2.1.1. Carrying activities by way of business

Rule 1.1.9 of GEN gives a description of what is understood as being carried on “by way of business”. Three criteria listed there do not contain the closed list of activities, and therefore whether an activity is carried by way of business or not is ultimately a question of judgment that may take into account several additional factors:

(a)   the degree of continuity;

(b)   the existence of a commercial element, for example is there direct or indirect financial benefit expected, which is not limited to profit;

(c)   the scale of the activity;

(d)   the proportion which the activity bears to other activities carried on by the same Person but which are not regulated;

(e)   the nature of the particular activity that is carried on; and

(f)    the existence of customers/clients.

If a Person can establish that the activities it is carrying on is not by way of business, and there are no applicable exclusions or exemptions, it follows that its activities do not require authorisation. (Note that for Market Activities and Ancillary Services being included into the list of activities in GEN is a sufficient provision for requiring authorisation).

Further, if the activities are not undertaken by way of business, the AIFC Conduct of Business Rules (COB) will not be applicable, as those rules only apply to an Authorised Firm with respect to any Regulated Activity carried on by an Authorised Firm operating in the AIFC. (Note certain exceptions with regard to client classification, client communication and financial promotions, complaint handling and dispute resolution. See COB 1.2.2. for more details).

With regard to an individual, who works for a Person, the General Prohibition will not be applied on the ground that the individual is not carrying on its business in a personal capacity if the individual is working under an employment agreement or services agreement (contract of service, contract for service).

2.1.2. Regulated Activities, Market Activities or Ancillary Services

The list of Regulated Activities, Market Activities and Ancillary Services is available in GEN, respectively in Schedules 1, 4 and 2: https://afsa.orderly.kz/articles/general-rules.

The process of applying for authorisation is available on the AFSA website: https://afsa.aifc.kz/authorisation-process/.

The AFSA may arrange pre-application meetings to provide general information about the authorisation process and applicable requirements.

Arranging a pre-application meeting with a prospective applicant for Regulated or Market Activities is a general recommendation, rather than an option. Forms of pre-application meetings may vary occasionally and be interchanged with a conference call in case of impossibility to arrange a meeting. However, the purpose of such meetings is to provide a prospective applicant with an overview of regulations, information about the application process and requirements, rather than to perform preliminary assessment of the application, which is a part of the authorisation process.

Pre-application meetings with the AIFC Authority and the AFSA are an important starting point in respect of any application to obtain a licence where a holistic description of the project, the proposed nature of the financial services and expansion plans are discussed. The outcome of such meetings is to provide general information, rather than perform the initial review. A prospective applicant for Regulated and Market Activities may seek advice from legal and other professional advisers in relation to any application for licencing and relevant laws, regulations and rules that may apply. While an advisor is welcomed at the pre-application meeting, the AFSA officials expect a firm’s shareholder or prospective management to speak on the firm’s behalf.

Before selecting a name of the firm, the applicant needs to check sensitive business names. Pursuant to the AIFC Companies Regulations a firm must not use a name that, because of any fact, matter or circumstance, is, or is reasonably likely to become, misleading, deceptive or conflicting with another name (including an existing name of another Company or Recognised Company). The firm must not use the name indicating it is related to providing regulated financial services without being properly authorised to do so, for example, “Fund Management”, “Investment Management”, etc.

In order to register a firm providing regulated financial services the applicant needs to ensure that it has the required amount of regulatory capital, which will be different based on the requirements for each category or type of firm (see the relevant AIFC Prudential Rules). It is recommended that the applicant's initial capital exceeds the required base capital, where additional risk and operational capital are considered. The firm must have and maintain at all times Capital Resources and Liquid Assets in accordance with the relevant prudential rules.

The individuals that will be performing senior management roles such as Approved and Designated Individuals need to undergo the Fit and Proper test (see the Regulatory Guidance on Fitness and Propriety and the Guidance on Competence Assessment).

2.1.3. Carrying on activities in or from the AIFC

Carrying on activities in the AIFC shall be dealt with in relation to activities in the territory of the Centre, and concerning the persons who can “use” the Centre. The heading of Article 3 of the Constitutional Statute mentions both of these, as the heading is “AIFC Participants and activities conducted in the territory of the AIFC”.

