No tax jurisdiction on the shores of Caspian Sea – Alyat Free Trade Zone

On June 4, 2018 the Azerbaijani President signed into the law important piece of legislation – the Law On Alyat Economic ZoneThis is a unique law, at least as far as Azerbaijan’s legal system is concerned.  Under the law all businesses in the Zone are exempt from taxes and state duties (including import duties).  The administration of the Zone will be setting forth its own rules on, among other things, employment, migration as well as dispute resolution, which will include commercial arbitration.  The intention is to create a place with minimal government intervention and maximum flexibility and protection for businesses.  Read more blow for more information on what Alyat Free Zone has to offer.

Alyat Free Zone

The Free Zone is based off of the port located at the shores of Caspian Sea, just few miles away from Azerbaijan’s capital city – Baku.  Alyat’s proximity to Baku and the fact it is located at the Caspian Sea is meant to attract attention and foreign investment. More information can be obtained from this website: http://portofbaku.com/en/FTZ/

Economic Benefits

The new law provides for exemption from taxes and all government duties, which are applicable in the main territory of Azerbaijan. Therefore, companies operating in Alyat will be exempt from profit or income tax, VAT and other taxes, as well as customs duties upon import of their products into the Zone’s territory.  Apart from corporate taxes, the law also exempts companies and individuals from employment related taxes.  Consequently, Alyat is meant to become a no tax jurisdiction. 

Investor Protection

Article 24 of the law provides for protection of investor assets.  In particular, the law prohibits nationalization or confiscation of investor assets.  It allows for free exchange and transfer of foreign currencies.  Investors are free to transfer their profit or any funds from outside Alyat’s to a foreign country.

Dispute Resolution

Perhaps one of the key elements in the law is the part on dispute resolution in Alyat’s territory.  Under the law, there are two types of dispute resolution bodies: (i) Arbitration center and (ii) other dispute resolution agencies, which may be set up by Alyat’s administration.  All decisions issued by Alyat’s dispute resolution bodies must be executed not just in the Zone, but also in the entire territory of Azerbaijan.  Alyat’s administration is yet to adopt rules more specifically governing dispute resolution in its territory.

Azerbaijan’s Central Bank approves new rules on transfer of currency

One of the most important pieces of regulation that Azerbaijan’s Central Bank approves is the currency rules (the “Rules”) which define the procedure for, among other things, transferring of foreign currency outside Azerbaijan.

Among the new elements is the requirement that legal persons transfer foreign currency only through their bank accounts. Only physical persons may transfer foreign currency without opening of a bank account. The Rules set the maximum limit for such personal transfers, which must not exceed USD 1000 (or its equivalent in other currency) within any day, and USD 10,000 within a calendar year.

The Rules allow the transfer of a foreign currency outside Azerbaijan as follows:

(i) as payment for imported goods or services. The payer must provide a bank with certain documents, such as a contract and, in case of sale of goods, customs declaration evidencing import of the products. In case of advance payments, the payer must submit to a bank the relevant documents within 270 days from the date of the payment;

(ii) payments in connection with re-export;

(iii) transferring back advance payments for obligations under import agreements, which have not been performed;

(iv) transfer by local legal persons of funds to their representative, branch offices or subsidiaries or affiliate companies. In case of such transfers, the transferor (i.e., the legal person making the transfer) must disclose the purpose of the transfer;

(v) payment of interests, principal and other obligations under loans or similar instruments issued by foreign institutions;

(vi) payment of court, notarial and arbitration expenses, state duties, pensions, allowances etc;

(vii) payment of conference fees and fees for subscribing to publications, tuition fees and medical expenses,

(viii) payment of royalties, including franchise fees;

(ix) distribution of dividends;

(x) repatriation of foreign investment and transfer of revenues from foreign investments. In case of repatriation, a transferor must provide the transferring bank with evidence of foreign investment in Azerbaijan. In case of transfer revenues from foreign investment, the transferor must provide evidence that it has complied with its tax obligations, and if it benefits from any tax exemptions, the document evidencing such exemptions.

(xi) transfers in connection with (a) contribution of capital to a share of foreign entity, (b) purchase of securities and (c) investment in real estate outside Azerbaijan.

The Rules also allow for certain other transfers, such as transfer of foreign currency by physical persons to their relatives outside Azerbaijan.

While we have listed documentary requirements for some of the transfers or payments, nearly all them must have some documentary basis, such as agreement and/or invoice evidencing the purpose of such transfers or payments.

 

 

Azerbaijani President Approves Rules on Internal and External Indebtedness of State Owned Entities

On December 28, 2016 the Azerbaijani President approved the Rules On Internal and External Indebtedness of State Owned Entities (the “Rules”). They were published on December 29, 2016. The Rules contain two key concepts: (i) the Azerbaijani Cabinet of Ministers sets the upper limit debt that may be taken out state owned entities and (ii) the Ministry of Finance must consent to debt arrangements of state owned entities.

For the purposes of the Rules a “state owned entity” means any entity (i) in which the state owns, either directly or indirectly, 51% or more shares, (ii) non-commercial entities and public legal entities and (iii) legal persons, including non-commercial legal persons and public legal persons, in which the entities listed in (i)-(ii) above own 51% or more shares.  The term indebtedness is defined broadly and includes loans, guarantees, debt undertakings under securities and leasing transactions and other borrowings.

The Rules do not apply to those debt arrangement of state owned entities, which are secured by a government guarantee. This is governed under Presidential Decree No. 368, dated February 13, 2006.

State owned entities must submit to the Ministry of Finance their estimate and plans for taking debt anytime before June 1 of each calendar year. The Ministry of Finance must analyze the information and, with the concurrence of the Azerbaijani Ministry for Economy, submit to the Azerbaijani Cabinet of Ministers investment projects to be financed with debt.  Presumably the Ministry must also submit its proposal on the upper limit of total debt. By September 15 of a calendar year the Cabinet of Ministers must, with the concurrence of the Azerbaijani President, set the upper limit of debt that may be taken out by state owned entities during the next calendar year. It is not clear from the Rules whether the “upper limit” means upper limit for each state owned entity, or upper limit of debt proposed to be taken by all state entities.

Before entering into a debt arrangement a state owned entity must obtain consent of the Ministry of Finance for that debt arrangement. In order to obtain this consent, the relevant entity must submit to the Ministry a set of documents, such as information on the project to be financed with the debt, feasibility study, positive opinion of the Azerbaijani Ministry for Economy for investment projects, initial revenue and expenses report for the year in which the application is made, its audited financial statements. The Ministry of Finance must review the documents and provide its opinion within 30 days. The Ministry may request opinion of other government agencies, in which case the timeline for issue of opinion can be extended for around 10 days.

If the Ministry of Finance believes that the proposed debt arrangement overly burdens the state owned entity and puts it under risk of default, the Ministry may refuse its consent. There are other grounds on which the Ministry may refuse its consent, such as providing false information by the state owned entity wishing to obtain the consent. In all other cases, the Ministry must issue its consent.