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Overview of Legislation concerning the State Support of Industrial and Innovation Activities
This article is prepared by Miran Maulenov, Cand. Sc Law, Managing Partner of Olympex Advisers LLP. For further information please email to Miran.Maulenov@olympex.kz
Our company continues to keep you informed about the recent important developments in the legislation of the Republic of Kazakhstan.
Apart from subsurface users, this article will also be of interest to other companies engaged in implementing investment projects or intending to invest in the territory of the Republic of Kazakhstan.
Speaking about the domestic investment climate, it should be noted that Kazakhstan improves its positions from year to year, ranking currently 47th by 2012 Doing Business (e.g. Russia is 120th), and 36th by the International Institute of Management Development (Russia is 49th).
Such high performance indicators have been achieved due to the timely decision made by the Head of the State to promote modernization and diversification of the Kazakhstan economy, which served as basis for the adoption of the Sate Programme of Forced Industrial and Innovation Development of the Republic of Kazakhstan in 2011- 2014.
On 9 January 2012, for the purpose of implementation of the above programme, the following laws were enacted: "On the State Support of Industrial and Innovation Activities" and "On Introduction of Amendments into Certain Legislative Enactments Concerning the State Support of Industrial and Innovation Activities", which contain new instruments of support and preferences both for local and foreign investors.
In this article we have attempted to cover the most important and key provisions of these laws in the drafting of which our company's experts were directly involved.
The laws of the Republic of Kazakhstan “On the State Support of Industrial and Innovation Activities” and “On Introduction of Amendments into Certain Legislative Enactments Concerning the State Support of Industrial and Innovation Activities” pursue the aim to establish legal, economic and organisational principles of stimulation of the industrial and innovative activity in the priority sectors of the national economy and to define measures for its state support.
The basis for their development was laid by the speech of the Head of the State at the Forum “Innovative Kazakhstan-2020”:
“I instruct the Government to form a working group to draft, within 3 months, a bill “On the State Support of Industrial and Innovation Activities”, so as to ensure that the Parliament (the law) could adopt it at its autumn session and so that the law could come into effect next year”.
The goal of the Law “On the State Support of Industrial and Innovation Activities” (the “Law”) is to improve the competitiveness of the national economy by stimulating the development of priority economy sectors identified by the President of the Republic of Kazakhstan.
The following could be said to be the main objectives of the Law:
1) creating conditions for the development of priority economy sectors;
2) ensuring conditions for the development of new competitive productions;
3) modernising (technical upgrading) existing productions;
4) supporting the effective mastering of innovations and development of hi-tech productions; and
5) increasing the investment attractiveness and export potential.
According to the provisions of the Law, to achieve those objectives a new industrial and innovation system is being formed, i.e. an institutional base is being created for industrial and innovative projects.
First, the Law clearly specify the competence of the Government, central state and local executive bodies, and distinguish between their functions and those of the national development institutions involved in the process of support of industrial and innovation activities.
Second, it expressly set out the elements of the industrial and innovative infrastructure that facilitate the effective implementation of projects. These include special economic and industrial zones, hi-tech parks, venture funds, technology commercialisation centres, design engineering bureaus, international technology transfer centres and innovation clusters.
Third, the Law defines new approaches to the development of the industrial and innovation system, which are based on the so-called “foresight” research (technological forecast).
Fourth, the authorised body for state planning is charged with responsibility to regularly and systematically make assessments of how efficiently the state support measures are being implemented by the state and local executive bodies and the national development institutions.
Fifth, the Law specifies specific targeted state support measures.
Speaking about the state support to the local business, it is worthwhile to note that the Law specifies the main functions of the national development institutions, which, in actual fact, will act as operators in providing various support instruments.
- the National Agency for Technological Development is competent to provide innovation grants (for the acquisition or commercialisation of technologies, industry research, compensation of costs incurred upon introduction of managerial technologies, professional development of engineering and technical personnel abroad) by priority areas determined by the Government;
- KazNex Invest, the national agency for export and investments, is authorised to compensate part of costs incurred by exporters in promoting their products on foreign markets (market research, exhibitions, PR materials);
- the National Agency for the Development of Local Content will, in its turn, finance the local businesses' spending incurred in connection with the certification of their products (consultancy services, certification audit, personnel advance training).
Furthermore, the above national development institutions must provide servicing assistance (informational and analytical and consultancy services), which is not connected with financing, but is also useful for entrepreneurs.
The local executive bodies will, in their turn, have to provide land plots for temporary land use for the implementation of industrial and innovation projects and to ensure that such land plots have necessary engineering infrastructure.
