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 Legal Environment Legal Environment and Legislation Update Daniel Matthews Partner, Baker & McKenzie Introduction As an independent nation for only ten years, Azerbaijan is still in political and economic transition. The Constitution of the Republic of Azerbaijan (the "Constitution"), ratified by popular referendum six years ago in November 1995, contains a western system of checks and balances aimed at securing separation of powers among the legislative, executive and judiciary branches of the government. The Constitution provides for a unicameral parliament (the National Assembly or Milli Majlis), a president and a prime minister.
Azeri Folk
Dancers
The
President is the head of the executive branch of the government
and, with the consent of the National Assembly, appoints the Prime
Minister. In contrast, the President appoints members of the Cabinet
of Ministers without the consent of the legislature.
Judicial
power in Azerbaijan is exercised by a court system whose independence
is guaranteed by the Constitution. The Constitutional Court decides
issues relating to the form and substance of laws and other acts
of authorized agencies, international treaties concluded on behalf
of the Republic of Azerbaijan, court decisions and the banning of
political parties. It also resolves disputes among the branches
of government. The Supreme Court, in contrast, is the court of last
resort for all civil, criminal, administrative and other matters. Foreign Investment in Azerbaijan
Since independence in 1991, Azerbaijan’s economic
policy has focused on attracting foreign capital into Azerbaijan.
To this end, Azerbaijan has been implementing a legal regime to
encourage foreign investment in various industrial sectors. Azerbaijan
has already succeeded in attracting major international oil companies
to explore and develop its natural resources1. With the
development of the oil industry, Azerbaijan has been able to attract
additional foreign capital into the development of transportation2,
communications3 and information technology services. Foreign investment in Azerbaijan is regulated by
a number of legislative acts, including the Law On Protection
of Foreign Investments dated January 15, 1992 (“Foreign Investment
Law”), the Law On Investment Activity dated January 13, 1995
(the “Investment Activity Law”), the Law On Privatization of
State Property and the Second Program for Privatization of
State Property in the Republic of Azerbaijan, adopted on August
10, 2000 (the “Second Privatization Program”), as well as laws that
regulate separate sectors of the Azerbaijani economy. Under Azerbaijani law, foreign investors may engage in any investment
activity not prohibited by law. Pursuant to the Foreign Investment
Law, foreign investment may be through: Under the Foreign Investment Law, foreign investments are guaranteed: a “not-less-favored” regime under which foreign investors have at least the same rights as local investors and may be granted certain preferential rights; the right to repatriate profits, revenues and other amounts received in connection with investments, provided that all applicable Azerbaijani taxes have been paid; a ten-year moratorium on the application of any subsequent law adversely affecting an investment. The moratorium has the force of law, automatically enforceable and binding upon all Azerbaijani state agencies. Laws, which govern the general investment climate, defense, national security, public order, morality, public health and environmental protection and legislation affecting credits and finances, however, fall outside the scope of the moratorium. Under the later-enacted Investment Activity Law, however, subsequent legislation (including laws on defense, national security, public order and tax) adversely affecting investment terms do not apply to an investor for the term of an investment contract; that property may only be nationalized by a resolution of the National Assembly under exceptional circumstances to prevent harm to the people and damage to the state interests. Requisition of property is possible only under circumstances of natural disaster, epidemics, and other extraordinary situations by a decision of the Cabinet of Ministers. In both cases, foreign investors are entitled to compensation which shall be “prompt, effective and adequate”; and free access to international arbitration upon the agreement of the parties where arbitration is not otherwise prohibited by law. Rulings of foreign courts are generally unenforceable in Azerbaijan. In certain sectors of the Azerbaijani economy, such as energy, incentives are available to foreign investors and enterprises with foreign investment. These incentives may be granted by law or by agreements with the government. Bilateral investment treaties may establish a more favorable investment climate for certain investors and provide additional guarantees. Under Azerbaijani law, international treaties prevail over local legislation except for the Constitution and acts adopted by referendum. Azerbaijan has so far concluded 17 bilateral investment treaties with countries, such as the U.S., the U.K., Germany, France, Austria, Italy, and Turkey, as well as a number of multilateral foreign investment treaties. Business Organizations Azerbaijani law authorizes both foreign and domestic
individuals and entities to participate in Azerbaijani legal entities.
An Azerbaijani legal entity may be established in the following
legal forms provided in the Civil Code and the Law On
Enterprises: TA general partnership is a legal entity comprised of at least two individuals and/or legal entities. An Azerbaijani citizen may participate in a general partnership only if registered as an entrepreneur. Additionally, Azerbaijani citizens and legal entities may participate in only one general partnership. As in most jurisdictions, general partners are jointly and severally liable for the partnership’s liabilities. To the extent that the partnership does not have sufficient assets to cover its obligations, the partners are then personally liable for its obligations.
