Legal Regulation of Investment Activities in Kazakhstan
Askar Batalov, President of the Kazakhstan Investment Promotion Center KAZINVEST
Formation of Investment Legislation
The history leading up to the coming of age of Kazakhstani investment legislation begins with the adoption of the first legal act in this area: the Law On Foreign Investment in the Kazakh SSR of 7th December 1990. This law provided legal protection of investments and a number of tax preferences for foreign investors. It was a measure that played a considerable role in encouraging the first foreign capital to come to Kazakhstan.
The next step was the Law On Foreign Investment of 27th December 1994, which was a kind of ‘second generation’ law. The changes included in it took account of the revised state policy towards investors called for by the economic development of the country and the inception of a favourable investment climate. Investment legislation was furthered by the act On State Support of Direct Investment of 28th February 1997. This act targeted the regulation of investment relations in priority sectors of the economy and served as an incentive to develop manufacturing.
As a full member of the international community, Kazakhstan has created a workable basis for mutually beneficial cooperation with foreign investors.
Of course, the country’s integration into the international market has also contributed to development of the Kazakhstani legislative framework at an international level. Kazakhstan has joined several international organizations and acceded to international treaties and agreements, both bilateral and multilateral. This has resulted in the implementation of generally accepted international principles in domestic legislation.
The passing of the Law On Investment of 8th January 2003 is yet further proof of Kazakhstan’s commitment to creating a favourable investment climate and encouraging external capital. This newly adopted law envisages equal conditions and equal preferences and guarantees to foreign and local investors.
Today the country faces the task of encouraging local capital by providing favourable conditions to domestic investors.
The Law On Investment comprises two parts, which used to be regulated by two separate legal acts. The first part establishes the legal framework for investment and the second includes provisions regulating state support of investment.
The law that was passed defines investment as all forms of property (except goods intended for personal consumption), including leased property from the time of signing a leasing agreement, and the rights to them, invested by an investor in the authorized capital stock of a legal entity, or increasing fixed assets used for business purposes. This definition covers a relatively broad field of investor rights, but at the same time it is specific in nature.
Two types of objects—authorized capital stock and fixed assets—are being introduced to replace the broad general concept of business objects, which was used by previous legal acts. The aim of this is to stimulate the development of manufacturing and breathe new life into Kazakhstan’s domestic market.
Under the new law the following traditional guarantees serve as instruments to protect the rights and interests of investors: a guarantee of legal protection of investors’ activities in the territory of Kazakhstan, a guarantee on the use of profits, transparency of the actions of government bodies, control and supervision to be carried out only by authorized bodies, and guarantees concerning nationalisation and requisition.
The law also includes provisions concerning standards of compensation for investor losses. Under these provisions Kazakhstan will give compensation in full for force majeure losses. This measure is especially relevant to investors at the present time. The procedure for compensating for losses is defined under the civil legislation of Kazakhstan.
Another interesting item is a new approach to the guarantee of ‘legislative stability’, which is also tremendously important to foreign investors. The Republic of Kazakhstan guarantees the stability of the terms of agreements signed between investors and state authorities of Kazakhstan, except in the event of agreements being amended by mutual consent.
These guarantees do not cover:
1) Changes in the legislation of Kazakhstan or legislation coming into force, or alterations in international treaties signed by Kazakhstan that change the procedures for the import, production and sale of excise goods;
2) Changes and amendments made to legal acts of Kazakhstan to ensure national and environmental security, health or public morality.
Since the above are very much exceptions to the rule, it can be concluded that, in other cases, changes to legislation will not influence the stability of the terms and conditions of agreements.
Measures for state stimulation and support of investment were reflected in the law as investment preferences, i.e. tailor-made privileges. These comprise investment tax exemptions, exemptions from customs duties and the provision of state grants in kind. The main condition for granting investment preferences is the need to place investment in the priority sectors. A list of priority sectors is approved by the government of Kazakhstan.
Investment tax preferences are granted as follows:
• Through corporate income tax. Investors who invest in fixed assets with the purpose of setting up new production facilities or expanding and rehabilitating existing ones, will be granted the right to deduct the cost of the fixed assets commissioned from their aggregate annual income, depending on the term of validity of the preferences.
By using corporate income tax preferences, the taxpayer will not include the cost of fixed assets constructed under an investment project in the cost balance, so will have to account for this separately.
