Monthly Legal Alert: Spring-Summer 2022

SIGNUM regularly provides Legislative/Regulatory Alerts to keep Clients informed about important laws and regulatory changes in the Republic of Kazakhstan (“RK”). This Alert includes recent developments introduced in Spring-Summer 2022 related to:

         I.        Implementation of trading activities, payments, foreign exchange transactions, VAT:

1.     Rules for retail trade outside trading places;

2.     Access to key power;

3.     Internal control rules for payment organizations;

4.     Changes in the rules for the control of foreign exchange transactions;

5.     Return of excess VAT;

6.     Information about goods in Russian and Kazakh languages

       II.        Improving intellectual property laws

      III.        Regulation and development of the insurance market and the securities market, banking

      IV.        Licensing of audit activity

       V.        Subsoil use

1.     Monitoring the fulfillment of subsoil use obligations;

2.     New definitions of unconventional hydrocarbons

      VI.        New customs regulation body

I.        Implementation of Trading Activities, Payments, Foreign Exchange Transactions, VAT

1.     Rules for Retail Trade Outside Trading Places

The rules of out-of-trading place via network marketing, public distributors, mail order and other means have been developed[1].

Other methods of retail trade means retail trade outside trading facilities via telecommunications, electronic communications, including the Internet and other means.

Also, new definitions have been introduced into the Kazakhstan laws, such as public distributors and network marketing:

Ø  Public distributors means sellers or agents who work directly with potential buyers by offering goods at home, in institutions, organizations, enterprises, transport, whose income depends only on the volume of sales;

Ø  Network marketing is a form of out-of-point retail in which independent sellers distribute goods independently or through the involvement of other agents, and their income consists of income from personal sales and commissions from sales of other agents involved in the network.

The key provisions of the Rules are as follows:

Ø  The fee for completing the order, the cost of delivering goods to the buyer, as well as for the provision of other additional services are all included in the cost of the order;

Ø  Placement of an order purchased through network marketing, public distributors, postal service is made in 2 copies, which indicate the serial number of the order, last name, first name, patronymic of the seller, price, quantity, total cost of goods, cost of additionally provided services, date and time of acceptance and execution of the order, last name, first name, signature and address of the buyer, as well as other agreed conditions;

Ø  In case of refusal to receive the goods sent according to a properly executed order on the terms of cash on delivery or prepayment, the buyer reimburses the seller's expenses for sending the goods by mail;

Ø  When transferring the order to the buyer, a cash receipt or other payment document confirming the payment for the goods is issued.

2.     Access to Key Power

The Entrepreneurial Code of the RK includes[2] the concept of "access to key capacity". A key capacity is a product, an infrastructure object of a market entity that occupies a dominant or monopoly position (hereinafter referred to as the “owner of a key capacity”), without access to which other market entities cannot produce and (or) sell goods on the relevant or related product markets. Recognition of key power is carried out under the following conditions:

Ø  duplication of goods, infrastructure facilities is impossible or economically impractical due to technological features;

Ø  the owner of the key power has the right to own, use and dispose of the relevant product, infrastructure facility;

Ø  the ability of the owner of key power to provide access to the relevant product, infrastructure facility;

Ø  a negative impact on competition in case of unreasonable refusal of the owner of key power in access to the relevant product, infrastructure facility;

Ø  access to the corresponding volume of goods, infrastructure facility of the owner of key capacity is not provided through exchange trading.

Failure to provide equal access to key power will be assessed as an abuse of a dominant or monopoly position.

3.     Internal Control Rules for Payment Organizations[3]

Payment organization – a Kazakhstan legal entity, established in the organizational and legal form of a limited liability partnership which is authorized to carry out payment services.

In order to comply with the requirements of the Rules of internal control in order to combat the legalization (laundering) of proceeds from crime and the financing of terrorism (hereinafter referred to as "AML/ CFT"), payment organizations must:

Ø  appoint an official responsible for monitoring compliance with internal control rules;

Ø  identify employees or subdivisions of the organization whose competence includes AML/CFT issues;

Ø  draw up the following programs in accordance with the AML/CFT Law:

•    a program for the organization of internal control in order to counter the legalization (laundering) of proceeds from crime and the financing of terrorism, including the requirements for employees of financial monitoring entities responsible for the implementation and compliance with the internal control rules;

•    a risk management program (low, high risk levels) for the legalization (laundering) of proceeds from crime and terrorist financing, taking into account the risks of clients and the risks of using services for criminal purposes, including the risk of using technological advances;

•    client identification program;

•    a program to monitor and study customer transactions, including the study of complex, unusually large and other unusual customer transactions;

•    a training and education program for subjects of financial monitoring in the field of combating the legalization (laundering) of proceeds from crime and the financing of terrorism;

•    other programs that may be developed by subjects of financial monitoring in accordance with the internal control rules.

