Legal updates: An up-to-the-minute guide to developments in the legislation of the Republic of Azerbaijan

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1 June 2018 An up-to-the-minute guide to developments in the legislation of the Republic of Azerbaijan Legal updates: In this issue, we would like to bring to your attention a brief overview of the recent amendments to the legislation concerning the following: Amendments to the Law on Accounting; The Law on Alat Free Economic Zone; Liability for violation of requirements on unemployment insurance. Amendments to the Law on Accounting On 3 June 2018, the Law on Amendments to the Law on Accounting (hereinafter, the Amendments ) was published. The Amendments introduce significant changes to accounting practice in Azerbaijan and create a basis for further regulatory framework to be established by competent authorities. We would like to draw your attention to notable provisions established by the Amendments. It is worth to mention that the Amendments are mainly focused on changes in applicable accounting standards, specifically, gradual transition to application of International Financial Reporting Standards (hereinafter, IFRS ) by all entities, requirements with respect to certification of accountants and state control over accounting. Besides, the Amendments introduce a number of significant definitions and procedures. Changes in applicable accounting standards According to the Amendments, the following accounting standards will be applied: IFRS to be used by public interest entities and public legal entities (mandatory), and large and medium entrepreneurs (optional); IFRS for Small and Medium Entrepreneurs to be used by large and medium entrepreneurs, medical and educational institutions, if their charters enable engaging in entrepreneurial activities (mandatory), as well as by micro and small entrepreneurs (optional); IFRS for Public Sector to be used by medical and educational institutions, if their charters do not enable engaging in entrepreneurial activities, budget organizations and municipals (mandatory). That said, the Amendments replace National Accounting Standards (hereinafter, NAS ) and simplified accounting rules for small entrepreneurs with IFRS and/or bookkeeping rules for micro and small entrepreneurs. International standards envisaged under the Law will be applied from the date of their official publication in Azerbaijani by the Ministry of

2 Finance. Upon first publication of official texts of IFRS in Azerbaijani, the Ministry of Finance will annul NAS and respective accounting rules. According to the Decree of the President on application of the Amendments, official publication of IFRS for Public Sector in Azerbaijani is expected by 30 December 2018, while IFRS for Small and Medium Entrepreneurs should be published by 30 June By that time, entrepreneurs are entitled to continue with previously applicable NAS and accounting rules or may opt to apply IFRS approved by respective international organization. Introduction of Certified Accountant concept The Amendments introduce a new concept of certified accountant, defined as a person who successfully passes state accounting examination, holds a professional accountant certificate and membership in organization of certified accountants. Requirement to employ a Certified Accountant Based on the Amendments, the following entities are required to have certified accountants at their chief accountant position: legal entities with the controlling share of the state; public interest entities, except for listed legal entities; large entrepreneurs; budget organizations; public legal entities publishing their annual or consolidated accounting reports. Besides, under the Amendments, external accounting services providers, i.e. consulting firms engaged by the above entities should have at least two certified accountants employed. Grant of Certified Accountant Certificate To obtain a certified accountant certificate, accountants should pass the state exam on accounting arranged by the State Examination Center. The certificate will be valid for the period of 5 years (to be retaken in the last year of its validity period). Upon receipt of the certificate (on the same accounting standard) for two times, the certificate is granted for a lifetime. Detailed rules on respective examination will be further elaborated in a separate document to be approved by the Cabinet of Ministers. State control over accounting The Amendments also establish rules for state control over accounting. The state control over accounting procedures, including requirement to employ a certified accountant as a chief accountant will be carried out by the Ministry of Taxes (Ministry of Finance for budget organizations) during the state financial control measures and tax audits.

