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Investment activity in Azerbaijan: Regulatory framework

Investment activity in Azerbaijan: Regulatory framework

Investment activity in Azerbaijan: Regulatory framework

25.06.2023

Introduction
In this article, I touch upon both local and international instruments that deal with the investment. Specifically, the main regulatory act applicable to the investment in Azerbaijan - the Law on Investment Activity, dated 22 June 2022 (the “Investment Law”) is summarized herein. Furthermore, bilateral investment treaties, as well as international multilateral treaties are generally discussed.   
 
Scope and definitions
The Investment Law sets out legal and economic grounds of investment activity and guarantees rights and interests of the investors. It applies to investment activities carried out by local and foreign investors in the territory of Azerbaijan.
Investment activities in the Alat Free Economic Zone (AFEZ) is regulated in accordance with the requirements of the Law on Alat Free Economic Zone, dated 18 May 2018.
Upon entry into force of the new Investment Law, the Law on Protection of Foreign Investment, dated 15 January 1992 and the previous Law on Investment Activity, dated 13 January 1995 ceased to have effect. However, in accordance with the new Investment Law, the more favorable conditions granted to investors based on the Law on Protection of Foreign Investment and the previous Law on Investment Activity when those laws were in effect, remain in force for a period of 10 (ten) years.
The Investment Law defines the “investment” as “funds, securities, other property, including property rights and other rights of monetary value, invested in objects of entrepreneurial activity for the purpose of obtaining income”.
In accordance with the Law, investor means local (a citizen/legal entity of Azerbaijan carrying out investment activities)and foreign investor (foreigners, stateless persons, foreign legal entities and their branches and representative offices, international organizations, as well as a foreign state) carrying out investment activities in the territory of Azerbaijan.
 
Main principles, goals and directions
The main principles related to the investment activities are: (a) inviolability of property; (b) legality; (c) protection and provision of human and civil rights and freedoms; (d) protection of confidential information.
The main goal of the state policy in this regard is to ensure sustainable economic development at the expense of local and foreign investments, to develop competitive production and service areas, and to apply new technologies and innovations in the economy.
 
The main directions of the state policy in relation thereto are the followings:
(a) formation of favorable investment environment, including strengthening of free competition environment;
(b) protection of investors' rights and legal interests, as well as investments;
(c) creating equal opportunities for investors;
(d) ensuring the stability of conditions of investment activity;
(e) privatization, restructuring and rehabilitation of the state property;
(f) supporting investment projects in priority areas of the economy;
(g) digitalization of services provided to investors and their provision on the basis of the "one-stop shop" principle.
 
Investment promotion measures
For promotion of investment, the following measures are implemented under the Investment Law:
(a) setting out concessions on tax and other state payments;
(b) providing loans on preferential terms;
(c) establishment of special economic zones, industrial parks and other regime zones;
(d) expansion of the public-private partnership mechanism;
(e) providing local and foreign investors with advice and information through online platforms about the investment potential of Azerbaijan, as well as normative legal acts regulating investment activities, investment projects and potential partners, and organization of investment related events;
(f) other investment promotion measures.
 
Priorities
Under the Investment Law, priority is given for the following investment projects:
(a) increasing the technological capacity of the economy aimed at the application and development of innovations;
(b) based on the application of environmentally friendly technologies, envisaging the improvement of the environment, efficient use of natural resources;
(c) supporting the development of a healthy lifestyle of the population;
(d) aimed at the development of social infrastructure and various sectors of the economy;
(e) requiring the formation of knowledge and skills in accordance with modern requirements;
(f) supporting the development of regions.
 
Forms of investment activities
Investment activity can be carried out in the following forms:
(a) establishment and reorganization of legal entities; (b) acquisition of shares in legal entities; (c) establishment of a branch and representative office of a foreign legal entity in Azerbaijan; (d) individual entrepreneurship; (e) entering into an agreement on the implementation of investment activities (the “Investment Agreement”); (f) acquisition of property, including property rights and other rights of monetary value; (g) other forms not prohibited by law.
 
Rights and duties of investors
The Investment Law grants the following rights to investors:
(a) freely determine the form of investment activity, the volume of investment, the field and form of entrepreneurial activity;
(b) freely determine sources of financing that are not prohibited by law;
(c) suspend or terminate the investment activity at any time, in accordance with the requirements of the Investment Law and the terms of the Investment Agreement;
(d) gain income from investment activities, goods produced, work performed and services provided, property, including property rights and other rights of monetary value;
(e) reinvest the income from investment activity;
(f) in relation to foreign investors, after payment of taxes and other state payments of income and other funds obtained therefrom, transfer to a foreign country in free currency or in other form in accordance with the requirements of the Law on Currency Regulation, dated 21 October 1994 and the Investment Agreement;
(g) participate in the privatization of the state property;
(h) obtain information from state authorities, local self-government bodies necessary for the implementation of investment activities and the disclosure of which is not prohibited by law;
(i) exercise other rights set out in the Investment Law and the Investment Agreement.
 
Investors have the following duties:
(a) carrying out the types of activities for which a license or permit is required in accordance with the Law on Licenses and Permits dated 15 March 2016;
(b) payment of statutory taxes and other mandatory payments in accordance with the laws in force at the time of the transactions;
(c) protecting the life and health of the population, the environment, historical and cultural monuments, compliance with mandatory requirements in the field of urban planning and construction, labor legislation, technical safety, safety of goods (works, services), fire and radiation safety, as well as state security;
(d) not to allow unfair competition, as well as not to damage the rights and interests of other persons protected by law;
(e) compliance with other duties set out in the Investment Law and the Investment Agreement.
It is prohibited to impose duties on investors that are not contemplated by the laws of Azerbaijan.
 
