With the signature of "the Contract of the Century" on September 20, 1994, the oil and gas industry of Azerbaijan entered into a new phase. Led by the national leader of the Azerbaijani people, Heydar Aliyev, the Production Sharing Agreement on the development of the Azeri-Chirag-Guneshli fields was signed with 11 international oil companies representing 7 different countries. The agreement laid down the foundational framework of modern Azerbaijan, securing its socio-economic development for decades to come. More than $US146 billion has been attracted as foreign direct investment since 1995, which has been contributing to the continuous development, economic growth, energy security, and political stability of Azerbaijan. This has created a friendly environment for investors.
This year marks the 100th birthday anniversary of the National Leader Heydar Aliyev, and the President of the Republic of Azerbaijan, Mr. Ilham Aliyev, signed an order declaring 2023 the "Year of Heydar Aliyev" in the country.
Azerbaijan’s economy has been on a steady upward trajectory since 2005. It has positioned itself as a strategic transportation hub between Europe and Asia. The economy grew 6.3 times between 2004 and 2021. During the same period, strategic foreign exchange reserves grew 28.4 times.
At the same time, the Alat Free Economic Zone (AFEZ) was created by the Decree of the President of the Republic of Azerbaijan dated May 22, 2020.
And now it is time to share the vision for AFEZ, the strategic intent in developing the free zone, the type of investors it will attract, the rationale for choosing this location, and the economic benefits that will flow from this for investors, the country, and the people of Azerbaijan.
AFEZ is being established in the vicinity of the Baku International Sea Trade Port. This strategic geographic location will serve as a regional investment hub and boost competitiveness in the East-West and North-South international transport corridors. It will intensify local and foreign investment in the country’s non-oil sector.
Strategic intent
It is time to turn the concept of AFEZ into reality. To do this, the Alat Free Economic Zone Authority (AFEZ Authority) will focus on and meet the needs of investors by delivering a world-class place to do business:
• with a strategic geographic location next to global transport corridors;
• using multimodal transport connections to create a sustainable regional advantage based on a regulatory, operating, and business environment that is investor-friendly.
Most important of all is the free zone’s investor-centric mindset and approach.
The AFEZ Authority will be selective and careful in its application of this approach to investors. At the same time, it will select and meet investor needs in a way which adds value for the economy and the people of Azerbaijan. This means that AFEZ will serve the needs of national and foreign investors who will:
- engage in high-value-added and export-oriented manufacturing and internationally traded services, using innovative technologies and approaches to work in accordance with the best international standards;
- generate additional value to the non-oil sectors of the economy.
To ensure this vision is brought to reality, the President of the Republic of Azerbaijan has given full backing to the development of AFEZ as a world-class investment location. The task of planning, developing, and managing AFEZ has been entrusted to the AFEZ Authority, which has been established for this purpose.
Legal basis for AFEZ
The legal framework for the development, operation, and governance of AFEZ is based on the Law of the Republic of Azerbaijan on the Alat Free Economic Zone (AFEZ Law), adopted by the Parliament and signed by the President of Azerbaijan as a prevailing law of the Republic of Azerbaijan, and internal regulations of AFEZ issued by the AFEZ Authority; these internal regulations are an integral part of AFEZ legislation. The Law of the Republic of Azerbaijan on the Alat Free Economic Zone declares that AFEZ legislation, which consists of the AFEZ Law and internal regulations, takes precedence over base economy legislation.
The AFEZ legislation has been prepared from the perspective of potential investors and best international practices.
To clearly demonstrate the precedence of AFEZ legislation over base economy legislation and to exclude the possibility of any conflicts, misunderstandings, or contradictions in the interpretation of the provisions of AFEZ legislation and base economy legislation, relevant amendments were made and adopted by the country’s Parliament in the constitutional law on normative-legal acts, in tax, customs, licensing, labor, dispute resolution, and other (more than 80) laws of the Republic of Azerbaijan, and these amendments clearly acknowledge that AFEZ legislation takes precedence over those laws of the base economy.
In addition to that, the AFEZ Law clearly declares that base economy authorities:
• shall not have any jurisdiction in the AFEZ and
• shall not have any power to regulate or oversee the activities of the AFEZ Authority or AFEZ Legal Entities (i.e., businesses established by investors) and the owners, creditors, and employees of these legal entities.
In short, the legislation of the base economy of Azerbaijan is not valid in AFEZ and for subjects of AFEZ (of course, except for criminal law and anti-money-laundering law).
Internal regulations, developed and approved by the AFEZ Authority, are an integral part of AFEZ legislation; the main purpose of these internal regulations is to create the best possible business environment for its investors.
There is a set of "fit-for-purpose" regulations, which will guide day-to-day activities in AFEZ in compliance with both policy goals and the AFEZ legislation.
Target clients
As already stated, the AFEZ Authority will be selective and careful in its approach to investors and will attract businesses engaged in high-value-added and export-oriented manufacturing and internationally traded services, using innovative technologies and approaches to work in accordance with the best international standards.
The master plan for AFEZ has also been designed to allow the easy movement of people and goods to and from AFEZ. The main entrance and exit points will use smart technology to allow efficient customs control of people and goods.
In summary, while most of the investment, export, and employment will be generated by AFEZ legal entities, the success of AFEZ will come from a planned mix of foreign and local investors and people, all combining to deliver an investor-friendly and value-added business location.
