Transparency of the Regulatory System
Azerbaijan’s central government is the primary source of regulations relevant to foreign businesses. Azerbaijan’s regulatory system has improved in recent years, although enforcement is inconsistent, and decision-making remains opaque. Private sector associations do not play a significant role in regulatory processes. Draft legislation is neither routinely made available for public comment nor usually involves a public consultation process. The government has more regularly engaged business organizations, such as the American Chamber of Commerce in Azerbaijan (AmCham), and consulting firms on various draft laws. The website of Azerbaijan’s National Parliament, http://meclis.gov.az/ lists all the country’s laws, but only in the Azerbaijani language.
Legal entities in Azerbaijan must adhere to the International Financial Reporting Standards (IFRS). These are only obligatory for large companies. Medium-sized companies can choose between reporting based on IFRS or IFRS-SME standards, which are specially designed for large and medium enterprises. Small and micro enterprises can choose between reporting based on IFRS, IFRS-SME, or simplified accounting procedures established by the Finance Ministry.
Several U.S. companies with operations and investments in Azerbaijan previously reported they had been subjected to repeated tax audits, requests for prepayment of taxes, and court-imposed fines for violations of the tax code. These allegations have markedly decreased since 2017.
On October 19, 2015, Azerbaijan suspended inspections of entrepreneurs for two years, but inspections still may occur if a complaint is lodged. This suspension was subsequently extended through January 1, 2022. Food and pharmaceutical products are not subject to this suspension order and are inspected for quality and safety.
The government has also simplified its licensing regime. All licenses are now issued with indefinite validity through ASAN service centers and must be issued within 10 days of application. The Economy Ministry also reduced the number of activities requiring a license from 60 to 32. Over the 2020 calendar year, the Economy Ministry continued work to improve the operation of the “Licenses and Permits” portal and the integration of information systems into ASAN systems. In 2020, 358 electronic licenses were issued to entrepreneurs through the portal. 1,790 electronic licenses have been issued from the launch of the portal on March 1, 2018 to January 1, 2021.
International Regulatory Considerations
Azerbaijan has held observer status at the World Trade Organization (WTO) since 1997 but has not made significant progress toward joining the WTO for the past several years. A working party on Azerbaijan’s succession to the WTO was established on July 16, 1997 and Azerbaijan began negotiations with WTO members in 2004. The WTO Secretariat reports Azerbaijan is less than a quarter of the way to full membership. In 2016, Azerbaijan imposed higher tariffs on a number of imported goods, including agricultural products, to promote domestic production and reduce imports. In February 2020, Azerbaijani President Ilham Aliyev made public remarks outlining Azerbaijan’s “cautious” approach to the WTO, saying that “the time [had] not come” for Azerbaijan’s membership. Currently, Azerbaijan is negotiating bilateral market access with 19 economies.
Legal System and Judicial Independence
Azerbaijan’s legal system is based on civil law. Disputes or disagreements arising between foreign investors and enterprises with foreign investment, Azerbaijani state bodies and/or enterprises, and other Azerbaijani legal entities, are to be settled in the Azerbaijani court system or, upon agreement between the parties, in a court of arbitration, including international arbitration bodies. The judiciary consists of the Constitutional Court of the Republic of Azerbaijan, the Supreme Court of the Republic of Azerbaijan, the appellate courts of the Republic of Azerbaijan, trial courts, and other specialized courts. Trial court judgments may be appealed in appellate courts and the judgments of appellate courts can be appealed in the Supreme Court. The Supreme Court is the highest court in the country. Under the Civil Procedure Code of Azerbaijan, appellate court judgments are published within three days of issuance or within ten days in exceptional circumstances. The Constitutional Court has the authority to review laws and court judgments for compliance with the constitution.
Businesses report problems with the reliability and independence of judicial processes in Azerbaijan. While the government promotes foreign investment and the law guarantees national treatment, in practice investment disputes can arise when a foreign investor or trader’s success threatens well-connected or favored local interests. According to Freedom House’s 2020 flagship report, Azerbaijan’s court system is “subservient to the executive.” The U.S. business community has complained about inconsistent application of regulations and non-transparent decision-making.
Laws and Regulations on Foreign Direct Investment
Foreign investment in Azerbaijan is regulated by a number of international treaties and agreements, as well as domestic legislation. These include the Bilateral Investment Treaty (BIT) between the United States and Azerbaijan, the Azerbaijan-European Commission Cooperation Agreement, the Law on Protection of Foreign Investment, the Law on Investment Activity, the Law on Investment Funds, the Law on Privatization of State Property, the Second Program for Privatization of State Property, and sector-specific legislation. Azerbaijani law permits foreign direct investment in any activity in which a national investor may also invest, unless otherwise prohibited (see “Limits on Foreign Control and Right to Private Ownership and Establishment” for further information).
A January 2018 Presidential decree called for drafting a new law on investment activities to conform to international standards. The decree also established mechanisms to protect investor rights and regulate damages, including lost profit caused to investors. The details of the proposed new law have not been publicized as of April 2021.