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A limited partnership has one or more general partners
and one or more limited partners. The general partners are personally
liable for the partnership’s obligations. A limited partner’s liability
is limited to the extent of its contribution. An individual may
be a general partner in only one limited partnership. Similarly,
a partner of the general partnership may not participate as a general
partner in a limited partnership. To secure a limited liability structure, i.e.,
without recourse to the founders, an Azerbaijani legal entity must
be created as a either a joint stock company (JSC) or a limited
liability company (LLC). These entities that provide their shareholders/members
with liability limited to the extent of their shares. An LLC established
by a physical person, however, may not participate as the only founder
in another LLC. A JSC may be created by a single shareholder provided
that shareholder has purchased all outstanding shares of the company.
A JSC may be either “open” or “closed”. Closed
JSCs with more than 50 shareholders must be reorganized into open
JSCs. Shares of a closed JSC and participatory interests of an LLC
are distributed only among the founders and transferred to third
parties only upon failure of shareholders/members to exercise their
right of first refusal and upon failure of the company to purchase
its shares for fair market value. Shares of an open JSC are publicly
traded and may be alienated by shareholders to third parties without
restriction. Shares in a JSC are securities, which must be registered
with the State Securities Committee before issuance. Shares may
be either common or preferred shares. Preferred shares may not exceed
25% of the charter capital. The charter capital of a JSC is divided into a
fixed number of shares of a stated par value. For a closed JSC,
the minimum amount of the charter capital is 10 million AZ manats
(approximately US $2,200 calculated at 4,600 AZ manats to US $1).
The minimum capitalization for an open JSC is 20 million AZ manats. An additional liability company (ALC) is an entity
established by one or more individuals or legal entities contributing
their shares to the charter capital. The legal structure of an ALC
is similar to an LLC, except that the participants of an ALC may
assume liability for the company in excess of their contributions
as regulated by the charter The charter capital of any Azerbaijani legal entity,
irrespective of its business form, must be fully paid on or before
the date of its state registration. If the value of the net assets
of an Azerbaijani legal entity is less than the amount of the charter
capital at the end of the Azerbaijani legal entity’s second fiscal
year, the charter capital must be decreased with the decrease registered
with the Ministry of Justice. All Azerbaijan legal entities are subject to state
registration with several state authorities including the Ministry
of Justice, the tax authorities and the social insurance, employment
and other special purpose mandatory funds A foreign legal entity may establish a representative
office or branch in Azerbaijan. Representative offices and branches
are not considered legal entities under Azerbaijani law but, rather,
are considered an extension of a foreign legal entity. Both a representative
office and a branch may carry out all or some of the functions of
the entity and may engage in revenue-generating activities. They
both operate on the basis of regulations (similar to a charter)
approved by their parent legal entities. Real
Estate
Azerbaijani law recognizes private land ownership
as well as non-possessory interests in land. Legal title to land
and structures may be held by any legal entity without regard to
its business form4. Azerbaijani law does, however, impose
certain restrictions on land ownership by foreign individuals and
entities, which may not directly hold title to land. As a general
rule, land may only be leased to foreign entities5. Foreigners
may own land only if it was transferred to them by bequest, gift
or enterprise mortgage and must be disposed of within one year of
such transfer. If a foreigner has not voluntarily disposed of an
interest in land and structures, the executive and municipal authorities
may order a forced sale6.
Azerbaijani law, however, does not prohibit foreign
investors from acquiring ownership interests in land and structures
through creation of joint ventures with local capital or the establishment
of wholly foreign-owned companies in Azerbaijan, as these are viewed
as Azerbaijani legal entities.
An ownership interest in land exclusive of buildings
and other structures not acquired through privatization must be
registered with the State Land Committee (SLC), which is responsible
for issuing title certificates and recording information in the
State Land Registrars. If land is owned by the municipality, the
SLC may issue an ownership/lease certificate pursuant to a decision
of the municipality to grant an ownership or a possessory interest
in the land7. An ownership interest in land acquired
through privatization, as well as any interest in immovable property,
is subject to registration with the Ministry of Economic Development.
Overview
of the Old Town
Banking and Finance
Banking in Azerbaijan is regulated by the Law On
Banks and Banking8 and the Law On the National Bank9.
