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Company Formation. Joint venture, branch and representative office registration.

Home Company Formation. Joint venture, branch and representative office registration.

Updated January 17, 2021

Company formation or a branch (representative) office registration is an integral part and starting point for creating a business, which success is depends on legal solutions made at this stage. Our team has proven record of completed projects, many years of business registration practice reinforced by corporate dispute resolution. This subsection provides more details on our skills and guidelines.

The Kazakhstan legislation provides a wide range of organizational and legal forms of entrepreneurial activity, from a sole proprietorship to a joint stock company. There is also an opportunity to set up a branch or representative office of both Kazakhstani and foreign companies. The choice of one or another legal form depends on the goals, objectives and expected turnover of the business.

You can find the relevant information on the registration of structural units of legal entities on the territory of the Republic of Kazakhstan in the next subsection.

But, before moving on to the disclosure of the topic, I think it would be informative and useful to briefly outline the possibilities of an entry into the market, using the advantages of branches and representative offices before deciding on the registration of a legal entity. Structural units are convenient because they allow you to study the potential of the market and make an informed and balanced decision on a full-fledged commercial presence and registration of a subsidiary. This approach is largely justified by the fact that at first it allows you to save on many operating costs and reduce the tax burden.

The tax legislation of Kazakhstan is unified with the international one, in particular, tax conventions have been signed and ratified with 55 countries in order to avoid double taxation. In this regard, Kazakhstan is consistently interpreting the provisions of the tax conventions on “permanent establishment” and a representative office carrying out “auxiliary activities”. According to the requirements of the Code of the Republic of Kazakhstan “On Taxes and Other Mandatory Payments to the Budget,” non-commercial structural units of foreign legal entities in the form of representative offices carry out “auxiliary activities” for the head office – marketing and other activities aimed at promoting goods or services, build and establish logistics and partner distribution network. After three years, the representative office from the date of registration is recognized as a “permanent establishment” with all the ensuing tax consequences.
For a better understanding, we propose to consider the example of the entry of large pharmaceutical companies into the Kazakhstan market, which has been repeatedly implemented by our lawyers. Such companies previously did not have any presence in the country, however, they cooperated with large domestic distributors and pharmacy chains. In such cases, the market share for individual pharmaceuticals is usually no more than 5-10%. At the same time, the pharmaceutical market of Kazakhstan is increasing every year, the population and well-being of the country is growing, the citizens of the country are increasingly preferring quality products.

The company realizes the potential of the market and plans to start a phased entry into the market through the registration of a representative office of a foreign legal entity based on our recommendation. At this stage, the goal and tasks of the representative office are to establish logistics, timely replenishment of warehouse stocks of partners-distributors, form new distribution channels, and promote goods. The representative office is a non-profit structural subdivision of the enterprise, and therefore it is not legal to act as an applicant on the territory of Kazakhstan for obtaining a pharmaceutical license for the wholesale trade of drugs in accordance with the requirements of the Law of the Republic of Kazakhstan “On Permits and Notifications”. In other words, the representative office forms its budget at the expense of appropriations coming from the head office and does not participate in generating the revenue side.

At the same time, in practice, many foreign companies prefer this particular scheme of phased entry into the market, because at this stage the business will be able to form all the pros and cons of curtailing and leaving the “market”, or further increasing its commercial presence through a branch or subsidiary.

Today, one of the most optimal organizational and legal forms of business is perhaps a limited liability partnership (hereinafter referred to as LLP) due to the division of responsibility between its participants and the partnership itself. In accordance with the profile Law of the Republic of Kazakhstan “On a limited and additional liability partnership”, participants are not responsible for the obligations of the partnership, and the partnership is not responsible for the obligations of its participants.

The legislation does not contain any restrictions for foreign citizens and foreign legal entities wishing to act as the only participant in an LLP or co-founder with another foreign citizen or foreign legal entity. In other words, foreign individuals and legal entities can establish a joint venture in the form of an LLP in Kazakhstan.

Moreover, LLPs with 100% foreign capital are entitled to appoint foreign directors and deputies without obtaining permission to attract foreign labor.

This provision provides foreign directors and their deputies with an exceptional opportunity to manage the established company from the first days of its registration, without wasting time and financial resources for obtaining permits and other formalities.

I would like to separately note that the legislation governing the registration and activities of economic entities, including in the form of a business partnership, is regularly improved and undergoes significant improvements to increase the investment attractiveness of the country.

Not so long ago, Kazakhstan rose in the Doing Business rating of the ease of doing business.

According to the DoingBusiness report of the World Bank (the most influential international financial institution) for 2020, the economy of Kazakhstan over the past 5 years has managed to make a significant leap and move from 77 to 25th place in the ranking, ahead of many developed European countries such as Austria, Iceland, France, Switzerland, the Netherlands. and The Land of the Rising Sun.

The rating is calculated by the World Bank based on a number of indicators, one of which is the protection of the rights of minority investors (members of the partnership and shareholders). It was in protecting the rights of minority investors that Kazakhstan managed to achieve the greatest progress in 2016, climb 22 positions and take 3rd place in the rating for this indicator.

Among the factors that favorably influenced the improvement of the investment climate was the introduction of online registration of companies through the e-government portal – EGOV.KZ, which made it possible to significantly reduce the waiting time and improve the quality of services.

When registering an LLP, it is important to know which business entity you are referring to a newly registered business – small, medium or large. A small business entity has a limit on the number of personnel not exceeding 100 people, and turnover not exceeding 300,000 monthly calculation indicators (as of 01.04.2020, 1 MCI is 2,778 Kazakhstani Tenge), which is 833,400,000 KZT or a little more 2,000,000 USD.

The size of a business entity affects a number of factors, including tax monitoring.

Our team will help you not only with rendering legal services, but also act as your business consultant.

We will calculate and offer the most optimal organizational and legal form of business, taking into account your wishes in terms of taxation, income repatriation, legal capacity and functionality, and other criteria.