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  KAZAKHSTAN International Business Magazine №5/6, 2001
 Comments on the Draft Law On Investments
Comments on the Draft Law On Investments
Aigoul Kenzhebayeva, Partner of international law firm, Salans Hertzfeld & Heilbronn, Director of the Almaty office of the firm, juridical sciences doctoral candidate, LLM (USA)
The Government of Kazakhstan has recently submitted for review to the Majilis House of the Parliament a draft law «On Investments» (the «Draft»), which, if adopted, will become the cornerstone law regulating the activities of investors in our country. It would replace the current laws «On Foreign Investment» of 27 December 1994 and «On State Support of Direct Investments» of 28 February 1997.
The Draft declares that it shall govern the legal relationships involving investments in the Republic of Kazakhstan (RK) and the realization of both foreign and domestic investments. In addition, it establishes ways for government incentives for investments as well as guarantees of the rights of investors.
However, careful reading of the Draft reveals that although it seeks to equalize the rights of local and foreign investors, its adoption would actually lead to the following:
• a significant restriction of the scope of the law due to a narrow definition of the concept of «investment»;
• the evisceration of certain principles contained in current laws dealing with investments which grant investors real incentives and privileges since the Draft includes positive rules of law and references to other laws that do not offer such incentives or privileges;
• the revocation of guarantees set forth in the legislation which protect investors from changes in the laws;
• the restriction of the right of investors to seek judicial relief in an arbitration proceeding or in the courts because when a dispute arises, the government agencies can unilaterally claim that the investor has violated the law.
Thus, in spite of the goals proclaimed in the Draft’s preamble, its adoption would significantly worsen the investment climate in Kazakhstan, resulting in an outflow of both local and foreign investment funds to countries with a more favorable political risk environment.
One indeed may ask why this Draft is necessary; would not it be simpler to revoke the current Law on Foreign Investments? It is not a pleasant thought that behind the motto of making a level playing field for foreign and local investors, the drafters merely sought to create the semblance of protection and incentive for the flow of investment into this country.
Such an impression is unavoidable when one considers that instead of extending to local investors the privileges and incentives that have been enjoyed by foreign investors, the Draft simply deprives the foreign investors of these advantages and thereby places them in the same unprotected position that local investors presently occupy.
Our comments on the Drafts
The definition of «investments» is found in section 1 of Article 2 of the Draft:
«investments are all types of tangible and intellectual property, as well as the rights to them, to be invested in the charter fund of a commercial juridical entity, or in the creation or enlargement of capital funds used for entrepreneurial activity in the form of subjects of civil-law rights belonging to the investor, if such subjects are not limited in their circulation in the Republic of Kazakhstan in accordance with legislative acts, including cash, securities, other property (besides goods to be sold without processing or goods for personal consumption), property rights, and rights to the fruits of intellectual activity.»
The definition of «investments» found in the Draft recognizes as such tangible and/or intellectual property invested in the charter fund of a commercial juridical entity, or in the creation or enlargement of capital funds used in commercial activity.
In our opinion, this definition significantly curtails the applicability of the Law in that it is understood that in order to receive the guarantees and grants offered in the Law, one must create a juridical entity. Although this has not been directly stated in the Draft, we assume that what is meant are investments in the charter capital of a Kazakhstan juridical entity. In this connection one should note that many foreign investors perform their activities in Kazakhstan in accordance with civil-law legislation by way of their affiliates which are not Kazakhstan juridical entities. Our legislation also envisions the possibility of business being carried out by sole proprietors who are non-incorporated physical persons. Thus, the definition of «investments» as being only those in the charter fund or the basic assets of a juridical entity, restricts the right of investors to choose the optimal form for their enterprise.
Therefore, we feel that the most acceptable definition of «investments» is that given in Article 2.1 of the draft Law «On the State Support and Protection of Investments» which preceded the present Draft. In it «investments» are defined as:
«all types of tangible and intellectual property, as well as the rights to such, that are invested in subjects of entrepreneurial activity on the territory of the RK in the form of civil-law subjects belonging to the investor, if such subjects of civil-law rights are not restricted in their circulation in the Republic of Kazakhstan in accordance with legislative acts, including, cash, securities, other property (except goods to be sold without processing or goods for personal consumption), property rights and rights to the fruits of intellectual activity».
