Constitutional Court requires Supreme Court to abide by 1958 New York Convention on Arbitration

Azerbaijan’s Constitutional Court (“CC”) invalidated decision of the Supreme Court on refusal to recognize and enforce an arbitral award.  The arbitral award was issued by the Korean Arbitration Council.  The decision is an important step in enforcement of foreign arbitral awards in Azerbaijan.

Facts and Supreme Court Refusal

The South Korean corporation, POSCO Daewoo, signed the contract with Azerbaijani company, Grand Motors LLC, on the supply of certain construction related equipment.  In the contract, parties agreed to resolve their disputes via arbitration based on the arbitration rules of the Korean Arbitration Council.  The local company breached the contract and POSCO Daewoo ultimately took the matter to arbitration and obtained an award its own favor.  The award, in particular, required Grand Motors LLC to pay money damage to POSCO Daewoo.

POSCO Daewoo submitted the award to the Azerbaijani Supreme Court (“SC”) seeking to enforce it.  Azerbaijan’s Supreme Court is the authority in charge of recognition and enforcement of foreign arbitral awards.  The Supreme Court refused enforcement on the grounds that the defendant (Grand Motors LLC) was not given due notice of the arbitration proceedings.  It can be inferred from the CC’s decision that the SC did not give POSCO Daewoo an opportunity to rebut Grand Motor LLC’s argument.   According to the CC, the Supreme Court made its decision solely based on Grand Motor LLC’s contention it did not receive the notice of arbitration proceedings.

CC Decision and Significance

The Constitutional Court overturned decision of the Supreme Court on refusal to enforce the award issued by the Korean Arbitration Council.  The Constitutional Court noted that the SC failed to comply with the 1958 New York Convention on enforcement of arbitration awards and local laws, which contain rules substantially similar to those in the Convention.  In particular, under the Convention and Azerbaijan’s Civil Procedure Court, it is the obligation of the party against whom enforcement is sought to prove that any of the grounds for refusing the enforcement exists.  This implies that the any such contention must be duly considered and investigated by the court based on, among other things, the principle of equality of arms.

In essence, the decision is the message to the Supreme Court that enforcement of foreign arbitral awards must be taken seriously and enforced, subject to the Convention and the local regulations.

Müqavilə – Bizines münasibətlərinizə bir “struktur” və aydınlıq gətirir

Yerli Müştəri

Əzəmətli Plazaların birində ele o qədər də əzəmətli otaqda qonaq üçün divanın üzərinə oturub mən müştəriyə diqqətlə baxıram.  Ağlımdan çox sayda fikirlər keçir. 

1 ildir ki, mən müstəqil hüquq praktikasına başlamışdım.  Məqsədim daha çox yerli müştərilərə xarici standartlara uyğun hüquqi xidmətləri yerli qiymətlərlə göstərməkdir.  Çox keçmir ki, mən düşünməyə başlayıram – düşünürəm ki, bu bazarın strukturu ümumiyyətlə necədir?  Görəsən kiməsə bu “beynəlxalq standartlara uyğun hüquqi xidmətlər” lazımdır? 

Müştəri mənə yaxınlaşaraq deyir ki, ona bir müqavilə lazımdır.  Əlavə edir ki, o restoran biznesinə investisiya qoymaq istəyir – 200,000 manat qoyub 30% şərik kimi daxil olur.  Deyir ki, “yaxşı olardı bir müqavilə olsun”.

Müqavilənin Əhəmiyyəti – “Struktur” Funksiyası

Mən düşünürəm ki, “görərən restoran biznesindən müştəri nə gözləyir”.  Əksər yerli (xarici olmayan) müştərilər “müqavilə” dedikdə bu iki səbəblərdən biri barədə düşünürlər: (i) ya müqavilə formal sənəddir və formal məqsədlər üçün lazımdır.  Bu hallarda heç hüquqşünasa (ələlxüsus, yüksək ixtisaslı hüquqşünasa) ehtiyyac olmur, yaxud (ii) hər hansısa maraqlarını “qorumaq” üçün istifadə olunan sənəddir – yəni problem yaranan zaman məhkəmədə istifadə oluna biləcək sənəd.

Mən burada müqavilənin digər, bəlkədə çox vaxtlar daha vacib olan faydasında danışmaq istəyirəm.  Bir çox müqavilələr biznes münasibətlərinin – xüsusən də davam edən münasibətlərin – “strukturunu” müəyyən edir və tərəflər bu struktura uyğun olaraq fəaliyyət göstərirlər.  Əlbəttə, hər bir müqavilənin əhəmiyyəti onun hüquqi qüvvəyə malik olmasından çox asılıdır.  Əks halda tərəflər müqaviləyə daxil olmazlar.  Ancaq müqavilənin “struktur” əhəmiyyəti tərəflər üçün ayrıca olaraq mühüm əhəmiyyət kəsb edir. 

