Update on the practice of authorized capital increase in Azerbaijan

 

Under the provisions of Article 90 of the Civil Code of the Republic of Azerbaijan, “…charter capital of a limited liability company may be increased only after its full payment, by increasing on the basis of the Company’s property pro-rata the value of the participants’ shares in the Charter capital and (or) by means of investing additional contributions and (or) at the expense of contributions made by newly accepted participants as specified in this Code and in the Charter of the company. An increase in the Charter capital of a limited liability company on the basis of the Company’s property shall be realized by decision of the General Meeting of the Company as specified in the Charter of the company. Such a decision may be taken only on the basis of the company’s accounting report data for the previous year. In case of increase in the Carter capital of the Company as specified in this Article, the asset value of all participants’ shares shall proportionally increase, without changing the amount of participants’ shares.”

In practice, based on similar cases, an increase of the company's shareholder capital on the basis of the company's property is considered to be equivalent to an increase of the shareholder capital with additional shares of the participant (founder), and an audit report is required by the registration authority. However, no such direct requirement is set by the laws. Caspian Legal Center has raised the issue before the upper tax authority arguing on the application of inapplicable provision and inadmissibility of analogy of norms to this case.  The higher tax authority approving this position has delivered a decision that an audit report is not required while increasing the shareholder capital on the basis of the enterprise's net profit (property).

Thus, the procedure for increasing the shareholder capital on the basis of the net profit for the previous financial year(s), i.e. the property of the entity should be distinguished from the increase of the shareholder capital via issuing additional shares by the shareholders. Articles 64.8-9 of the Civil Code (A contribution to the property of a business partnership or company may be made in money, securities, other assets or property rights, or other rights having a monetary value. A monetary evaluation of a contribution by a participant in a business company shall be carried out by agreement among the founders (participants) of the company and is subject to independent expert examination (audit)) is not applicable in such cases.