Banks and credit organizations are covered by the general notion
“credit organization.” While banks are allowed to carry out all
types of banking operations, credit organizations are still subject
to the NBA’s regulations and may conduct only certain types of banking
operations. Azerbaijan has a two-tiered banking system, with the
NBA comprising the first tier and the remaining banks comprising
the second tier. Currently, there are approximately 60 second-tier
banks registered in Azerbaijan, including about a dozen banks with
foreign participation. The number of registered second-tier banks
is expected to decrease as banks consolidate in order to meet the
minimum capitalization requirements imposed by the NBA.
All banking activities,
including the acceptance of deposits, maintenance of correspondent
accounts, cash operations, money transfers, and lending are subject
to licensing. Only the NBA has the right to grant licenses for banking
activity. The NBA establishes the prudential requirements (including
minimum capital and the ratio between monetary and non-monetary portions
of a bank’s capital) and reserve fund requirements.
Under the 1996 Lawi On Banks and Banking Activities
in Azerbaijan, the NBA is also authorized to establish a cap on
foreign participation in Azerbaijan’s banking industry. Pursuant
to this law, the NBA limited the aggregate amount of foreign participation
in the banking sector at 30%10. This was a considerable
liberalization compared with prior banking law, which had limited
foreign participation in any Azerbaijani bank to 49%.
With further liberalization in mind, Azerbaijan
created a regulatory framework for the activities of credit unions
and other types of credit organizations as envisioned by Law On
Banks and Banking. A non-banking credit organization is an entity
licensed by the NBA to conduct only certain types of banking operations.
On Amendments
to Rule No. 1 “On Licensing of Credit Institutions” (the “Rules”):
(1) non-banking credit organizations created in Azerbaijan by international
or foreign credit institutions and sponsored by such international
or foreign institutions or their respective governments to finance
small and medium businesses in the developing countries; and (2)
non-banking credit organizations created in Azerbaijan by international
financial institutions such as IFC and EBRD are qualified to hold
a limited banking license. Banks and non-banking organizations are
restricted from engaging directly in insurance, commercial and manufacturing
activities. Currency Control
Under the existing foreign currency regulatory
regime, residents11 and non-residents12 are
entitled to open bank accounts both in manats, the national
currency, and in foreign currency with the authorized banks of Azerbaijan.
The 1994 Law On Currency Regulation subjects residents’ capital
operations13 to a licensing requirement. To conduct such
capital operations, residents must first obtain a license from the
National Bank of Azerbaijan Both residents and non-residents are allowed to
make payments in foreign currency within the country in many instances,
such as for payments to representative offices, branches, and affiliates
of both residents and non-residents for imported goods and services,
for the creation of joint ventures and other legal entities in Azerbaijan;
for the purchase of foreign currencies, for the repayment of loans
issued in foreign currency, and for the payment of dividends. Although
offshore payments made under various import contracts and loan repayments
non-residents are not automatically deemed to be capital operations,
such payments in certain cases may require the prior consent of
the National Bank.
Payment
System
Prior to enactment of the new Civil Code of Azerbaijan,
the paper-based Azerbaijani payment system was a major contributing
factor to the slowness and complexity of inter-bank transfers. The
demand for electronic banking services has grown continuously since
the establishment of a commercial banking system in Azerbaijan.
This demand was first recognized in the law, however, only upon
the adoption of Azerbaijan’s new Civil Code which for the first
time authorized electronic banking and electronic signatures. That
initial legislative step has set the stage for electronic banking,
which previously had been limited to the introduction of automated
teller machines. Fortunately, the NBA has utilized this new legislative
basis to bring innovative technologies to Azerbaijan’s banking sector.
NBA's first public step was to adopt the Rules
On the Inter-bank Transfers by Banking Institutions in Azerbaijan
(the “Rule”) on February 2, 2001. Under the Rules, bank account
holders are authorized to issue payment instructions to their banks
either physically on paper or electronically. For electronic fund
transfer, the National Bank of Azerbaijan has now established: the National Inter-bank Settlement System (AZIPS);
and
the AZIPS National Settlement Center
Each commercial bank in Azerbaijan may now offer
electronic banking services to its customers only if it is a member
of AZIPS. AZIPS-based electronic payments in Azerbaijan are made
through the nearly universally used SWIFT system and processed through
the AZIPS National Settlement Center. This center processes electronic
inter-bank fund transfers by debiting the corresponding account
of the issuing bank and crediting the account of the beneficiary
bank in the amount of the electronic inter-bank fund transfers. Conclusion
As
Azerbaijan seeks to attract much needed foreign investment, it has
made progress in addressing issues arising from the legal regime.
Recently adopted laws and the pending regulations will help to improve
the investment climate and help to promote the country’s long-standing
foreign investment policy. FOOTNOTES
 
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