The Thick of It
1. KEY REGULATORY ISSUES FOR INVESTORS AND FOREIGN COMPANIES COMING TO THE MARKET
1.1. General overview
Vast oil reserves attracted foreign capital to the Azerbaijani economy and consequentially the oil and gas sector has become the main target of foreign investments. Several major oil contracts have been signed since 1994. Moreover, following the success of oil and gas projects, the government declared a policy that stimulated the development of the non-oil sector. Given the rapid development of the latter, the share of oil and gas investments relating to the total value of imported capital has decreased compared to earlier years. Generally, Azerbaijan pursues a welcoming policy toward foreign investors and the investment climate is gradually improving despite certain challenges. Over the past few years, the government has been taking steps toward attracting foreign investments and the integration of Azerbaijan into the global market.
1.2. Legal framework
The World Bank’s Doing Business 2015 report placed Azerbaijan in the Top-10 improvers, which includes the countries that implemented significant reforms aimed at reducing burdensome bureaucracy and improving legal and regulatory frameworks. Despite the progress achieved, certain gaps and uncertainties still exist, causing concerns amongst both domestic and foreign investors.
Entrepreneurial activity and its control by the state authorities (registration, licensing, employment, reporting, state audits, etc.) are heavily regulated by various legislative acts, in particular decrees and regulations. In the early 2000s, it was a common practice when legislative reforms were ineffective due to inconsistencies between various legislative acts, lack of implementation, and existent restrictions in decrees or discretionary powers of the state authorities.
Gradually, legal framework has become more sound and consistent, partially due to institutional reforms in public service and state inspections. In 2011, the solid information register of the state inspections conducted in the field of entrepreneurship was created. Pursuant to the respective regulations, all state inspections with respect to entrepreneurs should be recorded in this registry in advance, as to increase transparency of state control and eliminate unlawful inspections. Furthermore, in 2013 the law on the regulation of inspections at enterprises and the protection of entrepreneurs’ interests was adopted. The law envisages unified requirements to the procedures, frequency, and duration of the state inspections. Moreover, considering the unfavorable worldwide economic situation, the government decided to suspend state inspections (subject to some reservations) for a period of two years starting from November 1, 2015.
The judicial system has a three-tiered court structure consisting of the Supreme Court, Courts of Appeal, administrative-economical courts, and district/city courts. There is also a Constitutional Court. Pursuant to the WB Doing Business report, the index of quality of judicial processes in Azerbaijan is 6.5. It is quite low, taking into account that the maximum score is 18. At the same time, the judicial system is subject to continuous reforms aimed at improving the court structure and case management. The Ministry of Justice, in collaboration with international organizations, performs certain activities to strengthen judicial infrastructure, increase the transparency of the judiciary, and promote effectiveness in dispute resolutions. However, the public confidence in the judiciary remains low. The availability of the judgments rendered in cases at the appellate and Supreme Court level in court website may be admitted as one of the positive moments achieved within recent years.
1.2. Development of the commercial law
The development of a favorable environment for investors and reforming the legal framework is outlined under Azerbaijan 2020: Look into the Future National Development Concept. In view of the mentioned concept and taking into account the global economic slowdown, the government has taken certain steps toward the renovation and enhancement of commercial law in 2015. Besides the liberalization of state inspections mentioned above, the most significant changes made in 2015 are as follows:
The procedure for consideration and approval of related party transactions became stricter and more detailed. In particular, the participation of an independent auditor is now mandatory for the most significant transactions of the company. This is one more step forward to secure bona fide corporate governance and eliminate management abuses.
The government has also taken significant measures aimed to develop securities and derivative markets by introducing new specialized laws and supplementary legislation.
As part of the initiative aimed at establishing an attractive business environment, the licensing rules have been simplified. The new one-stop shop principle and the extensive use of electronic application systems will significantly accelerate the licensing process. Moreover, a license is no longer required for 23 types of activities that were previously licensed.
1.3. Foreign investments
The domestic legal framework on foreign investment in Azerbaijan includes inter alia various regulations on investment activity and protection, privatization of state property and other rules, which define types of permitted investments, repatriation of profits and earnings procedures, as well as general rights and guarantees for foreign investors.
Foreign investment is also regulated by a number of international agreements and treaties, such as Azerbaijan-EC Cooperation Agreement dated April 22, 1996, as well as bilateral investment and free trade agreements. Meanwhile, international treaties prevail over Azerbaijani legislation regulating the same issues (except for the Constitution and acts adopted by referendum).
1.3.1. Who can invest?
The following entities and individuals can be foreign investors in Azerbaijan:
• Foreign legal entities.
• Foreign citizens, stateless persons, and citizens of Azerbaijan with a permanent residence abroad (subject to registration for engaging in business activities in their country of residence).
• Foreign states.
• International organizations.
1.3.2. How to invest?
The legislation stipulates that foreign companies seeking to invest in Azerbaijan may be engaged in any type of economic activity which is not prohibited by local legislation. There are no specific licensing requirements with respect to foreign investments (except for general rules on licensing of various types of activities).
Foreigners can invest in Azerbaijan in a number of ways, such as:
• Establishing a fully owned subsidiary.
• Acquiring shares in an existing company, as well as bonds and securities.
• Establishing a joint venture with Azerbaijani companies and individuals.
