Investment Preferences: from A to Z

Investment Preferences: from A to Z

Broadly speaking the word “investment” should be understood as “expenses paid today in order to receive more income tomorrow“. There are two factors related to this process - time and risk. You have to invest a serious amount of money without knowing if any interest will be received or not. If it is received, it is received later and it is not known what amount will be received.

One of the major factors when choosing an investment is the availability of facilities, in other words preferences, established by the government for stimulating investment. The decision of the investor to proceed with the venture or not often depends on the volume and significance of the preferences

So, this article is related to the current system of investment preferences, namely: types and specialties, the list of documents necessary for receiving the investments, the order of its consideration and risks related to this. 

In addition to this it should be noted that there were organized the advisories with the representatives of the Committee on Investments of the Ministry of Industry and Trade of the Republic of Kazakhstan during the preparation of the Article. And the constancy of the represented conclusions was confirmed. 

Types of preferences

There are the following types of investment preferences in the Republic of Kazakhstan today:

1)    Investment tax preferences

2)    Exemption from customs fees

3)    State natural grants.

The aforementioned investment preferences are granted by conclusion of the contract with the representative body.

In accordance with the Order of the Government of the Republic of Kazakhstan №1237 “On enactment of the Order of the Committee on investments of the Ministry of Industry and Trade of the Republic of Kazakhstan” dated 26th November 2004 the authorized body in the area of investments is the Committee on investments of the Ministry of Industry and Trade of the Republic of Kazakhstan (hereinafter- “the Committee on investments”). The Committee considers the documents submitted by investors for revising in accordance with the legislation of the Republic of Kazakhstan.

Investment tax preferences:

According to Article 138 of the Tax Code investment tax preferences entails the exemption from payment of corporate income tax or the granting of additional deductions from gross annual income of taxpayers-legal entities carrying out the realization of an investment project for the purpose of creating new production capacities and expanding and updating existing capacities, as well as the exemption of such taxpayers from payment of the property tax on fixed assets that have been put into operation for the first time as part of an investment project (investment program), for the purpose of creating new production capacities and expanding and updating existing capacities, as well as the exemption from payment of land tax with regard to parcels of land for the realization of an investment project.

In accordance with Point 2 Article 14 of the Law on Investments the Government of the Republic of Kazakhstan confirms the maximum volume and duration of investment tax preferences granted by the Committee on investments for each priority activity.

So, the Order of the Chairman of the Committee on Investments # 18-II “ Regarding some issues concerning the state support of investments “ dated 18th March 2003 confirmed the table on  maximum volume and duration of  tax preferences.
The following example will show us the procedure used to determine this:
Example: For the purpose of clarity of the  determination procedure of the volume and duration of tax preferences we should look at the example where the foreign investor decided to invest his money in building a  factory for rubber and plastic manufacturing in the Republic of Kazakhstan. Let us suppose that the investor plans to invest 100 million USD (the investment volume in fixed assets).

If you have the necessary information concerning the volume and type of the estimated investment activity, you can use the following table:

The investment volume in fixed assets of priority activity, MCI (mln.)	Duration of tax preferences, years
	On corporate income tax		On property tax	On land tax
	Deductions	Exemption
1	2	3	4	5
Rubber and plastic manufacturing
Rubber manufacturing
Plastic manufacturing
From 1 518 000000 tg. (Including)	1-5	3	3	3
From 1 518 000000 tg. to 3 037 000000 tg. (including)	1-5	4	4	4
From 3 037 000000 tg. to 15 184 000000 tg. (including)	1-5	5	5	5
The maximum investment volume 15 184 000000 t.
From 15 184 000000 tg. to 16 936 000000 tg. (including)	1-6	6	5	5
From 16 936 000000 tg.  to 18 688 000000 tg. (including)	1-7	7	5	5
From 18 688 000000 tg.  to 20 440 000000 tg. (including)	1-8	8	5	5
From 20 440 000000 tg. to 22 192 000000 tg. (including)	1-9	9	5	5
Over 22 192 000 000 tg.	1-10	10	5	5

It is clear from the table that 100 million of investments or 12 150 000 000 tenge (100 million USD х 121.5 tenge exchange rate) refer to the third column of the table. 

