Kazakhstan: Key Things To Know About Mining In Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan And Mongolia

Last Updated: 9 November 2016
Article by Umid Aripdjanov
Most Popular Article in Kazakhstan, November 2016

This article contains a brief overview of the key aspects of mining industry laws in the jurisdictions of Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan and Mongolia.

Legal framework and regulatory authority

The exploration and development of minerals in these countries is regulated by a number of laws and regulations. In most of these jurisdictions the primary law regulating the mining sector is the Subsoil Use Law, which sets out the basic legal framework governing exploration and development of subsoil resources, provides for state control and granting, using and assigning or terminating rights and obligations of subsoil users, and other general matters. One exception is Mongolia, where the primary law regulating subsoil use for exploration and mining is the Minerals Law. Along with the relevant subsoil use laws, the laws on concessions (Tajikistan, Kyrgyzstan and Mongolia), the laws on production sharing agreements (Kyrgyzstan, Tajikistan, Uzbekistan and Mongolia), and the law on oil and gas (Georgia) regulate investors' operations in the mining sector.

The mining industry in these jurisdictions is also regulated by a number of other more general laws and regulations, including the laws on licensing, investment protection, taxes, and environmental laws.

In general, in all these jurisdictions the state's duties with regard to the management of the subsoil are allocated to the central government, competent body and local executive bodies. The responsibility of the government is lies in organising and managing the state subsoil stock, outlining subsoil allotments, establishing the procedures for the conclusion the subsoil use contracts, and appointing the "competent body" for the execution and implementation of contracts. The competent body prepares and organises tenders, conducts negotiations with subsoil users, signs and registers contracts, monitors compliance with contracts and issues permits for the assignment of subsoil rights. Local executive bodies grant land plots to subsoil users, supervise the protection of the land, and participate in negotiations with subsoil users for environmental and social protection, among other functions.

Ownership of subsoil, subsoil use rights, transfer

In all these jurisdictions, notwithstanding who owns or leases the land, the subsoil remains under state ownership. The title for minerals passes from the state to the subsoil user upon extraction from the ground pursuant to the terms of the subsoil use licence or contract.

In the jurisdictions of Georgia, Tajikistan and Uzbekistan, subsoil use rights are granted in accordance with the terms of the licence and licence agreement.

In Mongolia, subsoil use rights for the exploration and mining of all mineral resources apart from water, petroleum and natural gas are granted through exploration and mining licences.

In Kazakhstan, prior to August 1999, the state established subsoil use rights by granting a licence and implementing a subsoil use contract. In August 1999, the State abolished the two-tier process, and subsoil use rights are now established exclusively through a subsoil use contract, with no licence required. Licences previously issued, however, remain valid.

In Georgia, Uzbekistan and Tajikistan rights granted under licences are generally not transferable.

In Kyrgyzstan a licensee may transfer its licence, subject to the prior approval of such a transfer by the competent body, namely the Kyrgyz Republic's State Agency on Geology and Mineral Resources. Such a transfer may only be completed one year after the date on which the relevant project commenced.

With respect to strategic assets, such transfers are subject to the government's pre-emptive right.

In Kazakhstan, the state has the pre-emptive right to acquire the transferred subsoil use rights and/or the objects connected with the subsoil use rights (or a part thereof). Additionally, any acquisition of the subsoil use rights and/or objects connected to subsoil use rights is subject to the competent authority's prior consent, e.g. the Ministry of Oil and Gas or the Ministry of Industry and New Technologies.

As in Kyrgyzstan, the transfer is subject to the expiration of the so-called "moratorium" period, which in Kazakhstan is 2 years from the date of the execution of the relevant subsoil use contract.

Forms of subsoil use projects

The laws of all the jurisdictions under discussion allow any individual or legal entity, whether local or foreign, to become the subsoil user.

The legal entities may be established in any form of enterprises as allowed under the relevant laws of these countries. The most popular legal forms used in these jurisdictions are the companies/partnerships with limited liability and operating on the basis of joint ventures projects.

Granting of subsoil use rights and surface land rights

Subsoil use rights in all these jurisdictions are granted by the relevant government authorities for a specific period, but may be extended before the expiration of the contract and/or licence, generally depending on the type of activity carried out.

In Georgia the validity of the licence varies from 5 years to 45 years and in some exceptional cases the licence for subsoil use rights may be issued for an indefinite period of time.

Exploration contracts in Kazakhstan may be executed for up to 6 years. The term of production contracts is determined based on a production plan.