Investment disputes
Section 9 of Article 2 of the Draft gives the following definition of «investment dispute»:
«an investment dispute is one arising out of the contractual obligations between investors and State agencies in connection with the investment activities of the investor, except for disputes related to the actions of investors that have violated the laws of the Republic of Kazakhstan.»
The Draft excludes from the concept of an «investment dispute» the following: «disputes related to the actions of investors that have violated the laws of the Republic of Kazakhstan.» We are of the view that only a court can determine in the final tally whether the actions of an investor represent a violation of Kazakhstan law. One may legitimately query how would it be possible to determine before the court has rendered judgment whether the investor has violated the law, and thus, whether the given dispute with the government agency falls within the category of an «investment dispute».
In addition Article 9.3 of the Draft states that:
«disputes of foreign investors with RK government agencies which do not meet the criteria of an investment dispute shall be resolved in accordance with Kazakhstan law.»
The plain wording of this clause raises concern on the part of foreign investors in that it establishes the exclusive jurisdiction of Kazakhstan courts for cases of this sort. This becomes even more troublesome when one considers that an investment dispute cannot be one which involves violations of RK legislation before the fact of violation has been established. This provision countermands the «right to choose» the forum as set forth in Article 9.2 of the Draft:
«in cases when investment disputes cannot be resolved in accordance with the provisions of section 1 of this Article within three months of the date of written notification by any of the parties to the dispute of the other party, resolution of the disputes shall be conducted in accordance with the international treaties of the Republic of Kazakhstan and the legislative acts of the Republic of Kazakhstan in the courts of the Republic of Kazakhstan as well as in international arbitration tribunals, to which the foreign investor and the State agency have agreed to submit the dispute for review».
Article 4.1 holds that the provisions of international treaties1 have supremacy over the provisions of the Draft.
1 See Article II 3 of the Convention to Recognize and Enforce Foreign Arbitration Decisions of 10 June 1958 (the New York Convention).
«If international treaties which have been ratified by the Republic of Kazakhstan have established provisions other than those set forth in this Law, the provisions of the international treaty shall apply».
Nevertheless, one must ask whether the legislators intend by way of this provision to deny the applicability of arbitration clauses to disputes which do not satisfy the definition of «investment disputes». If this is the case, a Kazakhstan court will no longer be compelled to turn over a dispute to arbitration despite such a clause if it involves parties to a «non-investment dispute». This provision represents a completely unjustified renouncement of the right of parties to bring their disputes to arbitration for resolution.
In view of the above, we propose defining an «investment dispute» as any dispute between an investor and a State agency related to the investor’s investment activity; we also propose that it be stipulated that the parties may choose to resolve the dispute in RK court or submit it to arbitration.
Disposition of income
According to Article 5.1 of the Draft:
«investors shall have the right at their discretion to make use of the income received from their activities after payment of taxes and other obligatory payments to the budget in accordance with the legislation of the Republic of Kazakhstan».
In spite of this provision, the Draft does not furnish a direct guarantee that investors may make use of their own currency resources as set forth in the Law on Foreign Investments2. Thus the issue arises as to whether investors may freely dispose of their funds in hard currency in the event of a return to the requirement that a portion of hard-currency proceeds must be sold to the State. In the spirit of this provision one may conclude that mandatory sales of export proceeds do not apply to investors insofar as this would limit the right of an investor to dispose of income at his or her own discretion, and the mandatory sale of hard-currency proceeds is not a tax or an obligatory payment to the budget.
2 Article 11 of RK Law «On Foreign Investments» of 27 December 1994.
All the same, it is essential to establish precise regulations governing the actual advantages granted to investors by this most important provision and to expressly state that investors may use their own hard-currency funds. In this case there should be an express guarantee that foreign investors they may repatriate income after payment of all taxes.
