Legislation
New Aspects in Transactions on the Transfer of the Subsoil Use Right under the New Law of the Republic of Kazakhstan ‘On Subsoil and Subsoil Use’
Despite the strengthening of the requirements to the obtaining of an approval of a competent authority to commit transactions on the transfer of subsoil user rights, including by the transfer of shares (participatory interests) in a legal entity that holds the subsoil use right, as well as the pre-emptive right of the Republic of Kazakhstan to the transferred subsoil use right, shares (participatory interests) in a subsoil user or legal entities that may directly or indirectly govern the decisions of subsoil users, subsoil use is one of the high priority area for investors.
Given that additional investments are often raised through transactions on the sale of a part of the subsoil use right or shares (participatory interests) in a legal entity that holds the subsoil use right (subsoil user), or in a legal entity that may directly or indirectly govern the decisions of subsoil users (let’s call them ‘parent companies’), in this Article we will consider the most importance aspects in the new Law ‘On Subsoil and Subsoil Use’, dated 24 June 2010 (hereinafter – the ‘New Subsoil Law’).
As you know, in March of this year the powers of the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan in terms of the subsoil issues was shared between the Ministry of Oil and Gas of the Republic of Kazakhstan (hydrocarbon materials contracts) and the Ministry of Industry and New Technologies of the Republic of Kazakhstan (mining contracts). Further, in the text of the Article ‘competent authority’ shall mean the Ministry of Oil and Gas or Ministry of Industry and New Technologies depending on the type of minerals that are subject of a subsoil use contract.
Like under the previous Law ‘On Subsoil and Subsoil Use’, dated 27 January 1996, (hereinafter – the ‘Old Subsoil Law’), under the New Subsoil Law, when committing transactions on the transfer of subsoil rights including by the sale of shares (participatory interests), the following features shall be kept in mind:
- obtaining of a permit (approval) from the competent authority to commit the transaction;
- obtaining of the waiver from the State of its pre-emptive right to acquire the transferred object.
The application practice of the Old Subsoil Law provisions that govern the list of transactions and the procedure for provisions of a permit by the competent authority to commit transactions on the transfer of the subsoil use right affected the changes in the New Subsoil Law.
Subject of a Transaction on the Transfer of the Subsoil Use Right
First, please note that a legislative authority introduced the definition of ‘objects related to the subsoil use right’. Under this definition, such objects include “participatory interests (shares) in a legal entity that holds the subsoil use right (subsoil user), as well as in a legal entity that may directly or indirectly govern the decisions of a subsoil user provided that the main activities of this legal entity is connected with subsoil use in the Republic of Kazakhstan”.
Such objects had been also specified by the Old Subsoil Law as a subject of transactions, while now, in order to facilitate the recitation thereof, they were combined in one group. The legislative authority, however, still does not any clarification regarding the entities that may govern directly or indirectly the decisions of a subsoil user, as well as any factors that allows identifying that the main activities of the relevant legal entity are connected with the subsoil use in Kazakhstan.
In this case, according to the practice, the entities that may govern directly or indirectly the decisions of a subsoil user mean participants (shareholders) of a subsoil user, participants (shareholders) in such participant (shareholder) of the subsoil use, and so on and so forth. For clarity, such companies are called ‘mothers’, ‘grand-mothers’ and ‘great-grandmothers’.
Determination of the fact that activities of the relevant legal entity are connected with subsoil use in Kazakhstan shall be made by the legal entity itself that commits the transaction. In this case, as we have already mentioned, there are no criteria to establish that the main activities of one or another company, especially with respect to nonresidents, is connected with subsoil use in Kazakhstan, in the New Subsoil Law. In practice, there is no consensus on this issue. Some propose to make calculation conditionally depending on existence of other assets and participatory interests in the subsoil user, the other – on the analogy of applying the provisions of Tax Code of the Republic of Kazakhstan.
The Tax Code of Kazakhstan governs the procedure for calculation of taxes on income of nonresidents from the capital gain when selling property located in Kazakhstan, and shares, participatory interests related to subsoil use in Kazakhstan. In this case, shares (participatory interests) connected with subsoil use in Kazakhstan shall mean “shares issued by a nonresident and participatory interests in the charter capital of a nonresident legal entity or consortium provided that 50 or more percent of the value of the charter capital or shares (participatory interests) of the said nonresident legal entity or consortium as of the date of the sale consists of the property of an entity(s) that is subsoil user(s) under the legislation of Kazakhstan”.
According to this provisions, the main activities of a nonresident will be regarded as connected with subsoil use in Kazakhstan, if 50 or more percent of the value of the charter capital or shares (participatory interests) of the nonresident consists of the property of the entity that is subsoil user in Kazakhstan. Pursuant to the practice, however, we may conclude that such an analogy was not applied by officials of the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan. For instance, if the ratio of assets of a nonresident is divided so that the principle part is 30% while the remaining part is 10-15%, in this