Article: What is a “ТОО”? Characteristics of the “ТОО”
What is a “ТОО”?
Characteristics of the “ТОО”
Alzhan Stamkulov, partner
Synergy Partners Law Firm
LLM 2005, University of East Anglia
When businessmen and entrepreneurs start thinking about running a business in Kazakhstan, first things to come to their minds are what we call “ИП” (pronounced as E-P), and “TOO” (pronounced as T-O-O). “ИП” can be translated as a sole entrepreneurship, and “TOO” literally is translated as a limited liability partnership. This differentiation leads to entrepreneurs getting confused between these two forms of running a business. Most typically, practicing lawyers themselves, tax consultants, and accountants – perhaps, due to the lack of time – explain their clients very briefly that “TOO” is a legal entity, whereas “ИП” is only a tax regime for a private individual.
Nevertheless, entrepreneurs want to know what “TOO” actually is. Considering the lack of publications regarding this topic, as well as the fact that most of them are highly specialized scientific articles for professional lawyers, it might be difficult to find a clear and detailed answer to the question of defining “TOO”. Using our significant practical experience in working with foreign and Kazakh corporate law, we will try to answer the question – what is “TOO”. Do not hesitate to send us your reviews and comments if we did not сover the topic detailed enough.
“TOO” is a company. “TOO” is a legal entity [1]. On an equal basis with a private individual, it has all the rights to enter an arrangement [2], change and terminate it, make commitments, hold civil legal liabilities for its actions [3].
“TOO” does not consist of partners. It is not a partnership, even though in Kazakhstan “TOO” is usually translated as a limited liability partnership (LLP). Let’s bring some clarity into the status of a “TOO”. In western countries limited liability partnerships (LLP) do exist, along with limited liability companies (LLC). So, what is the difference between LLC and LLP?
A limited liability company (LLC) pays income tax as a single legal entity, and its net income after tax is divided between the members or shareholders, which means that their taxation schemes and net income payments are the same as in “TOO”-s and joint-stock companies [4].
In a limited liability partnership (LLP), on the contrary, separate accounting of members’ or partners’ income is made. Of course, this form slightly reminds us Kazakh lawyers’ and notaries’ offices, when “clustered” lawyers and notaries divide expenses between each other, such as, for example, rent of the common office, salaries of the common secretaries, etc. However, the income tax is paid by each partner separately according to their personal income [5].
Nonetheless, unlike Kazakh lawyers’ offices, limited liability partnership (LLP) as a legal entity is the processor of all the payment transactions, it also consolidates all the bookkeeping in the capacity of a legal entity, but in the same time separate accounting of expenses and income of each partner is made. LLP does not pay taxes because it is a partnership. To some extent, it is a convenient form of running a business for privately practicing lawyers, attorneys, notaries, consultants, and advertisers, who in practice, in Kazakhstan cannot individualize income of each partner form the “common pool”, and probably do it only by rough estimations. Regardless, such business entity as limited liability partnership (LLP) simply does not exist in Kazakhstan. That being said, in Kazakhstan this form of business can be registered and used only in the Astana International Financial Center (AIFC) [6].
Returning to our topic, “TOO” is a company, which pays corporate income tax, and is not a partnership. However, “TOO”, as well as “ИП”, has the right to switch to a special tax regime following the simplified declaration [7], meaning paying an income tax of 3% from all the sales instead of a corporate income tax. In other words, entrepreneurs can create a “TOO” with the same tax burden as “ИП” following a simplified declaration, while limiting their liabilities and shifting them to the “TOO”. The details are explained below.
Limited liability company. “ИП” is a special tax regime of a private individual [8]. If this private individual (“ИП”) signs a contract, then it is held legally liable to the creditors to the full extent of its assets [9], including the risk to lose the joint property with the spouse. If the property of this sole entrepreneur is not sufficient to cover the debt, a private court bailiff can continue to exact from the salary or other income of the obligor multiple times until the whole debt is payed down, even if the “ИП” tax regime is already terminated. In order to limit the civil liability of businessmen and sole entrepreneurs during the time of running the business, they can create a “TOO”, which can also use a special tax regime following the simplified declaration (a tax of 3% from all the sales without subtractions), or the fixed deduction scheme (20% corporate income tax with some simplified subtractions).
