Winter 1994 (2.4)
Doing Business in Azerbaijan
The Most Frequently Asked Questions
by Alum Bati (Ernst & Young)
How do you begin to set up business in Azerbaijan?
Many companies are beginning to ask the same question. Here are some of the most frequently asked questions compiled and answered by a representative of Ernst & Young, an international legal and accounting firm which makes it their business to advise companies about the new market possibilities in the former Soviet Republics including Azerbaijan.
In order to do business in Azerbaijan, must I have a joint venture partner?
No, a joint venture partner is not necessary although there may be fiscal and business advantages to having one.
What is the currency in Azerbaijan and is it stable?
The currency is the manat. Inflation is high, with the manat being linked to the ruble. At the beginning of 1994, the US dollar stood at about 380 manats but by mid-October, the manat had depreciated to approximately 2,100 manats to $1US.
What forms of doing business are permitted in Azerbaijan?
You may have (1) a joint venture (essentially local legal entity), (2) a wholly-owned Azeri subsidiary or (3) a representative office of foreign-registered company. Branch operations where the local branch conducts operations in its own name are permitted but the branch is essentially treated as a local subsidiary. A new company law has been passed by the Parliament, allowing the formation of companies whose liability is limited by shares. At the time of writing, this law had not been signed into effect by the President.
Are there any tax advantages of doing business in one form or another?
A representative office may not do business in its own name although it may act on behalf of its head office. It is subject to a corporate profits tax at 25% on its profits. A joint venture company is also taxed at 25% when foreign investment represents 30% or more of the total charter capital. A locally incorporated company is generally taxed at 35% although some forms of business (e.g., banks) are taxed at higher rates. Joint ventures engaged in "material production" also benefit from certain tax holidays and other types of relief.
In calculating taxable profit, are all "normal" deductions for expenses available?
No. There are some significant restrictions, for instance in deductibility of salaries and bank interests.
Is there a value-added tax (VAT)?
Yes. The rate of VAT is 20% and, as of September 1st, it applies to all imports (with a few exceptions such as food) as well as to the sale of goods and services in Azerbaijan. There are also import and export duties which vary according to the type of product involved.
Are expatriate employees subject to tax in Azerbaijan?
The basic rule is that if you are a resident in Azerbaijan for 183 days or more in a calendar year, you are subject to tax on your worldwide income. Most benefits, including tax reimbursements and home leave payments, are taxable in addition to salary but home pension fund contributions, car used for business purposes and accommodation paid for by the company are not taxable benefits.
What is the best way to hire local employees?
If you have time, you should advertise for local staff and undertake a careful interview and selection procedure. Ernst & Young is able to carry out an executive search function on your behalf.
Are there restrictions on the earning and export of currency?
Yes. There are detailed currency laws although not all aspects are enforced. A new draft currency law has been before the Parliament for some time. Basically, unless a special license is obtained, resident companies, including wholly foreign-owned subsidiaries, may only deal with other residents in local currency (the manat). A proportion of foreign currency earnings may have to be sold to the Common Currency Fund depending on the nature of business, etc.
Are office premises easy to obtain?
No. Purpose-built office accommodation is rare. There are some conversions of residential apartments available as offices but even those are hard to find.
What are communications like in Baku?
Problems occur from time to time (still quite frequently, as a matter of fact). It is only possible to make non-operator controlled international calls from certain exchanges (e.g. from phones with numbers beginning with "98"). Installing an international line will cost over US $2,000 (plus VAT). Cellular phones are available but are very costly to operate. E-mail is also available.
What sort of salaries can a foreign company expect to pay its local staff?
That will, of course, depend on the qualifications of the staff hired. A driver who provides his own car, petrol, etc., could expect US $12-18 per day (net of taxes and social security contributions). An English / Russian / Azeri-speaking secretary might expect a salary of US $50-150 per month depending on the experience, etc. A good quality interpreter would receive, perhaps, US $250 (net) per month. Ernst & Young published a "Salary Survey for Azerbaijan" in July this year and is expecting to update it in the near future based on the average salaries being paid by foreign companies. These salaries are well in excess of those paid by the local companies.
Alum Bati is representative Director of Ernst & Young in Baku. Their office is located at: Mardandov Qardashlar Street (formerly Gogol Street) 11, Apt. 32, Baku 370000. Tel: (99412) 98-33-85; 94-14-13; or Fax: (99412) 98-33-85; 98-41-14.
Ernst & Young is the largest firm of professional advisers in the CIS. The Baku office produces a regular Newsletter which is available free of charge to all clients. If you would like to be placed on the mailing list, please apply by fax.
From Azerbaijan International (2.4) Winter 1994.
© Azerbaijan International 1994. All rights reserved.