Amendments to the Investment Law: Shortcomings and Advantages
Sayat Zholshy & Partners Law Firm
It has not been long since the law On Investments1 was adopted, but there is a need to change the investment legislation again. Application of the aforementioned law has demonstrated that it has some provisions that "do not work" or, on the contrary, "restrain" the development of investment activity in Kazakhstan.
1.The Law of the Republic of Kazakhstan On Investments, dated January 8, 2003, #373-II // The Bulletin of the Parliament of the Republic of Kazakhstan, 2003, #1-2.
On May 4, 2005, following the state policy of developing and upgrading the investment law, the President of Kazakhstan signed the Law Concerning the Introduction of Amendments and Additions toCertain Legislative Acts of the Republic of Kazakhstan Concerning Investments (hereafter the "Law On Amendments and Additions"). The law entered into force on May 11, 20052.
2."Kazakhstanskaya Pravda", dated May 11, 2005, #116-117 (24726-24727).
In this article, we will analyze certain legal aspects of the amendments and additions, their further application, and their influence on the development of investment activity in our country.
Amendments and Additions to the Definition of Investments
As the result of the adoption of the law “On Amendments and Additions” to Article 1, Subclause 1, of the Law On Investments, some changes were made concerning the specification of the "leasing" term. According to the old wording, "investments" stands for all kinds of property (except consumer goods), including the subjects of leasing from the moment the leasing contract is concluded, as well as the interest in such property invested to the charter capital of the legal entity or increase of fixed assets, used for entrepreneurial activity. In the new wording, the words "the subject of leasing" were replaced with "the subject of financial leasing".
This specification was made in view of two types of leasing, defined by Kazakhstani legislation: financial and operational. According to the law of the Republic of Kazakhstan, dated July 5, 2000, On Financial Leasing3: "financial leasing" is a kind of investment activity in which the lessor acquires from the seller a certain asset, as requested by the lessee, and then leases such asset to the lessee to use for commercial purposes for a term of lease not less than three years.
3.The Law of the Republic of Kazakhstan On Financial Leasing, dated July 5, 2000, #78-II (as amended by the Laws of the Republic of Kazakhstan, dated 10.07.03, #483-II; dated 10.03.04, #532-II).
The aforementioned restriction does not apply to operational leasing, as it implies the temporary use of a subject of leasing without the subsequent transfer of the property interest in it. As the subject of the operational leasing cannot be transferred to the lessor, the investor cannot invest the subject of operational leasing to the charter capital or to increase the fixed assets.
Thus, the aforementioned amendments and additions to the law On Investments specify some terms and are mostly directed at practical application of this clause of the statute.
State Support of Domestic Specialists
It is necessary to pay attention to the amendment to Article 11, Clause 1 of the law On Investments, in accordance with which the words "creation of new and reservation of existing workplaces" were changed to "improvement of professional skills of the Kazakhstani staff".
The lack of skilled employees in the industrial sector of the country’s economy resulted in the involvement of foreign experts by the investors. Therefore, it was decided to stimulate the process of replacing foreign experts with domestic experts by raising the latter’s professional skill level.
On the one hand, the adoption of the aforesaid amendments to the law On Investments may increase the number of highly qualified domestic experts. On the other hand, these amendments may cause the total exclusion of highly qualified foreign experts from the Kazakhstani labour market. This circumstance may cause the outflow not only of foreign experts, but also of the transnational companies working in the country, which could essentially decrease the stream of foreign direct investments. Besides, the outflow of well-qualified experts from Kazakhstan could cause a situation in which there would be no one to share experience with our experts. At present, most Kazakhstani companies cannot afford extension courses for their employees abroad. Therefore, the best way to train employees is to attract highly trained specialists from other countries, which will consistently raise the professional level of domestic experts. International experience has shown that the migration of highly qualified specialists ("inflow of brains") always positively influences the development of a market economy.
According to Article 14, Clause 4 of the law On Amendments and Additions and Article 15, Subclause 3 of the law On Investments, the word "investor" was replaced with the words "a legal person of the Republic of Kazakhstan fulfilling the investment project". According to Article 1, Clause 6 of the law On Investments, "The investors are legal entities or individuals making investments in the Republic of Kazakhstan". Therefore, on the assumption of the definition stipulated by the old wording of the aforementioned terms, we may admit that at the present time any legal entity or individual, regardless of its residency, that meet the requirements of the law On Investments, could conclude a contract with the authorized bodies for granting investment preferences. After adoption of the law On Amendments and Additions, the range of the subjects of investment relations entitled to receive investment preferences will be automatically reduced. As, at the present time, only legal entities of Kazakhstan fulfilling the investment project can lay claim to investment preferences, we may come across the deterioration of the investment climate for foreign investors, who are the main catalysts of enterprise development and other economic spheres of our country.
The new wording of Article 16, Clause 1 of the law On Investments—"the investment tax preferences are rendered for the term defined in each case depending on the type of activity and amount of the investments into the fixed assets". The given changes are mostly directed at the individual approach to an estimation of the investment activity of the investment subject, depending on the sphere of activity in which he is going to invest. Given the recent tendency of increases in the investment stream only in the oil and gas extraction sector of our economy, a problem has arisen concerning the absence of investors for the other branches of our economy. As such, the legislator attempts to redirect the stream of investments into less developed sectors of the economy by stimulating investment in the development of other directions of industry and agriculture, by granting foreign investors corresponding preferences.