• Purchasing buildings and constructions, as well as other property which may belong to foreign investors based on legislation.
• Acquiring rights for the use of land and other natural resources.
• Entering into other acceptable forms of investment agreements.
1.3.3. What are the rights and guarantees?
Applicable legislation grants a number of guarantees to foreign investors, such as:
• Fair legal regime and full legal protection.
Foreign investors possess the same rights as local ones (unless otherwise provided in Azerbaijani legislation or international agreement) and may be granted additional privileges. They enjoy full and unconditional legal protection in Azerbaijan and also have access to the international arbitration.
• Profit repatriation.
Foreign investors are entitled to repatriate profits derived from their investment activity in convertible currency provided all taxes, levies and other duties are paid.
• Protection against nationalization and requisition.
Generally, foreign investments are not subject to nationalization (except for some force-majeure and state security cases). In any case, the Foreign Investment Law provides guarantees for the foreign investors to get immediate, adequate, and effective compensation for nationalization and requisition.
• Grandfather clause.
This is a set of legal regulations that exempts foreign investments from new Azerbaijani legislation negatively affecting prior investors’ rights and privileges. The exemption period is 10 years.
• Compensation for damages.
Foreign investors are entitled to get compensation for damages emerging from illegal acts of state authorities.
1.3.4. Are there any restrictions?
There are still certain limitations which should be taken into account by foreign investors, in particular:
• Foreign investors cannot possess land in Azerbaijan but are allowed to enjoy other rights (e.g. lease).
• Foreign legal entities as well as legal entities established by foreign nationals or with the participation of foreign capital are prohibited from establishing or managing private security companies.
• There are also a number of restrictions on foreign capital in the insurance market.
2. KEY LEGISLATION CHANGES THAT the GOVERNMENT IS discussing
In times of economic slowdown, forthcoming legislation changes announced by the government are primarily intended to reduce burdensome bureaucracy, improve current legal framework, and increase the investment potential of the country. Some efforts were made towards the protection of the economy against unfavorable capital outflow by both incentive and restrictive measures. Besides the introduction of some indulgences in regulatory areas (licensing and state inspections) mentioned above, public authorities are considering new tax and customs incentives for foreign investors as well as some tightening of profit repatriation rules.
3. LEGAL PRESENCE
Azerbaijani laws provide for the following types of commercial legal entities in which a foreign individual or legal entity may participate:
• Open and closed joint stock companies (JSCs)
• Additional and limited liability companies (ALCs and LLCs)
• General and limited partnerships
3.1. Joint stock companies (JSCs)
A JSC is established by at least one legal entity or an individual. A JSC shareholder’s liabilities are limited to the amount of its shares’ value. There are closed and open JSCs. The shares of closed JSCs are not freely transferable and the company must have a minimum capital of AZN2,000. The shares of open JSCs are not subject to the transfer restriction, but the company must have a minimum capital of AZN4,000.
3.2. Limited liability companies (LLCs)
LLCs can be founded by one or more legal entities or individuals, with the founding members having a portion of capital/interest in the LLC equal to the amount paid to the charter capital. Each owner’s liability is limited to the amount invested in the LLC. LLCs do not issue shares. Participation interest in LLCs can be freely transferable to third parties, unless provided otherwise under the charter of the LLC. Legal entities with only one founder cannot be the only (sole) participant of the LLC/ JSC.
A general partnership is established by at least two legal entities or individual entrepreneurs, with all partners having unlimited liability. A limited partnership is established by at least two legal entities or individual entrepreneurs, with at least one partner having unlimited liability.
3.4. Other types of business presence
Foreign companies may operate in Azerbaijan without establishing a local legal entity by registering a branch or a representative office with the Ministry of Taxes. Branches and representative offices are allowed to conduct commercial activities in Azerbaijan.
It should be noted that currently the government is intending to introduce the concept of the public legal entities to the Azerbaijani law along with already existing commercial and non-commercial legal entities.
4. ARBITRATION PROCEDURES
Arbitration, recognition, and enforcement of its awards are regulated in Azerbaijan under both international agreements and national laws. Azerbaijan is a party to the Convention on Recognition and Enforcement of Foreign Arbitral Awards and the European Convention on International Commercial Arbitration.
The Law on International Arbitration was adopted in November 18, 1999. This Law regulates issues related to International Arbitration, as well as envisages the recognition of arbitration awards and their execution.
The recognition and execution of arbitration resolutions are also covered by the Civil Procedural Code (hereinafter, “the Code”). Based on the Code, in case arbitration, resolutions (awards) do not contradict Azerbaijani legislation and are mutually guaranteed (principle of mutuality). Such awards may then be recognized and executed in Azerbaijan. Applications on recognition and execution of the arbitration awards are reviewed by the Supreme Court of the Republic of Azerbaijan.
The Code also envisages the list of cases when the arbitration resolution may not be recognized or executed. Despite the fact that international arbitration awards are recognized in Azerbaijan, there is quite low practice on their recognition and execution and comprehensive procedural steps are yet to be established. Apart from the above, it should be mentioned that the Azerbaijan International Commercial Arbitration Court was established on November 11, 2003. This court concluded mutual cooperation treaties with the arbitration institutions of Germany, Sweden, Romania, Egypt, Malaysia, Australia, Austria, the UAE, Italy, and Ukraine.