Priority, restricted sectors of foreign investment in Kazakhstan

By Wang Jihong and Liu Ying, Zhong Lun Law Firm
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The co-operation between China and Kazakhstan has scored great successes since Chinese President Xi Jinping visited Kazakhstan in September 2013, and first proposed the Belt and Road Initiative of jointly building economic zones.

At present, China is Kazakhstan’s third-largest trading partner, and second-largest export destination and source of import. According to China’s Ministry of Commerce, Chinese direct investment in Kazakhstan in 2019 was US$400 million, mainly concentrated in the electricity, mining, transportation and construction sectors.

In terms of foreign investment, Kazakhstan pursues an active policy of attracting interest, and proactively provides investors with an enticing investment environment. Kazakhstan’s Law on Investment expressly provides that foreign investors should be treated equally to domestic investors.. The fields of foreign investment in Kazakhstan can be divided into priority and restricted sectors.

Priority sectors

Kazakhstan encourages foreign investment in its government-determined priority development sectors, especially in non-resource fields. The List of Priority Economic Sectors for Implementation of Investment Projects, issued in 2003, and the Kazakhstan government resolution No. 633, approved in 2005, specify the production of building materials, textiles, metallurgy, food products, oil and gas machinery, tourism and transport as priority sectors.

Kazakhstan
Wang Jihong
Partner
Zhong Lun Law Firm

Enterprises investing in these sectors can enjoy tax preferences such as exemption from property tax, land tax, enterprise income tax and value-added tax for 10 years. In June 2014, the president of Kazakhstan signed a decree to grant a series of preferential tax policies to sectors encouraged by the government to invest. These sectors include ferrous metallurgy, non-ferrous metallurgy, oil refining, petrochemicals, food, pesticides, industrial chemicals, vehicles with accessories and engine manufacturing, electrical, agricultural machinery manufacturing, railway equipment manufacturing, mining machinery and equipment manufacturing, oil refining and chemical exploitation machinery and equipment manufacture, building materials, innovation and aerospace industries.

Kazakhstan
Liu Ying
Partner
Zhong Lun Law Firm

Enterprises should note that the Kazakhstan government only gives preferential treatment to projects listed among the government-determined priority categories, and only to legal persons in Kazakhstan. Thus foreign-funded enterprises should register as legal persons in Kazakhstan in order to obtain such treatment.

The preferential treatment that the Kazakhstan government offers includes: (1) tax incentives, such as exemption from enterprise income tax, land tax, property tax, and customs duties. For Chinese enterprises that are operating many construction projects there, when the local legal persons of the project in the priority categories import complete sets of equipment, spare parts and raw materials, Kazakhstan will exempt them from import tariffs; (2) in-kind preference. The government grants uncompensated temporary use of the property or land of Kazakhstan; (3) investment subsidies. It should be noted that there are strict restrictions on the amount and time of such subsidies. Only three years after the project is put into operation will the subsidy begin to be paid; and (4) the use of foreign labour does not come with a quota restriction, which is a much-needed preference for investors.

On the one hand, Kazakhstan implements a strict work permit system for foreign workers. The government controls the total, and issues them according to the state, and the actual labour quota shows a downward trend, from 49,000 in 2019 to only 29,000 in 2020.

On the other hand, the price of labour in Kazakhstan is higher than that of other Central Asian countries, yet there is still room for improvement with their professional skills. Local people place more emphasis on enjoying life, generally do not take the initiative to work overtime, and are unwilling to engage in work outside the scope of their duties.

Restricted sectors

Kazakhstan encourages foreign investment and has no restrictions on investment in most industries. Nonetheless, the government has the right to restrict or prohibit investment in some industries related to national security, such as banking, insurance, mineral investment and land investment.

Kazakhstan is rich in natural resources, especially in oil, natural gas, tungsten, coal, uranium and copper, and many mineral deposits rank among the top in the world. The Kazakhstan government realises the importance of energy resources, and has strengthened national control over subsoil deposits under the circumstances of increasingly prominent international energy issues, and relatively large fluctuations in the prices of international raw materials. For subsoil resources of strategic importance, the government has pre-emptive rights over their transfer.

Taking the field of mineral investment as an example, the Code on Subsoil and Subsoil Use, adopted by Kazakhstan in 2017, further strengthens the control of vital subsoil resources, especially those of strategic significance. The subsoil plots with strategic significance include three types: (1) containing geological oil reserves of over 50 million tonnes, or natural gas of over 15 billion square metres; (2) located in the Kazakhstan sector of the Caspian Sea; and (3) containing a uranium deposit. For investment in some strategic subsoil resources, Kazakhstan limits the proportion of foreign capital to under 50%.

It can be seen that foreign investment in Kazakhstan is facing both opportunities and challenges. First of all, in a larger sense, investors should be clear that Kazakhstan has positioned itself as an “important regional power with strength”, and pursues all-round pragmatic and balanced diplomacy in dealing with relations with China, Russia, Western countries and other parties, so as to avoid over-reliance on a single front.

Secondly, practically speaking, although its legal system is relatively sound, its stability is not as ideal as expected. Considering frequent changes in legislation, enterprises should consult professional organizations to conduct investigations on the existing local policies and laws before making investment decisions.

Wang Jihong is a partner and Liu Ying is a non-equity partner at Zhong Lun Law Firm. Li Shan, another non-equity partner at the firm, also contributed to this article

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