• Through property tax. Investors will be exempted from tax on fixed assets that are re-commissioned under an investment project with the purpose of setting up new production facilities, or expanding and rehabilitating existing ones.
• Through land tax. Investors will be exempted from tax on land lots that are bought or used for implementing the investment project.
When the investment tax preferences expire, investors will pay taxes as required by the legislation of Kazakhstan.
In addition to tax exemptions, customs duty exemptions will form part of state support for investment: customs exemption will apply to newly imported equipment and spare parts essential for implementing the investment project.
Investment preferences are granted under a contract signed by the investors and the authorized state body (the Committee for Investment of the Industry and Trade Ministry of Kazakhstan). However, the law states that in the event that the maximum investment amount is exceeded, preferences will be granted on a resolution of the government of Kazakhstan.
In addition to tax preferences and customs preferences, the law holds that investors can receive state grants in kind. Grants in kind mean free transfer of state property to the investor, if it is necessary for implementing the investment project. Under the law, grants in kind include land lots, buildings, equipment, machines, facilities, computer equipment, metering and regulating devices, means of transport (except motor cars) and production or household equipment. However, the value of the state grant in kind will not exceed 30% of the investment under the investment project. In the event that the estimated cost of the required state grant in kind is higher than this threshold, the investor can receive the property on paying the difference between the estimated cost and the maximum state grant in kind.
The advantages of the new approach are as follows:
• exemption from corporate income tax and property tax are granted to an investor corresponding to the investment that the investor places in fixed assets;
• the process of decision-making on the type, size and term of the investment preferences provided will involve the ministries and departments concerned, and will boost transparency and improve the quality of investment attracted;
• the law introduces the institution of voluntary insurance, which in our case means moving to an international mechanism of insuring non-commercial risks (force majeure conditions) by international insurance organizations.
• the procedure for settling investment disputes is changed fundamentally by the law: firstly, the broader concept of investment disputes is used; secondly, all investment disputes may be resolved by international courts of arbitration.
The new approach to providing investment preferences will help to ensure targeted use of the state’s stimulation and support measures, and effective monitoring of investment project implementation.
Therefore, it can be stated that Kazakhstan is adhering to international principles and standards.
International Legal Regulation of Investment Activities
Special attention should be paid to the importance of international treaties, especially bilateral ones on the stimulation and mutual protection of investments.
Today, legal regulation of foreign investment is carried out at national and international levels. The shortcomings of national regulation of foreign investment relations may be compensated for by international legal regulation. The guarantees provided to investment by national legislation may be cancelled any time due to the adoption of new laws with different provisions. The guarantees provided for by an international treaty cannot be cancelled unilaterally. Therefore, despite the similarity of national and international legal documents on investment protection, international legal regulation of investment is of special importance to foreign investors.
International legal regulation of foreign investment comprises multilateral and bilateral international treaties. In addition, international organizations in the UN system, and various global and regional international institutions, play a key role in unifying local legislations regulating foreign investment. Several documents have been passed by these organizations, which have had a great impact on the legal regulation of foreign investment.
Bilateral treaties on the stimulation and mutual protection of investment form part of the international legal regulation of investment. As a rule, bilateral agreements define investment as:
1) movable and fixed property and other property rights such as mortgage and pledge rights;
2) rights to shares and other interest in companies;
3) incorporeal rights to the money used to create items or services of economic value and related investments;
4) intellectual property rights, including those to inventions, technology, know-how, industrial samples and trademarks;
5) any other rights and property of value considered as investment under the legislation of their country of origin.
Certain bilateral agreements view the rights to commercial activities and concessions, including exploration rights, production or operation of natural resources, as investment.
It is obvious that bilateral treaties are also important in respect of the guarantees that are provided by the contracting countries to investors from these countries. For example, in treaties signed by Kazakhstan on stimulating and protecting investments, the contracting parties provide most-favoured nation treatment or national treatment on a mutual basis. In each case, an investor has the right to choose between the two.
The new law On Investment lacks a clear definition of the above guarantees in the form of most-favoured nation treatment or national treatment. It is obvious that domestic investment legislation is aimed at establishing common principles and standards for all investors, irrespective of their country of origin. The state policy for creating a climate conducive to investment in the country is being pursued both at national and international levels.
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