On 2 July 2018, Kazakhstan adopted a New Currency Law which will take effect on 1 July 2019, when it will supersede the Existing Currency Law. The country's central bank, the National Bank of Kazakhstan (the "NBK"), stated in an explanatory note to Parliament that the New Currency Law is intended (among other things) to improve "statistical monitoring of foreign exchange transactions." However, based upon the changes introduced, it appears that the main effects of the New Currency Law are to limit foreign currency transactions and to expand the use of local currency, the Tenge, which has been depreciating over the last several years.
On 5 October 2018, the NBK issued a letter to Baker McKenzie (the "NBK Letter"), in response to our interpretation request, expressing its views on matters relating to the practical application of the New Currency Law.
The main provisions of the New Currency Law and the NBK Letter are summarized below.
Key Provisions of the New Currency Law
New Definition of "Currency Resident"
The Existing Currency Law provides that non-currency residents may transact operations with residents in foreign currency. The definition of "non-currency residents" in the Existing Currency Law includes branches and representative offices of foreign companies.
The New Currency Law still allows non-currency residents to transact operations with residents in foreign currency. However, under the New Currency Law, the definition of "currency residents" has been expanded to include "branches (representative offices) of foreign non-financial organizations which create a permanent establishment of such non-financial organizations in the Republic of Kazakhstan in accordance with the [Tax Code] of the Republic of Kazakhstan."
Accordingly, the New Currency Law changes the status of foreign branches (and representative offices) from a non-currency resident to a resident if they form a permanent establishment for tax purposes in Kazakhstan. Because branches (and representative offices) are currency residents, they will be unable to transact operations with residents in foreign currency and must use Tenge as the currency for their transactions with local counterparties.
Exception for Certain Subsoil Company Branches
Not all branches (and representative offices) are considered currency residents under the New Currency Law. It specifically exempts "branches (representative offices) of foreign non-financial organizations for whom the non-currency residency status is established under the terms of agreements made on behalf of the Republic of Kazakhstan and which entered into legal force prior to the date of enactment of this Law." Such branches (representative offices) shall be non-currency residents. According to the New Currency Law, a list of such branches (and representative offices) will be established by the Government of Kazakhstan.
This exception is intended to cover primarily subsoil (oil, gas and mining) companies operating as branches in Kazakhstan under profit sharing agreements or other subsoil use agreements with the Government, provided that such agreements expressly indicate that such branches are non-currency residents. The NBK currently is working on the list of exempted branches based on copies of agreements with the Government provided to the NBK by subsoil use companies.
This exception in the New Currency Law is limited to subsoil company branches listed by the Government and does not extend to their sub-contractors who also operate as branches and deal extensively with residents. Thus, even though the branches of sub-contractors will be able to transact in foreign currency with the listed branches of subsoil companies, they will need to use Tenge for their transactions with other local counterparties.
Exceptions for Certain Transactions
As already noted, the New Currency Law does not change the existing rule under which non-currency residents can transact with residents in foreign currency.
In addition, the New Currency Law provides that the following specific types of “transactions” are exempt from the requirement to use Tenge and may be carried out in foreign currency:
(i) “transactions” made between branches (or representative offices) of different foreign companies;
(ii) “transactions” between a branch (representative office) and its home office outside of Kazakhstan.
Payment of Salaries in Foreign Currency
The Existing Currency Law specifically permits non-currency residents to pay salaries to their employees (whether local or foreign) in any currency. It also permits local companies to pay salaries in foreign currency to their foreign employees. However, the New Currency Law omits the provision referring to both of these rights and does not refer at all to payments of salary in foreign currency.
The explanatory note to Parliament prepared by the NBK is silent on the reason for this change. However, we understand that the change is based on the fact that the Labor Code requires all salary payments made in Kazakhstan to be in Tenge. Therefore, the omission in the New Currency Law appears to be part of the NBK's efforts to bring currency regulations in line with the Labor Code in respect of salary payments made in Kazakhstan.
All employers in Kazakhstan (including branches (representative offices) of subsoil companies which will be in the Government's list of non-currency residents under the New Currency Law) are subject to the Labor Code’s provision regarding salary payments made in Kazakhstan.
The New Currency Law authorizes the NBK to require resident legal entities to confirm the purposes for which they intend to purchase foreign currency in domestic markets and, then, to use such foreign currency for those declared purposes. There is no similar provision in the Existing Currency Law.
It remains to be seen how this new provision will be implemented by the NBK in its regulations. Hopefully, no significant restrictions will be introduced which will limit the ability of local companies to purchase foreign currency in domestic markets.
(i) New Reporting Requirement
The New Currency Law requires branches (and representative offices) which have been operating in Kazakhstan for more than a year to provide to the NBK information on transactions with residents and non-residents in the form of regular reporting. The New Currency Law gives no indication of what will be required by this additional reporting requirement since it will be addressed by NBK rules which have not yet been prepared. It is unclear whether the new reporting requirement will apply to branches of subsoil companies for which the non-currency residency status is preserved.
(ii) Operations Aimed at Withdrawal of Funds from Kazakhstan
The New Currency Law introduces a new term, "operations aimed at withdrawal of funds from Kazakhstan." Such operations include the following:
- a financial loan from a non-resident to a resident where the loan proceeds are credited to the resident's foreign bank accounts bypassing local accounts opened with Kazakhstani banks;
- a financial loan from a resident to a non-resident where the repayment of the loan is made to the resident's foreign bank accounts bypassing local accounts opened with Kazakhstani banks;
- an interest-free loan from a resident to an unaffiliated non-resident for a term exceeding 720 days;
- export/import operations involving a delay in delivery of the non-resident's payments obligations for more than 720 days after the date when the resident fulfills its obligations.
Local servicing banks are prohibited from processing payments under any of the above transactions without a specific written consent of the resident party authorizing the servicing bank to disclose information on the transaction to the NBK. Although the disclosure is required, the NBK cannot stop or suspend the reported transaction under the New Currency Law.
The disclosure requirement does not apply to branches and representative offices of foreign companies (including subsoil companies), as well as to financial loans made under trade and Islamic financing operations.
The NBK Letter
In response to Baker McKenzie’s interpretation request, the NBK expressed its views on the following matters relating to the practical application of the New Currency Law:
- According to the NBK Letter, the New Currency Law has no retroactive effect and therefore it should not apply to existing agreements of foreign branches (representative offices) made prior to 1 July 2019.
- However, where such an existing agreement is amended at any time after 1 July 2019 by way of an assignment of the agreement to a branch (representative office) of another foreign company, the stability of the agreement will be lost and the New Currency Law will take precedence over such agreement (as assigned to the new party).
- The NBK confirmed that branches of EU companies should be able to apply the three-year grace period provided under the 1995 Kazakhstan-EU Agreement, and therefore the New Currency Law should not apply to such branches of EU companies until 2 July 2021. Under the 1995 Kazakhstan-EU Agreement, where new legislation introduced in Kazakhstan would result in rendering the conditions for operation of branches (and subsidiaries) of Community companies established in Kazakhstan more restrictive than the situation existing on the day of signature of the Agreement, such legislation shall not apply during three years following the entry into force of the relevant act to those branches (and subsidiaries) already established in Kazakhstan at the time of the entry into force of the relevant act. The NBK stated that the New Currency Law should not apply to agreements made by branches of EU companies prior to 2 July 2021 according to the 1995 Kazakhstan-EU Agreement. While not addressed in the NBK Letter, we believe that the three-year grace period generally should extend to branches of companies from other countries (including the U.S. and Japan) based upon the most favored nation provisions contained in their bilateral investment treaties with Kazakhstan.