INVESTMENT IN KAZAKHSTAN
The Republic of Kazakhstan has a favourable investment climate.
The Constitution of the Republic of Kazakhstan and other regulatory acts provide for various guarantees of investors’ rights, in particular, guarantees in the event of nationalization and requisition, guarantees of transparency of the actions of government authorities with respect to investors, guarantees of use of income, and guarantees of legal protection of investors’ activities in the Republic of Kazakhstan.
Moreover, Kazakhstan has ratified the 1985 Seoul Convention Establishing the Multilateral Investment Guarantee Agency and the 1997 Moscow Convention on Protection of Investor Rights. Kazakhstan has also joined the 1965 International Convention on Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention) that established the International Centre for Settlement of Investment Disputes. This Convention is applied as may be agreed between contesting parties. Kazakhstan has also signed bilateral agreements on mutual protection of investment with a number of countries, including: Belgium-Luxembourg Economic Union, Bulgaria, Egypt, France, Hungary, India, Italy, Kuwait, Mongolia, Poland, Russia, Saudi Arabia, Switzerland, Tajikistan, Turkey, United Kingdom, USA, and some other countries.
Kazakhstan law recognizes priority of international treaties ratified by the Republic of Kazakhstan over its national legislation. Should an international treaty ratified by the Republic of Kazakhstan provide for rules different from those contained in the national legislation, the rules of the international treaty shall apply.
The principal legal act governing investment matters in the Republic of Kazakhstan is the Entrepreneurial Code of the Republic of Kazakhstan (the “Entrepreneurial Code”), in particular, Chapter 25 thereof. The Entrepreneurial Code determines the legal and economic basis for encouraging investment, guarantees the rights of investors investing in Kazakhstan and determines the measures for government support of investment and the procedure for resolution of disputes involving investors.
Defined Terms
The Entrepreneurial Code defines investment as follows:
investment – every kind of asset (other than asset intended for personal use), including items of financial lease as at the effective date of the leasing agreement, as well as rights thereto contributed by an investor to the authorised (charter) capital of a legal entity or its fixed assets expansion for business purposes and for implementation of any public-private partnership projects, including concession projects.
This definition is not different from those contained in most bilateral agreements on investment protection signed by the Republic of Kazakhstan with other countries.
The definition of investment activities reads as follows:
investment activities – activities of individuals and legal entities related to participation in the authorised (charter) capital of profit-making organizations or creation/expansion of fixed assets used for business purposes and for implementation of any public-private partnership projects, including concession projects.
The Entrepreneurial Code does not govern the matters related to investment of funds from the state budget and capital investment in non-profit organizations, including for educational, charity, research or religious purposes.
The Entrepreneurial Code defines ‘investor’ as a natural person or legal entity who invests in the economy of the Republic of Kazakhstan, and ‘major investor’ as a natural person or legal entity whose investment in the economy of the Republic of Kazakhstan exceeds the amount equivalent to the 2,000,000-fold monthly calculation index.
In other words, Kazakhstan law applies the domestic regime to foreign investors and does not differentiate between foreign and Kazakhstan investors.
The government supports investment activity through granting investment preferences and/or ensuring stability under changing tax legislation in accordance with the Kazakhstan Tax Code. Preferences under solid mineral processing contracts are regulated by the Kazakhstan Subsoil Use Code.
Investment benefits imply targeted privileges provided pursuant to Kazakhstan law to legal entities of the Republic of Kazakhstan that are implementing an investment project and to leasing companies which import to Kazakhstan plant and equipment for implementation of investment projects by Kazakhstan entities under financial lease agreements.
One of such investment benefits provided by the government is government in-kind donation, i.e. assets owned by the Republic of Kazakhstan and transferred under a temporary royalty-free use license or granted as a free land tenure to a Kazakhstan legal entity for implementation of an investment project with the subsequent transfer of ownership right or land tenure on a gratuitous basis.