Payment organizations that have been registered with the National Bank of the RK must have brought internal documentation in line with the new requirements within 3 months from the date of entry into force of the Resolution of the Board of the National Bank of the RK No. 11 dated 28 February 2022 (should have been enforced from 25 March 2022). You can also find a detailed list of requirements for the above programs in the said resolution.

4.     Changes in the Rules for Monitoring Foreign Exchange Transactions[4]

Identification Confirmation

According to the new changes, when submitting documents for accounting registration on paper, obtaining an account number for a currency agreement is carried out upon presentation by the recipient of an identity card or confirmation of his identity through the digital document service.

Currency Agreement Amount

A new provision has been introduced according to which the amount of a currency agreement, when a resident accepts a right to claim against a non-resident or a debt to a non-resident as a result of an assignment of a claim or a transfer of a debt, shall be recognized as the transferred (accepted) amount of the claim or debt, respectively, including the amount of the claim or debt for remuneration, commission, fines and other payments.

Extended List of Cases for a New Account Number

The list of cases for obtaining a new account number has been extended. Now, a new account number must be obtained when changing the identification data of a resident – a legal entity acting as a participant in a foreign exchange agreement - in connection with its reorganization (merger, accession, division, separation, transformation).

No Need for an Account Number

According to the amendments, an account number is not assigned to advance payments for participation in auctions on collateralized property - securities, equity instruments, real estate.

5.     Return of Excess VAT

The new version of the rules[5] for the return of VAT excess establishes a new procedure using the risk management system (“RMS”). The RMS is based on risk assessment and includes measures developed and (or) applied by the authorized body in order to identify and prevent risks. The risk is the probability of non-fulfillment and (or) incomplete fulfillment of the tax obligation by the payer, which causes damage to the state. The RMS determines the degree of risk based on the automated calculation of the points according to the risk criteria.

The rules now apply in the following cases:

Ø   When conducting thematic checks to confirm the reliability of amounts of VAT exceeding, including those presented for refund;

Ø   When applying the simplified procedure for the return of VAT excess, provided for in Article 434 of the Tax Code;

Ø   When confirming the excess of VAT in accordance with international treaties, in respect of which a special refund procedure is applied.

The simplified procedure for refunding excess VAT applies to the following payers:

1)     Registered for at least 12 consecutive months for tax monitoring;

2)     Manufacturers of goods of own production, according to the list of manufacturers of goods of own production;

3)     Those who converted at least 50% of the foreign exchange earnings from the export of raw materials for the tax period, according to the list of business entities that performed the conversion.

Payers must submit VAT returns indicating the requirement for a refund. They shall not have an unfulfilled tax obligation to submit tax returns as of the date of submission of the VAT return. The refund under the simplified procedure is made within 15 business days after the expiration of the last date established by the Tax Code for the submission of the VAT return.

6.     Information about Goods in Russian and Kazakh languages

Now[6], when selling goods via the Internet, information about the name of the product (work, service), cost and condition for purchasing the product (work, service), as well as information about the main consumer properties of the product (work, service), nutritional, biological and energy value of the product, as well as information about contraindications for their use, must be in Russian and Kazakh languages. It should be noted that before this change, the above information about the product could only be in Russian or Kazakh.

 II.        Improving Intellectual Property Laws

Geographical Indications

Geographical indications have become one of the means of individualization of participants in civil circulation of goods, works or services. A geographical indication is a designation that identifies a product originating in the territory of a geographical feature, a certain quality, reputation or other characteristic of which is largely related to its geographical origin. On the territory of a given geographical object, at least one of the stages of production of a product that has a significant impact on the formation of its characteristics must be carried out.

A person or entity who or which has the right to use a geographical indication and an appellation of origin of goods has the right to place this indication and appellation on the product, packaging, advertising, brochures, invoices and use them in any other way in connection with the introduction of this product into civil circulation.

Patent Term

A patent for an industrial design is valid for 10 years. Previously, the initial term of a patent was 15 years. The patent term may be extended each time by an expert organization at the request of the patent holder for 5 years. The total duration of the patent shall not exceed 25 years following the application date.