As to activities in the territory, Article 3(1) of the Constitutional Statute precludes “activities that may be conducted in the AIFC”. Thus, it enables AIFC Bodies to adopt AIFC Acts which define the permissible activities to be conducted inside the Centre.  As to the people who can use the Centre, the focus switches to Article 4 of the Constitutional Statute. It empowers, at Article 4(3), AIFC Bodies, to “regulate relationships” between various persons. By “relationships” the Constitutional Statute means, e.g., the relationship between an authorised Centre Participant and the AFSA. It imposes limits on these powers of the AIFC Bodies, by defining the “relationships” concerned. The main relationships are defined those as (a) between AIFC Participants, (b) between AIFC Bodies, and (c) between persons in (a) and (b). Employees of either persons are also included.

The words “in or from the AIFC” need to be considered as legal and regulatory construct, not solely geographical. It can be linked to the meaning ‘conducted under and in accordance with (valid) AIFC Law’, and not as having the literal, stricter, meaning limiting the activities to those having effects only withing geographical boundary of the AIFC.

Going further, section 6 of the FSFR envisages the circumstances when activities are deemed to be carried on “in or from the AIFC” for the purposes of the FSFR, thereby ensuring that the conduct falls within the remit of regulation by the AFSA:

6. Meaning “in the AIFC”

(1) A Person will be deemed to be carrying on activities in the AIFC for the purposes of these Regulations if:

(a) that Person is a Centre Participant and the day-to-day management of those activities (even if those activities are undertaken in whole or in part from outside the AIFC) is the responsibility of the Centre Participant in its capacity as such; or

(b) that Person’s head office is outside the AIFC, but the activity is carried on from a branch maintained by it in the AIFC; or

(c) the activities are conducted in circumstances that are deemed to amount to activities carried on in the AIFC under Rules made by the AFSA.

(2) The AFSA may issue Rules and guidance as to the circumstances in which activities capable of having an effect in the AIFC are or are not to be regarded as conducted in the AIFC.

Subsection 1(a) refers to an AIFC Participant carrying out activities for which it has either been registered or recognised and for which it is responsible for managing on a daily basis. The part "even if those activities are undertaken in whole or in part from outside the AIFC" clearly envisages that the activities being carried on will still fall "in" the AIFC for the purposes of this particular regulation even if they are carried on with persons outside the geographical limits of the AIFC.

Where subsection 1(b) applies, care needs to be taken not to read the word "in" in its geographical sense alone. Although the word "branch" clearly connotes a physical presence, it needs both to be physically within the area of the AIFC and "in" also, by way of recognition. This means that if a firm is recognised by the AFSA to operate as a Branch Office in the AIFC, any regulated activities that the firm carries on through that branch will fall "in or from the AIFC".

It is worth noting, of course, that if a firm has been successful in obtaining recognition through a Branch Office, this will be because the “Head Office” is governed by a system of financial regulation which is of sufficient quality and rigour to be recognised by the AFSA. The “Head Office” will not be able to use its branch’s AFSA authorisation other than through its Branch Office in the AIFC.

Finally, subsection 1(c) is aimed at enabling the AFSA to protect the integrity of the AIFC. It is a method by which the AFSA can bring potentially marginal activities by an AIFC Participant within the AIFC and therefore within its powers of regulation and enforcement. The AFSA, upon careful analysis of the activity proposed to be carried out and in accordance with the Rules and associated guidance, may "deem" that activity to fall within the AIFC and can thereafter take steps to regulate, prevent or curtail those activities.

For completeness, where activities are carried out in or from the AIFC which contravene the criminal laws of Kazakhstan, then the perpetrator of those activities will be subject to the criminal justice system of the Republic of Kazakhstan. Such a perpetrator may also face civil sanction within the AIFC arising from the same activities.

For reference: Requirements for having a registered office in the AIFC can be found in section 24 of the AIFC Companies Regulations.

In practice the AFSA may require some representatives of the management (CEO, compliance function, Directors) to be located in the AIFC.

Branches

When an entity desires to perform activities through a Branch Office, the threshold conditions, which are the minimum conditions for authorisation, apply to the international company as a whole and not just the AIFC branch, since a Branch Office is not a separate legal entity in its own right but an extension of a company incorporated outside of the AIFC. The AFSA requires companies to have an appropriate amount of liquidity and its quality, to have appropriate resources to monitor, measure, and manage the risks to which it is or may be exposed, to be fit and proper, to conduct their business prudently and to be capable of being effectively supervised by the AFSA.

