A high-altitude
financial
and investment
oasis

www.kyrgyzbusiness.com

Surprisingly Liberal Legislation

Anyone doing business with post-Soviet countries will notice that Kyrgyzstan has a combination of low taxes and a set of very liberal laws governing foreign investment and capital flows.

Companies and individuals pay a 10% Income (Profit) tax; there is an abundance of tax rebates and zero rate provisions (such as for startup industrial production having achieved a certain turnover, software developers, leasing companies, agricultural firms etc.) Gold mining companies pay a small turnover tax and do not have their profits taxed.

Kyrgyzstan has no capital flow (exchange) controls or restrictions: any capital or profits may be brought into the country and paid out. Kyrgyz residents are free to bank anywhere in the world, buy and sell foreign currency and gold and expatriate it at any time.

Since early 1990s the Kyrgyz law contains unique provisions maintaining the «Investor is always right» regime. If a matter, such as an application for a mining lease or approval of the exploration report, is dragged by the State officials for longer than is set in the law, the application is deemed approved as filed, without reservation. This is unique for the region otherwise known for its intricate post-USSR bureaucracy.

Many activities which are subject to licensing elsewhere in the region can be undertaken in Kyrgyzstan without a license, subject only to observance of the legal regulations. It is the result of gradual reduction of the administrative burden on the economy diligently pursued by Kyrgyzstan for the past 15 years with the help of international financial consultants.

Technical and customs regulations are now being harmonized with the regulations of the Customs Union, however Kyrgyzstan compares favourably with the other Customs Union countries by having less burdensome bureaucratic procedures.

Taxes in more detail

No-one can call Kyrgyz taxes a burden. In Russia and the countries neighbouring Kyrgysztan they are higher and the tax administration and enforcement is much more convoluted and at times terrorizing.

In general the Kyrgyz tax law is easy to follow. There is no evaluation of the «true economic purpose» of transactions, no searching for the «end recipient» of the income, no hard-to-follow rules of taxing transactions between «affiliated persons», no look-through taxation of «controlled foreign companies» etc. etc. It sometimes seems that the freedom-loving attitudes of the Kyrgyz people have translated into the system where the business would pay only as much tax as it can reasonably afford. Because of the low tax rate many foreign companies active in Kyrgyzstan make it an important point to always pay a reasonable amount in tax and not over-exploit the many loopholes available to drive the rate to zero.

Corporate Profit Tax = 10%, and even from this very reasonable rate the law makes a good deal of exceptions. There is a zero rate on agricultural production, on manufacturing businesses which have reached a certain sales turnover, on software development for export. A 5% rate is available to leasing companies.

There is no notion of a «controlled foreign company» in Kyrgyzstan. Any income received by a controlled foreign entity or a trust will only be taxed in Kyrgyzstan if and when distributed to the Kyrgyz resident (as dividend or otherwise).

VAT = 12%, but it is levied only on domestic transactions. Financial services are exempt from the VAT. Small businesses which have not reached the sales of 8 million Soms (~120,000$) do not pay the VAT at all which stimulates local entrepreneurs to split their businesses into several legal entities and avoid the VAT even on larger sales (whether they are affiliated does not really bother the Revenue Service).

There exists a Sales Tax (single per cent on sales), but it is levied only on settlements in cash. It is also not applicable altogether to any foreign or export business. Movement of capital (securities, loans, investments) is equally free from the Sales Tax.

Individual Income Tax = 10%. Many people choose not to pay it at all, opting for fixed rate taxation available for many small businesses (this is called a «patent» system). You can declare up to ~110,000$ per year for each activity under a «patent» before you break the threshold leading to the 10% rate.

Citizens of the Kyrgyz Republic, in theory, are subject to taxation of their worldwide income, irrespective of where they reside, however this rule is neither followed nor enforced. It will probably be abolished in the course of one of the future reforms of the Tax Code.

Non-citizen residents of the Kyrgyz Republic enjoy much more liberal rules of income taxation which basically amount to a territorial tax system. This makes Kyrgyzstan an ideal country to acquire an alternative residency for wealthy international investors. On top of that, Kyrgyzstan is not a member of the Common Reporting Standard (CRS) system of financial information exchange for tax matters which has lately been causing so much inconvenience to wealthy Europeans and Russians.

The general rate of withholding tax levied on expatriated income is 10%. This tax is charged only on the types of income set out in the Tax Code, and some income is by definition exempt. For example, capital gains is not on the list, and that is good news for anyone trading foreign securities through Kyrgyzstan.

Kyrgyzstan has a number of double tax treaties, but not as many as one would wish and the ones available do not have minimal rates smaller than 10%. Unfortunately, Kyrgyz negotiators did not have enough leverage to agree better rates to support the investors.

