Investor Protection

Introduction

Kyrgyzstan is one of the most investor-friendly countries in the region with a comparatively advanced legal framework and a sustained commitment to encouraging investment. However, difficulties faced in the implementation of the regulations remain a major challenge, which have continued to affect the investment climate and FDI levels in recent years. The Kyrgyz Law on Foreign Investments (1997, amended in 1998, 2002, and 2004) provides for non-expropriation, currency convertibility, the right to repatriate funds, and free access to international arbitration.

The law provides for inter alia, guarantees for national treatment and non-discrimination among foreign investors. However, restrictions exist on foreign ownership of land in Kyrgyzstan.

Legal background

The main principles of the state investment policy are reflected in the Kyrgyz Law on Foreign Investments and include improving investment climate and providing stimulus for foreign investors through establishment of a fair and non-discriminatory legal framework, protecting investors’ interests.
Below, you can find description and explanation of the most important provisions that contribute to investor protection in Kyrgyzstan:

1. Nationalization/expropriation

The investment law protects foreign investors against nationalization or expropriation of property, except where national interests are endangered, and then on a non-discriminatory basis only with compensation which shall be “prompt, appropriate and real”.

2. Repatriation of funds

Under the current legislation, foreign investors are entitled to repatriate profits in convertible currency after the payment of any taxes and other fees that are due.

3. Settlement of disputes

The investment law envisages international arbitration as a mechanism for resolving disputes between contracting parties. Foreign investors involved in disputes with the State may select the following procedures for arbitration: the Washington Convention on the order of resolution of investment disputes between states and citizens of other states (if applicable), the applicable procedures of the International Centre for the Settlement of Investment Disputes, the United Nations Commission on International Trade Law Arbitration Rules, and the Arbitration Court under Kyrgyzstan’s Chamber of Commerce and Industry. The Law on Third Party Arbitration, which entered into force in July 2002, outlines a clear procedure for the enforcement of the arbitral awards in Kyrgyzstan by the Kyrgyz courts.

The Government has a mixed record on the handling of investment disputes. While dispute settlement mechanisms are improving, effective means of protecting and enforcing property and contractual rights are not yet assured. Among the reasons for poor performance are weak institutions, including courts, poor understanding and incompetence of the judicial corps to deal with a wide body of new laws, and other structural shortcomings.

4. Performance requirements

Former tax holidays and other incentives for foreign investors provided by the previous investment law have been eliminated in accordance with standards preferred by IFIs. Performance requirements, therefore, are not imposed on new investment, but investors who participate in the privatization process of enterprises often assume specific obligations regarding future investment and employment. Foreign investors are not required to purchase from local sources or export a certain share of output as per the country’s WTO commitments (TRIMs). There are no legal requirements for employment of host country nationals as well. Despite certain privileges and incentives provided to companies active in Kyrgyzstan’s free economic zones, performance requirements are not imposed regarding the use of local products or local workforce.

5. Foreign exchange arrangements

Kyrgyzstan has a liberal exchange system, and in general, there are no restrictions on converting or transferring funds associated with an investment into freely usable currency and at legal, market-clearing rate. Foreign exchange is widely available, and the local currency, the som, is freely convertible at exchange offices.

6. Taxation

According to the new tax code that the Parliament approved in October 2008, starting in January 2009, VAT will be lowered to 12%, from the current 20%. The types of taxes will be reduced from sixteen to eight. This is all in addition to the 10% flat corporate tax implemented in 2006, which still is the lowest in the world. The new tax code is also instrumental in addressing another common problem in transitional economies - incessant inspections. It is a standard practice to inspect every single tax-paying corporation in the country at least once per year, wasting limited resources of the corporation and the state. The new code sanctions only random checks and only for those companies that are suspected of fraud.

7. Land law

Foreign citizens and entities are still forbidden to own land, including farmland. The regulations allow 99-year leases on property, which is adequate for most purposes. In January 2001, a new law was adopted which offers better regulation of land management and introduces more flexibility in the pledge of lands.

8. Main investment agency and other agencies

Since April 2007, the Ministry of Economic Development and Trade was to assist foreign investors with a variety of issues. The functions of this body are as follows:

• Implementation of the country’s policies on foreign investment attraction;
• Search for investment partners;
• Publicizing investment opportunities in Kyrgyzstan;
• Providing investment legislation and other related information to potential and existing investors;
• Carrying out monitoring processes during the course of implementation of the investment projects.

9. Free economic zones

Kyrgyzstan has four free economic zones (FEZ), the most active of which is FEZ Bishkek which has been functioning since 1996. FEZs operate under the Law on Free Economic Zones (1992, last amended in 2007). According to the law, the companies operating in FEZs are exempted from all kinds of taxes, duties and payments for the period of the activity within the FEZs. Priority in FEZs is given to the export sector, and in pursuance of the decision of the Government at least 70 per cent of the goods manufactured in FEZ are earmarked for export. However, if the goods manufactured in FEZs are supplied to the domestic market of the country, VAT and excise taxes are to be paid as well as customs duties which are levied only in the part of imported raw materials and semi-finished products used for processing of the goods. Incentives are not applied to the services sector. Profits of investors gained from the activities in FEZs and reinvested in the real sector in other areas of the country are subject to the same incentives provided by the law on FEZs. Moreover, activities of certain sectors are restricted in FEZs. Companies active in FEZs are not allowed to supply manufactured goods to the domestic market if value added is less than 30 per cent, and for consumer electronics less than 15 per cent, as well as fuels, alcohol drinks and tobacco products. The legislation provides for non-expropriation, unrestricted use of foreign exchange within the FEZs, repatriation of profits, and guarantee of stability in the legal regime. For example, the regulations of FEZ Bishkek provide for stability of contracts between investor and administration of FEZ. In case of adverse changes in the legislation, the conditions of the contract are to be preserved until the expiry of the contract. The law also provides for more simplified registration of companies, exemptions from licencing for exported products, and reporting to tax authorities only once a year. Moreover, various inspections of the companies registered in FEZs are performed only with the consent of the FEZ administration and not more than once a year. As could also be noted, in order to facilitate the implementation of investment projects, the administration of FEZ Bishkek is functioning as a “one-stop shop” effectively addressing the problems of investors. However, the success of existing FEZs is limited due to frequent changes in legislation and government policies in respect to FEZs in the country.