Granting Preferences to Kazakhstani Legal Entities in Connection With Their Investments in Kazakhstan
The issues related to the provision of preferences to Kazakhstani legal entities in connection with their investments in Kazakhstan are mainly governed by the Law of the Republic of Kazakhstan “On Investments” dated January 8, 2003 (hereinafter the “Investment Law”) and the Code of the Republic of Kazakhstan “On Taxes and Other Obligatory Payments to the Budget” dated December 10, 2008 (hereinafter the “Tax Code”). In particular, the Investment Law establishes the investment preferences (hereinafter the “Investment Preferences”) and the Tax Code determines the tax benefits (hereinafter the “Tax Benefits”).
Set forth below is a detailed description of the Investment Preferences and the Tax Benefits and the procedure for the provision thereof.
А. Types of Investment Preferences
The Investment Law (please see Article 13 of the Investment Law) provides for the following Investment Preferences for a Kazakhstani legal entity carrying out an investment project in Kazakhstan:
1) relief from a customs duty in case of importing an equipment;
2) state in-kind grants in the form of a land plot, building, equipment, etc.;
3) exemption from a land tax and property tax; and
4) industrial preferences, such as, partial reimbursement or payment of costs related to gas, power, the acquisition of a land plot, or the acquisition (construction) of a building, facility, etc.
Under the Investment Law, the right to the Investment Preferences listed in clauses 1) and 2) above is granted to an entity implementing an investment project in accordance with the List of Priority Activities, as approved by the Government of the Republic of Kazakhstan
The privileges specified in clauses 3) and 4) above extend to a strategic investment project. The Investment Law defines an “Investment Strategic Project” as an investment project which is included in the List of Investment Strategic Projects as specified by the Government of the Republic of Kazakhstan (hereinafter the “List of Strategic Projects”) and might strategically affect the economic development of the Republic of Kazakhstan (please see clause 10 of Article 1 of the Investment Law).
Under the Investment Law (please see clause 2 of Article 18-1 of the Investment Law), to be included in the List of Strategic Objects, an Investment Project must be aimed at manufacturing products with high added value and meet the priority activities and one of the below criteria:
(а) be aimed at manufacturing products included in the List of Activities Related to Manufacturing High-Technology Products, as approved by the Government of the Republic of Kazakhstan; or
(б) the investments thereunder must amount to at least 5 million times the minimum calculation index, as established by the Law on Central Government Budget for the relevant financial year (“MCI”).
Moreover, to be granted an investment privilege in the form of an industrial privilege, in addition to the requirement for a project to have the status of an Investment Strategic Project, the Investment Law establishes an additional requirement (see clause 5 of Article 13 of the Investment Law). In particular, it is required that the project be implemented in populated places with low level of social and economic development (hereinafter the “Additional Requirement”). The list of such populated places is approved by the Government of the Republic of Kazakhstan.
B. Procedure for Granting Investment Preferences
Set forth below are the procedures for (i) exemption from customs duties when importing the equipment and (ii) provision of state in-kind grants.
Procedure for Exemption from Customs Duties When Importing the Equipment
Pursuant to the Investment Law, an exemption from customs duties when importing the equipment shall be provided by virtue of execution of an investment contract with the authorized body (the Investment Committee within the Ministry of Industry and New Technologies of the Republic of Kazakhstan). To execute such a contract, the relevant legal entity needs to submit to the authorized body the following documents:
1) an application for the investment preferences (hereinafter the “Application”);
2) Certificate of its State Registration or Re-registration, as applicable;
3) a copy of its Charter signed by the Chief Executive Officer and stamped with its seal;
4) business plan for the investment project or investment strategic project, as the case may be (the requirements for the business plan are established by the authorized body);
5) copies of documents confirming the estimated cost of construction and installation works and cost of acquisition of fixed assets, raw materials and/or materials used when implementing the related investment project or investment strategic project, signed by the Chief Executive Officer and stamped with its seal (the list of such documents is determined by the laws of the Republic of Kazakhstan);
6) copies of documents determining the sources and warranties of financing of the related investment project or investment strategic project, signed by the Chief Executive Officer and stamped with the legal entity’s seal (In case the investment project is financed by the legal entity from its own sources, it is necessary to enclose a written confirmation of existence of such sources);
7) documents confirming the size of the requested state in-kind grant and the preliminary agreement with respect to the provision thereof; and
8) a statement from the tax authorities at the legal entity’s location acknowledging that the legal entity has no outstanding taxes, obligatory pension contributions or social security contributions.
