April 1999

Adapted with permission from an article by Ledingham Chalmers/Jura Consultants, Baku, and provided courtesy of the U.S.-Azerbaijan Chamber of Commerce, Washington, D.C.

There are three main ways that a foreign investor may establish a direct trading presence within Azerbaijan: (1) by establishing a joint venture involving foreign and local participation, (2) by creating an Azerbaijani corporate entity that is wholly foreign owned, and (3) by establishing a branch office of a foreign legal entity. Under current legislation, these entities are treated differently in such areas as tax and currency regulations. Joint ventures and wholly foreign-owned legal entities incorporated in Azerbaijan are considered to be Azerbaijani legal entities, whereas representative offices and branch offices are considered to be "nonresident" legal entities on the basis that they are only involved in trading activities in Azerbaijan on behalf of a foreign company. However, according to the latest interpretation of the law "On Enterprises" by the Ministry of Justice, a representative office is not entitled to conduct trading activity.

Azeri Legal Entities as Vehicles for Investing

The joint venture or wholly foreign-owned Azeri legal entity may benefit the foreign investor by formalizing the relationship with an Azeri partner, thereby creating the opportunity to obtain certain licenses or consents. To register a joint venture, the participants must fulfill certain requirements including, inter alia, submitting the following documents to the Ministry of Justice (duly notarized and legalized where appropriate): the draft charter and founding agreement; an extract from the foreign participant's Company Register (such as a Certificate of Incorporation); a letter of good standing from the foreign participant's bank; and an application for registration, together with the fee (currently approximately US$200). A power of attorney may also be needed to allow local representatives to complete certain formalities in Azerbaijan on behalf of the foreign investor.

Both joint ventures and Azerbaijani entities that are wholly foreign owned may be structured in a number of ways, including a full partnership, a limited partnership, a limited liability company, a closed joint-stock company, or an open joint-stock company.

Joint-stock companies are governed by the law "On Joint- Stock Companies" and can either be closed or open, but must have a minimum of three founders. In a closed joint-stock company, prior to the founding meeting, 50 percent of the nominal value of stocks must be prepaid and the amount of the declared charter fund must be in place within a year of the date of the company's registration. Currently, the minimum charter capital, depending on circumstances, will vary between US$1,200 and US$2,400 (approximately). It should be noted, however, that it is not uncommon for foreign participants to be required to contribute US$5,000-20,000 to the charter fund to meet local requirements.

Opening a Branch/Representative Office

Representative offices may be established by obtaining the registration certificate from the Ministry of Justice. To register a representative office various documents need to be filed and certain formalities need to be completed:

-- An application letter stating basic details about the company, any business connections with Azerbaijani organizations, and details of commercial transactions entered into in Azerbaijan;
-- A notarized and legalized Certificate of Incorporation and Memorandum of Association (or equivalent);
-- A copy of the passport of the proposed director/representative together with three passport photographs;
-- A copy of the lease agreement or other document of title verifying the address of the branch/representative office;
-- The regulations of the branch/representative office setting out provisions as to the purpose and obligations of the branch/representative office and detailing the powers of the director/general representative;
-- A sample of the company seal;
-- The appropriate fee (currently US$2,000 for a representative office and about US$200 for a branch office); and
-- Any power of attorneys (as appropriate), duly legalized and notarized to enable any formalities in Azerbaijan to be undertaken by individuals on behalf of the foreign company in establishing and operating their office.

The branch/representative office must register with the Azerbaijani tax authorities within one month of the date of the issuance of the registration certificate by the Ministry of Justice. If the branch office is not registered before that date, then it is deemed that the office is concealing income for the purposes of tax avoidance and penalties will be incurred. Recently, it has been held that a representative office is not entitled to carry on economic activity and earn revenues therefrom.

For more information on the legal environment in Azerbaijan, contact the U.S.-Azerbaijan Chamber of Commerce in Washington, D.C., at tel: (202) 898-0900, fax: (202) 898-0015.

For more information on Azerbaijan, visit BISNIS Online at www.mac.doc.gov/bisnis/country/caucasus.htm#Azerbaijan.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)