To regain its prominence, the government of Azerbaijan has set up a legal framework to encourage Foreign Investment and transform the state-controlled economy into a market-oriented one.

PROTECTION OF FOREIGN INVESTMENTS

At present, a new constitution is being drafted, and it is expected to be approved by referendum in November 1995. This new constitution will embody the political and economic changes that have taken place in the country since independence. The Melli Mejlis (Parliament), by enacting a series of laws, has already taken steps toward economic reform.

One of the first legislative acts of the new republic in January 1992 was to approve the law "On the Protection of Foreign Investments," which guarantees equal treatment to Foreign and domestic investments, with certain exceptions, and provides full and unconditional legal protection to Foreign investments. The act stipulates that Foreign investors can do business in Azerbaijan through joint ventures with local partners, through companies owned entirely by foreigners, and through branch and representative offices. Participation by Foreign investors in certain areas is subject to the prior approval of the Cabinet of Ministers of Azerbaijan.

This law also guarantees to foreigners the right to transfer abroad their profits in Foreign currency, after the payment of relevant taxes and fees; the right to set prices and terms for their products and choose their suppliers; the right to export their goods and services without a license (for 100 percent foreign-owned companies and joint ventures at least 30 percent foreign-owned); and the right to import without license goods that are used in their own economic activities (for companies with foreign investments).

Disputes involving foreign investors may be decided by the courts of Azerbaijan or, upon agreement between the parties, by arbitration tribunals at any agreed-upon location. Azerbaijan ratified the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States in 1992.

PRIVATIZATION 

The Privatization Act was enacted in January 1993 to strengthen the private sector and create the basis for building a competitive and socially-oriented market economy. The Act emphasizes the  necessity of annual Privatization programs to carry out the law. The first such program, adopted in April 1994 for 1994 - 1995, divided state assets into five categories, (1) assets that would remain as state property (including defense industries, public utilities, and forest and water resources); (2) assets that would be privatized with the approval of Parliament (including oil refining, oil equipment, and electronics); (3) assets that could be privatized with the permission of the State Privatization Committee (including light industry, food processing, agro-industries); (4) assets that would be privatized with the consent of the local authorities (including enterprises owned by schools and hospitals); and (5) assets whose Privatization would be mandatory (including small enterprises, workshops, and service firms of all sizes).

Under this initial program, Privatization was to be completed in three stages. Small enterprises, engaged mostly in trading and services, were to be privatized in 1994-1995, followed by the Privatization of medium-sized firms, engaged mostly in manufacturing, in 1996-98. The Privatization of large enterprises was planned to begin in 1998 and take several years to complete. The sale of state property to non-state legal entities and natural persons was to take place at an auction, although direct sales to workers was permitted in some instances.

The 1995-1998 Privatization program of state properties was approved on July 21, 1995. Under this program, the state enterprises are to be sold at auctions for cash and/or vouchers which will be distributed to the entire adult population. The small and medium sized firms are to be sold to their present managers. Firms with more than 300 employees are to be converted into joint stock companies and their shares sold to the public for cash and voucher. The ratio of voucher to cash varies depending upon the size and activity of each enterprise. The participation of the workers is limited to 15 percent of total shares of the enterprise.

The State Property Committee, operating under the auspices of the President of Azerbaijan, is in charge of the implementation of the Privatization program. Under a proposal from this Committee, each citizen will receive four vouchers which can be sold to other citizens or foreigners. The vouchers will not be marked with a monetary value, but each will represent 1/32 millionth of the total state assets for sale.

Approximately 8,000 small firms will be sold to their present managers for cash. Large enterprises are to be converted into joint stock companies, and under the Committee's proposal, stock ownership will be allocated as follows: 50 percent to parties purchasing with vouchers, 25 percent to employees, and 25 percent retained in a state fund, with 10 percent of this eventually being sold on the world stock market. Foreigners may own a controlling interest in these privatized enterprises.

The list of enterprises to be privatized and the implementing regulations are expected to be announced in the near future. The issue as to whether land on which enterprises are located will be included in the sale of the enterprises is presently being debated. Privatization of agricultural and other lands are handled separately by the State Property Committee. Foreigners are not allowed to own agricultural lands. Oil and gas companies are presently state owned, but it is anticipated that they will be privatized at a later stage by conversion into joint stock companies.

FORMS OF DOING BUSINESS

The Enterprises Law enacted in July 1994 sets out the legal framework for commercial companies operating for-profit. Ownership may be state, collective, private or mixed. The possible legal forms are as follows: state enterprise, sole proprietor (family), general partnership, limited partnership, limited liability company, joint - stock company, and association of enterprises. Enterprises may establish subsidiaries, branches and representational offices. 

The forms of business most commonly used by Foreign investors in Azerbaijan at this time are either representative offices (over 100 in 1994) or joint ventures with a local partner (over 800 in 1994).

REPRESENTATIVE OFFICE 

A representative office is traditionally considered to be the "eyes and ears" of a Foreign company. It is not classified as a legal person, but is a locally registered presence of a Foreign legal entity.