III.        Regulation and Development of the Insurance Market and the Securities market, Banking[7]

Security Fee

A monetary obligation, including the obligation to compensate for losses or pay a penalty in case of a breach of the contract by agreement of the parties, can be secured by the transfer of a certain amount of money (security fee) by one of the parties to the other party. The said fee can also secure an obligation that will arise in the future.

The security fee shall be credited against the fulfillment of the relevant obligation upon the occurrence of circumstances stipulated by the agreement.

If circumstances do not occur within the period stipulated by the agreement or the secured obligation is terminated, the security fee shall be returned to the person who previously provided the security fee, unless otherwise provided by the agreement.

The agreement may provide for the obligation of the relevant party to additionally pay or partially return the security fee upon the occurrence of certain circumstances. No interest is accrued on the amount of the security fee, unless otherwise provided by the laws of Kazakhstan or the agreement.

The rules on the security fee shall also apply in cases where securities, other financial instruments and/or things defined by generic characteristics are transferred into ownership on account of security.

Repo Transaction

Repo transaction means a contract consisting of two parts, according to which:

Ø  One party undertakes to transfer securities to the ownership of the other party within the period provided by the agreement, and the repo buyer undertakes to accept these securities and pay a certain amount of money for them (repo opening);

Ø  The repo buyer undertakes to transfer securities and (or) other financial instruments into the ownership of the repo seller within the period established by the agreement, and the repo seller undertakes to accept these securities and (or) financial instruments and pay a certain amount of money for them (repo closing).

Insurance Ombudsman

If the insurance claim is refused, the insured is entitled to apply to the insurance ombudsman to resolve disagreements.

Insurer's refusal to make an insurance payment may be appealed to the court, subject to the procedure for settling a dispute by the insurance ombudsman.

Re-registration of Microfinance Organizations

For the state re-registration of microfinance organizations, the bank must additionally file the following:

Ø  A permit from the competent authority for regulation and development of the financial market for the voluntary reorganization of a microfinance organization in the form of conversion into a bank;  and

Ø  An approved report on the implementation of measures provided for by the action plan for converting a microfinance organization into a bank.

Transfer of Insurance Risks

An insurance (reinsurance) company has the right to transfer insurance risks for reinsurance to a reinsurance company that is a non-resident of the RK, a member of the Astana International Financial Center. This can be done both directly or through mediation. An insurance (reinsurance) company is prohibited from transferring insurance risks for reinsurance to a reinsurance company that is a non-resident of the RK or a member of the Astana International Financial Centre, with the participation of 2 or more insurance brokers that are members of the Astana International Financial Centre or insurance brokers - non-residents of the Republic of Kazakhstan.

IV.        Qualification Requirements for Licensing Audit Activities

New qualification requirements[8] for licensing audit activities are presented. Now an audit company can be created not only in the form of an LLP, but also registered at the AIFC. The new requirements also include:

1)     Implementation by the auditor of his activities as an auditor only as part of one audit organization;

2)     Availability of a civil liability insurance contract for obligations arising as a result of causing property damage during the audit;

3)     Implementation of the types of activities provided for by the legislation of the RK on auditing activities;

4)     The company being the subject of medium or large business.

 V.        Subsoil Use

1.    Monitoring the Fulfillment of Subsoil Use Obligations

Amendments have been introduced to the Procedure for monitoring the fulfillment by subsoil users of their subsoil use contract obligations[9].

Analysis of the reports provided by subsoil users is carried out by the competent authority within 30 business days.

In case of violations, subsoil users must be notified by 1 April following the reporting period.

The term for elimination of violations by subsoil users must not exceed 6 months, if the subsoil user fulfills the financial obligations under the subsoil use contract by less than 30% for the reporting year.

2.    New Definitions of Unconventional Hydrocarbons[10]

New definitions of unconventional hydrocarbons have been introduced to the Subsoil Code.

Ø  Shale oil is the crude oil contained in shale rocks;

Ø  Shale gas is a multicomponent mixture of hydrocarbons and non-hydrocarbon gases with a predominant content of methane, which is in a gaseous state at normal atmospheric temperature and pressure, contained in shale rocks;

Ø  Shale rock is a fine-grained clastic rock of sedimentary origin with low permeability, formed from silt, organic substances, which are a mixture of flakes of clay minerals and tiny particles (fine particles of silt or clay) of other minerals, in particular, quartz and calcite;

Ø  Gas hydrates are solid crystalline substances of natural origin, the decomposition of which releases gas with a predominant content of methane.

