Attitude toward Foreign Direct Investment
Over the past few years, the Government of Azerbaijan has worked to integrate the country more fully into the global economic marketplace, attract increased foreign investment, diversify its economy, and maintain positive growth. Attracting foreign direct investment to support economic diversification continues to be the stated goal of President Aliyev and his government. Less than expected oil production over the past several years coupled with continued low world oil prices – and their concomitant impact on budget revenues – prompted the Azerbaijani government to pursue more comprehensive reforms. In February 2016, the government introduced amendments to the Tax Code, which provides tax benefits to legal and physical entities engaged in certain investment activities. With these amendments, these physical and legal entities can be exempt from paying taxes for 50 percent of their revenues and incomes, respectively, for up to seven years. Moreover, the government approved amendments to the law On Customs Tariff, under which legal and physical entities can be exempted from customs duties and value-added tax (VAT) on import of capital equipment for up to seven years. In addition, any organization or industrial or technology park operator who plans to import capital equipment in certain sectors may apply for permission to construct production facilities, or conduct research, test, and development activities.
Other Investment Policy Reviews
Azerbaijan has not conducted an Organization for Economic Cooperation and Development (OECD) investment policy review in the past three years. Over the past few years, Azerbaijan has made gradual progress in the World Bank’s, Doing Business Report: http://www.doingbusiness.org/data/exploreeconomies/azerbaijan
Laws/Regulations on Foreign Direct Investment
Foreign investment in Azerbaijan is regulated by a number of international treaties and agreements, as well as by domestic legislation. These include the Bilateral Investment Treaty (BIT) between the United States and the Government of the Republic of Azerbaijan, which encourages the reciprocal protection of investment, dated August 1, 1997; the Azerbaijan-EC Cooperation Agreement dated April 22, 1996; Law on Protection of Foreign Investment dated January 15, 1992 (the Foreign Investment Law); the Law on Investment Activity dated January 13, 1995 (the Investment Activity Law); the Law on Investment Funds dated October 22, 2010 (the Investment Funds Law); the Law On Privatization of State Property dated May 16, 2000 (the Privatization Law); and the Second Program for Privatization of State Property of the Republic of Azerbaijan dated August 10, 2002 (the Second Privatization Program), as well as laws regulating specific sectors of the Azerbaijani economy. This legislation permits foreign direct investment in any activity in which a national investor may also invest, unless otherwise prohibited by law. Azerbaijani law is evolving in accordance with the government’s strategic goal of creating a welcoming environment for foreign businesses; as such, foreign investments are protected by guarantees provided under Azerbaijani law. The website of Azerbaijan’s National Council, http://meclis.gov.az/, lists all laws of the Republic of Azerbaijan, but it is only available in the Azerbaijani language.
Business Registration
All companies operating in Azerbaijan are required to be registered. Without formal registration, a company may not do business in Azerbaijan (e.g., maintain a bank account, clear goods through customs). As part of the ongoing business law reforms, a “One Window” principle was introduced on January 1, 2008. The registration procedures involving several governmental bodies (Ministry of Justice, Social Insurance Fund, and State Statistics Committee) have been eliminated; therefore businesses only have to register with the Ministry of Taxes. The established period for state registration with the Ministry of Taxes is officially set at three days for commercial organizations. Online registration is available at http://taxes.gov.az/modul.php?lang=_eng&name=birpencere&bolme=registration and works adequately.
Azerbaijan ranks 63rd in Ease of Doing Business and 7th in Starting a Business out of 189 countries in The World Bank’s Doing Business Report (rankings are available at: http://www.doingbusiness.org/rankings).
Industrial Promotion
President Aliyev has targeted the following sectors for attracting investment: agriculture, transportation, tourism, and information/communication technology.
The Azerbaijan Export and Investment Promotion Foundation (AZPROMO) is a joint public-private-initiative, established by the Ministry of Economy and Industry of Azerbaijan in 2003 with the goal of contributing to economic development and diversification by attracting foreign investment in non-oil sectors of the economy and stimulating expansion of Azerbaijan's exports of non-oil goods to overseas markets. AZPROMO has been involved in a number of business forums and training events both in Azerbaijan and internationally. According to a Cabinet of Ministers decision, small enterprises in Azerbaijan are defined as those with less than 25 employees and medium enterprises as those with less than 125 employees.
