GILS Corporate law: Turkmenistan

TURKMENISTAN

(1) Forms of doing business and Establishment

1.1. What are the options for establishing a company's presence in a country (branch, representative office, subsidiary, etc.), and what are their key advantages and limitations?

Under Civil Code of Turkmenistan (the “CCT”), Law of Turkmenistan “On Enterprises” (the “Company Law”) and Law of Turkmenistan “On Foreign Investments Law” there are two options for establishing a company’s limited presence in a country, primarily through establishing a representative or a branch office. Alternatively, full legal presence can be established in one of the following forms: 

1) Economic Society (the “ES”); 

2) Joint Enterprise (the “JE”); 

3) Joint Stock Company (the “JSC”). 

Here is a summary of advantages and limitations for establishing different types of legal presence of a foreign company in Turkmenistan: 

• Representative Office: This option allows a foreign company to establish a separate division in Turkmenistan for activities like marketing and negotiation but cannot engage in business activities. While it provides a presence, it doesn't have separate legal status, and the parent company bears full liability for its obligations.
• Branch Office: Similar to a Representative Office, a Branch Office is a separate division authorised to conduct business activities in Turkmenistan. It operates under the parent company's umbrella and is liable for its obligations. However, it can engage in entrepreneurial activities, enabling profit generation.
• JSC: The Law of Turkmenistan “On Joint Stock Companies (the “JSC Law”) permits the establishment of open or closed types of JSCs as local legal entities. Open JSCs allow public distribution of shares, while closed JSCs restrict share distribution to company members. They offer flexibility in share ownership and management but require more than one shareholder.
• ES: An ES is a legal entity owned by two or more persons, allowing them to pursue common business goals. It offers flexibility in ownership, with no limit on the number of co-founders. Coowners can allocate or limit their responsibilities and liabilities within the entity.
• JE: Similar to an ES, a JE involves multiple shareholders, each holding a minimum 10% share. Despite this distinction, both ES and JE operate under similar legal requirements. As an additional requirement one of the shareholders of JE should be a physical or legal person of Turkmenistan.

1.2. What is the process for creating a legal entity or another form of presence in the country, including the laws to follow, legal entities to be considered, documents required, stages and terms for registration? 

It is commonly preferred and practised according to the laws related to foreign investors to open branch offices. Therefore, the process for creating a branch office will be considered.

The registration process of the Branch Office on the territory of Turkmenistan is conducted via 3 different government authorities, which are the Tax Department of the Ministry of Finance and Economy of Turkmenistan, Agency of Economic Risks Prevention at the MFE and the Commission of the Economic Risks Prevention. 

Required steps to establish the Branch Office: 

• identify the premises for the branch office and execute the tenancy agreement;
• present the necessary registration documents to the appropriate registration authorities; 
• the assessment of relevant registration documents by the respective authorities may span 45-50 days;
• make a payment of TMT 8 000 (approximately USD 2 300) for registration fees, accompanied by a letter and payment confirmation/payment order;
• obtain a temporary Extract form of Unified State Register of Legal Entities and Regulations of the Branch Office from the Tax Department of the Ministry of Finance and Economy;
• a designated representative handles registration affairs at the Statistical Office, Tax Department, Pension Fund, and selected local bank, updating the Temporary Extract of Registration with relevant information;
• prepare a document package for the Ashgabat City Municipality to confirm the legal address of the Branch Office;
• submit the confirmation along with the updated Temporary Extract of Registration to the Tax Department;
• receive a renewed Extract from the Unified State Register of Legal Entities of Turkmenistan and a Certificate of State Registration of the legal entity in Turkmenistan for 3 years from the Tax Department;
• provide notarized and legalised copies of registration documents to the local bank, Tax Department, and Police Department;
• establish a local bank account by preparing, notarizing, and submitting the required bank registration documents to the relevant local bank;
• transfer TMT 1 800 (approximately USD 520) from the Branch Office’s local bank account to the Ministry of Finance and Economy of Turkmenistan as a government fee for the Certificate of the Participant of Foreign Economic Relations;
• obtain the Certificate of the Participant of Foreign Economic Relations from the Tax Department;
• prepare and submit a package to create an official Branch Office stamp to the editorial office, police department, and printing office;
• notarize the Branch Office Director's signature with the Branch Office stamp and submit it to the local bank along with the bank registration document for a foreign currency account.