Thereby, if the total volume of investments for rubber and plastic manufacturing is 100 million USD the investor can expect the following investment preferences: 

• On corporate income tax- the deductions for the period from 1 to 5 years or the exemption for 5 years;
• On property or land tax- the exemption for 5 years

After learning the order of determination of duration of tax preferences we should find the answer to the important question: “From what date does the duration of the tax preferences begin as the process of investment project is sustainable?” The importance of this question becomes obvious when the duration of 5 years of tax preferences comes to an end and the investor will have to pay taxes in the general procedure. The potential risk is that the investor can miss the date when he starts to pay taxes in the general procedure. As a result: additional charges, penalties and fines will result.

The answer to this question is in Article 139 of the Tax Code. According to this article the preferences are granted to the taxpayers in compliance with the contract (the notarized duplicate is supplied to the tax body in place of registration of the taxpayer) where the following dates of the preferences application should be determined:

• From 1st January  of the year following the year in which the fixed assets are put into operation - by taxpayers who are in business at the time the contract is concluded (in other words the existing companies);
• From the moment when the fixed assets are placed into operation - by newly created taxpayers.

According to Point 4 Article 139 of the Tax Code the corporate income tax preferences for the taxpayers which perform the realization of an investment project on expanding and updating the existing capacities and do not meet the conditions of Point 3 of this article shall grant a taxpayer the right to deduct the value of the fixed assets put into operation within the framework of an investment project, except for the fixed assets not subject to depreciation from the gross annual income, in equal installments, depending on  duration of the preferences. This Point is related to the existing companies.

Therefore, the preferences for the corporate income tax for the newly created taxpayers carrying out their business exclusively within the framework of an investment contract for the creation of new production capacities shall grant a taxpayer the right to reduce the corporate income tax by 100 per cent (Point 3 Article 139 of the Tax Code). Such kinds of preferences are granted to the investors who have registered in the Ministry of Justice RK the legal entity the listed purpose of which is carrying out their business exclusively within the framework of an investment contract. 

It is necessary to note that according to Point 3 and 4 Article 16 of the Law on investments the investment tax preferences are not granted to the entities which are carrying out the business under special tax regime (the regime established for individual entrepreneurs) and under subsoil use contracts as well as the fixed assets granted to the entity as the state natural grant.      

Therefore, if there were investments for 100 million USD, the investor would have a right to deductions for the period of 1- 5 years (for the existing companies) or full exemption from the corporate income tax (for the newly created companies carrying out the business exclusively within the framework of an investment contract) and full exemption from the land and property taxes for 5 years.

Exemption from customs fees:

The exemption from customs fees is provided by Point 6 Article 330 of the Customs Code and Article 17 of the Law on investments establishes that the exemption from customs fees is granted for the equipment and its components imported for realization of the investment project. 

Herewith Point 2 Article 17 of the Law on investments provides that the exemption from customs fees is granted only for the period of the contract duration but for not more than for 5 years from the moment when the contract was concluded.

In accordance with Point 3 Article 17 of the Law on investments after taking a decision the authorized body (the Committee on investments) sends the Notification to the Committee on Customs control of the Ministry of Finance of the Republic of Kazakhstan (hereinafter- “CCC MF” for the exemption from customs fees. 

Herewith, after receiving the written justification from CCC MF RK the entity would be exempt from customs fees. 

State natural grants:

In accordance with Article 18 of the Law on investments the state natural grants are granted by the authorized body in concurrence with the state bodies in the area of state property and land plots administration and local administration for the temporary free of charge use or  temporary free of charge use of land with the following transfer  or use of land in case if the investment obligations are carried out in accordance with the contract.   The ground for the free of charge transfer or land-use of the state natural grant is a decree of the authorized body. The decree of the authorized body is concluded on the assumption of the audit’s results.

State natural grants could take the following forms:

• land plots,
• buildings,
• constructions,
• electronic devices and equipment,
• computing techniques,
• measuring and control equipments and devices,
• vehicles (except light vehicles),
• production and organizational stock

According to Point 4 Article 18 of the Law on investments the maximum volume of the state natural grant should not be more than 30 per cent from the general volume of investments in the fixed assets of the legal entity of the Republic of Kazakhstan. 

