the power of attorney and within the powers set forth thereby. 

Based on Article 88.1 of the Civil Code and decision of the Constitutional Court (dated 16 December 2011), if the number of shareholders exceeds 50, the company should transform to Open Joint Stock Company. 

Day-to-day management of the legal entities` operations is carried out: by its sole executive body – Director (Manager); or by collegial executive body – Managing Board. If a collegial executive body is chosen, the minimum number should not be less than 2 directors. Depending on scope of business and necessity of control, the General meeting of Participants can establish the Supervisory Board, the minimum number of directors of which is at least 3 and/or inspection committee (auditor) consisting of at least 2 participants, that oversee activities of the executive body. The common practice for LLCs and Branches: Sole director, without having a Board of Directors. 

Liability 

The founders of LLCs jointly bear subsidiary liability for its obligations with their property in the same for all multiples of the value of their contributions, determined by the charter of the company, while the Head Office of Representative Office/Branch is fully liable for the obligations of the Representative Office/Branch. 

1.5. What are the operating costs associated with the maintenance of a legal entity or presence in the country?

While establishing a company in Azerbaijan, it is necessary to take into account such operating costs as administrative costs, rental fees, employee salaries, etc. The amount of operating costs depends on the field of activity of the entity.

(2) General taxation issues 

2.1. What tax obligations are associated with doing business in the country? 

Doing business in the Republic of Azerbaijan entails different tax obligations depending on the tax regime applicable to the company. The following types of tax regimes are applicable to companies: 

А. Statutory tax regime. 

Depending on the volume of turnover, the following two types of statutory tax regimes apply to enterprises in the Republic of Azerbaijan: 

1. Simplified tax regime (2-8%). 

The simplified tax regime provides for lower tax rates. In order to benefit from this regime: 

• the organisation must not be a VAT payer; and
• the organisation's turnover should not exceed the threshold of AZN 200 000 for any consecutive 12 month period. 

2. Income Tax/VAT regime. 

This regime applies if the taxable turnover of the organisation exceeds AZN 200 000 in any month(s) of a consecutive 12 month period. Deductions are allowed under this regime. 

The main taxes stipulated by the Tax Code are: 

• profit tax;
• tax on personal income;
• value added tax (VAT);
• property tax;
• land tax;
• road tax;
• simplified tax and mineral extraction tax.

Moreover, the municipalities levy land tax and property tax on individuals, and profit tax on enterprises and organisations that are the property of municipalities. Separate laws address contributions for social insurance, unemployment insurance, and medical insurance. 

B. Special tax regime. 

Provides for a special procedure for the calculation and payment of taxes for a certain period of time. More than 20 PSAs have been signed and ratified in the Republic of Azerbaijan. Each PSA has its own special tax regime, however, as a rule, they provide for lower withholding tax rates, VAT exemption and simplified reporting and accounting procedures. The PSA tax regime applies to each contracting party (signatory to the PSA), operating company and subcontractor (including a foreign subcontractor). 

2.2. What tax and customs incentives are available in a country?

Tax and customs incentives are applicable to residents of lands liberated from occupation. Moreover, exemption from customs duties is applied to imports of goods from CIS countries. 

In case of compliance with the requirements stipulated by the legislation of the Republic of Azerbaijan, tax exemptions are applied in respect of: 

• startups;
• personal income tax on dividends;
• residents of technology parks;
• property tax;
• VAT. 

In addition to the above, Azerbaijan has concluded bilateral double taxation treaties with 56 countries. 

2.3. What are the accounting and reporting requirements for different types of presence, and how often must they be submitted? 

A comprehensive set of financial reports comprises the following elements: 

• report of financial position;
• report of profit or loss and other comprehensive income;
• report of changes in equity;
• report of cash flows;
• report accounting policies and explanatory notes. 

The following types of reports are distinguished by frequency: 

• monthly;
• quarterly;
• semi-annual;
• annual. 

2.4. What is the taxation of dividends for foreign investors? 

Dividends paid by both resident and non-resident enterprises shall be subject to taxation at the source of payment at a rate of 5%. 

2.5. What strategies exist for minimising tax liability when conducting international business? 

Strategies for minimising the tax liability are developed with consideration of the specifics of each business. 

In general, if applicable, the use of bilateral double taxation treaties (DTTs) is recommended.

(3) Regulatory and miscellaneous 

3.1. What are the general data protection and privacy requirements in the country, and how do they affect company operations? 

The main legislative act regulating the protection of personal data in the Republic of Azerbaijan is the Law “On personal data” #998-IIIQ dated 11 May 2010. 

As per the said Law, except for the cases of compulsory collection and processing of personal data in accordance with the procedure established by the legislation, the collection and processing of personal data about any person is allowed only with the written consent of the data subject, including the consent in the form of an electronic document with an enhanced electronic signature, or on the basis of the written data submitted by him/her. During the collection and processing of personal data, it is also necessary to take into account the requirements of the Law on the transfer of personal data to third parties, cross-border transfer, ensuring the rights of the personal data subject, registration of the information system, and etc.

3.2. What labour law features should be considered when hiring local and foreign employees? 

In the Republic of Azerbaijan employment matters are regulated by the Labor Code of the Republic of Azerbaijan dated 1 February 1999, according to which labour relations arise after the employment contract concluded between the employer and employee is entered into legal force by registering the notice of it in the electronic information system. The content of the employment contract must comply with the requirements of the Labor Code. 

In order to engage foreign nationals in paid labour activity, it is required that they obtain a temporary residence permit and a work permit, except for certain categories of individuals who are exempt from the work permit requirement. 

3.3. What are the requirements for currency regulation and currency control? 

The Central Bank of the Republic of Azerbaijan is the main financial control body of the country, which carries out general currency regulation in the Republic of Azerbaijan. 

The most important regulations related to currency control are the following: 

• transfer of funds into the Republic of Azerbaijan is not prohibited and/or subject to any restrictions;
• transfer of funds from the Republic of Azerbaijan without opening a bank account and through a bank account, but for personal purposes, is subject to a number of restrictions related to transaction amounts;
• transfer of funds from the Republic of Azerbaijan through bank accounts not for personal purposes is performed with submission of supporting documents defined by the legislation (such as contract, invoice, customs declaration, etc.) and is subject to no restrictions related to transaction amounts;
• no restrictions are applied to transactions of residents and nonresidents in national currency in the territory of Azerbaijan;
• and cash settlements in foreign currency are not allowed in Azerbaijan.

3.4. What corporate law features should be considered when planning mergers, acquisitions, and company restructuring in the country? 

The relevant provisions of the Civil Code, the Law “On AntiMonopoly Activities”, “On State Registration and State Register of Legal Entities” should be taken into account. 

Before entering into a merger and acquisition (M&A) transaction, the buyer needs to conduct due diligence. In a M&A transaction, due diligence allows the buyer to have clear information about the legal aspects of the target's business, such as: corporate structure, contracts, assets, intellectual property rights, litigation, and labour issues. In other words, by conducting a due diligence, the buyer obtains a complete picture of the business being acquired. Such an audit protects the buyer from potential legal risks that may arise in a M&A transaction.

3.5. What are the most efficient mechanics for dispute resolution?

Depending on the nature of the dispute and the objectives of the parties, each of the three dispute resolution methods (negotiation, mediation, litigation) may be considered to achieve the most favourable result.

Authors:

Vafa Teymurzade, Nargis Tagiyeva, Gozal Huseynzade.