Evaluation of business legislation in Kyrgyzstan 1

The evaluation of Legal basis for organizing of domestic business in the Kyrgyz Republic.

Muratov Askar

Introduction to Business 112, Section 2

Pfofessor Dinara Bobusheva

November 11, 2009

Bishkek. AUCA
 Evaluation of business legislation in Kyrgyzstan 2

Table of contents

1 Summary........................................................................................................ 1
2 Introduction................................................................................................... 2
3 Entrepreneurship ........................................................................................... 3
3.1 Registration of the individual entrepreneurs............................................. 3

4.Registration of general partnership………………………………………….. 3

5 Registration of limited partnership……………………………………………3

6 Branches and Representative Offices.............................................................. 4
6.1 Branches and Representative Offices of Legal Entities.............................4
6.2 Registration of Branches and Representative Offices............................... 4
6.3 Liquidation of Branches and Representative Offices................................ 5
7 Legal Entities.................................................................................................... 6

7.1 Limited Liability Companies.................................................................... 7

7.2 Joint Stock Companies………………………………………………….. 7

7.3 Registration of Legal Entities…………………………………………….8

7.4 Business Re-Organization and Restructuring…………………………… 8

7.5 Closure of a Business……………………………………………………. 9

7.6 Liquidation of a Legal Entity…………………………………………… 9

Conclusion ...................................................................................................... 10

Bibliography........................................................................................................11
 Evaluation of business legislation in Kyrgyzstan 3

1. Introduction

After several transitional years, caused by the collapse of the Soviet Union and search
for an independent development framework, the Kyrgyz Republic successfully set course on
economy recovery. Kyrgyzstan’s membership in World Trade Organization became one of the
most significant stages of the nation’s economy recovery. It is worth noting that Kyrgyzstan was
the first CIS country to join the WTO. Kyrgyzstan successfully develops market economy.
International experts have noted the introduction of private land-ownership reforms and the
introduction of international legislative standards as two of the most significant changes
implemented by the Republic. Agriculture, gold mining, hydro-energy and non-ferrous
metallurgy as well as light and food industries are the nation’s flagship industries. Agriculture,
Kyrgyz Republic’s leading industry, is the source of the over one-third of the Kyrgyz gross
domestic product. Major components of the Kyrgyz agricultural industry are livestock breeding
(meat, dairy and wool production) as well as tobacco, cotton and industrial crops production,
gardening, beekeeping and vegetable growing. Kyrgyzstan fully covers its foodstuff needs and
exports food to Kazakhstan and Russia. The industry of the Kyrgyz Republic, which produces
over 20% of GDP, consists of processing industry, non-ferrous metallurgy and mineral resources
industry. The “Kumtor” gold-mining project (a joint venture with “Kameko” Canada) is one of
the most significant commercial ventures in the Kyrgyz Republic. This enterprise generates
nearly 35% of the country’s total exports and is responsible for generating approximately one-
tenth of the domestic production. Kyrgyz Republic is the third among other CIS countries for
gold-mining output.

Moreover the Government of Kyrgyzstan pays special attention to development of

industry, trade, and tourism sectors of the country as well as to formation of domestic businesses.
At present, the process of registering enterprises, getting licenses, its number as well as
administrative barriers and tax control were decreased and/or simplified. Economic deregulation
is the main goal of the governmental management bodies. These governmental measures are
taken to remove the barriers on the way of entrepreneurs, to create favorable business
environment. In this way government plays the role of guarantor for keeping favorable and
predictable normative and legislative regime of economic activity for domestic business
activities.

In Kyrgyz Republic Enterprise activity can be organized in the following forms:

· Individual entrepreneurship;
· Partnership;
· Limited Partnership;
· Limited Liability Company;
· Company with Additional Responsibility;
· Joint-stock company (open and closed type);
· Representative Office;
· Branch Office

In order to start an activity in territory of the country, the legal entity should be registered
in three state bodies: Ministry of Justice of the Kyrgyz Republic (there are a regional
representative offices in each oblast of the country), National Statistics Committee which enters
registration data into United Single State Register of Statistics, and State Tax Inspectorate (STI).
Individual businessmen should register only in statistical committee and in Tax Inspectorate. So,
let me discuss how above stated forms of enterprise pass through the legalization process.
 Evaluation of business legislation in Kyrgyzstan 4

1.2 Entrepreneurship.

Entrepreneurship in Kyrgyzstan has been considered to be an independent branch of economics

for over ten years and is one of the most important targets for reforms directed on creation of an
effectively functioning economic system or one of the components determining successful
development of the state in general.