Restoran Biznesi və M-in Qarşılaşdığı Suallar

Restoran biznesinə investisiya yatırmaq istəyən müştəri düşünür ki, o 200,000 yatıraraq biznesdə 30% əldə edəcəkdir.  Ancaq bu 30% faiz ona nə verir?  Bu o deməkdirmi ki, əgər müştəri (şərti olaraq, “M” adlandıraq) restoran biznesi olan Rest MMC-də 30% əldə edirsə, ona hər ay və ya il 200,000 investisiyanın 30%-i ödənilməlidir?  Əlbəttə ki, xeyir.  O zaman M düşünməlidir ki, bu 200,000 əvəzində o, əslində nə əldə edir?  30% ona nə vəd edir və ya edə bilər? Beləliklə bu cür çoxsaylı suallar ortaya çıxır.  Biz qəliz biznes məsələlərindən agah olmayan bir sahibkardan danışırıq, ancaq bu cür məsələlər həmçinin təcrübəli sahibkarla arasında danışıqlarda da meydana çıxır.  Əksər bu cür suallar məhs müqavilənin (və ya müqavilədən əvvəl tərtib olunan əsas şərtlərin (İngiliscə: terms sheet), niyyət məktubunun və sair kimi sənədlərin) müzakirəsi zamanı meydana çıxır. 

Müştərinin (M-in) düşünməli olduğu bir çox məsələlər var.  Misal üçün, bəlkə o, bu 200,000 vəsaiti kapital şəklində deyil, borc şəklində versin.  O zaman M-in Rest MMC-dən aylıq (kvartallıq və ya illik və ya digər dövrü) sabit ödənişlər tələb etmək hüququ olar.  Bununla Rest MMC razı olmaya bilər, çünki bu zaman M bizneslə bağlı risklərin çox az hissəsini üzərinə götürmüş olur. 

Fərz edək ki, M investisiyanı kapital şəklində qoydu və “biznesdə 30% əldə etdi”.  Bu 30% Rest MMC-nin nizamnamə kapitalında paydır, yoxsa Rest MMC-nin gəlirlərindən paydır?  Əgər kapitaldan pay deyilsə, o zaman 200,000 Rest MMC-nin kapitalına qoyulmur, Rest MMC-yə verilir.  Burada vergi məsələlri yarana bilər.  Əgər 200,000 kapitaldırsa, o zaman digər məsələlərlə yanaşı investor olan M-ə ödənilməli olan gəlirin məbləğinin müəyyən edilməsi məsələsi ortaya çıxa bilər.

Fərz edək ki, M-in Rest MMC-nin illik gəlirlərindən 30% pay əldə etmək hüququ vardır.  Bu “gəlirlər” neçə hesablanır.  Burada “gəlir” dedikdə xalis gəlir nəzərdə tutulur (gəlirlər çıxılsın xərclər), yaxud ümumi gəlirlər (xərclər çıxılmadan gəlirlər).  Əgər xalis gəlirlər nəzərdə tutulursa, hansı xərclər çıxıla bilər və M necə nəzarət edə bilər ki, Rest MMC-nin sahibi (və ya direktoru) həddən artıq xərclər yükləməklə M-ə az məbləğin çatmasına çalışamayacaq? 

Yekun

Bu və ya digər məsələlər müqavilədə tənzimlənməlidir.  Mükəmməl tərtib edilmiş müqavilə mühüm məsələləri tənzimləyərək biznes münasibətlərini strukturunu müəyyən edir.  Tərəflər aydın bilirlər ki, onlar hansı vaxtda nə etməlidirlər və nəyə ümid edə bilər.  Bu baxımdan müqavilənin tərtib edilməsinin məqsədlərindən biri mübahisələrin həlli deyil, məhs mübahisələrin yaranmasının qarşısını almaqdır. 

Rashid Aliyev becomes member of Azerbaijan Bar Association

On July 19, 2018 a group of lawyers gathered in Baku Boulevard Hotel to take an oath.  They committed to protect constitutional rights and freedoms of their clients and abide by the laws and the Constitution of Azerbaijan.  It was the inauguration day of newly selected members of the Azerbaijani Bar Association.  Among those members was Rashid Aliyev, the Director of Remells Law Firm. 

Benefit to our Clients

Membership in the Bar Association allows us to represent our clients in court on civil, administrative as well as criminal matters.  We have a long term experience in representing companies and business in different court instances of Azerbaijan. 

About Bar Association 

Azerbaijan Bar Association is one of the key legal institutions in Azerbaijan charged with protecting rights of individuals and corporations alike, whether in or outside courtrooms.  The reputation of the Bar Association has been on the rise, since the election of its new membership back in 2017.  The recently elected management of the Association is taking measures to bring new members to the Association able to provide the legal services expected from one of the main legal institutions in the country. 

Congratulations to all the newly elected members of the Azerbaijani Bar Association and Good Luck to the Association!

We would be happy to serve our clients using the our membership status whenever our clients need us. 

 

 

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.

Setting Up Joint Ventures in Azerbaijan

Azerbaijani market is generally open for foreign businesses[1].  A foreign company wanting to enter Azerbaijani market does not have to partner with a local person.  If for business reasons the company needs 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 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 JV’s executive body – i.e., director or general manager or similar officer.  For instance, an LLC’s charter may require that a transaction above certain value be approved by the general meeting or supervisory council.  Most of these mechanisms would be included in the LLC’s charter, although there are number of contractual mechanisms that should be in a shareholders or similar agreement.

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%.  The burden of VAT falls on an 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

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.