For more details on the AFSA considerations for branch supervision of banks, insurers and investment companies see Supervisory Policy Statement on the AFSA’s approach to Branch supervision.

Representative Offices

When an entity desires to perform activities through a Representative Office, it shall not undertake a Regulated Activity outside the scope of its Licence.

The Scope of a Representative Office's Licence may include:

(a)   marketing activities of services or products;

(b)   activities that increase the profile, in the AIFC, of the Representative Office's head office;

(c)   activities that relate to correspondence with or the provision of information from the Representative Office's head office;

(d)   activities that relate to the provision of information to the Representative Office's head office relating to business trends, business opportunities and developments in the AIFC markets; and

(e)   any other activities that the AFSA determine may be suitable for a Representative Office to conduct.

For more details on description of activities see AIFC Representative Office Rules.

Substantial presence requirements for tax exemption purposes

For more details on substantial presence of the AIFC Participants applying tax exemptions see AIFC Rules on the Substantial Presence of the Astana International Financial Centre Participants Applying Tax Exemptions for the Payment of Corporate Income Tax, Value Added Tax (SPR).

The AFSA is in the process of drafting Guidance on the SPR, which is supposed to be adopted in Q3 2023 and will provide more detailed information on applying the SPR.  

The SPR have been adopted for the purposes of implementation of the OECD Base Erosion and Profit Shifting (BEPS) Action 5 and should be considered in addition to the "in the AIFC” requirement.

In general, under the SPR it is required to have adequate members of staff in the AIFC.

2.1.4. Exempt Activities

The FSFR envisages that certain AIFC Participants or categories of AIFC Participants may be exempted by an order or Rules from the General Prohibition in respect of Regulated Activities, or requirements of the criteria for granting of a Licence to carry on Regulated Activities.

Such exemptions are limited to certain Regulated Activities or specified circumstances, or subject to certain conditions and restrictions.

References to exemptions relate to Persons who are exempt from the need to apply for authorisation to carry on Regulated Activities, which means they can carry on Regulated Activities without breaching the General Prohibition.

Similar exemptions in the AIFC legal framework are also available to Authorised Market Institutions, who still need to be authorised to perform Market Activity but may be exempt from the General Prohibition in respect of any connected Regulated Activity.  

Pursuant to section 39(1) of the FSFR an Authorised Investment Exchange is exempt from the General Prohibition in respect of any Regulated Activity:

(a)   which is carried on as a part of the Authorised Investment Exchange's business as an investment exchange; or

(b)   which is carried on for the purposes of, or in connection with, the provision by the Authorised Investment Exchange of services designed to facilitate the provision of clearing services by another Person.

Pursuant to section 39(2) of the FSFR an Authorised Clearing House is exempt from the General Prohibition in respect of any Regulated Activity:

(a)   which is carried on for the purposes of, or in connection with, the provision of clearing services by the Authorised Clearing House; or

(b)   which is carried on for the purposes of, or in connection with, the provision by the Authorised Clearing House of services designed to facilitate the provision of clearing services by another Person.

Pursuant to section 39(3) of the FSFR and subject to Rule 7.2 of the AIFC Authorised Market Institution Rules, an Authorised Crowdfunding Platform is exempt from the General Prohibition in respect of any Regulated Activity which is carried on as a part of the Authorised Crowdfunding Platform's business as a private crowdfunding platform.

2.1.5. Excluded Activities

References to exclusions relate to activities which, if applicable, would mean that the activity in question would not be considered as carrying on a Regulated Activity in breach of the General Prohibition.

Statutory exclusions, which, if complied with, may turn Regulated Activities into unregulated activities, may apply to specified activities generally, and to several specified kinds of activity.

GEN contains the list of exclusions in respect of several activities:

PERG will provide additional available exclusions where applicable throughout the text below.

2.1.6. Recognition regime

AIFC legal framework also envisages a recognition regime, which foresees entities established in foreign regulatory regimes where they may become members of an AMI in the AIFC on the basis that they are considered to be subject to a broadly equivalent level of regulation to those AMI members licensed by the AFSA to perform similar activities in or from the AIFC.