Members of a “TOO” are not held liable fot its obligations [13]. In other words, in the case of bankruptcy or dissolution of the “TOO” due to the insufficient funds to pay the creditors, none of the debts or liabilities of the “TOO” shifts to its members both before and after the liquidation [14].
The liability for debts of a “TOO” can be transferred to its member only in the case of a deliberate bankruptcy, which was caused by knowingly intentional actions or inactions of its members [15]. Examples of an inaction can be companies first created and afterwards abandoned by its members.
Another case of an emergence of a civil legal liability of a member to the creditors of a “TOO” can be the situation when the members do not invest into the authorized capital of the “TOO” to the full extent [16]. These members hold joint and several liabilities for the “TOO” within the ambit of the part of the capital, which was not invested by each member [17]. But in practice, cases like this are very rear.
“TOO” can have a zero authorized capital [18], if it is a subject of a small business, or a public Islamic specialized financial company [19]. If the authorized capital of a “TOO” is zero, it is impossible to prove in the court that the authorized capital was paid by a member. In other words, how can you pay out an authorized capital which is zero? We suppose that the worst scenarios of courts using this law rule and the absence of the payment documents as a proof of a paid authorized capital of a “TOO” should be assumed. That is why we recommend to always pay your share by money or property in kind, in this case legal risks of a liability do not shift to the member.
Private company with a limited liability. There is a notional division that companies can be “private” and “public”. Public companies implicate free alienation of shares or stocks without any limitations for the sellers. You should not confuse liabilities and limitations for the buyers with liabilities and limitations for the sellers. For example, a liability of a major seller to offer current shareholders to buy up their shares (takeover offer), if a person has already bought more than 30% of shares issued [20].
“TOO” is not a public company, it has all the features of a private company. Private companies imply that current members have a prerogative right to buy out the shares under its alienation to the third party [21]. Generally, this form of business is more typical to European family businesses, which for generations have been producing cheese, wine, and other products following secret recipes. As a result, these family businesses don not allow “outsiders” or competitors to approach them too close. For example, if a member who is a relative “leaves the business” by selling his share to a third party who is let’s say an “outsider”, then the current members have a right to buy out his share according to the prerogative right, in order to keep a new member away from entering their family business. And if the members cannot do it, then the company itself can buy out this share [22]. The company is figuratively closed for outsiders. This mechanism in particular is carried out in the Kazakhstan’s legislation about “TOO”-s [23]. Let’s bring more details.
The moment a member of a “TOO” has agreed on all the basic conditions of sale of his share to the third party, he informs the director of the “TOO” about his intentions to sell his share to a third party for a particular price [23]. The director announces it to all the other members and asks to provide him an answer in the set period of time [25], because other members can use their right to the prerogative buy out of this share before the third party. If there are members who wish to buy out the share, the seller is obliged to sell it to them following the same conditions that were offered a third party [26]. If all the members refused, then the prerogative right to buy out transfers to the “TOO” itself [27]. It is worth mentioning that in practice, almost all the sellers of their shares did not have to address the “TOO” to refuse from the prerogative right to buy out. If the “TOO” uses this right, this will basically mean either a decrease of the authorized capital from losing a member, or a cancelation of a member’s share in the “TOO”. Nevertheless, in practice, the right of the “TOO” itself to a prerogative buy out is very often violated.
To conclude, we would like to highlight that “TOO” is in the first place a company, which limits and does not transfer its liabilities to its members. “TOO” is a closed company with limited liabilities, which is entitled to use a special tax regime following the simplified declaration, special tax regime of a fixed deduction, standard tax regime, as well as other types of tax regimes according to the particular characteristic of the business.