Mining in the Kyrgyz Republic: 10 Frequently Asked Questions

The Kyrgyz legislation provides for the following instruments of acquiring subsoil use rights from the state:
- license;
- state registration;
- concession agreement; and
- production sharing agreement.

The license is the most common basis to use subsoil and a document confirming the right to use subsoil issued by the Geology Agency.

The legislation provides for the following types of licenses depending on the type of work: 1) for geological prospecting activities up to 5 years with the possibility of further extension according to the technical project; 2) for geological exploration activities up to 10 years with the possibility of further extension according to the technical project; 3) for deposit development activities up to 20 years with the possibility of further extension until depletion of mineral reserves; 4) for objects not related to geological mineral exploration and deposit development issued for the term defined in the technical project with the possibility of further extension for the term defined in the adjusted technical project. Depending on the significance of the deposit/licensed area the license can be obtained on the basis of a competitive bidding, auction or direct negotiations.

On the basis of the state registration the following activities are performed:

- scientific subsoil research performed according to the approved program;
- individual placer mining activities.

The state registration of scientific subsoil research performed according to the approved program is conducted by the Geology Agency, while the state registration of individual placer mining activities is performed by local state administration.

Concession is a form of subsoil use right arising from the concession agreement between the Kyrgyz Government and/or authorized state body and subsoil user, awarding the subsoil user an exclusive right to geological exploration and/or development of mineral deposits under the terms and conditions defined in the concession agreement. According to the current legislation the decision to provide the object for a concession is made by the Kyrgyz Government based on competition. The concession agreement is concluded for a period from 5 up to 50 years.

Production sharing agreement (PSA) is an agreement under which the Kyrgyz Government awards exclusive rights for deposit development to a subsoil user for a certain term and the subsoil user undertakes to perform specified activities at its own expense and risk. In addition to other conditions of subsoil use, PSA should determine the procedure of production sharing between the parties to the agreement. The mandatory party of PSA is the state, on behalf of which acts the Kyrgyz Government or authorized bodies. If the other party of PSA is foreign individuals or legal entities, then this agreement shall be ratified byJogorkuKenesh (Parliament) of the Kyrgyz Republic. Upon signing the agreement, the investor is also issued a license in accordance with the legislation of the Kyrgyz Republic. Except for some cases, the PSA is concluded based on a competitive tender or auction. PSA period shall not exceed 10 years.

- The Government administers and manages the state subsoil fund of the Kyrgyz Republic, approves technical regulations in mining, restrictions and prohibitions on the use of natural resources in order to ensure national security, public safety and environmental protection;
- Ministry of Economy is the authorized body for the development of public policy on subsoil use, including the legal acts in mining sector, investment policy in the subsoil;
- Geology Agency is the authorized body for the implementation of state policy on subsoil use, including a system of organizing the right to use natural resources and land, attracts investment, maintains the State balance of mineral reserves and State cadaster of deposits and occurrences of minerals, issues, suspends and terminates the subsoil use right, examines mining and geological projects, controls the use and protection of subsoil for geological study and industrial development of the subsoil;
- State Inspectorate for Environmental and Technical Safety is the authorized body that supervises environmental and industrial security within the geological, mining and land leases and controls enforcement of environmental laws and industrial safety in the geological study and development of the subsoil;
- State Agency on Environment Protection and Forestry is the authorized body for implementation of policy and the regulation of relations in the sphere of environmental protection and use of natural resources, environmental safety and environmental management.

The subsoil legislation requires a compulsory environmental impact assessment and a positive expert opinion on the technical project for prospecting, exploration and development of deposit. Besides, while conducting activities the subsoil users must comply with the environmental legislation of the Kyrgyz Republic, including the following principal normative legal acts:

- Law on General Technical Regulation on Environmental Safety in the Kyrgyz Republic of 8 May 2009;
- Law on Environmental Impact Assessment of 16 June 1999;
- Forest Code of the Kyrgyz Republic of 8 July 1999;
- Water Code of the Kyrgyz Republic of 12 January 2005;
- Law on Production and Consumption Waste of 13 November 2001, and other.

It is prohibited or limited to conduct works on prospecting, exploration and development of mineral deposits in specially protected natural territories (reserves, natural parks, wildlife sanctuaries, natural monuments, botanical gardens, dendrological and zoological parks, biosphere territories and/or reserves, transboundary specially protected natural territories). There are also restrictions on conducting works in the border areas.

Commonly, the activity in the natural resources sector in the Kyrgyz Republic falls within the general tax regime, involving the payment and reporting for the following types of taxes for local companies and foreign companies operating in the Kyrgyz Republic through a permanent establishment:

- profittax (10%);
- incometax (10%);
- VAT (general rate is 12%, for some operations 0% or 20%);
- excise tax (ranges according to the type of excisable goods, the price or volume);
- sales tax (from 1% up to 3%).

