Recent Amendments to the Tax Code

The amendments which were introduced by the Law of the Republic of Kazakhstan.

Dear Sirs,

In this issue we would like to draw your attention to the amendments which were introduced by the Law of the Republic of Kazakhstan On Introducing Amendments to the Certain Legislative Acts of the Republic of Kazakhstan dated 21 July 2011 No. 467-IV ZRK (the “Law”).

The Law will come into force from 1 January 2012 except certain provisions.

Re-organisation of legal entities

The Code on Taxes and Other Obligatory Payments to the Budget (the “Tax Code”) specifies the procedure of re-organisation of a legal entity by separation. In accordance with the proposed amendments, the re-organised legal entity should not provide liquidation balance sheet if re-organisation is done by means of separation, as in this case such legal entity continues to exist.

This provision enters into force retrospectively from 1 July 2011.

Capital gains and losses from realization of shares, participation shares in a legal entity or consortium

The Law extends a list of conditions at simultaneous abidance of which, the following provisions shall be in force:

• the capital gains on realization of shares, participation shares in a legal entity or consortium decreased by the losses incurred from such realization are exempt from taxable income;

• the losses incurred from such realization are compensated from the capital gains on realization of shares, participation shares in a legal entity or consortium;

• the capital gains on realization of shares, participation shares in a legal entity or consortium are excluded from the taxable income of an individual.

Now except earlier provided conditions the above-mentioned income will be exempt from taxation and the losses shall be compensated from such gains if a taxpayer has owned such shares or participation shares for more than three years for the date of realization.

This provision shall come into force from 1 January 2012.

Losses

The Tax Code specifies the definition of “losses incurred from the entrepreneurship activities”. According to the Law losses incurred from the entrepreneurship activity shall not be considered as losses incurred in the following cases:

• losses from realization of securities;

• losses from derivative securities in due regard to peculiarities of hedging operations;

• losses from realization of non-depreciable assets;

• losses from disposal of fixed assets of one group.

This provision shall come into force from 1 January 2012.

Taxation of dividends

The Law extends the list of conditions where if they are simultaneously met the dividends paid to individuals and legal entities are exempt from taxation.

Now, except for conditions provided earlier, the dividends are exempt from the taxable income of an individual or legal entity if the legal entity paying the dividends has not been a subsurface user for the entire period the dividends were being paid.

This provision shall come into force from 1 January 2012.

Taxation of non-residents

The Law provides the order of fulfillment of tax obligations of permanent establishment of non-resident legal entity operating on the territory of the Republic of Kazakhstan without creating a branch or representative office, in case when such permanent establishment transfers rights and obligations to the non-resident legal entity on change of the place of effective management of this legal entity into the territory of the Republic of Kazakhstan.

On the basis of such transfer of rights and obligations the fulfillment of tax obligations shall be assigned to the non-resident legal entity whose place of effective management is situated on the territory of the Republic of Kazakhstan.

Also, the amount of excess paid taxes and fines of a permanent establishment, which is transferring the rights and obligations to the non-resident legal entity, are subject to refund to the non-resident legal entity.

This provision shall come into force from 1 January 2012.

Definition of permanent establishment

The Law extends the definition of permanent establishment for the tax purposes of a non-resident legal entity.

In accordance with the amendments, the following is also considered as a permanent establishment on the territory of the Republic of Kazakhstan:

• the place of a resident legal entity which has concluded a joint operation agreement with a non-resident legal entity, if such activity is conducted in the territory of the Republic of Kazakhstan;

• the place of conducting of construction work and/or construction and assembly work as well as provision of services on supervision on execution of such work.

This provision shall come into force from 1 January 2012.

Registration of permanent establishment

The law clarifies registration procedure of several permanent establishments.

According to the amendments, if non-resident legal entity’s entrepreneurship activities lead to creation of two or more permanent establishments which should be registered within the one tax authority, then only one permanent establishment from such group of permanent establishments of the non-resident should be registered.

In addition, if non-resident has registered permanent establishment and conducting similar activities in a place other than the place of the registered permanent establishment, conducting of activities leads to creation of another permanent establishment which should be registered from the moment of conducting similar activities.

This provision shall come into force from 1 January 2012.

Assessment of CIT from the income of non-resident

The Law specifies the order of CIT assessment from the income of non-resident rendering services on providing foreign personnel.

According to the Tax Code, the non-resident rendering services on providing foreign personnel to work on the territory of the Republic of Kazakhstan to the legal entity as well as non-resident operating in the Republic of Kazakhstan through its permanent establishment do not create permanent establishment on such services provided that certain conditions are met.