Limits on Foreign Control and Right to Private Ownership and Establishment
Azerbaijan imposes above average restrictions on foreign equity ownership compared to countries in the Eastern Europe and Central Asia region included in the IFC’s Investing Across Borders Report. Restricted sectors on investment include those relating to national security and defense. The Government of Azerbaijan also exerts some measure of control over other key sectors, such as agriculture, communications, oil, and mining. According to Azerbaijan’s laws, the state must retain a controlling stake in companies operating in the mining or oil and gas sectors. Thus, foreign (as well as domestic) capital participation is limited to a maximum of 49 percent ownership. Foreign ownership in the media sector is strictly limited as well. Unless any relevant international agreement with Azerbaijan provides otherwise, foreign shareholding in media companies is limited to 33 percent for newspaper publishers and is prohibited for TV broadcasting companies; currently, there are no such international agreements in place. While restrictions on foreign equity ownership in the financial services sectors (banking and insurance) have already been abolished, there are still sector-wide limits for total foreign capital participation.
Foreign investments enjoy complete and unreserved legal protection granted by the Law on Protection of Foreign Investment, in addition to any other guarantees contained within international agreements or treaties. This law stipulates that Azerbaijan will treat foreign investors, including foreign partners in joint ventures, in a manner not less favorable than the treatment accorded to national investors and allows the repatriation of profits, revenues and other investment-related funds as long as applicable taxes have been paid. Azerbaijan has endorsed limits on foreign control in the domestic insurance market. In compliance with the amendments to the Law on Insurance Activity, approved by the Azerbaijani Parliament in 2013, the share of foreign capital for one individual in the equity capital of insurance companies cannot exceed 10 percent, while the total share of foreign capital in such equities cannot exceed 50 percent. International financial institutions of which Azerbaijan is a member are exempt from these limits.
Privatization Program
Large-scale privatization has been particularly slow in Azerbaijan, and lags significantly behind other countries within the Commonwealth of Independent States (CIS). However, within the CIS, Azerbaijan scores higher than average with regards to small-scale privatization programs, which have also been comparatively more successful. Under Azerbaijani law, foreign investors can participate – according to existing legislation – in the privatization programs of state and municipal properties, and can invest in Azerbaijan through joint ventures with local companies or by establishing subsidiaries that are wholly-owned, as well as through representative offices and branches of foreign legal entities.
In January 2016, Azerbaijani President Ilham Aliyev ordered the government to draw up a major privatization program in a bid to revive the country’s economy, as it works to overcome the impacts of low world oil prices. Currently, the only sector targeted for privatization is public utilities. Although there is a public bidding process for the privatization programs, it is not transparent.
Screening of FDI
In 2008, Azerbaijan transferred responsibility for registering representative offices of foreign businesses, and the creation of business entities with foreign ownership, to the Ministry of Taxes based on the so-called “one-stop-shop” principle that greatly simplifies the registration process and reduces waiting times. The “online registration” system of legal entities has been available since 2012 and can be accessed in English at the following website: http://taxes.gov.az/modul.php?lang=_eng&name=birpencere&bolme=registration. The registration of representative or branch offices of foreign non-commercial entities was not, however, transferred to the Ministry of Taxes; such entities are still required to register with the Ministry of Justice.
The World Bank’s Investing Across Borders (IAB) report offers an informative overview on how to start a business in Azerbaijan:
“It takes 7 procedures and 11 days to establish a foreign-owned limited liability company (LLC) in Azerbaijan. This is faster than the regional IAB average for Eastern Europe and Central Asia and much faster than the IAB global average. There are no additional procedures required of a foreign-owned company establishing a subsidiary in Baku, Azerbaijan’s capital, other than the requirement to provide an apostille or notarized and translated copy of the incorporation documents and charter of the parent company abroad. A foreign-owned company does not need to get an investment approval to establish itself in Azerbaijan. The company registration is completed at a one-stop shop that also serves for registration for VAT. The Ministry of Taxes issues the business registration within 3 business days and the VAT number within 5 days of application. In order to open a bank account (in local or foreign currency), the company submits a Ministry of Taxes registration form to the appropriate bank. The whole process can be done online and usually takes only 2–3 days. There is no minimal capital requirement for LLCs, although the capital must be fully paid in prior to the state registration.”
Source: http://iab.worldbank.org/data/exploreeconomies/azerbaijan#starting-a-foreign-business
Competition Law
Over the past few years, Azerbaijan has been engaged in the process of updating several key pieces of legislation that impact the business environment. The State Committee for Antimonopoly Policy and Support of Entrepreneurship reviews transactions for competition-related concerns, whether domestic or international in nature. A new version of the Competition Code was undergoing revision in Parliament in late 2014, and some observers expect the law to pass in 2016. A hindrance to foreign direct investment is the difficulty of getting established Azerbaijani businesses to adopt standard investor-friendly practices, such as those associated with the concept of good corporate governance or international accounting norms.