The support instrument in the form of a long-term guaranteed order by national management holdings, national holdings and national companies will serve as an additional stimulus for business.
We would like to note that the following financial support instruments that have been envisaged by the existing industry programmes “2020 Road Map for Business” and “Productivity 2020” and that have already proved themselves have also been embodied in the law.
Accordingly, the Law provides for 13 targeted state support measures that should contribute to the more effective implementation of industrial and innovation projects.
In relation to the Law “On Introduction of Amendments to Certain Legislative Enactments Concerning the State Support”, in our view we should emphasize the novelties set out in the Laws “On Subsurface and Subsurface Use”, “On Investments” and the Tax Code of the Republic of Kazakhstan.
Two key amendments have been made to the Law “On Subsurface and Subsurface Use”.
First, entities implementing industrial and innovation projects are now granted subsurface use rights for carrying out exploration and/or production of minerals based on direct negotiations without holding a tender. An application for such granting of the right of subsurface use based on direct negotiations must contain a technological programme including information concerning technologies proposed for use.
Such provision has not yet been applied in practice, however, Mr A. P. Rau, the Fist Vice Minister of Industry and New Technologies of the Republic of Kazakhstan, explained with regard to such provision as follows:
“Today, there are two most effective ways, in the Kazakhstan opinion, to obtain the right of subsurface use. First – direct negotiations through the national companies and in accordance with the law, following which the initiator may obtain such right. The second way is the state support to an industrial project. Previously, we had the following situation – an entity would win a tender and would obtain the right to develop, i.e. to mine and carry out certain degree of processing. Now, the situation is quite opposite. For instance, if I want to construct a plant, and I need a certain raw material, the State would decide whether or not this project is in line with our goals of the sector development programme. Therefore, this instrument is more effective than a tender – who will pay more...”.
Second, subsurface users now have a new obligation to finance, on an annual basis, scientific and research, scientific-technical and/or design and engineering activities conducted by Kazakhstan manufacturers of goods, work and services, in the amount of at least 1% of the aggregate annual income.
Based on the interpretation of this requirement of law, a subsurface user has three options to fulfil this obligation:
1) development within the framework of its production contract activity;
2) financing of scientific research conducted by entities engaged in scientific and/or scientific-technical activities; and
3) financing of elements of the industrial and innovation infrastructure.
The Law “On Investments” has also been amended to provide for additional preferences for investors implementing strategic projects.
In order to be included into the list of investment strategic projects, an investment project must be aimed at the manufacture of high added value products (with higher degree of refining and processing), fall within the priority types of activities, and meet one of the following criteria:
1) an investment project should be aimed at the manufacture of products that are on the list of activities intended for the manufacture of hi-tech products approved by the Government of the Republic of Kazakhstan;
2) the amount of investments under an investment project should be at least five million times the monthly calculation index established by the law on the republican budget for a relevant financial year.
If one of the above criteria is met, investors will enjoy land and property tax exemption (at 0% rate).
Where an investment strategic project is implemented in populated areas with low level of social and economic development (such regions are determined by the Government), an investor may also claim compensation of part of its production costs: gas, electric power, acquisition of a land plot and acquisition (construction) of buildings and structures.
The amendments to the Tax Code are directed to stimulation and development of innovations.
First, commencing from 1 January 2013, a new sub-section 1 will be added to section 1 of article 133 of the Tax Code, under which a taxpayer will have the right to:
- reduce its taxable income by 50% of the actual expenses incurred for scientific and research, scientific-technical and/or design and engineering activities (in fact, the 150% deduction of expenses for the above activities is achieved, as such expenses are already subject to 100% deduction).
Second, the land and property tax exemptions (0.1%) is available to hi-tech parks, whose main activity is the technological business incubation, in other words, the provision of the set of services to innovators’ “start-up” (provision of office premises, book accounting, consulting services, etc.)
At the same time, hi-tech parks will enjoy such land and property tax exemptions only if they meet all of the following conditions:
- they are established in accordance with the legislation of the Republic of Kazakhstan on the state support of industrial and innovation activity; and
- fifty per cent. or more of their charter capital or shares (participating interests) are owned by the national development institution of technological development.
Finally, we would like to stress that the local legislation continues to move towards investors, and new changes and amendments are expected in near future due to the joining of Kazakhstan to the Organisation for Economic Cooperation and Development (OECD), that has its own recommendations for the investment climate of the OECD’s member countries.
For more information please visit www.olympex.kz