June 1998

Foreign Investment Environment: The government is anxious to attract foreign investments to meet the country's vast needs for capital and technology. The Ministry of Foreign Economic Relations has identified "priority areas" for attracting foreign investment and finance, including: gas, communications, telecommunications/ transportation, industry, irrigation, agricultural investments, textiles, and health. In November 1995, the government listed 93 key investment projects in these sectors. Additionally, two investment funds were established to make hard currency available for development in the oil and gas and agriculture sectors, the main sources of foreign exchange earnings in the country.

Turkmenistan is now announcing international tenders for competitive bids on government projects. This departs from past behavior, where politics--rather than economics--largely determined which companies received contracts. While Turkmenistan is broadly pursing economic reform, competition may remain a new concept for some government officials. Companies report experiencing a significant amount of "red tape," and remind investors that the President still makes the final decision in awarding a contracts. Complaints of corrupt and inept practices have marred the foreign investment environment to some extent.

Large-scale contracts are signed at the presidential level and usually require a company's CEO to travel to Ashgabat to close the deal. Almost all companies investing in Turkmenistan form a joint venture with a local company. Practically all joint ventures include a government partner.

Laws on foreign investment, banking, property ownership, and intellectual property rights protection passed in 1992 were intended to attract investors. Turkmenistan, however, continues to lack sufficient tax, labor, and health and safety laws. This could create frustrations for foreign business ventures. The Government intends to draw up a new law to replace a tax scheme originally planned to be in effect only until November 1, 1994, under which a varying proportion of foreign exchange proceeds from the export of certain goods is surrendered to support the government's foreign exchange fund. In place of this implicit tax on exports will be an explicit levy on foreign exchange earnings from exports.

Foreign Investment Regulations: The May 19, 1992 law on foreign investment is the principal regulating statute. The major obligations of foreign investors are to comply with applicable domestic law, obtain required licenses, and maintain proper books which are subject to government review. Regulations prevailing at the time of investment are locked in for three years and changes do not apply. Every foreign investor must be registered at the Ministry of Foreign Economic Relations and must report quarterly to the Ministry on their activities in Turkmenistan.

All import and export operations, excluding those for cotton, oil and any other government procurement imports, must be conducted via the State Commodities and Raw Materials Exchange (CRME) in Ashgabat. Foreign trading companies and joint ventures must register their transactions with the CRME at a .2% commission. Additionally, they must receive a license from the State Agency for Foreign Investment to export products manufactured in Turkmenistan and to import products need for production. By decree, only the CRME has authority to issue export/import licenses for commercial transactions. These licenses are awarded by the Exchange through auction. According to foreign companies, connections with someone holding a seat on the Exchange facilitates registration is helpful. The "Consignator" firm which works within the Exchange offers its services on arranging purchase and sale of goods in Turkmenistan on a consignment terms. The Exchange accepts and works with facsimiles contracts.

Certain goods and services may be subject to restrictions or licensing requirements. For example, listed "special foods (services) export/import" are licensed by the Cabinet of Ministers, and consumer goods imported into Turkmenistan must be certified by the State Standards Committee which issues a release document. Also, special customs duties apply to Turkmen carpets. Documentation of a carpet's age is required, because carpets over 20 years old are not allowed to leave the country. Contact the State Customs Office in Ashgabat for specific information.

The newly created State Agency for Foreign Investment monitors all foreign investment. It reviews investment proposals and foreign currency credits proposed by government ministries. All ministries and agencies must receive Investment Agency approval before committing to foreign procurement or investment projects. Once the board approves the project, the President will issue a presidential decree authorizing it. The Investment Agency tends to give preference to government "priority" projects.

The Investment Agency operates within the Turkmen State Bank for Foreign Economic Affairs (Vnesheconombank). Vnesheconombank is the key institution for foreign businessmen and investors, as well as exporters. It is a fiscal agent for the Turkmen government. Vnesheconombank, along with the Central Bank, are the only banks which issues sovereign guarantees required for U.S. Export-Import Bank funding. All state guarantees must be registered with the Foreign Investment Agency. Vnesheconombank has corespondent relations with a number of U.S. banks (refer to the end of the document).

Procedures for Registering a Company in Turkmenistan

Note: This information is current as of June 1, 1997, per the Foreign Commercial Service at the U.S. Embassy in Ashgabat. Contact the State Agency for Foreign Investment directly for clarification and consult legal counsel before acting on the following.

Foreign investors, interested in investing their capital into Turkmenistan either by opening a representative office or branch, or establishing an enterprise or joint venture, should apply to the State Agency for Foreign Investment.