Guaranteed Investors’ Rights in the Event of Nationalization or Requisition
Guarantees of investors’ rights in case of nationalization or requisition are provided, first of all, by the Constitution of the Republic of Kazakhstan: “No one may be deprived of their property unless otherwise stipulated by a court decision. Forced alienation of property for the State needs in extraordinary cases stipulated by law may be exercised on the condition of its adequate compensation.”
No involuntary taking of property is permitted unless otherwise provided for by Kazakhstan law, including, inter alia, requisition of property in emergency circumstances, seizure of property through judicial process as a sanction for committing a criminal or another offence, alienation of immovable property when the state decides to acquire a title to land, and nationalization in pursuance of a nationalization act (law).
In the event of nationalization, the Republic of Kazakhstan shall fully compensate the investor for their loss caused by the adoption of the respective nationalization act (law).
An investor’s property may be requisitioned subject to payment of the market value of the property to such investor. When the reasons for requisition cease to exist, the investor may claim for recovery of surviving property, provided that the investor returns the received compensation amount adjusted to the impairment loss on such property.
Guaranteed Legal Protection of Investors’ Activities in the Republic of Kazakhstan
This type of guarantee implies the right of investor for compensation of damages caused by acts of government authorities issued in violation of Kazakhstan legislation and by illegal actions (omissions) of officials of such government authorities. Investors’ rights are fully and unconditionally protected by the Kazakhstan Constitution and other laws/regulations, as well as international treaties ratified by the Republic of Kazakhstan. The Republic of Kazakhstan guarantees stability of contracts made between investors and government authorities of the Republic of Kazakhstan, unless contracts are amended as may be agreed between the parties.
However, the aforesaid guarantees do not apply in the event of:
– changes to the legislation of the Republic of Kazakhstan, and/or enactment of and/or changes to international treaties of the Republic of Kazakhstan that modify the procedure and conditions for import, production and sale of excise goods; and
– amendments to Kazakhstan laws introduced for the sake of national security, public order, healthcare and public morals.
Guarantees of stability are also enshrined in other legal acts which may be applied by investors when appropriate.
Guaranteed Use of Income
Investors may, at their discretion, use the income earned from their activities after payment of taxes and other obligatory payments to the budget and bank accounts in the national and/or foreign currency in accordance with the banking and currency regulations of the Republic of Kazakhstan.
Dispute Resolution
The Entrepreneurial Code provides for investment ombudsman qualified to protect legitimate rights and interests of investors. The investment ombudsman appointed by the Kazakhstan Government is authorised to:
1) consider investors’ applications regarding any issues arising in the course of their investment activities in the Republic of Kazakhstan and make recommendations on the resolution of such issues, including communication with government authorities;
2) render assistance to investors in connection with extrajudicial and prejudicial resolution of arising problems; and
3) develop recommendations on the improvement of Kazakhstan legislation concerning investment activity and submit them for consideration of the Kazakhstan Government.
When an investment dispute cannot be resolved by way of negotiation or in accordance with the dispute resolution procedure pre-agreed by the parties, such dispute must be settled in Kazakhstan courts in compliance with international treaties and Kazakhstan laws, or in arbitration courts chosen by the parties. Those investors the home states of which have signed bilateral agreements with Kazakhstan on mutual protection of investments and have acceded to the Energy Charter Treaty may refer to the provisions of such treaties which allow for settlement of investment disputes in an international commercial arbitration court, even in the absence of an arbitration clause.
Government Investment Support
In an effort to create a favourable investment climate for the development of economy and encouragement of investment in the establishment of new and expansion/upgrade of existing production facilities using modern technologies, as well as professional development of Kazakhstan personnel and protection of the environment, the Kazakhstan Government may offer investors their support in the form of investment benefits.
There are four categories of investment benefits:
The benefits granted to investment projects (including priority investment projects):
• exemption from customs duties and import VAT;
• government in-kind donations granted to priority investment projects;
• tax preferences granted to specific investment projects;
• exemption from import customs duties; and
• exemption from taxes as provided by Kazakhstan law.