Competition and Anti-Trust Laws
The State Service for Antimonopoly Policy and Consumer Protection under the Economy Ministry is responsible for implementing competition-related policy. The law on Antimonopoly Activity was amended in April 2016 to introduce regulations on price fixing and other anti-competitive behavior. Parliament began revising a new version of the Competition Code in late 2014, but it has not yet been adopted. Azerbaijan’s antimonopoly legislation does not constrain the size or scope of the handful of large holding companies that dominate the non-oil economy.
Expropriation and Compensation
The Law on the Protection of Foreign Investments forbids nationalization and requisition of foreign investment, except under certain circumstances. Nationalization of property can occur when authorized by parliamentary resolution, although there have been no known cases of official nationalization or requisition against foreign firms in Azerbaijan. By a decision of the Cabinet of Ministers, requisition is possible in the event of natural disaster, an epidemic, or other extraordinary situation. In the event of nationalization or requisition, foreign investors are legally entitled to prompt, effective, and adequate compensation. Amendments made to Azerbaijan’s Constitution in September 2016 enabled authorities to expropriate private property when necessary for social justice and effective use of land. According to Freedom House’s 2020 report, “[property] rights and free choice of residence are affected by government-backed development projects that often entail forced evictions, unlawful expropriations, and demolitions with little or no notice.” The Azerbaijani government has not shown any pattern of discriminating against U.S. persons by way of direct expropriations.
ICSID Convention and New York Convention
Azerbaijan is a member of the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID convention) as well as the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. The Supreme Court of Azerbaijan is responsible for recognizing and enforcing arbitral awards rendered pursuant to the Conventions. For the time being, as a method of resolving disputes in Azerbaijan, international arbitration is unpopular and underdeveloped. Domestic parties still prefer litigation as the main method of dispute settlement. Arbitration practice in Azerbaijan is limited to the recognition of foreign arbitral awards by the Supreme Court and their enforcement by the Ministry of Justice. Although there is an Azerbaijan International Commercial Arbitration Court, at present its activity is limited. Azerbaijan adopted a Law on Mediation on March 29, 2019 which requires attendance at an initial mediation session before bringing an action concerning family, labor, and business disputes. New laws amending the Civil Procedural Code and the Law on Courts and Judges were published in July 2019. Per the amendments, administrative-economic courts charged with administrative and economic disputes are divided into administrative courts and commercial courts. The newly established commercial courts are authorized to hear all commercial disputes and some other disputes affecting entrepreneurial activities. Legal experts anticipate commercial courts and administrative courts will grow to specialize respectively in commercial matters and administrative disputes, with such specialization increasing the quality of justice.
Investor-State Dispute Settlement
Azerbaijan is party to the European Convention on Foreign Commercial Arbitration dated April 21, 1961. The Bilateral Investment Treaty (BIT) between the United States and Azerbaijan, which went into force in 2001, provides U.S. investors recourse to settle any investment dispute using the ICSID convention. Azerbaijan has been a party to three ICSID cases, two of which (Barmek v. Azerbaijan and Fondel Metal Participations and B.V. v. Azerbaijan) were settled and one of which (Azpetrol v. Azerbaijan) was decided in favor of the State. Thus far, the ICSID has not issued arbitral awards against the government of Azerbaijan. Over the past 10 years, the U.S. Embassy in Baku has been notified of three investment dispute cases regarding U.S. citizens. None of these cases, however, have been resolved.
International Commercial Arbitration and Foreign Courts
International arbitration in Azerbaijan is regulated by the Law on International Commercial Arbitration, based on the UNCITRAL model law. Parties may select arbitrators of any nationality, the language of the proceedings, the national law to be applied, and the arbitration procedure to be used. In cases in which parties did not stipulate the terms of the proceedings, the Supreme Court of the Republic of Azerbaijan will resolve the omission. In 1999 Azerbaijan acceded to the New York Convention on the enforcement of foreign arbitral awards. Azerbaijan also passed a Law “On International Arbitration.” Accession to the New York Convention has greatly increased the utility of overseas arbitrations, while the Law “On International Arbitration” provides for international arbitrations with the place of arbitration in Baku. This law aimed to resolve difficulties in instances where it is impractical or inadvisable to arbitrate abroad (for example, for reasons of cost, language, or law). However, as no procedural mechanism has been established in Azerbaijan for the enforcement of a local arbitral award, arbitration proceedings inside Azerbaijan are fraught with difficulties. Though both the Law “On International Arbitration” and the New York Convention have been in force in Azerbaijan for several years, foreign arbitration is not necessarily effective and attempts to enforce foreign arbitral awards have been largely untested.
Azerbaijan’s Bankruptcy Law applies only to legal entities and entrepreneurs, not to private individuals. Either a debtor facing insolvency or any creditor may initiate bankruptcy proceedings. In general, the legislation focuses on liquidation procedures. The bankruptcy law in Azerbaijan is underdeveloped, which restricts private sector economic development by deterring entrepreneurship. Amendments to Azerbaijan’s bankruptcy law adopted in 2017 extended the obligations of bankruptcy administrators and defined new rights for creditors. In the World Bank’s “Doing Business” report’s section on resolving insolvency, Azerbaijan’s ranking decreased from 45 in 2019 to 47 in 2020 out of 190 countries.