Minimum capital requirement: 

• Representative Office/Branch Office: N/A;
• JSC: TMT 10 000 (ten thousand manats) or approximately USD 2860, half of which must be paid before registration of the JSC;
• ES: TMT 5 000 (five thousand manats) or approximately USD 1430, half of which must be paid before registration of the ES;
• JE: TMT 5 000 (five thousand manats) or approximately USD 1430, half of which must be paid before registration of the JE. 

1.3. What additional authorizations/approvals are required to create a legal entity or start operations, and how do they vary depending on the type of business (if any)? 

To conduct a business with a legal presence in Turkmenistan, several additional authorizations and approvals are required, which vary based on the type of business and its specific scope. Generally, the following permits are necessary from government authorities: 

• Sanitary Certificate: Issued by the Sanitary and Epidemiological Centre, this certificate ensures compliance with health and hygiene standards. It verifies that the business operations meet the necessary health requirements.
• Fire Safety Certificate: Obtained from the Fire Safety Service, this certificate confirms adherence to fire safety regulations. It ensures that the business premises and operations are safe from fire hazards.
• Certificate of Safety: Provided by Turkmenstandartlary, this certificate certifies compliance with safety standards. It covers various aspects of safety relevant to the business operations.
• Licences: Depending on the nature of the business, licences may be required from various licensing authorities of Turkmenistan. The licences authorise specific activities and ensure compliance with regulatory standards in the relevant field of the business entity.

It's essential to note that the documents required for obtaining these permits may vary depending on the scope of the business contract. Therefore, detailed information about the client's business activities is necessary to determine the specific documentation needed for permit applications.

1.4. What are the most common types of Legal Entities in your country and the differences between them in terms of taxation, liability, and management?

   1.4.1. What are the shareholder structures of these types of legal entities? 

   1.4.2. What is the Shareholders’ responsibility in these types of legal entities? 

   1.4.3. What is the responsibility of the representatives in these types of legal entities? 

   1.4.4. Briefly, what are the characteristics of the other types of Legal Entities? 

In Turkmenistan, the most common types of legal entities are the Branch Office of a foreign company, JSC, ES, and JE. 

The Branch Office: 

• Taxation: The Branch Office is subject to a 20% corporate income tax rate on net profit. There is a 1.5% tax on net profit for the arrangement of territory development, a 3% tax for the Agriculture Development Fund, and a 0.5% tax for the Ashgabat City Development Fund. They are also liable for VAT at 15% on the value of products, works, and services. Dividend tax is not applicable for the Branch Office.
• Shareholder Structure: The Branch Office is established by its parent company in accordance with board resolution thereof.
• Liability: The Parent company is fully liable for the debt of the Branch Office.
• Management: The Branch Office is managed by its director assigned by the parent company and acts on the basis of the Regulations of the Branch Office and the power of attorney issued by the parent company.  

JSC: 

• Taxation: JSCs are subject to an 8% corporate income tax rate on net profit. Additionally, there is a 1.5% tax on net profit for the arrangement of territory development, a 3% tax for the Agriculture Development Fund, and a 0.5% tax for the Ashgabat City Development Fund. They are also liable for VAT at 15% on the value of products, works, and services. Dividend tax is applicable at a rate of 15%.
• Shareholder Structure: JSCs must have more than one shareholder. In an open-type JSC, shares may be distributed publicly, and there is no limit on the number of shareholders. In a closed-type JSC, shares are distributed only among members or named individuals, and the number of shareholders is limited to 50.
• Liability: Limited liability for shareholders, with the company being a separate legal entity.
• Management: Board of Directors governs strategic decisionmaking and appoints an Executive Body, often led by a Director General, responsible for implementing decisions and overseeing daily operations. 

