Investment agreement: how to structure business contributions under Kazakhstan law

A private investor or entrepreneur in Almaty usually comes with a deal that is almost ready: money from one side, a project from the other, and in hand either a receipt or a standard loan agreement from the internet. At the dispute stage it turns out that the funds contributed were not legally structured the way the parties had agreed verbally, and getting them back or obtaining a share in the project becomes difficult.

The article examines how an investment agreement differs from a loan, when a loan is enough and when an investment structure is indispensable, which terms must be set out in writing and which decisions by the parties most often lead to a dispute. It separately considers the specifics of structuring in IT and startups, corporate mechanisms such as a share and an option, and the tax consequences that the parties often discover only after the money has been transferred.

Investment agreement and loan agreement: what the difference is under Kazakhstan law

The distinction starts with the subject matter. Under a loan agreement, one party transfers money or things to the other with an obligation to return an equal amount; the structure is governed by the Civil Code of the Republic of Kazakhstan. Investment is the contribution of funds to a common venture for future income, rather than the simple return of what was transferred. So the question is decided not by the name of the document, but by what the parties actually do.

The legal nature of an investment agreement depends on the form of participation. A contribution to the charter capital of an LLP relies on the Law of the Republic of Kazakhstan on Limited and Additional Liability Partnerships and gives the participant corporate rights. Joint activity without creating a legal entity is based on a consortium agreement or a joint activity agreement. In none of these options does the investor have an automatic right to demand back the amount transferred.

• The purpose of the transfer: the return of the same amount, or participation in a common venture and income from it.
• Presence of risk: in a loan, the risk of non-repayment lies with the lender; in an investment, with the investor.
• Documentation: a loan agreement under the Civil Code of the Republic of Kazakhstan, or a contribution to the charter capital and corporate documents.
• Rights of the party: a claim for the debt and remuneration, or a share, a vote and participation in profit.
• Term and return: a defined payment term, or exit from the project under the rules of its documents.
• Consequences of a dispute: recovery of the debt, or a dispute over the share and distribution of the result.

When contributions are documented by an investment agreement, and when a loan is sufficient

The choice of form depends on what the contributor receives in return. If the amount is returned to them with remuneration regardless of the project's result, this is a loan: the relations are governed by the Civil Code of the Republic of Kazakhstan, and the income does not depend on profit. If the contributor takes part in the affairs and shares the risk together with the organiser, a contribution to the charter capital of an LLP is documented under the Law of the Republic of Kazakhstan on Limited and Additional Liability Partnerships.

Where the project is being developed and a share is being purchased, an investment agreement is appropriate when the contributor joins the membership and acquires corporate rights. To finance a specific transaction, a loan is often sufficient: the money is transferred for a term, returned with remuneration, and the lender does not claim management.

• The contributor receives a fixed amount back plus remuneration — a sign of a loan.
• The contributor's income does not depend on the project's result — a sign of a loan.
• The contributor acquires a share and corporate rights — a sign of investment.
• Profit is distributed according to the share of participation — a sign of a corporate contribution.
• The contributor bears the risk of losses together with the organiser — a sign of investment.
• Mixed terms providing for both return and participation at the same time create a risk of a dispute over the nature of the transaction.

Investment agreement: parties, subject matter and essential terms

Relations for the joint financing of a project are documented by an investment agreement: the parties and the subject matter determine whether the contribution can be recovered. The investment structure must not be substituted by a loan or a corporate contribution without a clear purpose. The parties — the investor and the recipient of the investment — are recorded with precise details, not with the words "partner" or "project founder". If a party is not named, it is practically impossible to recover performance from it or to get the contribution back.

The subject matter describes what the investor transfers and on what basis: money, property, rights to a result. "Financing the project" without an object and stages leaves it unclear where the funds went and what counts as their use. The result must be expressed in measurable terms: a share in the company, a right to income, transfer of an object or another proprietary effect. Where the result is described as an intention to "develop the business", it is impossible to prove a breach of the terms.