Payment of salaries is subject to contributions to the Social Fund — the rate is slightly over 30%. This is hardly a plus in terms of business expenditure planning, but salaries in Kyrgyzstan are much lower than even in Russia and also — the Government should be able to fill up the Social Fund somehow… Residents of the High Technologies Park pay the Social Fund contributions at a lower rate — 17%.

Tax enforcement in Kyrgyzstan is milder than in many other countries, although inconveniences such as bribe extortion in the course of tax audits do happen from time to time. In any event, corruption costs do not significantly affect the general bottom line and may be easily avoided by following the law and keeping adequate accounts.

The court system is an adequate tool to challenge tax sanctions, should they be unlawfully imposed. A good lawyer and some luck, and sanctions levied through malice or incompetence can be removed.

There are no restrictions on settlements in cash in Kyrgyzstan. To the Kyrgyz the possibility to transact in cash is a fundamental freedom, much like the freedom to bear arms for the Americans. Kyrgyzstan is not an industrial country, but a country of small businesses, bazaars and regional-scale trade. If you remove from this system the freedom to pay and be paid in cash, this can easily lead to mass protests.

It is worth noting that some provisions of the Kyrgyz tax law create possibilities for international tax planning. There is a separate section on that on this website.

No Exchange Controls, But the Currency Is Stable

Absence of any form of exchange controls is a unique feature of Kyrgyz law, against the background of strong capital movement restrictions existing in Russia, China and many other countries of the region.

The only matter which is regulated in terms of currency is the business of street exchange offices (you need a license to open one) and the movement of physical cash across the State border (you must declare amounts over 2,000$ at the customs). The cash reporting rule is not applicable to border crossing within the Customs Union.

A provision of law exists that within the country you may not pay with anything but the national currency, the Som, however in practice this regulation bothers no-one, and if you run out of local money in your wallet, businesses will gladly accept US dollars. There are hardly any penalties for using foreign currency in pricing or settlements.

Prices per square meter of real estate, cars, business equipment and many services are traditionally quoted in dollars. The law requires to list prices in Soms, but again, this rule is observed only if the seller feels like it.

This does not in any way harm the economy because, strictly speaking, the country does not suffer from any currency imbalance. Migrant workers transfer back home dollars and Russian Roubles, then the family will inevitably convert those into Soms to pay for local expenses. Kyrgyzstan gets its international loans and grants in hard currency, and the bulk of those is spent within the country in local money. Kyrgyzstan does not have a huge industrial sector and therefore does not produce the demand for foreign currency to pay for imported equipment. A great deal of imports from China gets eventually resold abroad, for the same hard currency, putting no pressure on the domestic exchange market. The biggest mining operation in the country, Kumtor, pays its taxes in dollars and spends a lot of Soms on its local needs.

When the international financial crisis struck in the fall of 2008 and almost all the regional currencies including the Russian Rouble took a deep dive and needed over a year to partially recover, the Kyrgyz Som depreciated only a little.

In 2014 following the Crimea crisis and the institution of international sanctions against Russia the Russian Rouble lost almost half its value to the dollar. The Kyrgyz Som, although the Kyrgyz economy is linked with the Russian labour market, depreciated only about 15%.

The National Bank maintains an active position on the domestic currency market and spends either Soms or Dollars every week to stabilize the exchange rate. The gold and hard currency reserves of the National Bank show a steady growth for the past years. As a side note, the Kyrgyz banking sector now has a very able regulator who is not prone to unfounded actions.

Back to the exchange controls (which do not exist).

Kyrgyz-registered companies and resident individuals are free to open accounts with any foreign bank without getting a prior approval. The foreign account must then be notified to the National Bank, but this is really a formality and not a control tool.

Any investor into Kyrgyz assets is guaranteed the right to repatriate the investments and profits at any time — in any currency and without any restrictions.

Non-residents are free to open accounts with Kyrgyz banks and transact business on these accounts in any currency. Payments are subject to anti-money laundering controls, but this is typical of any contemporary financial system.

Precious Metals

Kyrgyzstan is a Gold Country. From the Soviet times it has been producing dozens of tons of gold every year. It hosts large international gold mining companies, smaller ‘pioneer’ explorers and miners and thousands of local mining companies and individual prospectors.

Kyrgyz law on transactions with precious metals is the most liberal in the region. Bullion trade is not subject to the VAT. The National Bank of the Kyrgyz Republic sells out gold bars daily, and anyone can come and buy. Purchasing artisanal gold and gold scrap through essay offices is subject to licensing by the Ministry of Finance, but the license is not difficult to obtain.

Financial instruments to invest into gold are locally available: those include metal accounts with local banks, gold-backed bonds (which can be redeemed in physical gold) and various types of gold derivatives tradable at the local commodities exchange.

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