A Summary Review of the Kazakhstan Law On Investments
Andrew Griffin, Attorney Specializing in Commercial and Energy Issues in Kazakhstan, Russia and Poland*
Karen Ostrander-Krug, Depute Managing Director Denton Wilde Sapte
* Andrew Griffin, also represented foreign investors’ point of view in the Majilis Working Group developing the Law On Investment.
The Law on Investments1 was passed on 8 January 2003. It expressly revokes and replaces the Law on Foreign Investments2, which had furnished many of the guarantees and protections enjoyed by foreign investors in Kazakhstan, and the Law on State Support for Direct Investments3, which had provided incentives for investments in priority sectors of Kazakhstan’s economy. The Investment Law is intended to provide equally advantageous conditions for foreign and domestic investors alike. In replacing the Foreign Investment Law and the Direct Investment Law, the Investment Law does two things. One is that it sets forth the basic tenets of investment protection and the other is that it provides for “investment preferences,” such as exemption from certain taxes and partially from customs fees, as well as grants of State property for Kazakhstan legal entities making investments in specified “priority types of activities.” The list of priority activities is established by the Government and as a rule does not include petroleum projects. This article will address primarily the general investment protections provided under the Investment Law.
1. Law on Investment adopted on 8 January 2003.
2. Law on Foreign Investment adopted on December 27, 1994.
3. Concerning the State Support to Direct Investments Law adopted on February 28, 1997, in the wording as of August 2, 1999.
Application of the Investment Law
The Investment Law defines “investments” as:
All types of property (except for goods destined for personal use), including subjects of leasing agreements once the leasing contract has been executed, as well as the rights thereto, contributed by an investor to the charter capital of a legal entity or to increase fixed assets used for entrepreneurial activity.
While “all types of property” evidences the drafters’ aim to have a broad definition, the stipulation that only contributions to a company’s charter capital or increases in fixed assets are considered an investment may prove restrictive. Thus, although the definition probably covers most forms of property and capital contribution there are likely to be some investors that find that their activities do not qualify as “investments” under the ambit of the Law. Of course, petroleum and infrastructure investments will almost certainly involve either or both a charter capital contribution or an increase in fixed assets used for entrepreneurial activity and should therefore fit solidly within the concept of “investments.”
An “investor” is defined as an entity that is making an investment “within Kazakhstan.” This is significant in that it stipulates that the Investment Law’s protections extend to both Kazakhstan and non-Kazakhstan legal entities and physical persons making investments.
All the same there remains the curious issue whether the Investment Law applies to all “investments” in Kazakhstan. This ambiguity arises from Article 2.3, which states:
The provisions of this Law shall not apply to relations which emerge when carrying out investments and which pertain to the sphere of the effect of other legislative acts of the Republic of Kazakhstan, except for the cases that are provided for by such legislative acts.
The ultimate import of this provision, in particular the phrase “which pertain to the sphere of the effect of other legislative acts,” is unclear. While it is likely that the provision will be narrowly construed to give precedence to only to those laws which expressly state that they regulate certain conditions of investments, a broader interpretation is also possible: it might be argued, for example, that petroleum activities which are specifically governed by the Law on Subsoil4 and the Law on Petroleum5 are under the sphere of those laws and consequently fall outside the Law on Investments.
4. The Edict of the President of the Republic of Kazakhstan Having the Force of Law, On the Subsoil and Its Use, dated January 27, 1996, in the wording as of August 11, 1999.
5. Edict # 2350 of the President of the Republic of Kazakhstan Having the Force of Law, On Petroleum, dated June 28, 1995, in the wording as of August 11, 1999.
Contract Stabilisation
The Investment Law contains two stabilisation provisions: Article 4.3 and Article 23. Article 23 only applies to contracts involving the “investment preferences” set forth in the Investment Law and states that the privileges granted in such contracts shall remain in effect for the life of the contract. Article 4.3 similarly stipulates that the guarantee of stability applies to contracts between State agencies of Kazakhstan and investors, except when changes in the laws affect national security, the environment, human health and morals, or the procedure and conditions for the import, production or sale of excisable goods.