Application Procedure
Turkmenistan classifies business activity into two distinct categories and treats transaction registration differently depending on the category. The categories are import/export and investment.

Strictly import/export contracts are registered only with the state commodities and raw materials exchange (CRME), a government body that regulates foreign trade in Turkmenistan. If an American firm is interested in only buying Turkmen goods or selling American products in Turkmenistan and not creating an office or joint venture, the firm registers only with the CRME to buy or sell.

However, if, in addition to importing and/or exporting, a foreign company intends to "invest" in Turkmenistan -- create a joint venture with a Turkmen firm or another foreign firm or create a branch or affiliated office in Turkmenistan, with the idea of investing capital, technology or expertise in Turkmenistan -- the firm must register with the State Agency for Foreign Investment (SAFI), as well as the CRME. The SAFI analyzes a project's feasibility and is the agency that register the foreign company in Turkmenistan.

Proving Project Feasibility
The SAFI was established by Presidential decree in 1996. Its mandate is to attract foreign investment and to control the implementation of investment projects in Turkmenistan. Before a foreign company interested in investing in Turkmenistan can register and begin operations, the SAFI must first approve the company's foreign investment project, taking into account the project's feasibility and economic importance to Turkmenistan.

To show the feasibility of its project and how the project fits into the overall plan of Turkmen economic development, the company must submit the following information to the SAFI concerning its project:

-General information about the project.
-A marketing analysis.
-Raw Materials supply analysis.
-Technology to be used.
-Management plan.
-Labor resources to be used.
-Project implementation schedule.
-Financial analysis and investment appraisal.

With this information, the SAFI studies and analyzes the proposed foreign investment project. It will seek, if necessary, opinions from the Ministries of Economics and Finance, Justice, and Nature Protection, as well as the Central Bank and the Tax Inspectorate, concerning the feasibility of the project (there is no fee for this project analyses). With these analyses, the SAFI reports to the President giving its recommendations for approval of the project. If the project is approved, the SAFI then registers the foreign company in Turkmenistan.

To Register in Turkmenistan
Once a foreign firms' project has gained SAFI approval, the foreign company can then register the company in Turkmenistan. To register, a foreign company must provide the company's objectives for establishing a Representative, Branch Office, or Enterprise in Turkmenistan and the necessary information about the firm and its activity. In particular, the foreign firm must supply the following documents:

-A completed registration form.
-A notarized copy of the company's charter filed in the country of origin.

-An official letter from a government office (for example, a U.S. Consular Office), with that office's official stamp or seal, verifying the existence of the company to be registered. This letter must be on the official government office's letterhead. Furthermore, this letter must include the registration number assigned to the company at the time the company registered in the country of origin.

-Original banking documents certifying the solvency of the firm. A dollar amount is not necessary, only verification that the account is, and has always been ,in good standing. This letter is only valid for six months form the date it is written. It must be signed by an authorized bank official and bear the stamp or seal of the financial institution.

-An official (i.e., a notarized) original letter authorizing power of attorney giving the company representative in Turkmenistan full authority to conduct all necessary business activities in Turkmenistan. This letter should include the Representative's passport information.

-For the creation of a representative office, a standing order of representation certified by the foreign firm or its representative.

-For the creation of a branch office, a standing order for the branch office and a feasibility report certified by the firm or its representative.

-For the creation of a joint venture, a copy of the agreement of terms establishing the venture, the charter of the venture and a feasibility report approved by the founders of the venture. The Turkmen company taking part in the joint venture must also submit a charter, a copy of the state registration certificate, banking documents about financial status, passport date and a written feasibility report stating participation in the creation of the joint venture with an indication of the share of investment in the charter fund of the venture.

Original documents must be translated into Russian and Turkmen. The translations must be certified as correct by a local company who is recognized as producing accurate translations (for example, the Turkmenistan Chamber of Commerce). The charge is usually US$5 per page to translate anc certify the translation is accurate. After the translations are completed, three copies of each document need to be made. The original Russian and Turkmen translations of the charter must be attached to a copy of the notarized copy of the business charter and taken to a Turkmen notary. The notary will make a book out of these three documents and stamp it as being a valid translation of the originals for less than US$5. The notary will register the entrance of the company into the country and stamp the document to show that a representative has been to the office.

Furthermore, with a joint venture, the charted, the document establishing the terms of the venture and the feasibility report must be signed by all founders of the venture.