• the subject matter is described in general terms without stating the object of investment and the stages;
• the parties are named imprecisely, without full details and the signatory's authority;
• the result has no measurable expression — only an intention to develop the project;
• the procedure for providing the funds and the recipient's reporting are not fixed;
• liability for non-performance and the procedure for returning contributions are not defined;
• changes to the terms and exit from the agreement are possible without a coordination procedure.

Structures of an investment agreement: loan, joint activity, contribution to capital, investment agreement

The choice of form of contribution determines the investor's risk and the benefit to the business. A loan agreement under the Civil Code of the Republic of Kazakhstan: money is transferred on a repayable basis, and the investor is a creditor without participation in management. A contribution to the charter capital of an LLP under the Law of the Republic of Kazakhstan on Limited and Additional Liability Partnerships gives a share and corporate rights.

A joint activity agreement (simple partnership) — pooling contributions for a common purpose without forming a legal entity. An investment agreement is similar to a partnership but differs in how results are distributed and in liability to third parties. A participant transferring property to an LLP without increasing the charter capital does not receive a share, whereas for a partnership this may have tax consequences as income.

• A loan — repayment and remuneration, the investor does not influence management.
• Contribution to the charter capital of an LLP — a share and corporate rights, risk limited to the contribution.
• Transfer of property to an LLP without increasing capital — asset support without changing shares, but with tax risks.
• Simple partnership — a common purpose, pooling of contributions, distribution of results.
• Investment agreement — a mixed form combining elements of a loan and participation.

The form is determined by the objective: return of funds, equity participation or a joint project.

The investment agreement and protection of the investor: what to put in writing

Protection of the investor begins with an accurate description of the subject matter and recording of the contribution: form and currency of the contribution, document confirming receipt, reflection of the share.

Secure the investor's rights: to a share in the result, information about the project, participation in profit, approval of key decisions, and a mechanism for controlling how the money is used. Otherwise, misuse of investments is difficult to prove and recover.

Reporting is mandatory and tied to deadlines: content, form, frequency, method of delivery, consequences of delay. The investor has the right to request primary documents and to review the accounts, and the absence of a report or refusal of access is a separate violation.

An investment becomes a dispute at exactly the moment when the parties started transferring money while the risks and grounds for return remained verbal.

The investment agreement and the interests of the recipient of funds: how not to lose control over the project

Agreeing the terms of an investment agreement for the recipient of investments is a search for balance: the investor wants guarantees and influence, but excessive control paralyses operations. If the investor approves every transaction, signs off on payments and appoints the director, the recipient loses control over the project.

The legal form sets the limits of control. A lender does not obtain corporate rights; its interest is the return of the amount and the fee. A contribution to the charter capital of an LLP is governed by the Law of the Republic of Kazakhstan on Limited and Additional Liability Partnerships: the investor becomes a participant and acts through the partnership's bodies.

• A list of matters whose resolution requires the investor's consent, with a direct statement that everything else falls within the recipient's day-to-day management.
• The deadline for the investor to respond to an approval request and the rule on deemed approval upon its expiry.
• Procedure for resolving deadlock situations: repeat voting, engagement of an independent expert, temporary course of action.
• The content, frequency and form of the recipient's reporting to the investor.
• Terms for amending and terminating the agreement, including the case of systematic unjustified refusal by the investor to give approval.

The investment agreement and taxes: what the parties in Kazakhstan should look at

An investment agreement does not create a separate tax: what matters is the structure actually used. If it is a loan, tax arises for the investor on the fee, not on the return of the principal. If it is a contribution to the charter capital of an LLP, the Law of the Republic of Kazakhstan on Limited and Additional Liability Partnerships applies, and the investor's income appears upon distribution of profit or exit from the participants.

The form of the agreement determines the tax consequences. In a loan, income is tied to interest; in investment, to participation in profit or an increase in the value of the share.

• who the investor is: an individual, an LLP or a non-resident
• what income arises: a fee, dividends or an increase in the value of the share
• at what point income is recognised and who pays it
• how payments are processed and whether withholding tax is deducted
• whether the investor's expenses are taken into account and supported by documents
• whether the name of the contract matches its actual terms

Investment agreement in IT, a startup and an operating business: how to put it in place

The structure depends on what the investor receives and at what stage the project is. In a startup with no assets or revenue, the subject matter is future results: development, rights to the code, a share in the LLP being set up. Such an agreement is closer to a mixed structure than to a loan: repayment is not guaranteed by assets. Security is built on the founders personally, the schedule for transferring rights and exit terms.

