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Setting Up Joint Ventures in Azerbaijan

 

Azerbaijani market is generally open for foreign businesses[1].  A foreign company wanting to enter the Azerbaijani market does not have to partner with a local person.  If for business reasons the company does not need to establish a joint venture, there are couple of options.  We assume that all or substantial of the business activity is carried out in the territory of Azerbaijan.

Registered (Equity) JV

Perhaps most popular and widely used, especially outside the oil and gas industry, form of a registered joint venture (JV) is a limited liability company (LLC).  Most privately held companies in Azerbaijan are established in the form of an LLC[2].   The partners join to set up an LLC in which each holds a certain shares.  LLCs must be registered with the Azerbaijani Ministry of Taxes.

When setting up a joint venture the parties need to carefully consider the terms of LLC’s charter.  Charter of an LLC is the LLC’s constitutional document, which regulates, among other things, governance in the LLC.  The charter must be registered with the Ministry of Taxes.  In addition to the charter, we typically recommend that partners enter into shareholders or similar agreements.  These agreements should govern the matters, which for either practical or regulatory reasons, cannot be included in the LLC’s charter.

An LLC typically has 3 governing bodies: general meeting, supervisory council (or similar supervising authority) and executive body.  Having a supervisory council is not necessary – it is optional.  Under Azerbaijani law certain matters, e.g., liquidation or reorganization, distribution of dividends, approval of annual balance etc., fall within the exclusive authority of the general meeting.  Only the general meeting is authorized to decide these matters.  Outside this “exclusive authority” and few other requirements, there are no limitations on allocation of authorities among the LLC’s corporate bodies.  Partners in JV typically want to establish control mechanism to oversee the executive body of the JV.  For instance, requiring that a transaction above certain value be approved by the general meeting or supervisory council.  These mechanisms can be included in the LLC’s charter.

In terms of allocation of cash flow rights, dividends must be distributed in proportion to share percentage in the LLC’s capital.  If, for instance, partner A has 30% and partner B has 70% in the capital of the LLC, dividends must be distributed in that proportion – i.e., 30/70%.  While most of the time JV partners are happy with this kind of arrangement, some, however, may want more flexibility in allocation of cash flow rights.  Shareholders or similar agreements may be helpful, however, additional tax obligations may arise from allocation of dividends not in proportion to shareholdings.

Exiting the JV is not particularly difficult.  A partner may either sell its shares in the JV or withdraw by demanding from the LLC value of its share.  While selling a share provides easier exit route, Azerbaijani law does not govern withdrawal in detail.

Contractual JV

JV partners may set up a contractual joint venture – they do not register a joint company, but instead sign agreement on joint operations.  The agreement must be detailed to govern, among other things, decision making, distribution of profits, allocation of costs and withdrawal.  Contractual joint ventures are widely used among companies engaged in oil and gas industries.

For practical reasons, even if the partners do not form a joint company, if they are engaged in day-to-day operations in Azerbaijan, they have to have some form of legal presence in Azerbaijan.  For instance, either one or both parties may register a branch office in Azerbaijan.

Azerbaijani law does not specifically provide for or govern contractual joint venture agreements.  Instead, these agreements would be governed by general contractual provisions of relevant laws, most importantly the Civil Code of Azerbaijan.  A local lawyer’s assistance is necessary in case of contractual joint ventures, as these agreements must not contradict mandatory requirements of Azerbaijani law.

One of the key issues in contractual JVs is the use of bank accounts.  It is important that parties decide how they would use bank accounts that would be used for receiving payments in connection with the joint business.  In Azerbaijan only the entities with registered legal presence may open bank accounts.  In other words, if a foreign company has not registered any office in Azerbaijan, it will not be able to open a bank account with any local bank.  In case of contractual joint venture parties may open a joint bank account.  Disposal of funds from such account can be done with consent of the JV partners.

Tax Matters

Generally income from business activities in Azerbaijan is subject to 20% of profit tax.  This tax is calculated from the net profit, which is the difference between income and deductible expenses and exclusions.  There is also value added tax at the rate of 18%.  VAT is born by the end-user of the product or service.  Dividend distributions are subject to 10% of dividend withholding tax.

In case of registered JV (as discussed above) in addition to 20% of profit tax, there will also be 10% of tax on dividends, which the JV decides to distribute to its shareholders.  As a result, there is double taxation of income, which is finally distributed to the JV partner. The Azerbaijani Tax Code provides that (i) further distribution of dividends is not subject to dividend tax, and (ii) in case the receiver of dividends is the “factual owner” (essentially, beneficial owner), the dividends are not subject to any other tax – i.e., they are subject to profit tax in the hands of the person, who receives dividends.  It is not clear who is considered “beneficial owner” for the purposes of the second type of exemption.  This matter can be subject to dispute.

In case of contractual JV, the contractual JV fulfills its VAT payment obligations and partners pay taxes on the profit, which they receive from their joint business.  Therefore, there can be tax benefit in contractual JV depending on the circumstances.

Given Azerbaijani tax regulations are generally not clear on some of the key issues concerning JVs, it is always best to ask advice from the professional before making any final arrangements.

This material is not and is not meant to constitute a legal advice.  Each case is different.  You must seek professional advice on your particular case.      

[1] Some limitations maybe in regulated industries, such as banking and insurance

[2] For more information on forms of legal entities in Azerbaijan please see the material in the following link: http://remells.com/files/Investing_and_Business_In_Azerbaijan_2014.pdf

 

New system of appellate councils aim to protect business in Azerbaijan

 

Introduction

The President of Azerbaijan created Appellate Council to handle complaints from businesses more efficiently.  Decree, No. 761, date 3 February 2016, On Establishment of the Appellate Council created the Appellate Council (the “Council”) in the President’s Office.  The same Decree requires that local and centralized executive authorities (such as ministries and state committees) create their internal appellate councils.

How This New System Works

The idea is that if an entrepreneur faces a challenge from any executive authority – e.g., refused a favorable decision on its case – and it believes the authority has breached the law, it may appeal the matter to the appellate council of that authority.  In other words, appeal to the internal appellate council of the authority, which issued (or refused issuing) the decision.  The internal appellate council must review the complaint and issue its decision.  If the entrepreneur is not happy with the decision of the internal appellate council, it may appeal the internal council’s decision to the Appellate Council in the President’s Office.

The Council

The Council is a collegial and public state institution.  The members of the Council are appointed by the President.

The Council receives appeals in written form (in person, postal or electronically). It hears complaints from a decision, refusal of decision, as well as any actions or inactions of internal appellate councils. Appeals must be in connection with business activities of an appellant.If the Council finds a violation it is authorized to refer the violation to the President of Azerbaijan for taking actions regarding persons, who commits the violation.

The Council is authorized to obtain documents from any state bodies, municipalities, NGOs and natural or legal persons.

Further details in connection with appeals are set out in the Law On Administrative Proceeding. According to the Law, an administrative complaint must be handled and a decision adopted not later than one month from the date it is received.