During the last few years, private sector of economics continued developing despite
complications in domestic political situation although in a slower pace. Based on official
assessment, private sector provides 86 percent of the GDP. It is exclusively the private sector
that prevails in economics of agriculture and services making up over 90 percent of the total
volume of production and services, and over 20 percent in industry.

Economic development. According to the Population Fund research results (chart 1) Kyrgyz
economics is 59.9% free (moderately free economics starts from 60 percent and more).
Freedom of entrepreneurship or regulation level is 61.4%. This index is lower than the
average world one and trend has been unstable since 1998.

1.3 Registration of the individual entrepreneurs

The National Statistical Committee and its departments in regions register individual
entrepreneurs depending on their location. Registration is carried out on the basis of the
registration application and the passport. After registration Statistical body gives a registration
certificate with individual identification number.

General Partnership

Same as in other countries general partnership in Kyrgyzstan is a company

in which two or more partners operate under a common business name. A
natural person or legal person may be a partner in a general partnership. All
partners are jointly liable for the obligations of the general partnership with
all of their assets. A general partnership operates on the basis of a
partnership agreement concluded by the partners which may be amended
only with the consent of all partners. Each partner may represent the general
partnership in all legal acts unless the partnership agreement prescribes
otherwise. The partnership agreement prescribes the amount of contribution
to be made by the partners. A contribution may be monetary or non-
monetary.To enter a general partnership into the Commercial Register, a
formal request for entry signed by all partners is submitted to the
Commercial Register.

Limited Partnership
In Kyrgyzstan as in other countries limited partnership is a company in which
two or more legal or natural persons operate under a common business
name. At least one of the persons (general partner) is liable for the
obligations of the limited partnership with all of the general partner’s assets,
and at least one of the persons (limited partner) is liable for the obligations
of the limited partnership to the extent of the limited partner’s contribution.
The state or a local government may not be partners in a limited
partnership. Partners of a limited partnership agree on the business name,
amount of contribution of the partners and headquarters of the limited
 Evaluation of business legislation in Kyrgyzstan 5

partnership. A contribution may be monetary or non-monetary. If a limited

partner joins a general partnership, the general partnership shall be deemed
to be transformed into a limited partnership. If all the limited partners leave
or are excluded from a limited partnership and at least two general partners
remain, the limited partnership shall be deemed to be transformed into a
general partnership.

2.1 Branches and Representative Offices

Branches and representative offices of foreign companies do not belong to legal entities of the
Kyrgyz Republic. They are endowed with property of legal entities that have founded them, and
act on the basis of the approved bylaws.

2.2 Branches and Representative Offices of Legal Entities

Legislation of the Kyrgyz Republic distinguishes between branches and representative offices.
Functions of representative offices are limited to representation of a foreign legal entity and
protection of its interests, performance of transactions and other legal actions on its behalf.
Branches, on the other hand, are in the position to perform all functions of the foreign legal
entity or part of these functions, including the function of representation.

Under the legislation of the Kyrgyz Republic (26), branches and representative offices have the
following rights and obligations:

o To open bank accounts and execute payments in any currency;

o To hire local employees;
o To hire foreign employees and obtain relevant work permits for them;
o To enter into any contractual relations with local and foreign companies and execute/assume
liabilities under any agreements providing for payments in local or foreign currency; and
o To have permits for purchase or lease of immovable property.

Legislation of the Kyrgyz Republic provides for a number of restrictions with respect to
branches and representative offices. Thus, a branch or a representative office may only exist as
long as their parent company exists. A branch or representative office may not be licensed to
perform certain types of activities or provide certain types of services.

2.3 Registration of Branches and Representative Offices

Registration of branches and representations is carried out the same as registration of legal
entities. There is a requirement about presenting additional documents: regulations about branch
or representation and copies of the registered documents of the person, organizing the branch or
representation. A foreign enterprise or a physical entity should also present an extract from the
trading registrar system or other document confirming, that the company, organizing
branch/representation in the Kyrgyz Republic, is a legal entity in accordance with the legislation
of the country and a letter from the bank confirming his/her solvency. All documents should be
accompanied by notarially certified translation into Kyrgyz or Russian languages.