Nationalization and requisition
The Draft calls for «compensation of equal value»3 in cases of compulsory alienation of an investor’s property, including «full reimbursement of losses»4 when property is nationalized, and »payment of market value»5 when property is requisitioned. Nevertheless it is unclear what «compensation of equal value» encompasses, especially when applied to other forms of compulsory alienation besides nationalization or requisition. We feel that the «speedy, adequate and effective»6 compensation upon expropriation set forth in the current Law on Foreign Investments is a more reliable guarantor of investors’ rights.
3 Article 8.1 of the Draft Law «On Investments».
4 Article 8.2 of the Draft Law «On Investments».
5 Article 8.3 of the Draft law «On Investments».
6 Article 7 of RK Law «On Foreign Investments» of 27 December 1994.
According to Article 8.2:
«In cases of nationalization, all losses incurred by the investor or the juridical entity belonging to it as a result of the publication of legislation acts of the Republic of Kazakhstan concerning nationalization shall be compensated in full».
The nationalization of an investor’s property entitles him or her to «full compensation of losses». Does this include «lost profits»? We believe that in order to achieve full clarity it is necessary to include at the end of this clause the words «including lost profits».
 On the other hand requisition gives the right to «payment of market value», as stated in Article 8.3:
«Requisition of the property of an investor or a juridical entity belonging to it shall be carried out with payment to it of the market value of the property».
This provision echoes Article 253 of the RK Civil Code. However, it remains unclear for foreign and local investors as to how «market value» to be determined, and also whether other types of losses or damages are subject to compensation.
Special features of the legal regime for foreign investments
Article 10.3 reads as follows:
«The legislative acts of the Republic of Kazakhstan, based on the necessity of providing for national security, may stipulate types of activities or territories in which investment activities by foreign investors or organizations with foreign participation are limited or prohibited».
It is our opinion that at the end of this clause the following provision should be inserted: «In cases where such legislative acts prohibit or restrict the investment activities of foreign investors or enterprises with foreign participation on territories where such activities were legally conducted before the adoption of such legislative acts, the losses of investors related to such prohibition or limitation shall be compensated in accordance with Article of 8 of this Law».
Investment preferences
Article 18, which sets forth the application procedure, types and amounts of State in-kind grants, reads as follows:
«State In-Kind Grants.
1. State in-kind grants, in accordance with the procedure established in this Law, shall be granted in the form of right of ownership or right to land use by the Government of the Republic of Kazakhstan or the authorized State agency with the approval of the appropriate State agencies in the area of State property and land resources management in accordance with the legislation of the Republic of Kazakhstan.
2. The following may be conveyed as State in-kind grants: land plots, buildings, structures, machines and equipment, computer equipment, measuring and monitoring instruments and equipment, means of transportation (except for passenger automobiles), and industrial and business inventory.
3. Valuation of State in-kind grants shall be carried out according to the procedure established by the legislation of the Republic of Kazakhstan.
4. The maximum amount of a State in-kind grant shall not be more than 30% of the volume of investments in the capital funds of the RK juridical entity.
If the valuation of the requested State in-kind grant exceeds the above maximum amount, the RK juridical entity shall have the right to receive the requested property upon payment of the difference between its valuation and the maximum amount of the State in-kind grant».
It is obvious that this Article together with the definition of «State in-kind grants» calls for the awarding of such grants only to Kazakhstan juridical entities. This means that any foreign investor seeking to receive such a grant should create a juridical entity in this country. We think that such a limitation significantly curtails the rights of foreign investors and their opportunity to choose the optimal form for doing business in Kazakhstan.
Executing and terminating contracts
Article 21.1 reads as follows:
«the authorized State agency within 20 days after taking the decision to grant investment preferences, shall prepare for signature a Contract, taking into consideration the provisions of the Model Contract approved by the Government of the Republic of Kazakhstan».
Although the majority of the Draft’s provisions regulating State in-kind grants are of a discretionary or administrative nature, this particular provision gives rise to the query as to whether an applicant must unconditionally accept all terms and conditions included in the Contract by the authorized State agency. Thus, we recommend adding the following words to the last sentence of this Article: «and in accordance with the conditions agreed to by the applicant and the authorized State agency».