Currently, investment benefits apply only to Kazakhstan legal entities. Thus, if a foreign investor seeks investment benefits provided by the Entrepreneurial Code, such investor should set up a Kazakhstan legal entity.
In Kazakhstan, all investment relations and matters are handled by the Ministry of Foreign Affairs (the “MFA”) which is vested with broad powers to make independent decisions on investment preferences.
Investment preferences are assigned to the priority activities listed and approved by the Kazakhstan Government.
The List of Priority Activities for Implementation of Investment Projects was approved by Kazakhstan Government Resolution No. 13 of 14 January 2016.
Exemption from Customs Duties
Any legal entity engaged in the implementation of an investment project and importing process equipment, elements and spare parts thereto, as well as raw and other materials shall be exempt from customs duties.
Any leasing company that imports plant and equipment to Kazakhstan for a Kazakhstan entity implementing an investment project under a financial lease agreement shall be exempt from customs duties.
Any Kazakhstan legal entity that is engaged in the implementation of a special-purpose investment project under a special investment contract shall be exempt from customs duties, provided that such entity imports plant and equipment, components and spare parts thereto, raw and/or other materials as part of finished products manufactured in a special economic zone or free warehouse in compliance with Kazakhstan laws. Please note that, with effect from 1 July 2021, the used raw and/or other materials are exempt from customs duties upon completion of free customs zone or free warehouse procedure, provided that such raw and/or other materials have been identified as part of finished products and that the appropriate use of the conditionally released goods has been acknowledged.
Imported technological equipment and elements thereto are exempt from customs duties for the validity period of an investment contract, but not more than 5 years from the date of its registration. Imported spare parts to technological equipment, raw and other materials are exempt from customs duties for a period of maximum 5 years depending on the scope of investments in PPE, subject to the investment project compliance with the list of priority activities adopted by the Kazakhstan Government. The exemption from customs duties is granted for the validity period of an investment contract, but not more than 5 years from the commissioning of PPE under the respective work program.
The following persons engaged in the implementation of a special-purpose investment project shall be exempt from import customs duties:
1) participants of special economic zones – for a 15-year period, but in any case within the operation period of the relevant special economic zone;
2) free warehouse owners – for maximum 15 years from the date of the relevant special investment contract registration; and
3) Kazakhstan legal entities participating in agreements for industrial assembly of motor vehicles – for maximum 15 years from the date of the relevant special investment contract registration.
Government In-kind Donations
Government in-kind donations are granted by a competent investment authority upon consultation with relevant competent authorities responsible for the management of state property and/or land resources, as well as with local executive bodies, either for temporary free use or on a temporary free land tenure basis with subsequent transfer of ownership or land tenure rights subject to fulfilment of the investment commitments under an investment contract.
Government in-kind donations may be granted in the form of land plots, buildings, structures, machinery and equipment, computers, measuring and control devices and apparatus, transport vehicles (other than automobiles), and production and household appliances. The maximum limit for a government in-kind donation is 30% of the value of investment in PPE of a Kazakhstan legal entity.
Tax Preferences
Tax preferences are granted to Kazakhstan entities in the manner and on the terms established by Kazakhstan tax law.
Types of tax preferences:
The tax preferences for priority investment projects:
1) 100% abatement of corporate income tax assessments;
2) zero-rating of land tax; and
3) assessment of property tax at the rate of 0% of tax base;
The tax preferences: -
for investment projects (except for priority investment projects) - exemption of materials and/or supplies from import VAT under investment contracts; and
for specific investment projects – exemption of raw and/or other materials imported under a specific investment contract from value added tax in compliance with Kazakhstan tax law.
Investment contract determines the duration of each type of tax preferences, provided that such duration does not exceed the time limit of the tax preference application established by the Kazakhstan Code On Taxes and Other Obligatory Payments to the Budget (Tax Code).