Branches and representative offices located within the territory of the Kyrgyz Republic, with the
exception of branches and representative offices established within territories of free economic
zones, are subject to mandatory registration.
 Evaluation of business legislation in Kyrgyzstan 6

Branches and offices of foreign legal entities shall be registered with the Ministry of Justice of
the Kyrgyz Republic. For the purposes of registration, a foreign legal entity shall submit the
following documents to the Ministry of Justice of the Kyrgyz Republic (27):

(i) Application for registration;

(ii) Bylaws of the branch or representative office approved by the authorized body of the foreign
legal entity;
(iii) Extract from the resolution of the authorized body of the foreign legal entity on
establishment of the branch or representative office, approval of the bylaws of the branch or
representative office, and appointment of the head of the branch or representative office;
(iv) Copy of the state registration (re-registration) certificate of the foreign legal entity;
(v) Documents proving location of the branch or representative office (such as a lease agreement,
an agreement on gratuitous use of premises, or an official letter);
(vi) A power of attorney issued by the foreign legal entity to the head of its branch or
representative office subject to the legislation of the Kyrgyz Republic, with a notarized
translation into the national or official language;
(vii) Copies of notarized founding documents of the foreign legal entity that establishes a branch
or representation office, with a notarized translation into the national or official language;
(viii) A legalized extract from a registry or another document proving that the entity opening the
branch or representative office is an operating legal entity under the laws of its country, with a
notarized translation into the national or official language; and
(ix) A bank statement proving payment capacity of the legal entity that establishes a branch or
representative office, with a notarized translation into the national or official language.
A permit of the National Bank of the Kyrgyz Republic is required for the establishment of a
branch or representative office of a foreign bank.

2.4 Liquidation of Branches and Representative Offices

To liquidate a branch or representative office, the following documents need to be submitted to

the registering authority:

(i) A resolution of the authorized body on liquidation of the branch or representative office;
(ii) Originals of the founding documents of the branch or representative office, registration (re-
registration) certificates, and statistical card;
(iii) A reference from the militia body proving that the seal and stamps of the
branch/representative offices have been delivered, and a reference from bank proving that the
account of the branch/representative office has been closed;
(iv) A tax inspection report, a reference from the respective division of the National Committee
for Taxes and Duties of the Kyrgyz Republic proving that the branch/representative office has no
outstanding tax liabilities; and
(v) A reference from the respective division of the Social Fund of the Kyrgyz Republic proving
that the branch/representative office has no arrears.
The registering authority (the Ministry of Justice of the Kyrgyz Republic) performs registration
of branches and representative offices, as well as registration of their liquidation, within 10 days
from the date of submission of the required documents.
 Evaluation of business legislation in Kyrgyzstan 7

3.1 Legal Entities

A variety of organizational legal forms of legal entities exist in the Kyrgyz Republic, the most
common being:
. Limited liability companies; and
. Joint stock companies (open or closed).
The key legal acts regulating activities of legal entities are the Civil Code of the Kyrgyz
Republic (28) the Law of the Kyrgyz Republic “On Business Partnerships and Companies”, and
the Law of the Kyrgyz Republic “On Joint Stock Companies”, (29).

3.2 Limited Liability Companies

A limited liability company (LLC) is one of the most widespread types of legal entities in the
Kyrgyz Republic, having a number of advantages:
o Participants of an LLC are not liable for its obligations, and their risk of losses that may be
incurred as a result of the company performance is limited to the amount of their respective
contributions; and
o The structure and powers of management bodies of an LLC are not subject to detailed
legislative regulation, therefore, management and decision making in an LLC is more flexible.
The minimum amount of an authorized fund of an LLC may not be lower than one statutory rate
(which, as of September 2007, is 100 soms, or about $2.5) established in the Kyrgyz Republic as
of the time of participants’ contributions to the authorized capital. It must be noted that, subject
to legislation of the Kyrgyz Republic (30), if the founding legal entity consists of one
shareholder/participant, it may not act as the only founder/participant of an LLC. The number of
participants in an LLC may not exceed 30; otherwise the LLC must be reorganized into a joint
stock company within one year. Should an LLC fail to comply with this requirement, it will be
subject to liquidation by judicial procedure.

