Some aspects of voluntary liquidation of branch and representative offices of foreign legal entities (Duman Akhmetov, Partner; Almas Bektassov, Junior Associate. International law firm Integrites Kazakhstan)
Some aspects of voluntary liquidation of branch and representative offices of foreign legal entities
International law firm Integrites Kazakhstan
This information only provided as a general guide and should not be used as a specialized legal opinion.
Many legal entities, including non-resident legal entities (hereinafter the «Legal entities») while conducting their business activities often face the necessity of expanding their businesses not only within their country of incorporation but also by the presence of in different regions as well. The legislation of the Republic of Kazakhstan provides for the commercial registration of branch and representative offices of non-resident companies in the Republic of Kazakhstan. Legal aspects related to commercial registration of branch and representative offices are governed by the Civil Code of the Republic of Kazakhstan (hereinafter «CC RK») and the Law «On state registration of legal entities, branch and representative offices» (hereinafter the «Law»). The registration procedure itself is regulated by the «Instruction on the state registration of legal entities and registration of branches and representative offices» (hereinafter the «Instruction»).
Thus, in case there is a need of establishing a foreign legal entity branch or representative office on the territory of the Republic of Kazakhstan, the foreign legal entity should follow the procedures and provisions of the mentioned legal acts.
With the completion of certain business projects companies often face with the need to eliminate the previously established structural units represented by either branch or representative offices.
It is worth mentioning that whereas the procedure of registration of a structural unit of a legal entity is sufficiently clear, the voluntary liquidation of the structural unit, in our opinion, requires a number of clarifications. Namely, we believe that it is important to consider some aspects related to the provided procedural actions necessary for liquidation of a structural unit of a legal entity (liquidation). Taking into account current legal provisions related to this issue, the voluntary liquidation of a structural unit of a legal entity presumes submission of the following paperwork to the registering authority:
ØApplication form according to the existing appendix to the Instruction;
ØThe Provisions of the branch (representative office);
ØReceipt or other document confirming the payment of corresponding fee associated with the branch (representative office) liquidation.
We believe that the above list is not exhaustive and to be completed for the following reasons. Firstly, the branch and representative offices do not have a separate legal identity under the law of the Republic of Kazakhstan. Therefore, such have no authority to decide on actions of own liquidation. This authority, in fact, belongs exceptionally to the legal entity, which previously took the decision on establishment of this branch office (representative office).
When reading trough the procedure of liquidation outlined in the Instruction, one may get a perception that a branch or representative office can be eliminated without an authorized decision of the founding legal entity itself. However, because it is a branch or representative office and both have a limited legal capacity, this kind of conclusion is erroneous.
Secondly, as one of the attributes of the individualization a structural unit may have a seal. With the liquidation of the structural unit the seal must also be destroyed. This procedure must also be duly certified by the corresponding act. However, the Instruction does not account for this aspect either.
Thirdly, we believe that creditors and counterparties of the legal entity must be aware of the liquidation of its structural unit, as commercial transactions between the entity and creditors in varying degrees can be carried out through its branch or representative office being liquidated.
Fourthly, it should be noted that the Instruction also outlines that the tax authorities provide information in respect to any outstanding taxes and fees are due to be paid by the structural unit of the legal entity based on data retrieved from the National Business Identification Numbers registry. In other words, the Tax authorities present information on absence (presence) of any liabilities of the structural unit before the government. In case there is any liability, the branch or representative office must fulfill such tax liability in the manner prescribed by the Tax Code. In case there is no liability, the Tax authority provides the registering authority with a certificate confirming the absence of liabilities.
When reading this provision of the Instruction the applicant may get an impression that the mentioned Tax authorities are supposed to take actions in order to provide information about the liabilities on their own. Moreover, applying the literal interpretation of this provision, the impression is that the tax authorities carry out these actions solely on the basis of the data of the National Business Identification Numbers registry. As we understand it, the registering authority in turn is supposed to enter a preliminary data associated with liquidation of the structural unit of a legal entity.
Nevertheless, the provisions of the Tax Code of the Republic of Kazakhstan (hereinafter the «Tax Code»), provides a number of important points that are associated with the liquidation.
For example, Article 37 of the Tax Code specifies the order of execution of the tax obligations by the legal entity subjected to liquidation, as well as the termination of the activities of the structural unit of the non-resident legal entity in the Republic of Kazakhstan. The clause of 13 of the commented article provides that the fulfillment of the tax liabilities by the structural unit of the foreign legal subjected to liquidation must be carried out in accordance with the procedure of submission of an application for tax audits. Thus, the Tax authorities carry out a tax audit based on stated above Tax application for conducting documentary checks, but in no manner it is based on information of the National Business Identification Numbers registry.
Under the subclause 1, clause 5, Art. 627 of the Tax Code setting out the concepts, types and forms of tax audits, the particular audit, provided in the Article 37 of the Tax Code, is referred to as the liquidation audit referring to a comprehensive tax audit. It should be borne in mind that according to subclause 2, clause 9, of Art. 627 of the Tax Code, such audit relates to unplanned audits and is carried out in the event of liquidation of the structural unit of a non-resident legal entity.
Guided by all the above norms and arguments, we believe that it would be fare to determine that liquidation of the structural units of a foreign legal entity shall require a tax audit. Currently, there is no sufficient and adequate clarity in respect to this matter applicable to the Instruction.
Fifth, the implementation of the voluntary liquidation of the legal entity, in addition to providing a certificate of absence of tax arrears, the Instruction also provides for the granting of certificate of absence of arrears of customs duties and customs fees. Such information is provided in the application, further directed to the territorial divisions of state revenue Committee of the Ministry of Finance of the Republic of Kazakhstan. We believe it is important to note that the Instructions’ provisions related to the liquidation of a structural unit of a legal entity do not provide a sufficient reference for the necessity of conducting of the customs checks. In general practice there may be occasions when a structural unit of a legal entity in course of its business may conduct certain types of customs operations.
Thus, we see some incompleteness and lack of clarity in the content of the Instruction in the area of procedures for liquidation of a structural unit of a foreign legal entity. Taking this into account and we believe it would be appropriate to recommend the following revision of this particular provision of the Instruction applicable to the liquidation of a business entity’s structural unit:
«The following list of documents is to be provided to the registering authority for initiating the procedure of voluntary liquidation of the branch (representative office) of a legal entity:
1) The application in compliance with Appendix to this Instruction;
2) The Provisions of the branch (representative) office;
3) The receipt or other document confirming payment of the registration fee for withdrawing (removing) from the registration of the branch (representative office);
4) The resolution by the owner of the legal entity or by its authorized body or owner of the legal entity authorized by the constituent documents of the liquidation of the branch (representative office) of a legal entity with the seal of the legal entity;
5) The document confirming publication of information on branch (representative office) liquidation in the official publications of the Ministry of Justice;
6) Certificate (act) on results of the liquidation tax audit;
7) Certificate of no arrears of customs duties and customs fees;
8) The certificate confirming the destruction of the seal of branch (representative office) of a legal entity.»
Thus, we believe that the introduction of the proposed changes into the revision of the Instruction will protect the interests of all stakeholders to a greater extent, as well as it would help avoiding delays in the process of liquidation of a structural unit of a legal entity, the risk of which is due to the circumstances outlined in this article.