In Kyrgyzstan geological exploration licences may be valid for up to 10 years and the production licence may be extended until the complete depletion of mineral reserves.

In Uzbekistan the validity of the licence for geological study operations is up to 5 years, excluding extensions. Production licences depend on the production term, as determined in the feasibility study.

In Mongolia both exploration and mining licences are granted to legal persons duly formed and operating under the laws of Mongolia and Mongolian taxpayers. Exploration licences are valid for three years, with an option to extend for two additional terms of three years each. The initial term of a mining licence is 30 years and may be extended twice for a period of 20 years each, depending on the reserve of the mineral.

In Tajikistan the term of the licence is subject to negotiations. In general, the term of a concession agreement, on the basis of which the subsoil use rights are formalized, should not exceed 49 years. However, for deposits that may require significant capital investments the term of the contract may be up to 99 years.

Subsoil use licences and contracts may be granted on the basis of competitive tenders and, in some exceptional cases, through direct negotiations with the competent body.

Entering into any of the above contracts includes a right to use the surface land thereof while exploring, mining and reclaiming the land. However, such rights must be set forth in a surface lease agreement with the applicable local administrative authorities. A surface lease agreement may be entered for the same period of time as the relevant underlying subsoil use contract, including any extensions.

Progression from exploration to mining

In all of these jurisdictions, if a subsoil user under an exploration licence/contract has discovered and appraised a deposit, it then has an exclusive right to obtain/execute a production licence/contract on the basis of direct negotiations. If a production licence/contract is not granted or executed, then the relevant subsoil area shall be put up for tender or auction.

Access to geological data

As a general rule, in all these jurisdictions geological data is provided to an investor by a relevant competent authority subject to a confidentiality agreement. Depending on the level of disclosure and/or the level of an investor's involvement in the project (i.e. being a potential or the licenced investor), the data may be provided either on a free-of-charge basis or for a fee. In particular, in Georgia, Kazakhstan and Uzbekistan potential investors may obtain certain preliminary information free of charge, such as the names of the given deposits, their location and general geological, geophysical and geochemical data. In other cases, access to geological data is possible for a fee, which is usually determined on the basis of historical costs.

During the term of a subsoil use contract and upon its termination, all geological data obtained at the expense of the subsoil user during the course of the operations, as well as the documents and material carriers of such data, shall be provided by the subsoil user to the competent authority free of charge.

With some exceptions, investors cannot disclose the provided geological data to any third party. Such exceptions include, inter alia, disclosure to a subcontractor operating under the subsoil use contract. In other cases, disclosure is possible with the consent of the competent authority and/or subject to a trilateral agreement executed between the subsoil user, the competent authority and the third party.

Unauthorised disclosure of geological information may lead to certain penalties, which may vary from established fines to the suspension or termination of the relevant licence and/or subsoil use contract. This is certainly the case in Kazakhstan.

Taxation and stabilisation

The taxation system in the region is still developing. The tax risks with respect to subsoil user's operations and investment into these jurisdictions vary from medium (Georgia) to significant (Kazakhstan and Kyrgyzstan). Tax legislation here is subject to different and changing interpretations, as well as inconsistent enforcement at both the local and state levels.

Subsoil users in these jurisdictions are required to pay all so-called 'general' taxes, duties and fees applicable to all tax payers. Such taxes include income tax, value-added tax, excise tax, social tax, land tax, property tax, transport tax, as well as required contributions to various funds, duties and fees for licences.

In addition to the general taxes, there are specific taxes, payable by subsoil users. In particular, these include mineral extraction tax (Kazakhstan), excess profits taxes (Kazakhstan and Uzbekistan), royalties (Georgia, Kyrgyzstan, and Tajikistan), bonuses (subscription bonus in Kazakhstan, Kyrgyzstan, Uzbekistan and Tajikistan, commercial discovery bonuses in Kazakhstan, and bonuses on commercial exploration and production in Tajikistan), and payments for the compensation of historical costs (Kazakhstan). The Minerals law of Mongolia imposes exploration and mining fees per hectare plus the royalty payment, which varies depending on the type of the mineral resources and their use.

In some exceptional cases the rates of the specific taxes and mandatory payments are stipulated in the respective subsoil use contracts. However, in general, in all these jurisdictions a subsoil user undertakes to pay taxes and other mandatory payments to the budget in accordance with the law, as applicable at the time obligations of payment arise.