In order to establish a representative office, a Foreign company must obtain a permit from the Ministry of Foreign Economic Affairs. The permits are issued for a period necessary to carry out the purpose of the office, generally not exceeding three years, but with a possibility of extension.

Currently, an application for permission to establish a representative office must be ac companied by a fee of U.S.$2,500 and the following documents, which must be notarized, legalized, and translated into Azeri:
+ charter or certificate of incorporation of a Foreign company;
+ by-laws of the representative office;
+ resolution or decision of the competent body in the Foreign company directing that the representative office be established;
+ a certification from a western bank verifying the creditworthiness of the Foreign company.

Branch offices and representative offices are referred to collectively as representative offices for the purposes of some legislation. A branch is, however, considered a legal person under the law of Azerbaijan, whereas a representative office is not. The documentation necessary for registering a branch of a Foreign company is similar to that required for representative offices, but the branch, instead of paying a fee, must present evidence from a bank in Azerbaijan that it has established a "charter fund" of at least five million Manat1 in Foreign currency.

JOINT STOCK COMPANY 

Both limited liability companies and joint stock companies are legal entities having shareholders whose liability is limited by the amount of their shares. The joint stock company, however, is a more complex structure governed by the Joint Stock Company Law enacted in July 1994; it maybe either private (closed) or public (open). A private company is defined as one where the stockholders cannot sell stocks to non-owners without the approval of the majority of the stockholders. In a public company, stocks can be freely traded by the shareholders, and the company can sell the stocks directly or through the services of banks or stock brokers.

The establishment of the company requires at least three natural or legal persons as founders. The minimum amount of capital re queried for forming a public joint stock company is 10 million manat, and for forming a private company is five million manat. Consideration for the shares may be paid in cash, in foreign currency, or in other property, tangible or intangible, such as buildings or the rights to use land or water. The company may issue common and preferred stock; the preferred stock may not exceed more than 10 percent of the total stock. Holders of preferred stock are not entitled to vote, unless the articles of association provide otherwise. The law permits stock certificates to be either registered or bearer. Natural persons can own registered stocks only. Transfer of registered stock must take place before a notary public.

A shareholder's liability is limited to the amount of the share.  The founding members, however, are personally liable for any act undertaken on behalf of the company before it is registered, and the founders remain personally liable after registration unless the company accepts the responsibility.

The general stockholders meeting is considered the highest executive body. A shareholder is entitled to vote at the general meeting, in person or by proxy, in accordance with the number of his or her stocks. The law guarantees certain rights for minority shareholders holding at least 10 percent of the stock of a company.

The managerial bodies consist of the supervisory board, management board, and auditing committee. Their members are elected by the shareholders in the general meeting.

The supervisory board, comprised of at least three members, oversees the activities of the management board. Its members may be either shareholders or outsiders, but cannot be officials of government bodies, representatives of subsidiaries or branches, management board members, attorneys or clients of the company,

The management board carries out the day-to-day activities of the company and executes the resolutions of the supervisory board and the general stockholders meeting. It consists of at least three members, either shareholders or outsiders.

The auditing committee supervises and reviews the financial activities of the company. Its members may not be stockholders or members of the supervisory board or of the management board. The law does not specify the number of members on the committee.

TAXES 

All legal entities and representative offices doing business in Azerbaijan are subject to profit taxes. The rate of the profit tax is usually 25 percent for representative offices and for joint ventures with greater than 30 percent foreign participation. Income from certain entertainment activities, such as casinos, arcades, video and cassette rentals, etc., is taxed at a high rate of 70 percent. A joint venture with 30 percent foreign participation operating in a mountainous region is subject to a 10 percent tax. The profit tax is 35 percent for joint ventures where foreign participation is less than 30 percent. It is presently unclear whether a wholly owned foreign entity, such as a joint - stock company, is subject to the 25 percent or 35 percent profit tax.

Other taxes include the value added tax (20 percent), excise tax (not applicable to exported goods), export tax on most goods, import duties (depending whether there is a most-favored nation treaty with a country), natural resources tax, road fund tax, and payroll taxes.

INTERNATIONAL TREATIES 

Azerbaijan joined the World Bank, the International Monetary Fund (IMF), and the European Bank for Reconstruction and Development in 1992. The Parliament of Azerbaijan ratified a bilateral treaty with the Overseas Private Investment Corporation in January 1995. On October 11,1995, Azerbaijan became the 167th member of the International Finance Corporation. Financing from the IFC will be available for the four sectors of agriculture, oil, banking and Privatization. Azerbaijan has requested GATT observer status.

The United States and Azerbaijan entered into a Bilateral Trade Agreement that went into effect in April 1995. The Agreement grants most favored nation status for the products of both countries, providing for non-discriminatory treatment for U.S. goods and services in Azerbaijan and for Azerbaijan products in the U.S. The Agreement also reaffirms commitments to international agreements and thereby provides strong protection to intellectual property rights. A draft Bilateral Investment Treaty and a Treaty for the Avoidance of Double Taxation of Income are pr>

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