On September 17, 2012 amendments to the Tax Code of the Kyrgyz Republic entered into force, according to which taxpayers involved in activities on mining and sale of gold ore, gold concentrate, gold alloy and refined gold shall not pay profit tax. The said persons shall pay tax on income at the rate ranging from 1% up to 20% (depending on the world price for one troy ounce), applied to:

- revenue (excluding VAT and sales tax) from the sale of gold alloy and refined gold; or
- value of gold in the gold-bearing ore and gold concentrate, calculated on the basis of world prices in accordance with the procedure established by the Kyrgyz Government.

Foreign organizations with no a permanent establishment in the Kyrgyz Republic receiving income at source in the Kyrgyz Republic, are subject to tax on income at the following rates:

- 5% of the income excluding the deductions from telecommunication services, transport services, insurance payments under the insurance agreements or reinsurance of risks, and
- 10% of the income excluding the deductions from dividends, interest, copyright royalties, royalty, insurance payments under the compulsory insurance agreements or reinsurance under compulsory insurance of risks, income from management services, advisory services and other services and works.

This type of tax shall be withheld by the tax agent, i.e. person paying the income.

Additionally, subsoil users pay taxes for subsoil use: bonus and royalty.

Bonus is a one-time payment for the subsoil use right for prospecting, exploration and development of mineral deposits. Taxpayer of bonus is the person who obtained the right to use subsoil. The bonus is also paid in case of change in ownership shares, when changing the participants, in the amount of 10 percent or more in proportion to the share of the property (except for a change in ownership shares of companies listed on stock exchanges). The tax base for the calculation of the bonus is the amount of geological reserves and expected resources registered by State cadaster of deposits and occurrences of minerals of the Kyrgyz Republic, and the drilling depth of water wells. Bonus rate is set by the Kyrgyz Government on all types of minerals on the classification table, depending on the degree of exploration, values, and scale deposits and/or occurrences of minerals, as well as the size of the area of deposits for the search of minerals and the drilling depth of water wells. For mineral deposits, which are tendered, the rate of the bonus is determined by the Kyrgyz Government for each deposit separately.

Royalty is the recurrent payments for the use of subsoil for development purposes and/or selection (extraction from the subsoil) of groundwater. The tax base of the royalty is:

- revenue, excluding VAT and sales tax, received from the sale of mineral resources or the products received as a result of mineral resources processing;
- in-kind volume of products sold;
- volume of the underground water withdrawn according to water gauges, except for specialized water supply organizations.

Royalty rates for different minerals (other than water) and construction materials range from 1% up to 12%.

Under the Law of the Kyrgyz Republic: “On Investments in the Kyrgyz Republic investment dispute shall be settled in accordance with any applicable procedure previously agreed between the investor and the public authorities of the Kyrgyz Republic, which does not exclude the use of other remedies in accordance with the legislation of the Kyrgyz Republic. In the absence of such agreement, an investment dispute between the public authorities of the Kyrgyz Republic and the investor shall be settled through consultations between the parties. If parties fail to reach a peaceful settlement of the dispute, any investment dispute shall be settled in the courts of the Kyrgyz Republic, unless in the case of disputes between foreign investors and state bodies of the parties requests that the dispute in accordance with one of the following procedures by contacting:
- The International Centre for Settlement of Investment Disputes (ICSID) under the Convention on the Settlement of Investment Disputes between States and nationals of other States or of the rules governing the use of additional funds for the conduct of hearings by the Secretariat of the center; or
- Arbitration or a provisional international arbitration tribunal (commercial court) established in accordance with the arbitration rules of the United Nations Commission on International Trade Law.

For initiating the arbitration, foreign companies may also enjoy the benefits granted by the bilateral treaties on mutual support, encouragement and protection of investment (capital expenditure) which have been executed by the Kyrgyz Republic with 27 countries. Recognition and enforcement of foreign arbitral awards in the Kyrgyz Republic is possible on the ground of and in the manner provided in the UN Convention on Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958, joined by the Kyrgyz Republic in 1995.

The subsoil use right is terminated upon expiration of the license, unless the licensee files for extension or transformation of the license within the required period as well as in case of waiving of the mineral right by the subsoil users.

Also the subsoil use rights may be terminated by the decision of the Geology Agency in the following cases:

- pledge of the license for subsoil use and change of control without registration with the Geology Agency;
- more than 30 day late payment of a bonus and/or license fees and/or royalty;
- performance of activities without the engineering design approved by all necessary expert opinions;
- failure to eliminate the reasons for suspension of the mineral right within the period of time established by law.

Termination of the subsoil use right does not terminate the subsoil user’s obligation to perform reclamation of the land plot and disposal of the mining property, conservation and maintenance of the mining property securely, faultlessly and safely for the general public and environment until its transfer to the next subsoil user and transfer of geological information and primary documentation to the State Geological Information Fund.