Investors in Karabakh to be encouraged by tax incentives Review by Caliber.Az

In a relatively short period of time, Azerbaijan has managed to deploy a wide range of construction work on the liberated lands, attracting an impressive number of contractors from friendly countries to lay roads, build airports, and restore energy facilities, utilities, and communications systems. The number of foreign and local companies, wishing to take part in investment projects in Karabakh and East-Zangezur economic regions, is rapidly growing, and it was proved once again by the scientific conference dedicated to the investment attractiveness of the liberated territories, which was held the day before in Shamakhi.

Unprecedented for Southern Caucasus and even for the vast Caspian region scales of "Great Karabakh construction" were supported by very impressive financing: for more than two years almost 6,5 billion manats were allocated from the budget for infrastructure and other works. This year, around 3 billion manats will be provided from the state budget for reconstruction work. The allocated sums are being actively utilized, and in addition to primary (road, energy, utilities, ICT) infrastructure, a little less than a third of state investments were directed to fixed capital - construction of residential, social buildings, industrial, agricultural and other production clusters, development of generation at hydropower plants, solar and wind facilities, etc.

State funding for the development of the Karabakh and East Zangazur economic regions will not diminish for quite some time, and these tranches are estimated at many billions of dollars. Consequently, for many years to come a major construction project in Karabakh will create ample opportunities for local and international construction contractors, suppliers of equipment and building materials, and consulting and design firms. It is not only about direct budgetary injections: the construction of industrial zones and agricultural parks has already started in the liberated territories in Aghdam, Zangilan, Jabrayil, and Fuzuli districts, and funds are invested in the formation of recreational potential in Shusha, Sugovushan, and Kalbajar. These business undertakings primarily involve local investors, and in the future, it is expected to attract foreign companies and donor structures. As a matter of fact, this process is already underway today: the total amount of private investment in Karabakh is close to 300 million manats as a result of reconstruction work.

Moreover, the number of potential projects sent to the Ministry of Economy by business representatives for participation in the development of Karabakh has already exceeded 1400, and almost one-third of the total number of applications comes from foreign companies. The leaders are the Turkish businessmen who are planning to develop the mineral resources of the Karabakh region, especially the gold and copper deposits, and also to develop the sphere of tourism, agricultural processing, manufacture of clothes and consumer goods, building materials, rendering construction services, and so on. Many applications were received from Kazakhstani companies wishing to implement business initiatives in Karabakh, there are a number of proposals from businessmen from Hungary, Uzbekistan, Great Britain, Israel, and Pakistan - in total, from 40 countries of the world.

"Work on 73 investment projects covering industry, agriculture, trade, and services is already being implemented in the liberated territories," Azerbaijani Deputy Economy Minister Sahib Alakbarov said at a scientific and practical conference on the investment attractiveness of the liberated areas.

Over time, private investment is expected to be the main source of the formation of agro-industrial clusters, tourism, transport, trade sectors, the area of renewable energy sources (RES), the IT sector, and start-up businesses. Thus, it's planned to invest only 50 million manats in the first phase of the Aghdam Industrial Park, with an increase of up to 100 million manats and more in the subsequent period. At the same time, it is expected financial inflow of more than 30 million manats to the Araz Valley Economic Zone, with subsequent multiple increases of investment flows. The readiness of foreign partners to participate in these and other projects is extremely important as it will enable them to realize all undertakings in the most transparent mode, with clear technical parameters and within set timeframes, and most importantly, to ensure the transfer of modern technologies. The participation of foreign investors is an important condition for attracting grants from international donor structures, technical and advisory assistance, and the use of venture capital.

The prospects for attracting investors and creating new jobs were also discussed at a scientific and practical conference in Shamakhi, organised with the joint participation of the presidential plenipotentiary in the liberated territories comprising the Karabakh economic region (except for the Shusha region), the Ministry of Economy and the Institute of Economics of the Ministry of Science and Education of Azerbaijan.

"By 2030, about 150,000 jobs are expected to be opened in the Karabakh economic region, mainly in industrial parks, in the agricultural and mining sectors, and the tourism sector," said Emin Huseynov, special representative of the head of state in the Karabakh economic region. He added that the expected number of jobs in the "Aghdam Industrial Park" will be 5 thousand, in agriculture from 15 to 17 thousand, in mining - from 1.5 to 2 thousand, in the tourism sector - about 1.5-2 thousand, and from 10 to 11.5 thousand jobs should be provided by small and medium businesses (SME).

According to him, the process of restoration and rehabilitation of the liberated territories can be divided into three stages. The first stage in the "Great Return" covers the period from 2022 to 2026, and it is expected that 66 thousand of our compatriots will return to their homes. The main objectives in the first phase are the reconstruction of two urban centres - Fuzuli and Aghdam and 32 villages, as well as the development of tourism in Hadrut, Sugovushan, and Tug. Equally important are plans to stimulate the opening of private businesses and the creation of new jobs in the second phase by 2030 and in the third phase by 2040.

All the above-mentioned plans to attract local and foreign investors are quite justified, and their implementation will be supported, inter alia, by creating attractive business conditions in the exempted areas, first of all for the residents of industrial-agrarian clusters. As elsewhere in Azerbaijan, residents of economic zones are granted significant preferences, in particular, they are exempted for 10 years from payment of income tax, property, and land taxes from the date of their registration, as well as VAT on imported machinery, technological equipment, and installations. At the same time, residents are exempt from customs duty on imported machinery, process equipment, and installations for seven years.

At the same time, by the decree of President Ilham Aliyev of December 10, 2022 "On some measures to accelerate economic development in the territories freed from occupation", in order to effectively use the rich resource and infrastructure potential of the Karabakh region, revive economic activity through public-private partnership and create a favorable business environment, additional incentives are provided for entrepreneurs involved in the formation of processing industry in the region and in the creation of a favorable business environment. In particular, by the decree of the head of state, residents of the territories freed from the occupation are exempted from income, property, land, and simplified tax for 10 years starting from January 1, 2023. This provision will also apply to non-sales income received by a resident due to his/her activities in the liberated territories. At the same time, starting from the beginning of this year and for the next 10 years, machinery, technological equipment, and installations by sectors of economic activity and commodity nomenclature as well as the import of raw materials and supplies by residents who are VAT payers in the exempted territories will be exempted from VAT. For this purpose, a separate approval of the list of sectors of economic activity and commodity nomenclature exempted from VAT is envisaged. In addition, the dividend income of shareholders of legal entities resident in the Karabakh region is also exempt from taxation for a period of 10 years. Given that the exempted areas have wide tourism potential, along with the general incentives provided for tourism, a portion of the VAT paid for lodging and accommodation services (excluding other ancillary services) provided by hotels and hotel-type facilities will be refunded to consumers. In general, the tax incentives are planned to cover all areas of the real sector - trade, services, manufacturing, construction sector, extractive industry, etc.