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Investment climate in Kazakhstan

August 2011

There are three factors that have an impact on how attractive Kazakhstan is to investors:

The first one is the country’s business climate - a rather good one thanks to favourable investment laws and a number of measures taken to support investments.

The second factor is the large quantities of natural and mineral resources available.

The third factor is a most favourable geographical location of Kazakhstan giving it easy access to the Central Asia, Russia and China – the consumer markets totalling almost half a billion people.

Attracting and efficiently utilising foreign investments is a key priority in Kazakhstan. Foreign investments can help to significantly improve the country’s unbalanced economy, create new high-tech manufacturing facilities, modernise the plant and equipment, upgrade the production capacity, train new technicians and workers, introduce cutting edge management and marketing practices and know-how, supply sufficient numbers of high-quality domestic goods to the local market as well as increasing exports simultaneously. According to the National Bank of Kazakhstan direct foreign investments in the country totalled US$ 10 billion in 2010 and in the first quarter of 2010 another US$3.2 billion was invested in the country’s economy. However, there is one problem with these investments; 80% of them were made in the mineral resources extraction sector since by now 99 out of the 103 elements in the Period Table have been found in Kazakhstan and 70 of those are being explored.(!)

Today Kazakhstan has all the necessary laws to regulate investments. According to international experts, the country’s Law On Investments is one of the best laws of its kind in the countries with a transitional economy. The law guarantees 100% protection for the rights of investors and the stability of the contracts they enter into. It also provides strict regulations on the interaction between state authorities and investors (free flow of capital, repatriation of capital, freedom to use profit in any way investors see fit, property rights to land, including the right of foreign companies to own land in the country). According to the World Bank, in 2010 Kazakhstan achieved the best results in terms of improving its investment climate of all countries that were trying to attract foreign investments. In the international investment protection rating of 183 countries Kazakhstan is rated 44th.

For example, the New Tax Code of Kazakhstan, which went into effect on January 1st 2009, has significantly simplified the procedure that investors have to follow to apply for tax exemptions, specifically, it has scrapped the previous procedure for getting tax exemptions under which tax exemptions could only be provided from the date that a contract was entered into with an authorised agency (Committee for Investments).

Under the tax exemptions granted to investors, investors can deduct the cost of exempted assets as well as the cost of renovating and modernising said assets from their taxable base.

Investment tax exemptions also apply to corporate income tax (the tax charged on profits) for a period of up to 10 years (for newly established companies; the existing companies can exempt the cost of fixed assets purchased for the implementation of an investment project); to property and lad tax for up to 5 years. Foreign companies are exempted from customs tariffs on the equipment they bring in to implement their investments projects as well as on spare parts for such equipment.

All the aforementioned benefits are granted on condition that the investor meets the following requirements:

• Investments must be made in a priority sector of Kazakhstan’s economy (the government has approved a list of priority types of investments that includes 245 sectors);
• Investments are made in the fixed assets of companies that qualify as legal entities under the law of Kazakhstan to create new or expand and modernise existing production capacity with modern technologies;
• The investor provides documents confirming availability of financial, technical and organisational resources needed for the implementation of the proposed project to appropriate state authorities.

Companies investing in the natural gas and oil industry are subject to a completely different set of taxation laws regulating the extraction of mineral resources and the production sharing agreement (PSA).

The most popular form of business organisation for making foreign investments in Kazakhstan is a limited liability partnership (LLP). The minimal share capital for a limited liability partnership is KZT 100 (about US$ 0.68). Investments in the share capital can be made both in cash and in assets. If the value of assets invested in the share capital exceeds 20,000 minimal calculated indicators (about US$ 205,714), the value of the assets is subject to confirmation by an independent expert.

If a foreign company does not want to set up a legal entity in Kazakhstan, it can open a representative office or a branch. Representative offices cannot act as independent legal entities and conduct business transactions and as such they are usually opened to gather information or establish business relations. For this reason any representative office pursuing commercial interest must get registered as a branch, which is regarded by the Kazakh law as a subsidiary of the foreign legal entity and can therefore engage in business transactions.

The registration procedure for representative offices or branches of foreign legal entities is in many respects similar to the procedure for registering Kazakh legal entities. The main difference is what documents must be submitted to the justice department. These include an application for the state registration of a representative office (branch); by-laws of the representative office (branch) approved by the foreign legal entity; minutes of the meeting (resolution) of the members/shareholders of the foreign legal entity that validates the opening of the representative office (branch) in Kazakhstan; copies of the Articles of Association or other incorporation documents of the foreign legal entity that is registering its representative office (branch); an excerpt from the commercial registry confirming the legal status of the foreign investor (for example, a registration certificate); the power of attorney issued to the manager of the representative office (branch); a copy of the passport of the manager of the representative office (branch), Taxpayer Registration Certificate issued to the manager of the representative office (branch); a proxy issued by the foreign legal entity to the person authorized to have a representative office (branch) registered; a copy of the lease agreement or another document confirming the registered address of the representative office (branch); payment order to pay the state registration fee.

In addition to investment law provisions aimed at promoting and protecting investments in Kazakhstan, the Government of Kazakhstan has also signed bilateral agreements for the mutual promotion and protection of investments with 41 other nations including the US, UK, Germany, France, Russia, the Netherlands, Turkey and others plus one multilateral agreement with the member states of the Eurasian Economic Community.

However, there is also a number of challenges. According to the 2010-2011 Competitiveness Report of the Global Economic Forum, the main obstacles to doing business in Kazakhstan are corruption, poor access to financing, inefficient government bureaucracy, and inadequate educated workforce.

Prapared by Diana Kim,
Consultant of Kazakhconsulting Ltd,
member of Nexia International (Almaty, Kazakhstan)
www.nexia.kz
Exclusively for Russian Survey