The main concern with the stability provided by Article 4.3 is the exception: legislative changes “which change the procedure and conditions of import, production and sale of excisable goods.” Oil is an excisable good and a change in any law governing “the import, production and sale” of that commodity arguably could be interpreted to fall within the exception and therefore apply to existing contracts for the exploration or production of petroleum. It must be noted, however, that an almost identical exceptions clause concerning excisable goods was contained in the Foreign Investment Law. We know of no cases when it was invoked to change a petroleum contract.
Moreover, both the Petroleum Law and the Subsoil Law contain stabilisation provisions which have narrower exceptions. For example, Article 57 of the Petroleum Law contains the following provision:
The Contractor is guaranteed the protection of its rights in accordance with RK legislation. Amendments and additions to legislation worsening the position of a contractor shall not apply in contracts executed before such amendments and additions.
The guarantees established in this article shall not extend to amendments of RK law in the area of insuring defence capabilities, national security and in the sphere of environmental protection as well as human health.
Another issue arising from adoption of the Investment Law is the continuing application of the Foreign Investment Law, and particularly the legislative stability granted thereunder, to existing contracts. The Investment Law is silent on this issue. Arguably, the stability provisions (i.e. the grandfather clause) of article 6 of the Foreign Investment Law would apply to investments made while it was in effect, including the guarantee against the revocation of the stabilisation right itself. In such a case investors would retain some of the protections of the otherwise obsolete Foreign Investment Law. However, it is not clear how this will ultimately be interpreted. Most likely, the issue will be decided on a case-by-case basis depending on the particular facts and the language of the applicable subsurface contract.
Stabilisation is a multi-faceted legal issue, which depends heavily upon the facts of each particular case. Therefore, investors should seek specific legal advice when faced with such a concern.
Other Guarantees
The former Law on Foreign Investments contained a number of express guarantees: against changes in legislation, against expropriation and illegal acts of government organs and officials as well as guarantees that a foreign investor could freely use and expatriate its income and its hard currency after taxes were paid. Despite its revocation, a number of the Foreign Investment Law’s guarantees remain intact by having been incorporated into other legislation.
The guarantees provided by the Investment Law can be summarised as follows: a guarantee of legal protection (including stability of contracts as previously discussed); a guarantee of the right to use after-tax income as the investor sees fit; and guarantees of investors’ rights to compensation when property is nationalised or requisitioned.
Legal Protection
An investor is afforded the right to compensation of damages as a result of the issuance of illegal government acts or the actions/inaction of government officials. This guarantee is substantially the same as that provided by Article 922 of the Civil Code of Kazakhstan which establishes the State’s liability in certain circumstances.
Use of Income
Investors are guaranteed the right to use their income after the payment of taxes and other obligatory payments. The guarantee that that one may use after-tax income is subject to Kazakhstan currency laws, which in certain cases require the issuance of licences by the National Bank of Kazakhstan. As for foreign investors, Kazakhstan currency laws permit proceeds to be freely expatriated. While the Investment Law contains no assurances that after-tax income in foreign currency cannot be made subject to mandatory conversion to Kazakhstan tenge, there is currently no such requirement under Kazakhstan currency legislation.
Nationalisation and Requisitioning of Property
The guarantees of compensation in the event of nationalisation or requisition of an investor’s property include compensation for all damages in case of the former, and payment of the market price of the requisitioned property in case of the latter.
The accepted international standard for compensation in cases of nationalisation is that it be “prompt, adequate and effective.” This was the standard was that was expressed in the Foreign Investment Law. The more limited standard in the current Investment Law raises the issue as to whether “all damages” includes, for example, lost profits. In addition, there is now no express legal requirement that such compensation be paid promptly. The problems caused by this restrictive drafting, however, may be resolved contractually. Also, some foreign investors may find that there are applicable international treaties which explicitly require prompt, adequate and effective compensation in the event of nationalisation.
The standard for compensation for requisitioned property (e.g. oil stocks) provides that “property may be requisitioned by way of payment of the market value of such property. The market value of the property shall be determined in accordance with the procedure established by legislation of the Republic of Kazakhstan.” In principle, this is a favourable provision, although what each party ultimately believes to constitute market value may differ.