ES: 

• Taxation: ESs face an 8% corporate income tax rate on net profit. Similar to JSCs, they are subject to taxes for territory development, agriculture development, and Ashgabat city development. VAT at 15% applies to the value of products, works, and services. Dividend tax is also applicable at a rate of 15%.
• Shareholder Structure: Two or more legal or physical persons own ESs, with the number of co-founders not being limited. This allows for flexibility in ownership structure.
• Liability: Limited liability for shareholders, with the company being a separate legal entity.
• Management: ESs often have a management structure similar to JSCs. They are governed by a General Meeting of Founders, which makes major decisions regarding the enterprise. The Executive Body, led by a Director, is responsible for executing the decisions of the General Meeting and managing day-to-day operations. 

JE: 

• Taxation: JEs are subject to an 8% corporate income tax rate on net profit. They are also liable for taxes related to territory development, agriculture development, and Ashgabat city development. VAT at 15% applies to the value of products, works, and services. Similarly, dividend tax is applicable at a rate of 15%.
• Shareholder Structure: Each shareholder in a JE must have a share not less than 10% of the enterprise. This ensures a more balanced distribution of ownership.
• Liability: Limited liability for shareholders, with the company being a separate legal entity.
• Management: JEs typically have a management structure similar to JSCs and ESs. A General Meeting of Members governs them, which is responsible for major decisions. The Executive Body, led by a Director, oversees the implementation of decisions and manages daily operations.

1.5. What are the operating costs associated with the maintenance of a legal entity or presence in the country?

Representative Office: 

• There are costs associated with maintaining a representative office, including registration fees and taxes;
• No minimum capital requirement is specified, but there are taxes applicable to property, and employee salaries;
• Full liability for debts incurred by the parent company of the representative office. 

Branch Office: 

• Similar to the representative office, there are registration fees and taxes;
• Full liability for debts incurred by the parent company of the branch office. 

JSC: 

• Minimum capital requirement of TMT 10 000 (or approximately USD 2860), half of which must be paid before registration;
• Shareholders, directors, and senior management requirements;
• Liability limited to the value of shares.

ES: 

• Lower minimum capital requirement of TMT 5 000 (or approximately USD 1430), half of which must be paid before registration;
• Shareholders, directors, and management requirements;
• Liability depends on the form of property liability.

JE: 

• Similar to ES with a minimum capital requirement of TMT 5 000;
• Additional requirement of at least one shareholder holding 10% of shares;
• Liability depends on property liability form.

(2) General taxation issues 

2.1. What tax obligations are associated with doing business in the country? 

Corporate Income Tax (CIT): 

The tax rate for corporate income is specified as follows: 

• Representative Office: Not applicable;
• Branch Office (from net profit): 20%;
• JSC, ES, JE (from net profit): 8%;

Local Taxes: 

These include taxes for the arrangement of territory cities, towns, and rural settlements, contributions to the Agriculture Development Fund, contributions to the Ashgabat City Development Fund, and property taxes.

Value Added Tax (VAT): 

The VAT at a rate of 15% and is applicable to the value of products, works, and services provided by the business. 

Retirement Insurance Contributions: 

Contributions to retirement insurance at a rate of 20% and are calculated based on the gross monthly salary of employees and shall be paid by the employer. 

Personal Income Tax (PIT): 

The tax rate for personal income is 10% and is applicable to the gross monthly salary of employees and is paid by the employer on behalf of the employee. 

Dividend Tax: 

Dividend tax is applicable to distributed profit at a rate of 15% for JSCs, ESs, and JEs.

2.2. What tax and customs incentives are available in a country? 

Different types of organisations may receive specific tax and/or customs benefits depending on their activities and other relevant factors. 

The following entities are eligible for exemption from income tax: 

• investment pension funds;
• organisations dedicated to the rehabilitation of disabled individuals;
• educational institutions;
• enterprises associated with public organisations serving disabled persons, wherein the entire authorised capital is exclusively owned by such public associations, with a minimum of 70% of the workforce comprising individuals with disabilities, and a minimum employment of 20 individuals with disabilities;
• religious organisations;
• agricultural enterprises;
• resident legal entities of Turkmenistan or non-resident legal entities of Turkmenistan providing circus services;
• international, intergovernmental, and interstate organisations, excluding income derived from entrepreneurial endeavours;
• legal entities operating within free economic zones, excluding those designated for tourist and recreational purposes, are entitled to a ten-year income tax exemption during their initial operational decade, provided they engage in activities specified within the decision and agreement governing the establishment of such zones, as per the prescribed procedures.

