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:


Azerbaijan adopts new law on securities market


On July 14, 2015 the President of Azerbaijan signs the Law On Securities Market (the “Law”). The Law regulates, among other things, public issue of investment securities – mainly stocks and bonds, activities of investment companies, clearing and settlement and depository system. The Law is a comprehensive regulatory document on matters relating to Azerbaijan’s securities market.

Public Issue of Securities: The Law defines “public issue” of investment securities.  In a nutshell, that is offering securities to indefinite number of people or offering it to more than 50 persons.  Following the approach in Azerbaijan’s Civil Code, which used to be the main regulatory instrument on securities, in the Law “investment securities” include stocks in Open Joint Stock Companies and bonds.  In order to issue securities publicly, the issuer must, among other things, prepare and publish prospectus and register the securities with the Azerbaijani State Committee for Securities (the “SCS”).  The prospectus must disclose information on the issuer, its business, management and etc.  The audited financial statements of the issuer must be attached to the prospectus.

Following issues of the securities and their listing in a stock exchange, issuers must make half-yearly and yearly disclosures.  The implementing regulations that the SCS will issue will provide for more specific list of information that the issuer must disclose.  In general, issuer must disclose information on its business, management and, of course, financial statements.  While half-yearly financial statements do not have to be audited, yearly financial statements must be audited.

Investment Companies: The Law brought more significant changes to regulations on investment companies.  Prior to the Law, Azerbaijan followed the US system of having brokers and dealers.  The Law does not distinguish between brokers and dealers, but instead introduces the concept of “investment company” – this follows the EU approach.  An investment company may engage in certain core and also in ancillary activities.  As part of their core activities investment companies may act as intermediary in the sale and purchase of securities by its clients (such as brokers), may be act as underwriters in securities issues (such as dealers), manage portfolio of securities etc.  Ancillary services include managing clients’ accounts, investment research, foreign currency transactions relating to its core activities etc.

Investment companies must obtain a license from the SCS for providing investment services.  There are no limitations as to nationality of holders of interest in investment companies.  Therefore, foreign investment companies may register their wholly owned subsidiaries.  Alternatively, they may establish their branch office in Azerbaijan, which can provide investment services.

Insider Trading: The Law governs insider information and insider trading.  Insider information is confidential information, which is material for investor’s choice of making investment decision and which, if disclosed, could affect prices of securities.  More specific examples of insider information will be provided in the implementing regulations.  The Law provides for the list of “insiders” – those are mainly managers of the issuer and its certain employees having access to the information, consultants and members of their families.  Unlawful disclosure of insider information is a violation, which leads to penalties.

Depository System: Another important part of the Law concerns depository system.  The depository system consists of one central depository, investment companies, who are its members and also depositories of investment funds.

Lawyer of Remells Rashid Aliyev actively participated in works in connection with drafting the Law and its implementing regulations.

Remells Law Firm’s lawyers have significant experience in Azerbaijan business law. Our lawyers are experienced in cross-border transactions and large scale litigations.  We provide legal services and assist our clients on matters relating to corporate law, finance, oil & gas, IT, employment, tax and other areas of law.

Remells’ lawyers hold law degrees from reputable US and European law schools.


Rules for Acting Securities Dealers in Azerbaijan Become Effective


The new rule in Azerbaijan defines requirements to securities dealers.

The State Committee for Securities (the “SCS”) has issued Rules On Acting as Dealers in Securities Market on June 30, 2014. The rules became effective on January 1, 2015.

Dealer are professional participants of Azerbaijan’s securities market. A dealer must obtain license from the SCS to be able to operate in Azerbaijan. A dealer may act as market maker – stand ready to buy and sell the securities at their bid and ask prices. More important for Azerbaijani market, dealers act as underwriters in security issues.

The new rules set out new requirements with respect to organizational structure of a dealer. A dealer must have, among others, internal control, internal audit and risk management department.

The rules also set forth capital requirements. In all cases, a dealer’s risk weighed capital must not be below AZN 100,000, which is around USD 125,881. A dealer must also maintain certain amount of so called “total capital”.