Non-AIFC Market Institutions

Recognition requirements for Recognised Non-AIFC Investment Exchanges and Recognised Non-AIFC Clearing Houses are listed in section 89(3) of the FSFR: 

(a)   investors are afforded protection equivalent to that which they would be afforded if the body concerned were required to comply with the relevant requirements for the licensing of an Authorised Market Institution;

(b)   there are adequate procedures for dealing with a Person who is unable, or likely to become unable, to meet its obligations in respect of one or more Market Contracts connected with the investment exchange or clearing house;

(c)   the applicant is able to co‐operate with the AFSA by sharing information and in other ways;

(d)   adequate arrangements exist for co‐operation between the AFSA and those responsible for the supervision of the applicant in the country or territory in which the applicant or the applicant's head office is situated.

Non-AIFC Members

Recognition requirements for Recognised Non-AIFC Members are listed in section 91(3) of the FSFR:

(a)   the applicant is licensed or otherwise authorised to trade on or use the facilities of an exchange or clearing house in a jurisdiction acceptable to the AFSA;

(b)   the applicant is regulated in respect of trading in such jurisdiction by a regulator to a standard satisfactory to the AFSA;

(c)   the law and practice under which the applicant is licensed or otherwise authorised is broadly equivalent to the AFSA’s regulatory regime as it applies to a Member;

(d)   when using the facilities of an Authorised Investment Exchange or Authorised Clearing House, the applicant does not exceed the scope of the activities it is authorised to carry on by those responsible for the supervision of the applicant in the country or territory in which the applicant's head office is situated;

(e)   the applicant has agreed to cooperate with the AFSA and subject itself to such parts of the legal and regulatory framework administered by the AFSA as the AFSA may require.

For more details on recognition and supervision of recognised entities see AIFC Recognition Rules.

AFSA may publish notices on equivalent regulated exchanges from time to time.

2.1.7. Carrying activities without authorisation

For carrying on activities without authorisation all possible exemptions and exclusions must be reviewed

2.1.8. Offering services to residents and non-residents of the Republic of Kazakhstan

Offering services to residents of Kazakhstan

The Acting Law of the AIFC may contain specific limitations for offering financial and professional services to residents and non-residents of the Republic of Kazakhstan.

When an AIFC Participant decides to offer financial and professional services to residents of the Republic of Kazakhstan that are not AIFC participants it needs to be aware of potential currency regulation implications.

The AIFC Rules on Currency Regulation use the definitions such as “financial services”, “related services” and “professional services”. GEN does not have the same differentiation. In fact, those definitions are used due to the wording provided in the Constitutional Statute and in the jurisdiction of the Republic of Kazakhstan. One could review them under GEN context in the following way:

However, this should not be a straightforward approach, and each activity needs to be considered separately. The context of the AIFC Rules on Currency Regulation may set a different understanding of the name of the allowed service.

When an AIFC Participant decides to offer services to the residents of Kazakhstan that are not AIFC Participants, he may do this only in accordance with Schedule 2 or Schedule 3 of the AIFC Rules on Currency Regulation:

-        Schedule 2 contains the list of permitted services and the type of allowed currency.

-        Schedule 3 contains the list of professional services that can be provided in any currency.

Sections 2.2., 2.3., 2.4. and 2.5. of PERG below contain brief guidance on currency regulatory implications of each activity.

The detailed currency implications of offering services by AIFC Participants to residents that are not AIFC Participants are presented in Chapter 4 of PERG.

Offering services to non-residents of Kazakhstan

An AIFC Participant may offer services to other AIFC Participants and non-residents of Kazakhstan within the scope of permitted activities under the Licence.

There may be restrictions to perform certain transactions using AIFC banks that are described in more details in Chapter 4 of PERG. 

2.1.9. Offering services to Retail and Professional Clients

Firms when performing Regulated Activities must classify persons as:

(a)   a Retail Client;

(b)   a Professional Client; or

(c)   a Market Counterparty.

There are separate requirements to perform client classification. For more details see Chapter 2 of the AIFC Conduct of Business Rules (COB). 

2.1.10. Variation of the Licence. Waivers and modifications

The AFSA may vary a Licence based on the application of the Authorised Firm. Terms and conditions of variation depend on the circumstances of each case and are decided individually.

The AFSA also may waive all or any part of its generally adopted requirements as to form and contents either in individual cases or generally, provided it is satisfied in either case that:

(a)   materially similar, up-to-date information is provided in other documentation already issued or completed by the applicant; or

(b)   such information is not necessary in the light of any registration or authorisation of the applicant in another jurisdiction; or

(c)   such information is not considered by the AFSA to be relevant in the context of any particular application.