For more information about registering a foreign company, contact the SAFI. The contact name, address and phone number are:

Mr. Yolly Gurbanmuradov, Director
(Speaks Russian and Turkmen)
53 Azadi Street
Ashgabat, Turkmenistan 74400
Tel: (993) (12) 35-02-31 or 35-03-18
Fax: (993) (12) 35-04-15

The Cost of Registering
To register, a company that produces raw materials, consumer goods, food, and so on must pay US$2000. A company that is not connected with production, such as a service company, must pay US$3000 to register. And a Branch or Representative or a foreign company, must also pay US$3000. Finally, to extend the term or registration, the fee is US$1500 (the original registration is valid for two years and then must be renewed).

Once the foreign company or joint venture has registered and begun producing, it must return to the SAFI to apply for a certificate or license to export. Certain goods such as cotton and oil require a license, or permission, to export. Other goods require only a certificate, or declaration or tariff privileges. Presently, no licenses are required to export goods produced in Turkmenistan, other than cotton and oil, an no tariffs or restrictions have been set on U.S. goods imported into Turkmenistan (although certain excise taxes exist for certain categories of goods, for example, cigarettes).

Taxation: Turkmenistan is in the process of developing its commercial and tax codes. While neither a bilateral investment treaty nor a bilateral tax treaty exists between Turkmenistan and the U.S., the former U.S.-Soviet treaty on double taxation presently applies. Currently, no tariffs or duties are charged for goods imported into Turkmenistan, with the exception of excise taxes on specific consumer goods. These include fish, beer, wines, alcohol, cigars and cigarettes, tobacco, jewelry made of precious/semi-precious stones, and automobiles.

Customs offers its services at 0.2% commission fee from the contract cost plus 20% VAT from the commission sum. Customs duties are not charged on foreign investors' imported property if it is designated for production purposes or considered part of the enterprise's capital fund. No restrictive packaging, testing, labeling, or certification regulations exist at present. The exact treatment for joint venture is likely to be set in a specific contract.

Business can benefit from exemptions and tax holidays established for specific circumstances. A value added tax is imposed on all goods and services, sold or bartered, of 10 percent for foodstuffs and 20 percent for all other items; however, President Niyazov exempted "foreign investors registered in Turkmenistan, private enterprises (other than Turkmenpotrebsoyuz enterprises), and businessmen importing and selling consumer goods in Turkmenistan" from the value added tax since March, 1994. Foreign investors are offered some tax relief from Turkmenistan's 25 percent profit tax and its 15 percent dividend tax on income from dividends, interests, copyrights, licenses, leases, royalties and other incomes. Investors holding more than 30 percent of hard currency shares in an enterprise's capital fund are exempt from the dividend tax. Enterprises are not required to pay the profit tax until the investors have fully recovered their original investment. Additionally, those companies which reinvest their profits are exempt from tax payments on the reinvested capital, and any equipment of product contributing to the capital of a joint venture is exempt from import duty.

Free economic zones have been created in the republic to attract more foreign capital. Foreign investors operating in these zones have the right to transfer, deposit and export hard currency without restrictions. Investors may earn unlimited profits, repatriate after-tax profits, and export their products. Also, enterprises may freely set prices of their goods and services within the free trade zone. Enterprises in which foreigners hold more than 30 percent will be charged 50 percent profit tax during the next three years and 30 percent during the next ten years. Reinvested profits are exempt from taxation. All enterprises are exempt from profit taxes for the first three years of profitable operation. For details on the location of these free economic zones, contact the Turkmen Ministry of Foreign Economic Relations directly.

By presidential decree, foreign investors are freely able to repatriate profits and exchange national currency, manats, for dollars at the exchange rate established by regular central bank auctions. Due to Turkmenistan's hard currency shortage, investors may sometimes experience difficulty exchanging money.

At present, there is no legal system in place to enforce property and contractual rights. In the event of a dispute between investors and the government, the problem must be worked out directly between the two parties.

Currency: Turkmenistan's new national currency, the manat, was introduced on November 1, 1993. On December 14, 1994, President Niyazov issued a decree requiring all companies operating in Turkmenistan to conduct transactions in the manat as of December 20, except in specific cases approved by the President. On September 19, 1995, the Central Bank announced new official and commercial exchange rates for the manat against the dollar. The official exchange rate for government transactions changed from 75 manats/usd to 200 manats/usd. The commercial rate changed from 195 manats/usd to 500 manats/usd. The black market rate fell briefly from a high of 850 manats/usd immediately after the announcement was made, but has since climbed back to 720 manats/usd.

Foreign businesses can benefit from provisions allowing direct purchase of national currency through local banks, though Turkmen banks usually experience a lack of liquidity both in manats and in dollars.

The texts of existing laws on foreign investment, taxes, privatization, and ownership are available in translation from the National Technical Information Service. These laws may be ordered by calling (703) 487-4650.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)