Exemption from Tax Duties
Tax regulation is a significant factor controlling investment relations with foreign investors. As such, a number of amendments and additions were made to the law On Investments.
Article 17 of the law On Investments was changed completely and it is stated as follows:
"1. Exemption from custom duties can be rendered at import of equipment and its accessories, imported for realization of the investment project.
2. Exemption from custom duties is rendered for the term of the contract, but no more than five years from the contract implementation.
3. The notice on the decision, accepted in accordance with Clause 2 of this Article, should be directed by the authorized body within five working days to the authorized customs body".
We would like to note that in the new wording, the subclauses concerning situations in which the imported equipment can be released from customs duties were completely excluded from this article. In accordance with the old wording, in order to obtain a decision from the authorized body about customs duties exemption, the investor should perform the following actions:
1) to prove the absence of the production of similar equipment and accessories in Kazakhstan;
2) to confirm the insufficient manufacturing of similar equipment and accessories, for realization of activity, according to the investment project in Kazakhstan;
3) to reveal the discrepancy of similar equipment and accessories produced in Kazakhstan and discrepancies in the requirements for equipment of the investment project.
On the basis of the aforementioned, being guided by the norms of the law On Investments and the Customs Code of the Republic of Kazakhstan, dated April 5, 20034 it is possible to conclude that because of requirements to the investor importing equipment and accessories to the territory of Kazakhstan, it is rather difficult to obtain a sanction on customs duties exemption. That is why the alterations stipulated in the law On Amendments and Additions are positive factors of the investment legislation development, as they do not limit the investors in the choice of equipment necessary for the fulfilment of the investment project, and simplify the tax duties exemption procedure.
4.The Tax Code of the Republic of Kazakhstan, dated April 5, 2003 #401-II (as amended by the Laws of the Republic of Kazakhstan, dated 10.07.03, #483-II; dated 09.07.04, #592-II,).
It is also worth mentioning the alterations to Article 17, Clause 2 of the law On Investments, concerning the terms of the customs duties exemption. According to the current version of this clause, customs duties exemption was given for a one-year period, with an opportunity to prolong this term for no more than five years from the moment of contract registration. The new wording allows investors not to confirm their rights to the exemption from tax duties and, accordingly, gives them the opportunity to work without difficulties.
State Grants in Kind
At the present time, according to the practice of rendering grants in kind, the government of the Republic of Kazakhstan does not perform these functions and, in fact, now only authorized bodies fulfil these duties. As such, the law On Amendments and Additions specifies the wording of Article 18, Clause 1 of the law On Investments. It stipulates the rendering of the investment grant in kind exclusively by the authorized body on agreement with the corresponding state bodies regulating state property and land issues.
Further, the alterations in the aforementioned article stipulate that state grants in kind should be granted for temporary gratuitous use or land use with the further gratuitous transfer to the property in the event of the fulfilment of the investment obligations under the contract. This may help to prevent possible negative consequences as the litigation regarding the return of the state grants in kind in the event of the early termination of the contract or the termination through the investor fault. In accordance with Article 1, Clause 7 of the law On Investments: "The state grants in kind are the property of the Republic of Kazakhstan, gratuitously granted to the property or the land use of the legal entity of the Republic of Kazakhstan for the fulfilment of the investment project". Analyzing the aforementioned article and alterations in Article 18, Clause 1 of the law On Investments, it is necessary to note the contradictions concerning property rights to the state grants in kind. Given the interpretation of the definition of a state grant in kind, stipulated in the old wording of the law On Investments, it is possible to suppose that the right to the state grants in kind arises either before the beginning of the realization of the investment project or in the process of its fulfilment. According to the alterations stipulated in the law On Amendments and Additions, the state may render a state grant in kind to the private ownership only at the fulfilment of all terms and conditions of the contracts, i.e. at the fulfilment of the investment project.
Also the law On Amendments and Additions stipulates "The ground for the gratuitous granting of the state grants in kind to the property or land use is the decision of the authorized body, which should be made as the result of a financial audit, in accordance with Article 21-1, Clause 2, Subclause 3 of the law On Investments. Furthermore, the law On Investments regulates monitoring and control over the fulfilment of the terms and conditions of the contract, with the documentary audit visiting the object of the investment activity. On the assumption of the analysis made in this article, we may conclude that the provisions of the law On Amendments and Additions significantly toughened state control over investors’ activity. The law On Investments includes Article 21-1, regulating the investors’ monitoring and control over the observance of the terms of the contract.
In conclusion, we would like to mention that new amendments and additions to the law On Investments are mostly positive and directed to the development of investment activity in Kazakhstan. However, there are some unresolved questions concerning the rights and interest protection of foreign employees and the toughening of the investment climate in our country. Kazakhstan has achieved success in attracting investments and establishing contacts with other countries. At the same time, recent trends for toughening the tax and investment regime for foreign investors adversely influence the investment image of our country.
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