Kazakhstan: Doing Business In Kazakhstan: Establishing Legal Presence

Mr. Vladimir Furman is in co-authorship with Ms Yulia Petrenko

Since its independence in 1991 Kazakhstan has been rapidly developing to become a country with a market economy establishing and strengthening its economic and trade ties with foreign countries, encouraging foreign investment, and liberalizing trade. Since the economic life of Kazakhstan keeps changing rapidly, the law is changing, as well, in order to create a favorable climate for foreign investors and to be a good location for business.

Key legislative acts that regulate establishment of business structures in Kazakhstan are the Civil Code of the Republic of Kazakhstan (Civil Code), Law on Economic Partnerships, Law on Partnerships with Limited and Additional Liability (LLP Law), Law on Joint Stock Companies (JSC Law), Law on State Registration of Legal Entities and Record Registration of Branch Offices and Representative Offices, and Law on State Registration of Rights on Immovable Property and Transactions with It.

Legal presence of a foreign company in Kazakhstan may be established either through opening of a subdivision in Kazakhstan or incorporating a separate legal entity.

Branch/Representative Office

Legal presence in Kazakhstan can be established through opening a subdivision of a foreign company in the form of a representative office or a branch. Neither a representative office nor a branch is a legal entity under Kazakhstan law. They act on behalf of a parent company within the limits defined by the latter. A representative office merely represents and protects interests of its parent company and is not entitled to generate profit. A branch, in addition to representing the parent company's interests, may carry out all or a part of the parent company's activities, including those subject to licensing, and may generate profit.

The organizational legal forms of legal entities depend on what types of activities foreign investors and businessmen intend to carry out in Kazakhstan. Kazakhstan legislation provides for a number of forms for organizing business in Kazakhstan. The most common and effective forms of a legal entity are: (i) a limited liability partnership and (ii) a joint stock company.

Limited Liability Partnership (LLP) is a corporate entity established by one or several individuals or legal entities, whether foreign or local, vested with its separate property, rights and liability. Participants of an LLP are not liable for its obligations and bear the risk of losses associated with the activities of the partnership only to the extent of the amount of their contributions into the LLP's charter capital, except in certain cases.

Pursuant to Article 78 of the Civil Code and Article 23 of the LLP Law, an LLP's charter capital is formed by combining contributions from founders/participants of the LLP. The minimum size of the charter capital may not be less than the amount equivalent to 100 monthly calculation indexes (MCI) on the date of submitting documents for state registration of the LLP, which in 2008 constitutes equivalent of approximately U.S. $1,000. The LLP's charter capital is divided into shares (participation interest), amounts of which are stipulated in the LLP's foundation documents. The foundation documents include a foundation agreement, where applicable, and a charter.

Where an LLP is founded by a sole founder/participant, which can be either individuals or legal entities, the legislation of Kazakhstan does not require entering into a foundation agreement. Where an LLP is founded by two or more founders/participants, the foundation agreement must be entered into by the latter. Should the LLP's ownership structure change so that to include more than one participant, the LLP participants must enter into a foundation agreement as required by the LLP Law.

The LLP Law does not set specific requirements as to what management bodies should be established in LLPs apart from requiring LLPs to have (i) the general meeting of participants (or a sole participant) as a supreme body; and (ii) an executive body. The LLP Law allows LLPs to form a supervisory body and/or an audit commission.

LLPs are generally managed by the general meeting of participants (or a sole founder/participant), which decides on key issues of the LLP's activities. The executive body, a general director as a rule, carries out day-to-day management of the LLP without any power of attorney. The role of the general director can hardly be overestimated, however, it is important to strike a balance between the powers that the general director may be vested with and certain limits to such powers. The LLP's charter may include provisions stating that the general director may not perform certain actions without prior written approval of the general meeting of participants (or a sole founder/participant). For instance, powers of the executive director may be limited by a certain maximum amount of a transaction. If the amount of the transaction exceeds the established maximum, the general director would have to seek an approval.

LLP is a commercial organization, whose objective is to carry out activities aimed at generation of profit and conducting any types of activities not contrary to the Kazakhstan legislation, subject to obtaining a special license or permit where required. A list of activities subject to licensing is set forth in the Law on Licensing dated 11 January 2007, and the procedure of obtaining certain types of licenses is regulated by a number of normative legal acts.

An LLP is the most used form of making investments and doing business in Kazakhstan through either a subsidiary or a joint venture in Kazakhstan.

Joint Stock Company (JSC) is another available form for a Kazakhstan company or a joint venture, which is a more complex type of a legal entity.

A JSC, public company, is a legal entity which issues shares to raise funds for carrying out its activities. JSC is liable for its obligations to the extent of the value of its property. JSC's capital charter consists of its founders' payments for shares at their par value and payments from investors for JSC's shares placed at a securities market. The minimum amount of the JSC's charter capital is equivalent of approximately U.S. $ 482,500 to be paid by the founders within 30 days following the state registration.

The JSC's supreme managing body is the general meeting of shareholders, which has the exclusive competence of deciding on most vital aspects of JSC's activities, including approval of "major transactions" (transaction or a series of transactions for the amount of at least 25% of the total amount of the JSC's assets). Other bodies of the JSC are: the supervisory body – the board of directors and the executive body – the general director(s).

The following can be considered as disadvantages of a JSC compare to an LLP: (i) more significant amount of a charter capital; (ii) more complex corporate structure; (iii) more complicated state registration procedure; (iv) stricter reporting requirements (JSCs are subject to control and supervision of the Agency for Regulation and Supervision of Financial Market and Financial Organizations and are required to regularly furnish reports on placement of shares to this authority); (v) mandatory requirement of publication of accounts; (vi) strict internal regulations to enter into major transactions; (vii) longer decision-making procedure; and (viii) special requirements to the procedure for entering into interested-party transactions.

Legal entities and representative offices/branches must be registered with the Ministry of Justice or its territorial subdivisions. The procedure for state registration is carried out by the Ministry of Justice or its territorial subdivisions within 10 business days pursuant to the law.

Seeking competent legal advice with regard to advantages and disadvantages of certain forms available for establishing a representative office/branch or a legal entity in Kazakhstan is highly recommended with respect to a wide range of issues, including but not limited to, control and management of the established presence, intended activities, currency regulations, work permits, customs, and licensing of certain types of activities.

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.