3.3 Joint Stock Companies

A joint stock company is another popular form of a legal entity as shareholders are not liable for
the obligations of the company. Also, the risk of losses that they may incur as a result of the
company performance is limited to the value of shares owned by the shareholders.
A joint stock company must issue shares in the national currency of the Kyrgyz Republic,
regardless of the form of original contribution. In addition to shares, joint stock companies may
issue other securities (such as debenture bonds) to raise working capital.

According to the legislation of the Kyrgyz Republic (31), if a founding legal entity consists of
one participant/shareholder it may not act as the only founder/participant of a joint stock
company. Authorized capital of a joint stock company may not be lower than 100,000 soms
(which, as of September 2007, equals about $2,677). As of the date of founding, authorized
capital must be completely paid in and distributed among founders.

Joint stock companies established in the Kyrgyz Republic may be either open or closed.
A closed joint stock company is a joint stock company whose shares may only be distributed
 Evaluation of business legislation in Kyrgyzstan 8

among its founders or within another predetermined group. A closed joint stock company may
not carry out a public placement of shares issued or otherwise offer them to an unlimited group
of persons. The number of shareholders in a closed joint stock company may not exceed 50;
should the number of shareholders in a closed joint stock company exceed 50, the company must
be reorganized into an open joint stock company within one year. Upon expiry of this period,
unless the number of shareholders has decreased to meet the established limit, the company will
be subject to liquidation by judicial procedure. Shareholders of a closed joint stock company
have pre-emptive right to purchase shares offered for sale by other shareholders of the same
company.

An open joint stock company is a joint stock company participants of which may alienate their
shares without the consent of other shareholders. An open joint stock company may carry out
open subscription to the shares it issues and may freely sell them on conditions established by
law. An open joint stock company that has 500 shareholders or more and has carried out at least
one public placement of securities must annually publish in the media an annual report on its
financial and business performance.

3.4 Registration of Legal Entities

In the Kyrgyz Republic legal entities obtain the respective status upon their state registration
with the Ministry of Justice of the Kyrgyz Republic.
State registration of the establishment or liquidation of a legal entity is performed free of charge
within 10 business days from the date on which an application with all supporting documentation
is submitted to the registering authority.
Should a legal entity be founded by a foreign entity, the following documentation has to be
submitted to the relevant justice bodies:

(i) Application for registration;

(ii) Charter and founding agreement of the newly established legal entity approved by its
founders’ meeting;
(iii) Minutes of the founders’ meeting on establishment of the legal entity, approval of its charter
and founding agreement, and appointment of managerial bodies;
(iv) Documents proving the location of the legal entity (such as a lease agreement, an agreement
on gratuitous use of premises, or an official letter);
(v) Legalized (32) copies of founding documents of a foreign legal entity that acts as a founder
of the new legal entity, with a notarized translation into the national or official language;
(vi) A legalized extract from a registry or another document proving that the foreign legal entity
is an operating legal entity subject to legislation of its country, with a notarized translation into
the national or official language.

Should a legal entity be founded by a foreign individual, instead of the last two documents on the
above list, a copy of passport or other ID (with the visa term specified in cases where the foreign
citizen resides within the Kyrgyz Republic) shall be submitted with a notarized translation into
the national or official language (26). The Law of the Kyrgyz Republic “On Business
Partnerships and Companies” of 15 November 1996 (with the latest amendments as of 27
January 2006).

3.5 Business Re-Organization and Restructuring

Reorganization of a legal entity (consolidation, merger, division, separation, and transformation)

may be performed by the decision of its founders/participants, by the decision of the body of the
legal entity duly authorized by founding documents, or, in the case of banks, finance and
 Evaluation of business legislation in Kyrgyzstan 9

crediting institutions (or other institutions for which the only permissible activity is the activity
provided by their license) by decision of an authorized government body. To restrict monopoly,
legislation may provide for cases and procedures of mandatory restructuring of for-profit
organizations subject to judicial procedure.

A consolidation of legal entities presupposes that the rights and obligations of each entity
participating in the consolidation are transferred to the newly established legal entity according
to a transfer deed. A merger of a legal entity with another legal entity presupposes that the
acquiring entity obtains the rights and obligations of the entity acquired according to a transfer
deed.

A division of a legal entity presupposes that its rights and obligations are transferred to the newly
established legal entities according to a division balance sheet.
A separation of one or more legal entities from the original legal entity presupposes that rights
and obligations of the legal entity reorganized are being transferred to each of the entities
according to a separation balance sheet.