Benefits for investors
The business-friendly environment and access to large international markets available from AFEZ’s multimodal location create real value for investors. In addition, in line with international benchmarks, the AFEZ Authority will offer a package of fiscal and non-fiscal incentives to businesses established in AFEZ:
Tax exemption
One of the key benefits is the absence of any tax on a business in AFEZ. A qualified business in AFEZ is not required to pay a value-added tax, withholding tax, or any other corporate taxes. Employees will be exempted from personal income tax if the monthly salary does not exceed 8000 manat – approximately 4700$ (or $4,700). Social security payments for foreign skilled personnel are optional and for local personnel are obligatory. The import of any products or services by AFEZ legal entities from a foreign country to the AFEZ and the export of any products and services by AFEZ legal entities from the AFEZ to a foreign country are exempt from customs duties and taxes, including value-added taxes.
No restriction on foreign ownership
There is no restriction on foreign ownership of AFEZ legal entities. A foreign parent company can own 100% of the shares in the AFEZ legal entity. A foreign company can successfully carry on business without a requirement for a local partner.
Additional benefits
• trade-facilitation-based customs regime;
• investor property is immune from nationalization or other restrictions;
• no restrictions on foreign currency or profit repatriation;
• voluntary participation in the State Social Protection Fund for foreign employees;
• ease of access to visas for foreign nationals;
• an on-site "one-stop-shop" business center for appraisal and licensing, permitting, etc. (without any base economy authorities or agencies involvement);
• an industrial training center;
• an independent regulatory authority;
• independent dispute resolution procedures in accordance with the best international standards;
• internal regulations in accordance with the best international standards;
• full investor protection;
• full protection of intellectual property rights.
Continuing investor support
These incentives will also be available to support the subsequent expansion and growth of its clients’ businesses into the future. The success of AFEZ will arise not only from the attraction of new investors, but also from a consistent programme of engagement and aftercare with companies after they locate at AFEZ. So, as what has been said earlier: the AFEZ Authority is investor-centric in its approach. That is a core principle for the AFEZ Authority, from the most junior to the most senior staff member and all in between. A client of AFEZ is a client for life.
Access to skilled labour
Azerbaijan’s energy, light and heavy manufacturing industries have helped to create an army of individuals with professional skills and competencies. Further, Azerbaijan’s educational system and, generally, its business environment have encouraged attaining the level of education required for any work condition. This labour force, committed to investors' business needs, is part of the incentive package.
In summary, the combination of AFEZ fiscal incentives, trade facilitation measures, industrial skills development opportunities, and a business-friendly operating environment will provide companies from around the world with a cost-competitive and strategic location for serving regional and international markets.
Benefits for the people of Azerbaijan
AFEZ also provides an opportunity for the people of Azerbaijan. Indeed, anything that is done in AFEZ is really done for the benefit of the entire country of Azerbaijan and its population.
Firstly, AFEZ intends to create jobs for thousands of citizens of Azerbaijan. The number of new jobs is expected to multiply every year. But not just any jobs — the jobs that pay well and allow people to work and improve in a business environment that encourages innovation and new management styles.
There are plans for industrial training facilities on-site at AFEZ. These facilities will train local personnel and prepare them for new challenges. In the meantime, work will be carried out with vocational and higher education training institutions in the rest of Azerbaijan to ensure that they are producing the skilled workforce needed by AFEZ investors. This will enable the creation and provision of potential and existing clients with an active database of current and available skills.
This approach will ensure that citizens of Azerbaijan who are active in AFEZ gain the training and valuable experience necessary to be successful in internationally competitive businesses.
Investor-friendly property solutions
In addition to business-friendly services and incentives, AFEZ will provide to investors and their employees a modern and "fit-for-purpose" environment and property solutions.
AFEZ will initially occupy a total site area of approximately 850 ha, spread over three zones. Zone 1 (206 ha), Zone 2 (433 ha), and Zone 3 (211 ha) are in the vicinity of the Baku International Sea Trade Port, adjacent to internationally connected railway and highway lines.
The development strategy being implemented by the AFEZ Authority is to build out AFEZ infrastructure and facilities in phases. The first phase of development covers the initial 60-ha (Phase 1) area of FEZ 1, which was constructed on a high-profile site adjacent to the highway, railway, and the Baku International Sea Trade Port. Phase 1 includes five distinct components:
• the Customs Plaza and main entrance to the AFEZ;
• the AFEZ Authority Building, and one-stop-shop business center;
• advance office accommodation for investors;
• ready-to-use plots for investors to lease;
• utility services center.
The physical development program is on schedule. In addition, to meet the needs of the free economic zone's customers in logistics and transportation services, there will be two centers established: one on the territory of 50,000 square meters for goods transported by road and the second on the territory of 160,000 square meters for goods transported by rail.
Bringing positive experience from the oil and gas industry to AFEZ
Azerbaijan’s approach to its oil and gas industry is a testament to how promises given to investors are kept.
For over 25 years, they have provided solid protection to investors and their investments in oil and gas projects. This principle has never been violated and has stood the test of time. This approach is proof that Azerbaijan has previously created a favorable regime for investors and does not violate its obligations.
This principle and practice from the oil and gas industry will be brought to AFEZ.
Concluding remarks
AFEZ has two goals, both of which are crucial.
First, the best possible business environment will be created for clients, so that they have all they need to successfully establish and develop their businesses in AFEZ; at the same time, AFEZ will support the expansion and growth of its clients' businesses into the future.
Secondly, the AFEZ Authority wants to demonstrate to the people of Azerbaijan what the transition to an internationally competitive and knowledge-based economy means in practice, to support and assist its entrepreneurs and business entities to learn and practice a new business culture and new technologies, and to generate innovative enterprises to create real value for the economy and the people of Azerbaijan.
AFEZ will do its best to deliver value to investors, and there are no doubts that investors selected by the management staff will deliver value to the economy and the people of Azerbaijan.