As was noted earlier the tax investment preferences and state natural grant are alternative options. This means that the investor can use only one kind of preferences at the same time. 

The conditions for investment preferences granting

Article 15 of the Law of the Republic of Kazakhstan №373-II “On investments” dated 8th January 2003 (hereinafter- “the Law on investments”) establishes that the investment preferences are granted on the following conditions:

1) The invested project should accord to the list of priority activity;

2) The investments should be made in the fixed assets of the legal entity of the Republic of Kazakhstan for the purpose of creating new production capacities and expanding and updating existing capacities by implementing new technologies;

3) There should be also introduced the Request and necessary documents pointed by Article 19 of the Law on investments (the notarized duplicate of the certificate of the state registration, statistic card, the Charter of company etc.,) 

The list of priority activities:

According to Article 14 of the Law on investments the investment preferences could be granted only for the priority activities which are approved by the Government of the Republic of Kazakhstan in accordance with the categories of the general classifier of economic activity.

Today the acting list of priority activity in accordance with the categories of the general classifier of economic activity (hereinafter- “the List”) which the investment preferences are granted for was approved by the Decree of the Government of the Republic of Kazakhstan №436 “On some issues regarding realization of the Law of the Republic of Kazakhstan “On investments” dated 8th May 2003 (hereinafter- “the Decree on investments”).  

The aforementioned List consists of special sections, title of sections, codes and title of species and subspecies of activity. 

If there is no difficulty to identify the title of the priority activity, it should be noted that necessary special knowledge is required to identify the code, species and subspecies of the activity.

The solution of this problem is contained in Point 2 Article 12 of the Law on investments. According to this the authorized body (the Committee on investments) within its competence has the right to engage the specialists of the state bodies, advisors and experts among the individuals and legal entities of the Republic of Kazakhstan.

To clarify the procedure of engaging the specialists of the state bodies, advisors and experts we contacted representatives of the Committee on investments (the Division on investment projects). They explained that if there are some problems with identification of the code of activity in accordance with the categories of the general classifier of economic activity, it is necessary to make a written enquiry to the Statistics Agency of the Republic of Kazakhstan (hereinafter-“the Agency”) which is the exclusively authorized body to identify the code of the invested activity.

Thereby, to identify if your activity is included in the List of priority activity you should make a written enquiry to the Agency. The answer on your enquiry should be attached to the Request and other documents (See the List of necessary documents).
 
The investments in fixed assets:

According to the acting investment legislation the second clause for granting investment preferences is that the investments should be made in the fixed assets of a legal entity of the Republic of Kazakhstan (Article 15 of the Law on investments). 

In accordance with Article 105 of the Tax Code the fixed assets are the fixed capital and intangible assets recorded in a taxpayer’s accounting balance sheet in accordance with the legislation of the Republic of Kazakhstan on business accounting and financial statements as well as according to standards of business accounting, and used to earn gross annual income, except for fixed capital and intangible assets placed in operation by a Subsoil user before the moment the extraction begins after the commercial discovery and recorded for the purposes of taxation.

In accordance with the present situation the investor plans to invest 100 million USD for rubber and plastic manufacturing. 

Herewith the taxpayer should invest 100 million USD in fixed assets kept in the balance of subsidiary enterprise and used for receiving the gross annual income.

The List of necessary documents:

The third clause necessary for granting the aforementioned investment preferences is to introduce the List of documents that includes the Request and appendix provided in Article 19 of the Law on investments.  

According to Article 19 of the Law on investments the Request for granting the investment preferences could be accepted and registered by the authorized body with the following attached documents:

1) notarized duplicate of the certificate of the state registration;

2) notarized duplicate of the statistic card;

3) notarized duplicate of the Charter of company;

4) business-plan of the investment project, drafted in accordance with the requirements established by the Committee on investments;

5) notarized duplicate of documents containing the information on the budget expenses for shell and core works and expenses for acquisition of the fixed assets used for realization of the investment project;

6) notarized duplicate of documents containing the information on the source and garantees of financing the investment project. If the project is invested by the company’s own assets there should be attached the written confirmation on its availability;

7) documents containing the information on the amount of the state natural grant and the tentative agreement on conditions for its granting (in case if the company submits the Request on the state natural grant);

8) bookkeeping balance on the first day of the quarter in which the Request was submitted;

9) Note of the tax body in place of registration confirming that the company does not have the debts on taxes, debts on mandatory pension tax and social expenditures.  

