The PPP legal environment in Kyrgyzstan from the perspective of the private partner’s interests

Ms. Gulnara KalikovaSenior Partner

Kalikova & Associates Law Firm

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Basic

1. National legislation (a) Law “On investments in the Kyrgyz

Republic” No. 66 dated March 27, 2003 (b) Law “On public-private partnerships in the

Kyrgyz Republic” No. 7 dated February 22, 2012

2. Bilateral investment protection treaties 26+ treaties e.g. USA, China, Great Britain

and Northern Ireland, South Korea, Germany, Turkey, Malaysia

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Guarantees

• equal treatment to domestic and foreign investors

• no intervention into business activities• freedom to invest in and run any business

not prohibited by Kyrgyz laws• chose any managerial structure for the

business, hire local and foreign employees subject to Kyrgyz legislation

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Guarantees

• right to acquire any property, equity, right

• repatriation of investment profit, export of proceeds, assets, intellectual property and information

• protection against expropriation (nationalization, requisition or similar measures that may result in seizure of investment funds or investor’s deprivation of the possibility to manage the investments) with exception of cases which require appropriate coverage of the investor’s damage

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Corporate structure (SPV)NATIONAL LEGISLATION: (a) Civil Code dated May 8, 1996; (b) Law “On Business Partnerships & Companies” No. 60 dated November 15, 1996; (c) Law “On Joint Stock Companies” No. 64 dated March 27, 2003

Two common commercial legal forms of legal entities:1.Joint-Stock Company - for large-scale business: clear and strict corporate governance rules, IPO and public listing, minimum charter capital of USD 2,150. Registration: 3-5 days (+30 days for registration of shares), transfer of shares less than 1 day2.Limited Liability Company - for small and medium enterprises: flexible corporate governance, no minimum charter capital. Registration: 3-5 days, transfer of stake 3-5 days

Public partner may be a co-founder of the special purpose vehicle (SPV) (not more than 1/3 participation shares)

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TaxationNATIONAL LEGISLATION: Tax Code dated October 17, 2008

• corporate income tax: 10%• employee income tax: 10% • non-resident income tax (withholding from

dividends/interests) : 10%• VAT: general rate 12%• sales tax: 2,5%-3,5%• fixed land tax depending on type, location, area, commercial

value and inflation rate • real estate property tax: commercial 0.8%• double taxation treaties 22+ treaties e.g. Germany, China,

Russia, Canada, Turkey• tax incentives and privileges for the private partner and/or

SPV under the PPP agreement with the Governmente.g. as per proposed amendments to the Tax Code: supply of

goods, works, services provided under the PPP agreement shall be exempt from VAT.

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Licensable activitiesNATIONAL LEGISLATION: Law of the Kyrgyz Republic “On Licensing” No. 12 dated March 3, 1997

32+ types of business are subject to licensing, e.g. in the field of PPP:

• urban planning, research and design of residential, public and production premises and structures

• construction and assembly jobs, with the exception of the construction of individual residential houses

• production, transfer, distribution, sale of electric power and heating energy

• construction of electric power stations, substations and electric power lines

• private medical practice• education, regardless of the level of education and form of

ownership (with the exception of state education institutions offering pre-school, primary, basic, and secondary education programs)

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Land rightsNATIONAL LEGISLATION: Land Code dated June 25, 1999

•Forms of property: state, municipal and private• Land rights may be owned by:

− nationals − foreign nationals (if engaged in housing finance)− legal entities (if not more than 20% of company's

charter capital owned by foreign nationals or legal entities)

•If more than 20% of company's charter capital owned by foreign nationals or legal entities land rights may be granted for temporary use for the term up to 50 years •foreigners may own buildings and structures on any land plots •foreigners may own residential houses or apartments subject to permissions of a special commission

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Environmental and safety regulations

NATIONAL LEGISLATION: (a) Law “On Environment Protection” No. 53 dated June 16, 1999; (b) Law “On Industrial Safety of Hazardous Production Facilities” No. 93 dated November 19, 2001; (c) Law “On Environment Expertise” No. 54 June16, 1999

•Environmental, health and safety requirements for the PPP project shall be mandatorily stipulated in the PPP agreement•Procedure for resettlement and payment of respective compensations if it involves the resettlement of citizens shall be mandatorily stipulated in the PPP agreement•Mandatory state expertise:−state ecological expertise, including environmental impact appraisal −industrial safety expertise−construction expertise

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Financing and securityNATIONAL LEGISLATION: (a) Law “On Banks and Banking Activity in the Kyrgyz Republic” No. 60 dated July 29, 1997; (b) Law “On Pledge” No. 49 dated March 12, 2005; (c) Law “On Operations in Foreign Currency” No. 6-I dated July 5, 1995

•the SPV may take loans, credits or use other methods of financing the PPP project•freedom to open any accounts and have accounts in one or several banks•freedom to choose the bank to obtain credit and clearing services•free conversion of foreign currency, unrestricted money transfers

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Financing and security• “Step-in right” of lenders• Pledge of property as a security for performance of

obligations:(a) Private partner may pledge its own property

(including proprietary and non-property rights) (b) SPV may pledge its own property upon preliminary

written notification of the public partner and Ministry of Economy

(c) Private partner and SPV may pledge public partner’s property which was given for temporary use

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Dispute resolutionDispute resolution mechanisms:

a) Disputes arising out of or in connection with the procedure of selection of private partner – Kyrgyz courts

b) Disputes arising out of or in connection with the execution, performance and termination of the PPP agreement - courts of the Kyrgyz Republic or arbitral tribunals of the Kyrgyz Republic or international commercial arbitration institutions

c) Disputes arising out of or in connection with the provision by the private partner/project company of services to beneficiaries – Kyrgyz courts

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Dispute resolutionCurrently the Kyrgyz Republic recognizes and enforces:

(a)Decisions of other countries’ arbitration courts established under the arbitration rules of the UN Commission for International Trade Law (UNCITRAL);

(b)Decisions of the courts of Armenia, Belarus, Kazakhstan, Latvia, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan on civil, matrimonial, and criminal cases;

(c) Decisions of the arbitration, economic and business courts of Azerbaijan, Moldova, Kazakhstan, Russia, and Tajikistan.

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The private partner’s concerns and recommendations

Concerns related to instability and uncertainty of legislation

Recommendation: the agreement shall be detailed as much as possible in order to prevent risks with instabilities of the legislation; inclusion of stability clause; closely follow all legislative developments; in the absence of legal act or conflicts among legal acts obtain formal clarifications from respective state authority and maintain such clarifications in the company files for reference in the future.

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The private partner’s concerns and recommendations

Concerns related to expropriation of investments

Recommendation: to ensure that all major assets are protected under the PPP agreement, Law “On investments” and/or investment protection treaties of the Kyrgyz Republic.

Concerns related to public partner’s default of its obligation under the PPP agreement

Recommendation: to ensure that obligation of the public partner to reimburse the private partner’s damages is protected under the PPP agreement 16

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Thank youfor your attention!

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