In the case of transformation of a legal entity of a given type into a legal entity of another type
(change in the organizational legal form of the entity), rights and obligations of the restructured
legal entity are transferred to the newly established legal entity according to a transfer deed.
A transfer deed and a division/separation balance sheet are required for reorganization of a legal
entity. They must contain provisions on legal successor ship with respect to all liabilities of the
legal entity reorganized. The transfer deed and division/separation balance sheet shall be
approved by founders/participants of the legal entity or the authority that has taken the decision
to reorganize, and shall be submitted together with the founding documents for state registration
of the newly established legal entities or for amendment of the founding documents of existing
legal entities. In the case of restructuring a legal entity, its founders must inform its creditors in
writing about the restructuring. According to the legislation of the Kyrgyz Republic, in the cases
of business entity reorganization specified in the anti-monopoly legislation of the Kyrgyz
Republic, consent of the anti-monopoly authority of the Kyrgyz Republic is required for
reorganization.

3.6 Closure of a Business

Liquidation of a legal entity entails cessation of its activities without transfer of its rights and
obligations to any other persons.

3.7 Liquidation of a Legal Entity

By the decision of its founders/participants or by the decision of the legal entity’s body duly
authorized for it by founding documents, including cases where such liquidation is caused by
expiration of the term for which the entity has been established, the achievement of purposes for
which it has been established, or by a court decision on invalidity of the legal entity’s registration
due to irremediable violations committed in the course of its establishment; or by a court
decision in cases where the entity has acted in the absence of the required permit/license, has
engaged in the activities prohibited by law, or has committed other repeated or gross violations
of law or continuously engaged in activities that contradict its charter purposes; in cases of
revocation of a license of a bank, financial/lending institution, or institution for which the only
allowed activity is the activity provided in its license; and in other cases stipulated by law.
A bank or another financial/lending institution licensed by the National Bank of the Kyrgyz
Republic may be liquidated in the case of revocation of its baking license, taking into account
 Evaluation of business legislation in Kyrgyzstan 10

specific provisions applying to banks and other financial/lending institutions.

Founders/participants of a legal entity or the authority that has taken decision upon liquidation of
the legal entity must immediately in writing inform about it the state authority in charge of state
registration of legal entities. Liquidation is carried out subject to the procedures set forth by the
Civil Code of the Kyrgyz Republic (33) and other legislation of the Kyrgyz Republic.

5. Conclusion
To sum up, we have discussed how individual entrepreneurship, forms of partnership, branch
and representative offices, and legal entities of domestic business in Kyrgyzstan are legalized. In
accordance, as government of Kyrgyz Republic is highly interested in attracting external
investors to initiate a business within the country, it is also eager to develop domestic business.
As it is common thing in business practice that prior to business start-up, every founder of any
kind of business form must take into account legalization procedures. So, first step towards
business activity is to pass through registration in certain state body. For any entrepreneur
dealing with legal aspects of his or her business is very difficult and important process.
Accordingly, every government in order to attract businessmen tries to facilitate registration
procedure and provides suitable business environment. In Kyrgyz Republic according to
president’s new deal with economic development, governmental forces are focused for attracting
external investors as well as domestic business owners to establish businesses or to expand
already exist companies or firms.
 Evaluation of business legislation in Kyrgyzstan 11

Summary

Registration of a legal entity includes registration in the Ministry of Justice of the Kyrgyz
Republic, in both Statistical and Tax bodies, getting licenses for implementing certain kind of
activity (the list of activities which are subject to obligatory licensing is in article 9 of the Law
«On licensing» the Kyrgyz Republic) and permission depending on enterprise type of activity.
State registration of legal entities include conformity assessment of founding documents which
should be developed for legal entities by the law of the Kyrgyz Republic, issuance of a state
registration certificate with assigned registration number, entering of data on legal entities to the
unified state registrar system. In order to register in the Ministry of Justice of the Kyrgyz
Republic, a representative of the company or the founder should present following documents:

- An application for registration;

- Other documents depending on the form of the company;

If one of the founders is a foreign legal entity, in order to register it is necessary to give the
legalized extract from the registrar, certifying, that the founder is a legal entity in accordance
with the legislation of his/her country. Legalization is not required for legal entities of the
Commonwealth of Independent States. Registration of legal entities is carried out free of charge
within 10 days from the moment of application submission.