Guarantees under the Investment Law
Under the Investment Law, the State guarantees the protection of the rights and freedoms of investors as set out therein, and prohibits unreasonable and discriminatory treatment, intimidation, persecution and violence against investors and their investments.
Foreign investors and their investments are subject to a regime (national regime) no less favorable than the regime applied to local investors and their investments in similar situations.
A regime that is not less favorable than the regime applied to other foreign investors and their investments (the most favorable regime) in similar situations is applied to foreign investors and their investment.
The application of the national and the most favorable regimes does not affect the application of laws related to protection of the life and health of people, the environment, public order, as well as the protection of the state's security and economic interests in the event of an important threat, provided that such application is carried out without discrimination and prejudice.
 
Guarantees against nationalization and acquisition of investment by the State
Acquisition and nationalization of investment in the territory of Azerbaijan is not allowed without the consent of the investor, with the exception of acquisition of investment for state needs, as well as requisition as set out in the Civil Code.
In accordance with the Civil Code, in the event of natural disasters, technological accidents, epidemics and other emergency situations, by the decision of the relevant state authorities, the property can be acquired from the owner for the benefit of the society by payment of the value to the owner in the manner and under the conditions established by law (requisition).
No discrimination is allowed during the nationalization of the investment and acquisition by the State.
In exchange for nationalization and acquisition of investment by the State, compensation must be paid to investors in accordance with the Law on Acquisition of Land for State Needs, dated 20 April 2010. Such compensation must be equal to the fair market value of the investment at the immediately preceding time after the nationalization or acquisition by the State of the investment or if these are known to the public (whichever occurs sooner) and must be paid without delay in the freely convertible currency in relation to foreign investment, and for local investment, it is paid in the currency of the investment.
 
Guarantees regarding the transfer of investment income
Investment income is guaranteed to be freely transferred abroad out of Azerbaijan in free currency in accordance with the Law on Currency Regulation, dated 21 October 1994. Amounts freely transferred abroad include: (a) profits, dividends, interests, royalties and other income; (b)profit resulting from the full or partial sale or other alienation of the investment, or the full or partial termination of the investment activity; (c) compensation and payment for damages; (d) earnings of migrant workers in connection with the investment; (e) other payments not prohibited by the Investment Law.
 
Dispute resolution
In the absence of any other agreement between the parties, as well as after the exhaustion of the legal remedies provided for in the Civil Procedure Code of Azerbaijan, the foreign investor may submit the dispute related to the investment activity between the Republic of Azerbaijan and the foreign investor to an international arbitration.
If the bilateral international treaties on the promotion and mutual protection of investments signed between Azerbaijan and foreign countries sets out different rules for the settlement of disputes than those specified in the Investment Law, the rules established by the international agreement shall apply.
Awards of the international arbitration on disputes related to investment activity are recognized and enforced in accordance with the international treaties to which the Republic of Azerbaijan is a party and the Civil Procedure Code of Azerbaijan.
 
Bilateral and international treaties
Azerbaijan is a party to the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, known as the “ICSID Convention” and the member State of the International Centre for the Settlement of Investment Disputes (ICSID) as of 18 October 1992.
Azerbaijan is also a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (10 June 1958), also known as the “New York Convention” as of 29 February 2000.
In accordance with ICSID Database, Azerbaijan is a party to 44 bilateral investment treaties (BITs).
Azerbaijan entered into BIT with the following states: Türkiye (1994), Russian Federation (2014), Pakistan (1995), UK(1996), Georgia (1996), Germany (1995), Kazakhstan (1996), Ukraine (1997), Kyrgyz Republic (1997), Poland (1997), Italy (1997), France (1998), Iran (1996), Lebanon (1998), Moldova (1997), Austria (2000), Romania (2002), Bulgaria(2004), Saudi Arabia (2005), United Arab Emirates (2006), Switzerland (2006), Israel (2007), Tajikistan (2007). For the full list of the States please see the following link: https://icsid.worldbank.org/resources/databases/bilateral-investment-treaties
 
Investment promotion agency in Azerbaijan
The Export and Investment Promotion Agency of the Republic of Azerbaijan - AZPROMO is a public legal entity operating in the direction of export and investment promotion, providing a number of services to exporters and investors. The Agency operates under the Ministry of Economy of Azerbaijan. For further information about the Agency please see the following link: https://azpromo.az/en/page/haqqimizda/azpromo
 
 
About the author: Fuad Gashamov is a professional lawyer with over 13 years of experience in consulting industry. He mainly specializes in dispute resolution, real estate, contracts, regulatory, intellectual property and compliance. He is the founding partner at Legalize Law Firm. He is a member of the Bar Association since 2014 and also a member of the newly established Business Committee of the Bar Association. Fuad Gashamov is also a member of the Commission on Business Environment and International Ratings of the Republic of Azerbaijan “Enforcement of contracts, resolution of disputes, closure and bankruptcy of an enterprise, judicial system and rule of law”.
For more information about the author please see the following link: https://www.legalize.az/en/team/fuadgashamov