Thereby, in addition to the aforementioned mandatory conditions for receiving the investment preferences, namely correspondence of the activity to the List of priority activity and investments in fixed assets, there should be also prepared the Request with the aforementioned documents attached (the seventh document should be attached only to the Request for receiving the state natural grant). 

We remind you that in addition to the Request there also should be attached the written answer of the Agency confirming that the activity is included in the List of priority activity. 

The Order of Request consideration

As it was noted earlier the Request on the investment preferences and the List of necessary documents should be submitted to the Committee on investments which takes the decision on the investment preferences granting. And in accordance with Point 1 Article 20 of the Law on investments the Committee sends the answer in written form during thirty workdays from the moment of the Request registration. 

The Rules on reception, registration and consideration of the Request on investment preferences receiving was established by the Decree of the Chairman of the Committee on investments №38-II dated 5th June 2005 (hereinafter- “the Rules”).

So, according to Point 2 of the Rules the Request should be submitted by the declarant in the office of the authorized body where the completion of the Request is checked after what it should be delivered to the Head chairman of the authorized body or to his deputy. 

The Request should be drafted in the form established by the Decree dated 18th March 2003. There also should be attached all the aforementioned necessary documents (See the List of necessary documents), the work program draft on the investment project,  the list and volume of the imported equipment and its components exempted from the customs fees with the description of its engineering factors, business-plan of the investment project prepared in the suitable form.  If all the aforementioned requirements are satisfied the Request will be entered in the register.  The day of it’s enter in the register is the day of the Request registration.

Hereinafter Point 8 of the Rules includes in the power of the competent division of the Committee on investments the following:

1) Carries out the analysis of business-plan of the investment project;

2) Carries out the analysis of the presence of the source of financing the investment project and the balance;

3) Carries out the analysis on the presence of the documents confirming the expenses on the fixed assets acquisition for compliance with the point of the work program;

4) Finds the debts on taxes and other mandatory payments as well as the debts on salary. In case if there are revealed any long-term debts (more than 3 months) the consideration of the project will be suspended up until its cancellation;

5) Cooperates with other state bodies and organizations regarding the investment issues (coordination work).

Finally, after the Request consideration the Committee on investments drafts the conclusion in the established form which is the ground for the investment preferences granting or refusal.

In accordance with Point 9 of the Rules if the declarant does not agree with the refusal for registration of the Request, he has right to appeal on the actions of the Committee on investments.

Summary:

This Article was devoted to the acting system of the investment preferences granted by the Committee on investments in the Republic of Kazakhstan. In order to try to fully explain the system we will provide a summary basing on the example of the factory for rubber and plastic manufacturing:

“To receive the investment preferences (the most preferable is the full exemption from the corporate income tax) the company should create the subsidiary enterprise in the legal form of an LLP which is carrying out the business exclusively within the framework of the rubber and plastic manufacturing.

Besides this there are some mandatory requirements in the investment legislation which are necessary to fulfill for the investment preferences granting:

1) The activity should be included in the List of priority activity;

2) The investments should be made in the fixed assets of the legal entity of the Republic of Kazakhstan for the purpose of creating new production capacities and expanding and updating existing capacities by implementing new technologies;

3) There should be also introduced the necessary documents listed in Article 19 of the Law on investments.

If there are some problems with the identification of the classification code the legislation provides for a special Enquiry to be made to the Statistic Agency RK with the technical description and mode of operation of the suggested manufacturing attached. After the investor receives the confirmation he can continue the procedure of registration of the legal entity and preparing the necessary documents for submitting the Request for the granting of investment preferences.

Best regards,

"Tax Law" Department

Tel.: +7 (727) 2 445-777
Fax: +7 (727) 2 445-776
info@gratanet.com
tax@gratanet.com