With some exceptions, the laws in these jurisdictions do not provide for tax stability. Specifically, the legislative exceptions may include the tax stability regime under production sharing agreements (Kazakhstan, Kyrgyzstan and Uzbekistan), the subsoil use contracts signed by the head of state (Kazakhstan) or granted by special resolution of the Cabinet of Ministers (Uzbekistan).

Under the Minerals Law of Mongolia, an investment agreement may be concluded between the government and a licence holder. Projects involving an investment of between USD 50 million and USD 100 million will have 10-year terms; USD 100 million to USD 300 million projects will have 15-year terms; and projects involving more than USD 300 million will have 30-year terms. For investments of greater than USD 100 million, such agreements will be concluded at the parliament level.

Perhaps with the exception of Georgia and Tajikistan, analysis of the changes of tax legislation amendments in these jurisdictions demonstrates the tightening of subsoil user taxation. In practice, in jurisdictions such as Kazakhstan and Kyrgyzstan there is a tendency to reconsider the tax regimes, established in the subsoil use contracts concluded in the early nineties.

Investment protection

A fundamental principle of investor protection in the region is the constitutional provision that ratified international agreements take precedence over domestic legislation. If there is no applicable ratified international agreement covering a specific issue, the terms and conditions of the investment or other agreement must be in strict compliance with national laws.

Essentially, investment laws provide various investor protections such as the stability of contract terms, international dispute resolution and guarantees against nationalisation and other protections.

In all of the jurisdictions under discussion the state guarantees the stability of contracts concluded between investors and authorised state bodies. However, in Uzbekistan, Kyrgyzstan and Kazakhstan subsoil users are only stabilised against the legislative amendments adversely affecting the results of a commercial activity of a subsoil user. As such, the contractual stability may not cover changes in the law for defence, national security, environmental protection, health, taxes and customs duties, and social contributions.

Another important protection available under the investment laws of these countries is the right to resolve disputes by way of international arbitration. All these jurisdictions are the contracting states to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. As such, disputes may be settled through foreign arbitration, including at the International Centre for the Settlement of Investment Disputes (ICSID), and an arbitration forum using the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL).

It is worth noting that the general policies of these jurisdictions are based on the principle that special (discriminative) treatment should not be given to foreign investors and that all investors should be treated on an equal basis. Despite this, at present legislation in these countries contain some provisions that can be considered as directly or indirectly discriminative with regard to foreign investors.

Naturally, one of the main principles and objectives of any state policy is to protect the internal labour market, domestic manufacturers and suppliers of goods. Such protection is provided specifically in the subsoil use law of Kazakhstan and, as recent developments demonstrate, is a hot topic in Kyrgyzstan as well. Pursuant to local content requirements, subsoil users are required to employ local personnel and enterprises to perform work and services for subsoil. In Kazakhstan, the requirement also spreads to the use of materials and products produced in Kazakhstan, provided that they comply with standards and other requirements.

Another policy that may be considered discriminative to foreign investors is that the requirement for the protection of national security must be taken into consideration upon the execution of contracts pertaining to the use of the strategic resources of these jurisdictions, the fulfilment of such contracts and control over their execution. This is also true for the decision by the competent authority to issue or deny the issuance of a permit for partial or full assignment of the subsoil use right by the subsoil user to another entity. This is a particular concern for subsoil users operating in Kazakhstan, Kyrgyzstan and Uzbekistan.

Following the recent trends in FDI, the Mongolian Government has introduced a new foreign investment law that has given the government the power to intervene in sectors of strategic importance. Three sectors, namely the minerals sector, the banking and finance sector, and the media and communication sector, are listed as sectors of strategic importance.

Restrictions in foreign currency transactions and repatriation of foreign currency/capital are other measures that may have a negative impact upon the activities of foreign investors in the region.

Safety and environmental protection

Subsoil users' activities are subject to certain state and local laws and regulations governing environmental protection and employee health and safety. In addition to compliance with the general environmental requirements as prescribed by the law and contained in, or incorporated into, subsoil use contracts, subsoil users must obtain specific environmental licences and permits before carrying out subsoil operations. There are several types of permits, applicable to issues such as emissions into the environment, water use and waste disposal.

Failure to comply with the applicable environmental and health and safety laws may result in injunctions, damages, suspension or revocation of licences or permits, the imposition of penalties and even the termination of the subsoil use contract, the latter of which is applicable to subsoil users operating in Kazakhstan.

It is worth mentioning that the environmental and employee health and safety laws and regulations within the region have tended to become more stringent over time, which may have a material adverse effect on subsoil users' financial condition, cash flow or the results of operations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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