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 promoting liberalization of 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), Entrepreneurship Code, 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.
Legal presence of a foreign company in Kazakhstan can be established either through incorporating a separate legal entity or opening of a subdivision in Kazakhstan.
The choice of an organizational legal form depends on what types of activities foreign investors intend to carry out in Kazakhstan. The Kazakhstani 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 (LLP) and (ii) a joint stock company (JSC).
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, except for subjects of small entrepreneurship, is not to be less than 100 monthly calculation indices (MCI) on the date of submitting documents for state registration of the LLP, which in 2016 constitutes equivalent of approximately U.S. $650. The LLP's charter capital is divided into participation interests, the 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 an individual or a legal entity, 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 between all the founders/participants. Should the LLP's ownership structure change 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 an LLP apart from requiring the LLP to have (i) the general meeting of participants (or a sole participant) as a supreme body; and (ii) an executive body, either sole or collective. The LLP Law allows LLPs to form a supervisory body and 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 and represents LLPs vis-à-vis third parties without a 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 limiting the general director's powers, for example, by certain types of transactions or by the amount of the transaction, and if the amount exceeds the established maximum, the general director would have to seek an approval of the LLP's participants.
LLP is a commercial organization, whose objective is to carry out activities aimed at generation of profit. Certain types of activities require a license or a permit from a respective licensor. The Law on Permits and Notices lists the activities subject to licensing; the procedure for obtaining certain types of licenses and permits is regulated by a number of normative legal acts.
JSC is another common form for a Kazakhstan company, which is a more complex type normally used for large and medium-size businesses.
A JSC is a legal entity, founded by individuals and/or legal entities, 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. In 2016, the minimum amount of the JSC's charter capital is equivalent of approximately U.S. $ 320,000 to be paid by the founders within 30 days following the state registration. The charter capital requirement is different for a JSC carrying out its activities in the form of a bank, a privatization and investment fund, a commodities market, and some other.
A JSC's supreme managing body is the general meeting of shareholders, which has the exclusive competence to decide on the most important aspects of JSC's activities, including approval of "major transactions" (transaction or a series of transactions for the amount of 25% or more of the total amount of the JSC's assets). The other bodies of the JSC are the management body, which is the board of directors, the executive body, either collegial or sole, and other bodies set forth by other legislative acts or the JSC's charter. Under the law, the board of directors consists of not less than three individuals. 30% of the board of directors' composition must be allocated to independent directors, who are not to be affiliated with JSC on this or that ground set forth by the JSC Law.
The following can be considered as disadvantages of a JSC compare to an LLP: (i) a larger amount of the charter capital; (ii) a more complex corporate structure; (iii) a more complicated state registration procedure; (iv) stricter reporting requirements (JSCs are subject to control and supervision by the Committee for Regulation and Supervision of Financial Market and Financial Organizations under the National Bank of Kazakhstan 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 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 has a status of a legal entity under Kazakhstani 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, has a right to carry out all or a part of the parent company's activities, including those subject to licensing, and generate profit.
Both a branch and a representative office are headed by their parent companies' representative acting on the basis of regulations of the branch and the representative office, respectively, and a power of attorney that specifies the head's powers and authorities.
We recommend that foreign investors who intend to launch business in Kazakhstan seek professional legal advice regarding advantages and disadvantages of the legal forms available for establishing a representative office/branch or a legal entity in Kazakhstan. This would help avoid possible mistakes and undesirable consequences when the entity starts operating.
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.