 Article 22.3 reads as follows:
«The authorized State agency shall have the right to unilaterally terminate the Contract after the expiration of three months from the written notification of the investor thereof in the following cases:
1) upon the revelation of distortion or concealment of information submitted by the applicant to the authorized agency which had an impact on the decision of the latter to grant investment preferences;
2) upon the failure of the investor to perform its obligations under the Contract».
Compared to the rules governing the unilateral termination of a subsoil-use contract7, the rules for this procedure in relation to a Contract to grant investment preferences are much more harsh, especially when one considers the possibility of holding the investor accountable for «lost profit». The term «substantially» should be added to the concept of «information, which has influenced the decision». In addition, we recommend including in the Article a mechanism similar to that in the RK Presidential Decree «On the Subsoil and the Use of the Subsoil», that would allow the Contract to be suspended upon notification of the investor, and the investor would be given a period of time in which he or she would have the opportunity of curing the causes of the suspension of the Contract.
7 See Article 45 of the RK Presidential Decree Having Force of Law of 27 January 1996 #2828 «On the Subsoil and Subsoil Use» (as amended by RK Law of 11.05.99 #381-1; of 11.08.99 #467-1).
Guarantees against changes in the laws
Should this Draft be adopted, the so-called «stabilization of legislation» provided for in the current Law on Foreign Investments will cease to exist. Thus, new investors will have no form of protection against changes in Kazakhstan laws. Guarantees against changes in the law are one of the most important legal considerations for investors and, in our view, should be set forth in the new Law.
At the same time, in accordance with Article 23 of the Draft, «stabilization of legislation» will remain effective for foreign investors who have made their investments before the adoption of the new Law. Section 1 of Article 23 of the Draft provides the following:
Should the position of a foreign investor be worsened by any changes in laws, foreign investments made prior to the effective date of the Law shall be governed by the laws in force as of date of such investment for a period of 10 years from the date of such investment, or, as regards investments made under long-term (over 10 years) contracts concluded with competent bodies prior to the effective date of the Law, until the expiration of the contract, unless otherwise provided in such contract.
In case of improvement of the foreign investor’s position as a result of changes in the legislation, individual terms and conditions of the contracts between the foreign investor and the State agency shall be amended by agreement of the parties in order to achieve a balance of the economic interests of the parties».
However, Article 23.3 sets forth exceptions to this rule, according to which «stabilization» will not extend to changes or additions to RK legislative acts which affect «the protection of the constitutional system, national security, law and order, protection of the environment and personal property, public morality, the life, health, rights and freedoms of the citizenry as well as the applicability of transfer pricing». This list of exceptions has been extended in comparison with the list provided in the current Law on Foreign Investments8. Thus, the adoption of the new Law will unavoidably result in the contradiction of its provisions relating to guarantees against changes in legislation with those set forth in the current Law on Foreign Investments. In this connection, it is essential to bring the Draft’s provision on «stabilization of legislation» in line with the current Law on Foreign Investments.
8 Article 6.3 of the RK Law on Foreign Investments of 27 December 1994.
We also feel that the rules for determining whether the position of a foreign investor has worsened or improved set forth in Article 23.5 should be made more precise and clear:
«The determination of the fact that a foreign investor’s position has worsened or improved shall be carried out in accordance with the procedure to be established by the Government of the Republic of Kazakhstan».           
In conclusion we would like to note that within Kazakhstan government circles there is the opinion that the Republic no longer needs foreign investment. This notion is manifested in the hardening of the attitude of the agencies charged with monitoring of the activities of foreign investors.
This has resulted in a snowball effect on the number of disputes between investors and these agencies. This is also evident in the recent practice of the Government of Kazakhstan of re-evaluating contracts that had been previously concluded with foreign investors. It is our opinion that such an attitude on the part of government agencies does not serve the interests of the State since it leads to the outflow of foreign and domestic investment funds, the waning of business activity and the increase in the number of cases in international arbitration tribunals.
Therefore, our legislators and the drafters of this Draft must make an adequate assessment of its impact on the investment climate in Kazakhstan and take into account when passing a new law on investments not only the interests of the investment community.

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· 2001 №1/2  №3/4  №5/6
· 2000 №1  №2  №3

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