Azerbaijan: New Law Establishes Special Economic Zones

Last Updated: 22 March 2010
Article by Aykhan Asadov

Azerbaijan has promulgated a law that creates special economic zones (SEZs) where businesses may take advantage of preferential tax and customs regimes. Law 791-IIIQ is aimed at developing and promoting business and the economy in general by creating new production and service capacities under a special legal regime.

The law specifically seeks to promote the use of advanced technologies in Azerbaijan. (For prior coverage, see Doc 2009-8928 or 2009 WTD 75-7.)

Under the law, an SEZ is a section of Azerbaijani territory where businesses are governed by a special legal regime. The law defines a special legal regime as a regime that applies to residents of an SEZ to allow them to run their businesses on special terms.

The law establishes the framework of a special regime under which an SEZ can be established and operate.

Tax Regime

The law establishes a special tax regime for residents of SEZs. A simplified 0.5 percent tax rate applies to the proceeds of residents doing business in SEZs from the supply of goods, works, and services, as well as to out-of-sale proceeds; the tax must be reported and paid by the 20th of the month following each calendar quarter. Residents are exempt from all other Azerbaijani taxes except for the individual income tax of employees when it is withheld by employers.

If a zone resident's registration is terminated for failure to commence operations within a year of the contract with the SEZ operator, the resident's tax liabilities for that period are reinstated. All other issues of taxation and tax administration in SEZs are subject to Azerbaijani tax law.

Customs Regime

The law establishes a special customs regime for residents of SEZs. This regime does not apply to residents that export products produced or processed in an SEZ to other parts of the Republic of Azerbaijan.

The following rules apply to the importation and exportation of goods (not otherwise restricted under Azerbaijani law) under the special customs regime:

  • goods (except for excise goods) imported into an SEZ from outside Azerbaijan are not subject to the import duty or VAT;
  • goods imported to an SEZ from outside Azerbaijan are not subject to customs duties or taxes while being exported from the zone outside Azerbaijan;
  • goods produced or processed in an SEZ are not subject to customs duties or taxes while being exported outside Azerbaijan;
  • customs duties and taxes specified by relevant Azerbaijani law apply on exportation from the SEZ inside Azerbaijan of goods imported into the SEZ from outside Azerbaijan;
  • goods produced or processed in an SEZ are not subject to customs duties or taxes on their importation into Azerbaijan for repair, finishing works, exhibition of samples, and other similar purposes; and
  • goods are not subject to customs duties or taxes upon their importation or exportation between SEZs of the Republic of Azerbaijan.

No time limit is imposed on the storage of goods (except for low-value, rapidly wearing, and hazardous items) at an SEZ. Customs control is exercised at the boundaries of an SEZ; according to the law, this control is exercised in a simplified manner. Customs clearance and storage at customs warehouses are subject to fees specified by Azerbaijani customs law.

Establishment and Operation of SEZs

Under the presidential decree dated June 3, 2009 (On Approval of Law on Special Economic Zones), the Cabinet of Ministers and the Ministry of Economic Development must submit their proposals to the president regarding the establishment and locations of SEZs based on the country's priority of needs.

The establishment of a particular SEZ must be approved by the president based on a proposal from the Ministry of Economic Development; a decision on the establishment will specify the purposes of the establishment, objectives, the term of operation, and sources of funds of the zone.

An SEZ will be governed by its own administration and managed by an operator selected under a competitive tender. Tender rules are approved by the president.

SEZ residents may be individuals or entities registered under Azerbaijani law that have obtained registration certificates to carry out business in the SEZ.

To operate in an SEZ, individuals and legal entities must register with the administration of the zone and enter into a business contract with the operator of the zone. Entities wholly owned by the state cannot register as residents of an SEZ. A resident's failure to commence operations specified in the agreement with the zone operator within a year of the agreement will result in termination by the zone administration of the land lease agreement (if any), the resident's registration, and the operator's contract with the resident.

The following activities are restricted in SEZs: manufacturing alcohol and tobacco products; sale, maintenance, and production of goods restricted by law; mining; production and processing of precious metal, oil, oil products, and natural gas; and TV and radio broadcasting.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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