Shale oil, shale gas, natural bitumen, coal bed methane and gas extracted from gas hydrates are unconventional hydrocarbons.

  VI.        New Customs Regulation Authority

The new territorial authority[11] of the Committee of State Revenues of the Ministry of Finance of the Republic of Kazakhstan is the Main Dispatch Department of the Committee (hereinafter referred to as the "MDD"), which is authorized to perform the functions of state administration and control in the field of customs, to ensure the completeness and timeliness of tax receipts, customs and other obligatory payments to the budget, participation in the implementation of customs policy, etc.

The MDD has been assigned with the following tasks:

1)     Protecting the national security of the RK, human life and health, flora and fauna, the environment;

2)     Creating conditions for accelerating and simplifying the movement of goods across the customs border of the Eurasian Economic Union;

3)     Ensuring the fulfillment of international obligations of the RK and participation in the development of international treaties of the RK in the field of customs, etc.

1. Order of the Deputy Prime Minister - Minister of Trade and Integration of the Republic of Kazakhstan No. 136-НҚ dated 11 March 2022 "On Approval of the Rules for Retail Trade Outside Trading Places through Network Marketing, Public Distributors, Selling by Mail and Other Methods". Entered into force on 27 March 2022.
2. Law of the Republic of Kazakhstan No. 101-VII dated 3 January 2022 “On Amendments and Additions to Certain Legislative Acts of the Republic of Kazakhstan on the Development of Competition”. Entered into force on 18 March 2022.
3. Resolution of the Board of the National Bank of the Republic of Kazakhstan No. 11 dated 28 February 2022 “On Approval of the Requirements for the Internal Control Rules in Order to Counter the Legalization (laundering) of Proceeds from Crime and the Financing of Terrorism for Payment Organizations”. Entered into force on 25 March 2022.
4. Resolution of the Board of the National Bank of the Republic of Kazakhstan No. 13 dated 28 February 2022 “On amendments and additions to the Resolution of the Board of the National Bank of the Republic of Kazakhstan No. 64 dated 10 April 2019 “On approval of the Rules for monitoring foreign exchange transactions in the Republic of Kazakhstan”. Entered into force on 4 April 2022.
5. Order of the Minister of Finance of the Republic of Kazakhstan No. 317 dated 28 March 2022 “On Amendments and Additions to the Order of the Minister of Finance of the Republic of Kazakhstan No. 391 dated 19 March 2018 “On Approval of the Rules for the Return of Excess Value Added Tax” and Invalidating Some Orders of the Ministry of Finance Republic of Kazakhstan". Entered into force on 11 April 2022.
6. Law of the Republic of Kazakhstan No. 94-VII dated 29 December 2021 “On Amendments and Additions to Certain Legislative Acts of the Republic of Kazakhstan on Issues of Visual Information and Religious Activities”. Entered into force on 9 January 2022, some clauses entered into force on 1 March 2022.
7. Law of the Republic of Kazakhstan No. 138-VII dated 12 July 2022 "On Amendments to Certain Laws of the Republic of Kazakhstan on the Regulation and Development of the Insurance Market and the Securities Market, Banking Activities". Entered into force on 12 September 2022.
8. Order of the Minister of Finance of the Republic of Kazakhstan No. 79 dated 24 January 2022 "On Some Issues of Licensing Audit Activities". Entered into force on 30 March 2022.
9. Order of the Minister of Energy of the Republic of Kazakhstan No. 189 dated 26 May 2022 “On Amendments to the Order of the Minister of Energy of the Republic of Kazakhstan No. 160 dated 5 May 2018” “On Approval of the Rules for Monitoring Subsoil Users’ Compliance with Obligations Under a Subsoil Use Contract”. Entered into force on 4 August 2022.
10. Law of the Republic of Kazakhstan No. 130-VII dated 30 June 2022 “On Amendments to Certain Laws of the Republic of Kazakhstan on the Issues of the Electric Power Industry, Energy Saving and Energy Efficiency, Subsoil Use, Local Government, State Border, Housing and Communal Services and Science”. Entered into force on 31 August 2022.
11. Decree of the Government of the Republic of Kazakhstan No. 130 dated 16 March 2022 "On Certain Issues of the Ministry of Finance of the Republic of Kazakhstan". Entered into force on 16 March 2022.