Dispute Resolution and Arbitration
Among the most important provisions in any law on investment protection is that concerning the right to resolve disputes by way of international arbitration. The Investment Law’s Article 9 on dispute resolution contains express acknowledgement of the possibility by agreement of the parties to submit investment disputes to international arbitration. An “investment dispute,” as defined in the Investment Law, is one arising from contractual obligations between an investor and a State agency of Kazakhstan. Thus, the provision only applies to disputes directly arising from contracts with the government. In this way the Investment Law differs from the Foreign Investment Law in that it limits the application of foreign arbitration to disputes directly arising from contractual obligations. It also differs because the new law requires the agreement of the parties to international arbitration whereas under the Foreign Investment Law, the consent of the Republic of Kazakhstan to submit disputes to international arbitration was presumed by law.
According to the Investment Law, all other disputes (“non-investment disputes”) are to be “resolved in accordance with legislation of the Republic of Kazakhstan.” Although the provision may be literally interpreted to mean that Kazakhstan law shall govern non-investment disputes, such a facile interpretation seems unlikely since Article 1112 of the RK Civil Code permits parties to determine the choice of applicable law to their contracts unless otherwise prohibited by law. Furthermore, the Civil Code’s Article 1113 sets forth situations in which foreign law may apply to a transaction involving a Kazakhstan legal entity or physical person even if the parties have not expressly chosen which law will govern.
While the Investment Law does not specifically condone international arbitration for non-investment disputes, as it does for investment disputes, this fact should not restrict the parties’ right to choose this form of arbitration. Article 25 of the RK Civil Procedure Code allows parties to submit a matter that would otherwise be under the jurisdiction of a Kazakhstan court to a “third-party court” (i.e., any tribunal not consisting of State judiciaries), unless prohibited by Kazakhstan law. Article 249.5 of this Code requires a Kazakhstan court to decline to review a case when the parties have executed a “third-party” court dispute-resolution agreement and the defendant has filed a motion objecting to the review of the case in court. Furthermore, Kazakhstan is a party to the New York Convention on the enforcement on foreign arbitral awards and in April of 2002 the RK Constitutional Council issued a ruling confirming the validity of international arbitration for settling disputes between parties in Kazakhstan.
All the same, the differentiation between investment and non-investment disputes with regard to international arbitration cannot help but attract the attention of investors and lawyers. Only actual judicial practice will show if investment disputes are somehow “more equal” than others in the availability of international arbitration as a means for dispute resolution.
Conclusion
The goal of equalising the position of foreign and domestic investors is laudable, but there are certain aspects where the two will never be situated in quite the same way. The most obvious, of course, is the perception that international arbitration will be more impartial to the parties (the assumption being, as it is in any jurisdiction, that in a domestic court the “home team” always has the advantage over the outsider). Certain guarantees previously expressly granted to foreigners are now available for all, but they have been scaled back in the process. Still, the cancellation of the Foreign Investment Law does not mean that foreign investors have lost all of the guarantees previously granted to them. Some guarantees have been scaled back (which to an extent is part of the natural development of Kazakhstan and concomitant evolution of its laws). Other guarantees still are embodied in various Kazakhstan normative acts such as the existing petroleum and currency laws. Nonetheless, the new Investment Law has certain ambiguities and uncertainties concerning the rights given to investors, which will likely require judicial interpretation and possible amendment.
Table of contents
ChevronTexaco: Turning Partnership into Energy Guy Hollingsworth
Kazakhstan’s Membership of the WTO: Problems, Consequences and Prospects Kenzhegali Sagadiyev
The Use of Subsoil Resources in Kazakhstan. Results for the Year 2002 Elvira Dzhantureyeva
Imstalcon: Domestic Producers Need State Support! Vladimir Khoroshilov
Activities of the Committee for International Affairs, Defence and Security of the Majilis of Parliament, 2002 Sharip Omarov
Germany and Kazakhstan: Problems and Prospects for Economic Co-operation Galiya Dzhunusaliyeva
Investing in Kazakhstan – Opportunities and Threads for German Investors Michael F. Krause
Legal Regulation of Investment Activities in Kazakhstan Askar Batalov
A Summary Review of the Kazakhstan Law On Investments Andrew Griffin, Karen Ostrander-Krug
Tax burden in Kazakhstan Janat Berdalina, Aigul Mustapaeva