3 Meanwhile, the Financial Market Supervisory Authority will be in charge for state control over accounting procedures of credit organizations, insurance companies, investment funds and their managers, as well as licensed participants of securities market. However, no detailed procedures of such control are determined for now. The Law on Alat Free Economic Zone The Law on Alat Free Economic Zone was published on 5 June 2018 (hereinafter, the Law ). The Law governs legal regime for operations, development and management of Alat Free Economic Zone (the FEZ ). Under the Law, an authorized body entrusted with governance of the FEZ will be established. This authorized body will be in charge for adopting mandatory internal regulations of the FEZ with respect to a number of issues, such as tax, customs, labor, migration as well as operations of legal entities incorporated in the FEZ. Tax and customs exemptions Based on the Law, FEZ resident individuals, legal entities incorporated in the FEZ and their employees will be exempt from all taxes in connection with their FEZ activities. Moreover, no import customs duties and taxes will be charged with respect to goods, works and services imported to the FEZ. The Law entered into force on 5 June However, certain provisions will enter into force once the respective internal regulations of the FEZ are adopted by an authorized body. Liability for violation of requirements on unemployment insurance As we delivered in previous issues, the Law on Unemployment Insurance was published on 9 August The Law became effective on 1 January 2018 and until recent time there were no sanctions envisaged for violation of the said Law. With that said, on 16 May 2018 the Laws amending the Code of Administrative Offences and the Criminal Code were published. Amendments to the Code of Administrative Offences Prescribing penalties for evasion from payments of unemployment insurance The liability for evasion from payments of unemployment insurance contributions was incorporated to the Article prescribing penalties for evasion from payments of taxes and mandatory social insurance contributions. As such, evasion from payment of unemployment insurance in a small amount* is subject to fine from 30% to 70% of the evaded amount.

4 * Note: The words "in a small amount" mean an amount not exceeding twenty thousand manats. Introduction of a new article on violation of the Law on Unemployment Insurance Violation of the legislation on unemployment insurance by an insurer (the employer), i.e.: Not registering as an insurer; Not insuring employees from unemployment; Not paying insurance contributions to the state insurer in the manner, amount and timeframe provided by the Law on Unemployment Insurance; Not informing the state insurer on employee s profession, occupation and salary within 5 days from the date of notifying the employee on termination of employment agreement due to redundancy; Failure to submit information (either electronically or hard copy) being basis for calculation and payment of insurance contributions and determining of insurance payment; Not informing the state insurer on reorganization or liquidation of the insurer in cases specified by the Civil Code of the Republic of Azerbaijan; Failure to properly record and report to the state insurer the procedures on calculation and payment of insurance contributions and failure to maintain the documents and information being basis for insurance payments. results in the following penalties: individuals in the amount of one hundred manats; officials in the amount of two hundred manats; legal entities in the amount of four hundred manats. Moreover, failure to inform the state insurer about certain circumstances which caused the change or termination of insurance payments by the insured will trigger fine in the amount of damage (income) caused as a result of this administrative violation. Amendments to the Criminal Code The liability for evasion from payments of unemployment insurance contributions was incorporated to the Article prescribing penalties for evasion from payments of taxes and mandatory social insurance contributions. As such, evasion from payment of unemployment insurance contributions in significant amount** will be subject to fine from twice to four times of the amount of damage, caused as a result of the crime or correctional works for up to two years or imprisonment for up to three years, with deprivation of right to hold certain positions or engage in certain activities for up to three years or without it.

5 **Note: The words significant amount mean an amount exceeding twenty thousand manats, but not more than one hundred thousand manats. EY Assurance Tax Transactions Advisory Contacts We hope that you will find this overview helpful. For more detailed information, please contact the following specialists: Arzu Hajiyeva Partner, Tax & Law Zaur Gurbanov Senior Manager, Tax & Law Ulvi Yusifov Senior Manager, Tax & Law Ilya Murzinov Head of Law, Tax & Law About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY works together with companies across the CIS and assists them in realizing their business goals. 4,500 professionals work at 20 CIS offices (in Moscow, St. Petersburg, Novosibirsk, Kazan, Togliatti, Vladivostok, Yuzhno- Sakhalinsk, Almaty, Astana, Bishkek, Baku, Kyiv, Tashkent, Tbilisi, Minsk and other locations). EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young (CIS) B.V. All Rights Reserved. Contacts This publication has been carefully prepared, but it necessarily contains information in summary form and is therefore intended for general guidance only, and is not intended to be a substitute for detailed research or the exercise of professional judgment. EY can accept no responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate adviser. Almaty +7 (727) Astana +7 (7172) Baku +994 (12) Kazan +7 (843) Kyiv +380 (44) Minsk +375 (17) Moscow +7 (495) St. Petersburg +7 (812) Tashkent +998 (71) Tbilisi +995 (32)