FORMS OF BUSINESS ORGANIZATION IN KAZAKHSTAN

Branches and Representative Offices

Kazakhstan law defines ‘structural subdivision’ as a separate subdivision of a legal entity which is located outside the place of its incorporation.  Structural subdivisions are not deemed as legal entities.

The most common forms of structural subdivision are branches and representative offices, while branches are more versatile due to their wider authority.

Subsidiary

A subsidiary is a legal entity whose decisions can be determined by another legal entity by virtue of a majority interest in its authorised capital or an agreement between such entities or otherwise.

In Kazakhstan, subsidiaries are incorporated, as a general rule, in the form of a limited liability partnership (LLP) or a joint stock company (JSC).

Joint Stock Company (JSC)

A joint stock company is a legal entity issuing shares to raise funds for operation of its business.  

Shareholders’ risks are limited to the value of their shares.  Shareholders are liable for the obligations of the JSC only in exceptional cases, e.g. when it is established that the shareholders’ actions have caused the bankruptcy of the JSC.

Shareholders of a JSC have the right to freely dispose of their shares without consent of other shareholders.

The minimum charter capital requirement to a joint stock company is about 350,000 US dollars.

Voting in general shareholders’ meetings is conducted in accordance with the “one share – one vote” rule, unless otherwise provided for by the JSC Law.

All JSCs must have the following corporate bodies:

• general meeting of shareholders / sole shareholder (the supreme body);
• board of directors (the body responsible for general strategic decision-making); and
• sole or collective executive body (the body responsible for day-to-day management of the JSC operations).

JSCs are allowed to set up other corporate bodies in compliance with Kazakhstan regulatory legal acts and/or JSC’s constituent documents.

The incorporation and operation of a JSC in Kazakhstan is subject to a number of requirements and regulations established by Kazakhstan primary and secondary legislation.  A JSC must file a wide variety of reports and notices on essential actions and/or events (financial statements, shares placement reports, corporate event notices, etc.).  JSC’s financial statements are subject to external audit which is prerequisite to the payment of dividends to shareholders.

Limited Liability Partnership (LLP)

A limited liability partnership (LLP) is the most common legal form of a legal entity in Kazakhstan covering over 95% of all legal entities in the country.  Registration formalities, corporate matters and transaction approval procedures applicable to LLP are much more straightforward than those applicable to JSC.  

This form of business organisation is quite flexible and is not subject to numerous control and monitoring procedures.  We recommend incorporating an LLP whenever Kazakhstan law does not strictly require incorporating a JSC (as is the case with banks, insurance companies, etc.) or there is no need to raise capital through the issuance of shares.

An LLP is a legal entity with limited liability founded by one or more private individuals (natural persons) or legal entities (corporations) whose authorised capital (“charter capital”) is divided into participation interests (shares).  

Interests of all members in the charter capital and, accordingly, their interests in the asset value of the LLP (interests in assets) are proportionate to their contributions to the charter capital, unless otherwise provided for by the LLP’s constituent documents.

An LLP may have a zero charter capital if its revenues throughout a year do not exceed 2,100,000 US dollars and the annual average number of its employees is below 100.  When an LLP exceeds the thresholds, its minimum charter capital requirement is rather moderate, i.e. about 700 US dollars.

When selling an interest in the LLP’s charter capital to a third party, the LLP members must comply with the other members’ right of first refusal (pre-emption right) to acquire their interests.  This requirement does not apply to any gratuitous disposal of an interest.  LLP’s constituent documents may restrict or condition the disposal of interests in the LLP to non-members of such LLP.

LLP and its members are individually and severally liable for their own obligations.  The general rule is that LLP is not liable for obligations of its members, while members are liable for the LLP’s obligations to the extent of their contributions to the LLP’s charter capital.  Members of LLP who have only made partial contributions to the charter capital are jointly liable for its obligations to the extent of the unpaid part of each member’s contribution.

All LLPs must have the following corporate bodies:

• general meeting of members / sole member (the supreme body); and
• sole and/or collective executive body (the body responsible for day-to-day management of the LLP operations).

The Charter (or Articles of Association) of an LLP may provide for a supervisory board and/or audit commission (auditor).

LLPs are not prohibited from setting up other corporate bodies (e.g. board of directors); however, due to the specifics of Kazakhstan law, the activities of such bodies might be hindered and the decisions made thereby might be challenged.

By general rule, LLPs are not obliged to publish their financial statements (such obligation may arise only when it is explicitly provided by Kazakhstan law).  

Considering the foregoing, as well as our experience and common practice, we can infer that, in the vast majority of cases when a company decides to start its business in Kazakhstan, it sets up a subsidiary in the form of an LLP or opens its structural subdivision (i.e. a branch or representative office) depending on the company’s objectives.

It is worth noting that LLPs and structural subdivisions have similar startup advantages by a number of criteria, e.g. foreign employment, charter capital, management requirements, currency regulations, etc.

Nevertheless, we would recommend opting for LLP due to its wider prospects in terms of profit repatriation (i.e. potential exemption from withholding tax) and coverage of the parent company’s risks associated with its Kazakhstan subsidiary operations since the parent company is fully liable for obligations of its branches and representative offices (as opposed to the LLP members).

Sole Traders

Citizens of the Republic of Kazakhstan and qandases (returnees) may run business as sole traders not incorporated as legal entities and not registered otherwise.

However, when a Kazakhstan citizen or qandas hires permanent staff or when income from their business activity exceeds 12-fold minimum wages, they must get registered as a sole trader.  Such registration is a simple and easily realisable notification procedure.  Registration of a sole trader does not form a legal entity.

We believe it important to emphasize that individuals, other than Kazakhstan citizens and qandases, are not permitted to engage in business activity.

Special Legal Structure Requirements to Certain Types of Business

Kazakhstan law sets out special legal structure requirements to certain types of business.  In the table below we list some of such businesses: