Tips for foreign investors entering the Kyrgyz market

Asel Momoshova, Lawyer

Entering a new market poses many challenges. Success of a deal heavily depends on how well a foreign investor is familiar with the peculiarities of a particular jurisdiction. Here we would like to provide some legal and practical tips for potential foreign investors considering doing business in the Kyrgyz Republic.

ANALYZE TAX REGIME FOR TAX STABILIZATION

Tax climate is one of the principal concerns in making a decision as to the entering the new market. Under the feasibility study an investor shall evaluate how favorable the tax regime is, consider ways of tax optimization, and make a preliminary cost estimation. This also involves selection of the jurisdiction where the parent company will headquarter. It is especially significant in light of the double taxation issue. In order to avoid double taxation it is highly encouraged that the parent company headquarters in a country with which the Kyrgyz Republic has a bilateral double taxation treaty. Additionally, the position of the foreign investor can be enhanced provided that there is an investment protection treaty between the Kyrgyz Republic and country where the parent company is located. Ideally, existence of both treaties to some extent will ensure state protection of foreign investments made in the Kyrgyz Republic and lift the double taxation liability of the company. Furthermore, given the fact that national law is the primary source of tax regulation, a foreign investor should thoroughly examine the local tax regime. Unfortunately, it has to be admitted that no tax holidays and preferential treatment is available for foreign investors in the Kyrgyz Republic. Just like domestic companies they are subject to the general tax regime. The following taxes are prescribed by the Kyrgyz laws: corporate income tax, personal income tax, value added tax, sales tax, excise tax, subsoil use tax, land tax and property tax. Nevertheless, there is a legislative ground for tax preferences applicable to both foreign and domestic companies. Special tax treatment can be granted based on tax contracts executed with the Kyrgyz Government. Apart from that preferential tax regime special customs treatment is available within Free Economic Zones (Bishkek, Naryn, Maimak, and Karakol) for business entities registered with relevant Free Economic Zones. The investor shall also be aware that besides taxes the company is subject to mandatory payments to the Social Fund, which are applicable to all payments made by the company to the benefit of employees.

SELECT APPROPRIATE CORPORATE FORM

Selecting a corporate form is one of the key issues to be considered. The corporate form should meet objectives and needs of investors and be suitable for activities of the company. Investor may set up a subsidiary in the form of Limited Liability Company (“LLC”) or Joint Stock Company (“JSC”). As an alternative, operation through a branch or representative office is available under the Kyrgyz laws. Given the fact that branches and representative offices do not possess separate corporate personality, diversification of risks associated with business is ensured only through subsidiary. In addition, branches and representative offices are limited in scope of their activities, and thereby may not be suitable for company goals. Both LLC and JSC provide limited liability to participants/ shareholders. LLC is the most commonly selected form of operation due to the absence of a minimum capital requirement and flexibility in management. In contrast, JSC is characterized with strict corporate governance regulation, but it provides access to capital markets through the possibility of issuance of stock, bonds and other securities not prohibited be the Kyrgyz laws.

STRUCTURE BUSINESS FINANCING

Financing a business plays a significant role in success of the company. On the pre and post-incorporation stages an investor may contribute to the charter capital of the company or arrange an interest-free loan between parent company and its subsidiary in the Kyrgyz Republic. Sufficient start-up capital is always important for smooth operation of newly established company. This is true, especially bearing in mind that at the initial stage of operation the company incurs more expenses, than generates income. In this sense it is principally essential that investor thoroughly structures business financing.

EXPLORE WAYS OF ACQUISITION OF REAL ESTATE

Acquisition of real estate is often a core issues of company operation. The Kyrgyz laws governing the acquisition of real estate by foreign entities are quite restrictive. As a general rule, a foreign entity that has acquired property rights over real estate shall dispose the property within one year from the date of the acquisition. The definition of “foreign entity” is rather broad. It encompasses foreign incorporated business entities, 100% foreign subsidiaries, business entities with no less than 20% of foreign participation, and business entities established based on intergovernmental agreements. Pursuant to legislative restriction foreign investor may have property right solely over non-residential buildings and structures. Acquisition by a foreign investor of land plots (especially, agricultural lands), residential premises, and objects of recreation and infrastructure for tourism is prohibited. Under special permit a foreign investor may obtain an ownership right over residential premises. Settlement land plots may be owned by a foreign investor in case it is engaged in a mortgage of residential construction. In all other cases real estate may be leased to a foreign investor for a term of up to 49 years.

OBSERVE REPORTING REQUIREMENT

Once the company is incorporated an investor should be fully aware of certain procedures and requirements prescribed by the Kyrgyz laws associated with operation of the company. Pursuant to the Kyrgyz laws the company is subject to reporting requirement in connection with taxes and social fund payments. Noncompliance with reporting requirements entails fines and may even lead to initiation of a liquidation proceeding against the company.

OBTAIN LICENSES AND PERMITS

Licenses and permits can become a barrier for operation of the company. A company can freely carry out business activities in the Kyrgyz Republic, unless they are subject to licensing pursuant to the Kyrgyz laws. A list of licensed activities includes, among other, such activities as banking, insurance, mining and construction. The requirements and procedure of licensing equally apply to companies with local and foreign capital. Besides licenses, in case the company intends to engage foreign labor force, irrespective of the type of the contract on which the relationship is based, it shall obtain a permit which allows the company to hire foreign individuals. Foreign employees of the company shall also get work permits in order to carry out labor activities in the Kyrgyz Republic. Violation of these requirements entails administrative liability (fines).

PROPERLY ARRANGE EMPLOYMENT

Another aspect of hiring a work force is determining what contract to enter into. Pursuant to the Kyrgyz laws an investor may select either labor or civil contract (for instance, service contract). As a general rule, a labor contract both with local and foreign employees must be concluded. In exceptional circumstances, the company may execute a service contract. Below is a comparative analysis of pros and cons of labor and service contracts. From the interests of the company, on one hand, a labor contract is associated with many responsibilities. The company as employer shall comply with the Labor Code which specifies certain requirements and obligations in regards to employees. Thus, the company shall insure safe labor, work place, provide annual leave etc. Employees may be fired solely on the grounds specified in the Labor Code. Besides, the company bears liability for timely payments of individual income taxes and social fund payments in relation to each employee (as specified earlier). A labor contract is also burdensome in light of the obligation of the company to pay social fund payments for each employee at its own expenses in addition to social fund payments that are withheld from payments made to the benefit of employees. On the other hand, under the labor contract the company as employer has more control over its employees. It may determine company internal labor regulation, employee working schedule, supervise and monitor the activities of employees. As opposed to labor contract, under the civil contract the company exercises less control over the process of the work and has less responsibility. The company bears no liability for tax and social fund payments. Since workers are individual entrepreneurs the responsibility for tax and social fund payments remains solely with them. Civil contracts are governed by the Civil Code and other laws applicable to such contractual relations. It is important to note that in case civil contract contains distinctive features of labor contract such as certain terms and conditions intrinsic to labor contract or labor terminology, this contract can be recognized as labor contract. Generally, it is possible to have labor contracts for permanent or long term relationships, while for single, one-time works and services to execute civil contracts. Having in mind the above mentioned pros and cons of contracts an investor should be on the safer side in its dealing with employees and workers.

BE FAMILIAR WITH INVESTMENT GUARANTEES

Investment guarantees ensure, to a certain extent, protection of an investor’s business.The investment climate in the Kyrgyz Republic can be characterized as rather favorable. Certain worldwide recognized state guarantees are ensured to foreign investors operating within the territory of the Kyrgyz Republic. Kyrgyz laws guarantee national treatment, protection from expropriation, remittance of profit and proceeds, freedom to invest in any industries and business activities, freedom of currency transactions, currency convertibility, freedom of establishment, and free access to open-source information. BE AWARE OF DISPUTE RESOLUTION MECHANISMS Last, but not the least, an investor should be aware of dispute resolution mechanisms available in the Kyrgyz Republic. An investor may resort to both judicial and non-judicial means of dispute resolution. Pursuant to the Kyrgyz laws an investor may select any forum (domestic or foreign), except for matters over which the courts of the Kyrgyz Republic have exclusive jurisdiction. Alternatively, disputes may be settled within arbitration on an ad hoc basis or under specific arbitral institutions. Investment disputes can be resolved, among other, under the International Convention on the Settlement of Investment Disputes between States and Nationals of other Countries of 1965 (ICSID) with the ICSID institution as the Kyrgyz Republic is a signatory thereof. Provided that no forum is selected or no arbitration agreement is concluded, disputes are subject to settlement by the Kyrgyz courts. The enforcement of foreign arbitral awards in the Kyrgyz Republic is ensured under the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards of 1958 (New York Convention). The Kyrgyz Republic is a member-state of the New York Convention. In addition to the above mentioned legal issues, it might be of equal importance to consider practical issues that may to a certain extent contribute to the business success of the company.

DECIDE ON NECESSITY OF BUSINESS PARTNER & DETERMINE PARTICIPATION INTEREST

Identification of business partners and determination of participation interest refer to strategic issues of doing business in a foreign jurisdiction. Whether or not to have absolute or effective control over the company is an issue an investor may encounter. Kyrgyz laws grant full freedom in establishing a company with 100% foreign capital. A dilemma of running a business alone or with a local partner justifiably arises before start up. A local partner may facilitate liaison with public authorities and overall incorporation of a company. At the same time there is an issue of trust and associated risks. The Kyrgyz laws lack any special regulation of joint ventures and companies with foreign capital. Equitable treatment is guaranteed to companies with partial or 100% foreign participation. No foreign investment approval is required. Thus, in light of legislative freedom an investor has full discretion in the determination of its participation interest in the company.

BEAR IN MIND LEGAL & AUDIT CONSULTANTS

Qualified professional assistance in a foreign jurisdiction may substantially enhance an investor’s position. The market of legal and audit services of the Kyrgyz Republic is presented by experienced local and foreign consulting companies. The audit companies include both internationally recognized and locally experienced companies. Although, no global law firms are operating in the Kyrgyz Republic, domestic law firms with English proficiency render professional legal services that may serve as effective guidance for activities of a foreign investor. Useful information may also be obtained from international business associations such as the International Business Council (IBC) and the American Chamber of Commerce in the Kyrgyz Republic (AmCham) established in order to foster a favorable business climate, represent business interests of foreign companies and provide overall support for companies in their operation in the Kyrgyz Republic. These organizations may provide useful contacts and establish an important network necessary for getting accustomed to the new market. Knowing the rules of the game is half of a business success. Thise article targeted identification of major legal issues together with non-legal aspects to be taken into consideration by foreign investors while starting doing business in the Kyrgyz Republic. Due regard to each issue and proper approach will contribute to the successful operation of the company and its further economic development in the Kyrgyz market.