The application is considered by the authorized body within 20 business days. In case that the authorized body decides to exempt a legal entity from the customs duties, the authorized body, within 5 business days, shall inform the customs bodies of such decision and, within 10 business days from the date of the above decision, prepare an investment contract for execution, subject to the provisions of a model contract (hereinafter the “Investment Contract”). The Investment Contract is subject to registration with the authorized body within 5 business days from the date of execution and comes into force from the date of its registration. The period of operation of an investment contract is determined based upon the period of operation of the investment preference which is granted. An exemption from customs duties shall be granted for the period of operation of an investment contract, but may not exceed 5 years from the date of its registration (see clause 2 of Article 17 of the Investment Law).
State In-kind Grants and Procedure for Their Provision
The state in-kind grants are provided by the authorized body by an agreement with the other relevant competent authorities (e.g., in the area of land resources, etc.) (i) into temporary use without charge; or (ii) into temporary use without charge with subsequent gratuitous transfer into ownership or land use on condition that the investment obligations under the Investment Contract are performed.
A gratuitous transfer of a state in-kind grant into ownership or land use is based on a decision of the authorized body. Such decision is adopted upon expiry of the period of operation of the relevant investment contract in the event that the investor in question performs its investment obligations under the Investment Contract.
The maximum size of a state in-kind grant shall be no more than 30% of the total investments in the fixed assets of the relevant Kazakhstani legal entity. If the estimated value of the requested state in-kind grant exceeds the above maximum size, the applying legal entity may get from the authorized body the requested property and be paid a difference between its estimated value and the maximum size of the state in-kind grant.
The application of the Tax Benefits means the deducting from the income of the cost of item to which a preference/Tax Benefit extends or future expenses for reconstruction or modernization by one of the below methods, at the discretion of the tax payer:
- prior to commissioning of such item, in the tax period in which such expenses were actually incurred;
- after commissioning of such item, either one-time or in equal installments within the first three years.
Under the Tax Code (see clause 2 of Article 123 of the Tax Code), the following shall be treated as an item to which a preference shall apply: a building or an erection which is commissioned in Kazakhstan for the first time, and machinery and equipment which, within at least 3 (three) tax periods immediately following the tax period of the commissioning thereof, concurrently meet the following conditions:
1) are either fixed assets or assets with the service life exceeding one year, produced and/or received by a concessionary (legal successor or a legal entity specifically established by a concessionary for the implementation of a concession contract) within a concession contract;
2) are used for the activities that are aimed to generate an income;
3) are not the activities which have the causal connection with carrying out the activities under a subsoil use contract;
4) in the fiscal accounting, any subsequent expenses incurred by a subsoil user in respect of such assets are not subject to allocation between the activities under a subsoil use contract and the non-contractual activities;
5) are not the activities that are commissioned within an investment project under contracts entered into prior to 1 January 2009 pursuant to the Republic of Kazakhstan investment legislation.
To apply the above Tax Benefits in the form of deductions, a tax payer must maintain a tax ledger in the form as approved by the Government of the Republic of Kazakhstan.
The Tax Code lists the persons which have no right to apply the Tax Benefits. Such persons are as follows:
- an organization operating in a free economic zone;
- a company producing and/or selling excisable goods, including all types of spirit and alcoholic and tobacco products;
- a company applying a special tax regime, as contemplated by Section 63 of the Tax Code, in particular, producers of agricultural and aquaculture products, and rural consumer cooperatives.
The laws of Kazakhstan establish preferences neither in relation to the payment of (i) VAT when importing the goods; nor (ii) corporate income tax. However, it is worth noting that under the Tax Code (please see clause 1 of Article 250 of the Tax Code) when importing certain goods, including an equipment, the VAT shall be taken as an offset. The list of such goods and the procedure for its formation is approved by Governmental Resolution No. 269 of 19 March 2003. It should be noted that such list may include those goods only which are either not produced in Kazakhstan or are produced in Kazakhstan but do not satisfy its needs.
When importing a good which is on the above list, the VAT shall be taken as an offset, which in fact is similar to VAT exemption.