Loans raising from individuals

May 13, 2015

As is known, legal entities and individuals are prohibited to attract any funds from individuals as an entrepreneurial activity in the Republic of Kazakhstan, in other words to carry out entrepreneurial activity in form of loans raising from individuals, and any such transactions will be declared void from the time of signature.

This prohibition intended originally to protect people from fraud and different pyramid scheme. In this context entrepreneurial activity in form of funds attraction from individuals mean attraction of deposits from people with payment of interests, and this constitute banking activity, which is subject to licensing.

Currently this prohibition, stipulated by article 715, Civil Code, gives rise to disputes as to:

– whether it is applicable to foreign citizens;

– if entrepreneurial activity means profit generation, i.e. receipt of interest payments in this case, whether this provision applicable to raising of loans without interests.

As to the applicability to foreign citizens, indeed article 715 contains the word “citizen”, so it can be construed as citizens of the Republic of Kazakhstan. The Civil Code does not provide for the concept “citizen”. Perhaps, if the words “physical persons” were indicated instead of “citizens”, there would not be any disputes on applicability of this provision to foreign citizens, as foreign citizens fall under the category “physical persons” in the Civil Code. However, article 715 contains the word “citizens” and this gives rise to opinion that it applies only to Kazakhstani citizens.

Pursuant to point 7, article 3, Civil Code of the Republic of Kazakhstan, foreign legal entities, and individuals, should comply with the same duties that stipulated for citizens and legal entities of the Republic of Kazakhstan, if none other is provided by the laws. Besides this, as per the article 3 of Law of the Republic of Kazakhstan “On legal status of foreign citizens” No. 2337, all foreign citizens have the same rights and freedoms and must perform the same duties, provided by the Constitution, laws and international treaties of the Republic of Kazakhstan, except for cases, stipulated in the laws and international treaties of the Republic of Kazakhstan.

Besides this, as per the article 1100, the law of a legal entity should be the law of state, where the legal entity is registered in, i.e. Kazakhstani legal entities should abide laws of the Republic of Kazakhstan.

As to the second issue, pursuant to article 10, Civil Code of the Republic of Kazakhstan, entrepreneurial activity shall mean an initiative activity of citizens and legal entities, regardless of property form, aimed at net profit generation through  satisfaction demands in goods, works and services, on the basis of the right of private property (private entrepreneurship), economic jurisdiction or operational management of a state enterprise (state entrepreneurship). Pursuant to article 8, Law of the Republic of Kazakhstan No.124-II of 31 January 2006 “O private entrepreneurship” private entrepreneurs may give loans to other private entrepreneurs on the reimbursable basis.

From one point of view, when loans raising is not an entrepreneurial activity, i.e. when such raising is not aimed at net profit generation through accrual and receipt of interest payments, such raising is not prohibited.

From another point of view, one of the main characteristics of a loan is its reimbursable nature, and in any case, loans are raised for business activity of a legal entity, objected at profit generation and the loan will be reimbursed from this profit. In this context, the loans can be raised only for the purposes of business activity, as a loan not for business activity of  a legal entity cannot exist, in this case it would be a gift rather than loan. Therefore, legal entities cannot raise loans from citizens.

However, the second point of view confuses the words “for carrying out business activity” and “as an entrepreneurial activity”. These two words are not synonymic, as “for carrying out” implies auxiliary nature, whilst “as an entrepreneurial activity” implies profit generation from such raising and permanent character.

Loans raising by individuals from individuals is also ambiguous. As per the Law on RK “On legal and regulatory acts” No.213-I of 24 March 1998, the Civil Code has a priority over the Law on Private Entrepreneurship, thereby the prohibition on business activity in form of raising loans from individuals is in force and has a priority.

Currently, we can say that it is hardly possible to prove and state firmly that raising of loans without interests accrual from physical persons not as an entrepreneurial activity is prohibited due to ambiguous construing of the article. Taking into account provisions of Law on Private Entrepreneurship, it may be stated that private entrepreneurs both legal entities and individuals are not prohibited and restricted in raising and giving loans.

Nevertheless, in order to avoid problems with tax and other governmental bodies, risk of declaring the transaction void, it is highly recommended not to raise loans from individuals.

Alida Tuyebekova