An agreement on investment in an IT project links the contribution to a digital result: exclusive rights, transfer of code, access to infrastructure, confidentiality. It is important to determine who owns the rights to the objects being created and what counts as completion of a stage. If the product is created by employees or contractors, the rights must be vested in the company rather than remaining with the authors.

• subject matter and object of the investment: share, rights to the product, development result
• schedule and stages of financing with conditions for releasing the next tranche
• representations on assets, liabilities and rights to the result being created
• procedure for distributing profit and making decisions
• terms of the investor's exit and settlement on exit
• confidentiality and ownership of rights to the code and development

Investment agreement and corporate rights: share, option, conversion

If the investment gives the investor a stake in the business, the relationship is structured through corporate mechanisms rather than a loan model. Mixing the two structures in one document gives rise to a dispute over the nature of the payment: it is unclear whether the investor is entitled to demand repayment of the amount or a share in the company.

Investing in exchange for a share in an LLP means the status of a participant with corporate rights: a vote at the general meeting, the right to dividends and to a part of the property on exit. Entry is formalised by a decision of the general meeting, amendments to the constituent documents and their registration (notification) with the justice authorities via eGov or a Public Service Centre.

• subject matter of the agreement: contribution to the charter capital or a loan — the nature of the relationship depends on this
• the size and procedure for forming the investor's share in the charter capital of the LLP
• the condition, moment and procedure for the investor joining the participants
• an option on the share or a mechanism for converting the loan into a contribution
• the investor's corporate rights: voting, dividends, access to information
• procedure for registering amendments with the justice authorities via eGov or a Public Service Centre

Investment agreement: common mistakes and how to avoid them

Mistakes in an investment agreement most often stem from mixing a loan with a contribution to the charter capital. If the document calls the relationship an investment but it does not fit either model, the court assesses the actual nature of the transaction, not the heading.

Risks increase when the object of the investment and the procedure for accounting for the funds are not defined: the investor gets neither a share nor an obligation to repay. Uncertainty as to the subject matter and the absence of a link between the payment and the result create grounds for claims.

• The subject matter of the contract is not specified: it is unclear whether the money is transferred as a loan, as capital, or for other purposes.
• Corporate decisions and amendments to the constituent documents for a contribution to the charter capital have not been formalised.
• The liability and risks of the parties in the event the investment objective is not achieved are not delineated.
• The procedure for the return of funds and the allocation of losses is not established.
• The terms of the contract contradict the provisions of the Civil Code of the Republic of Kazakhstan or the Law of the Republic of Kazakhstan on Limited and Additional Liability Partnerships.

Dispute under an investment contract: grounds, documents, procedure for protecting rights

The dispute arises from the uncertainty of the legal nature of the agreement: the parties describe the relationship as investment, but do not record what is being transferred — a loan, a contribution to the charter capital of an LLP, or joint activity. A loan is governed by the Civil Code of the Republic of Kazakhstan, while a contribution to the charter capital of an LLP is governed by the Law of the Republic of Kazakhstan on Limited and Additional Liability Partnerships, so the qualification determines which provisions the court will apply. If terms on the return of the amount and on participation in profit are mixed, the other party may challenge both the return and the very fact of the contributions.

To defend the position, it is important to preserve written confirmation of the transfer of property or money and the basis of payment. How to prove contributions: payment documents with a stated purpose, acceptance and transfer acts, correspondence on the terms, and the minutes of the general meeting of participants on accepting the contribution. Recovery is built on confirming not only the amount, but also that the obligation has not been performed or has been performed improperly.

• an investment contract stating the subject matter and the procedure for settlements;
• payment documents with the purpose of payment;
• acceptance and transfer acts for property or money;
• correspondence and minutes of meetings on the terms of the contributions;
• reporting on the use of the invested funds;
• a pre-action claim and evidence of its dispatch.

The set of documents depends on how the relationship is classified: a loan, a contribution to the charter capital of an LLP, or a joint activity.