This exemption does not apply to profits made from selling excisable products, nor does it include certain types of income such as dividends and earnings from gambling activities.

Legal entities of private ownership listed above except those governed by the Law of Turkmenistan "On Hydrocarbon Resources," (the “Petroleum Law”) and categorised as small to medium-sized, are exempt from paying income tax, set at a rate of 2%.

Additionally, the Petroleum Law outlines a special tax arrangement for contractors operating under subsurface use agreements such as Production Sharing Agreements, Royalty Contracts and Service Contracts. According to this arrangement, contractors are solely liable for corporate income tax and subsurface use payments, while being relieved from all other taxes and duties imposed by the Turkmenistan government.

2.3. What are the accounting and reporting requirements for different types of presence, and how often must they be submitted? 

Accounting and reporting requirements are tailored to fit the purpose and size of the entity, ensuring that general and interim financial statements meet both national and international standards, while simplified statements specifically accommodate small to medium-sized businesses. It's crucial that all statements receive authorization from designated personnel. Additionally, the reporting period varies depending on the type of financial statements: 

• General purpose financial statements: These must be prepared annually, covering the calendar year from January 1st to December 31st.
• Interim financial statements: These should be prepared either quarterly or semi-annually.
• Simplified financial statements and interim simplified financial statements: For simplified financial statements, the reporting period is the calendar year, while for interim simplified financial statements, it is half a year.
• Newly created economic entities: The first reporting period for such entities extends from the date of their state registration to December 31st of the corresponding year.
• Economic entities created in the fourth quarter: The first reporting period for these entities covers the period from January 1st to December 31st of the following year. However, the financial activities of the current year are reflected in the financial statements of the next year.
• Liquidated economic entities: The reporting period for these entities spans from January 1st of the reporting year until the date of their liquidation, as per the established procedures outlined in the legislation of Turkmenistan. 

2.4. What is the taxation of dividends for foreign investors? 

Representative/Branch Office: Dividend tax is not applicable. 

JSC, ES, JE: Dividend tax is 15% for these types of entities

2.5. What strategies exist for minimising tax liability when conducting international business?

Strategies for optimising tax liability may be developed based on scope of international business conducted in the territory of Turkmenistan. Besides, applicable bilateral double taxation treaties (DTTs) are recommended and widely used for minimising tax liability.

(3) Regulatory and miscellaneous 

3.1. What are the general data protection and privacy requirements in the country, and how do they affect company operations? 

The data protection laws and regulations in Turkmenistan are based on the principles outlined in the Constitution of Turkmenistan. These laws include the Law of Turkmenistan “On Information about Private Life and Its Protection” dated March 20, 2017 (the “Data Protection Law”) and other regulatory legal acts, which specify the procedures for collecting, processing, and safeguarding personal data. The Data Protection Law in Turkmenistan emphasises obtaining consent, respecting individual rights, ensuring lawful and secure data processing, and maintaining confidentiality. 

In regard to company operations, there are several aspects that need to be considered:

• the consent of the individual must be obtained, either in writing or in the form of an electronic document;
• personal data stored in electronic databases, including biometric information, is confidential, and its collection and processing are limited to predefined purposes;
• confidentiality for electronic databases containing personal data is obligatory from the moment the information is provided by the individual;
• the retention period for personal data is determined based on the fulfilment of the purposes for its collection and processing;
• personal data accumulation is conducted by gathering the necessary and sufficient information to fulfil tasks assigned by the operator or a third party;
• upon the expiration of the retention period, the operator or a third party is responsible for the destruction of personal data.

3.2. What labour law features should be considered when hiring local and foreign employees? 

• Restrictions on Foreign Workers: Understand any restrictions on hiring foreign workers. In the given scenario, the percentage of foreign workers should not exceed 10% of the total staff.
• Local Content Requirements: Check for any local content requirements related to hiring foreign workers. Ensure compliance with regulations concerning the employment ratio of foreign to local staff.
• Work Permits and Visas for Foreign Workers: Foreign workers must obtain appropriate work permits and visas. These documents typically require specific paperwork, including contracts, employment contracts, HIV (AIDS) test certificates, diplomas, corporate documents, and a Power of Attorney (PoA).
• Types of Visas: Understand the types of visas applicable to foreign workers (e.g., business visa/work permits).
• Documentation for Visas and Work Permits: Ensure all necessary documentation is provided for visa and work permit applications. This may include contracts, corporate documents, PoA, and other relevant paperwork.
• Processing Times: Be aware of the processing times for visa and work permit applications. Urgent processing options may be available in some cases.
• Duration of Visas and Work Permits: Understand the validity period of business visas and work permits. In this scenario, business visas are typically issued for one month, while work permits can be issued for up to one year.
• Registration Requirements: Foreign employees are required to register with the relevant authorities within 3 working days after arrival in the country or after changing their place of residence. Ensure compliance with registration procedures and timelines.

3.3. What are the requirements for currency regulation and currency control? 

In Turkmenistan, currency regulation and currency control are primarily governed by the Cabinet of Ministers of Turkmenistan and the Central Bank of Turkmenistan. 

Several currency regulation and control requirements must be taken into account: 

• Primary currency regulation methods include licensing banking activities, registering currency transactions and accounts, and notifying authorities;
• Capital movements in foreign exchange transactions between residents and non-residents are subject to notification if they exceed the freely circulating currency limit (USD 10,000) or involve opening or closing resident accounts in foreign credit institutions;
• Non-residents have rights to export foreign currency, receive dividends, and transfer surplus income;
• Transfers of funds from non-residents adhere to currency agreements or market exchange rates in accordance with the rules thereof, in the absence of such agreements;
• Transactions and payments between residents in Turkmenistan are conducted in the national currency, with limited exceptions;
• Foreign exchange transactions related to property transfer or services within Turkmenistan are primarily conducted in the national currency, unless specified otherwise;
• Employment contracts may involve payments in both national and foreign currency;
• Foreign exchange transactions among non-residents are generally unrestricted, including currency transfers between different types of accounts held by non-residents.

3.4. What corporate law features should be considered when planning mergers, acquisitions, and company restructuring in the country? 

Mainly, mergers, acquisitions (M&A), as well as restructuring of the company are regulated by the Company Law and JSC Law of Turkmenistan. Here are the most important features derived from these laws which should be taken into account when planning M&A and company restructuring within jurisdiction of Turkmenistan: 

• restructuring of the company is a reorganisation hereof without fulfilment of the de-registration procedure;
• restructuring of the company in the form M&A may be performed by the decision of its founders and/or the parent company;
• restructured in the form of M&A company is a legal successor for all rights and obligations of merged and/or acquired company;
• restructured company should be re-registered at the Statistical Office, Tax Department, Pension Fund and its respective bank;
• merger of two or more companies is carried out through the creation of a new company based on complete combination of their property;
• the companies participating in the merger cease their activities;
• all rights and obligations of merged companies are transferred to the newly created company in accordance with the transfer act;
• if the rights and obligations of participants in the merged companies were not based on the principle of equity participation in the authorised capital, the decision on the merger of companies must determine the rights and obligations of participants in the new company.

3.5. What are the most efficient mechanics for dispute resolution?

Taking into account that Arbitral Procedure Code of Turkmenistan allows to choose any jurisdiction as governing law of commercial transaction, as well as any arbitral institution at own discretion provided that there is specific clause in the commercial agreement, it is recommended to use any jurisdiction which is a participant of New York Convention (the "Convention") on the Recognition and Enforcement of Foreign Arbitral Awards, taking into account following declarations and reservations: 

• “In accordance with article I (3) of the Convention, the Government of Turkmenistan declares that it will apply this Convention only to the recognition and enforcement of awards made in the territory of another Contracting State.
• In accordance with article I (3) of the Convention, the Government of Turkmenistan declares that it will apply this Convention only in relation to disputes which are considered as commercial disputes under the national law of Turkmenistan.
• The Government of Turkmenistan will apply this Convention only to the recognition and enforcement of awards which are rendered after the Convention enters into force”. Please, note the Convention entered into force on the 4th day of May, 2022.

 

Authors:

Ikbal Said Alauddin, Annamenli Rozymyradova.