Thus, for the purposes of CIT assessment from the income of non-resident rendering services on providing foreign personnel with the condition that certain conditions are met, such services shall be considered as services rendered outside the territory of the Republic of Kazakhstan.

This provision shall come into force from 1 January 2012.

Income incurred from the state with preferential tax regime

According to the Tax Code, the part of the income of non-resident located and/or registered in a state with preferential tax regime, if 10 or more per cent of charter capital or voting shares of such legal entity directly or indirectly belongs to a resident of the Republic of Kazakhstan, should be included into the taxable income of such resident.

The Law clarifies that in case of absence of taxable income the part of the income of such non-residents decreases the losses of the resident of the Republic of Kazakhstan which holds ten or more per cent of charter capital or voting shares of such non-residents. However, the above-mentioned conditions do not apply in cases when resident indirectly participates in the charter capital and/or holds voting shares of such non-resident through another resident of the Republic of Kazakhstan.

This provision has retrospective effect and comes into force from 1 January 2009.

Taxation of dividends

The Law clarifies the order of taxation of dividends paid to the entity registered within the state with the tax preferential regime.

According to the amendments, the dividends paid to the entity registered within the state with preferential tax regime are subject to withholding tax from the source of payment at rate of 20 per cent, even if the conditions exempting the non-residents which are not registered in a state with preferential tax regime from payment of taxes on dividends are met.

This provision shall come into force from 1 January 2012.

Income of non-residents from the sources of the Republic of Kazakhstan

According to the effective Tax Code, the income of the non-residents from the sources of the Republic of Kazakhstan, among others, includes income of an entity registered in a state with preferential tax regime from realization of goods, work and services irrespectively of the place of actual execution.

The Law introduces exemption in accordance with which – the income of a nonresident from the sources of the Republic of Kazakhstan does not include income from the provision of touristic services to an individual on the territory of a state with preferential tax regime by non-resident registered in the territory of such state.

Additionally, income of non-resident from the sources of the Republic of Kazakhstan includes income from the payments of demurrage on cargo-handling operations in excess of lay days provided in a contract for carriage by sea.

This provision shall come into force from 1 January 2012.

Assessment and deduction of income tax from the source of payment

According to the Law, the order of assessment and deduction of income tax from the source of payment provided that the contracts concluded with non-residents contain provisions stipulating provision of various work and services on the territory of the Republic of Kazakhstan and abroad should apply separately to each kind of work and service.

For the purpose of assessment and deduction of income tax from the source of payment the income of non-resident at each stage of work (services) shall be considered as separate type of work. Whereas, the total amount of income of nonresident from the above-mentioned contracts should be allocated to income received from provision of work (services) in the Republic of Kazakhstan and income received from abroad.

For confirmation of feasibility of allocation of the total amount of income of a nonresident, it shall provide the copies of accounting documents to the receiver of the services. In case of unfeasible allocation of income of non-resident which led to decrease of amount of income which is subject to taxation in the Republic of Kazakhstan, the total amount of income received from the above-mentioned contracts will be subject to taxation.

This provision shall come into force from 1 January 2012.

Taxation of subsurface users

The Law provides appointment of authorised body (the Ministry of Oil and Gas of the Republic of Kazakhstan) which will be responsible for provision of information on contracts on sale and purchase of securities, participation shares connected with the property of subsurface user to the tax authorities.

This provision shall come into force from 1 January 2012.

Deduction of subsequent expenses

According to the effective Tax Code, the taxpayers can deduct as subsequent expenses the expenses incurred in exploitation, repair, maintenance and liquidation of assets. Now in accordance with the Law, the subsequent expenses for deduction include expenses on reconstruction and modernization.

This provision shall come into force from 1 January 2012.

Income of an individual

The Law introduces the amendment specifying that for an individual working on rotating scheme the limitation of the extent of per diems is established only in connection to the expenses of employer for meals and does not cover expenses on renting an accommodations.

This provision enters into force retrospectively from 1 January 2009.

Exemption from VAT

The Law extends the list of services provided on the territory of the Republic of Kazakhstan which are exempt from VAT. Besides previously specified services movement of carriage to bogie or wheelpair of another width track at crossing the borders of the Customs Union is also exempt from VAT.

Also, in accordance with the Law, from 1 January 2013 turnover from realization of goods produced on the territory of free warehouse and realized by the owner of the free warehouse on the territory of the Republic of Kazakhstan is exempt from VAT provided the following conditions are met simultaneously:

• processing of goods is in compliance with the criterion of sufficient processing established by the Government of the Republic of Kazakhstan;

• the goods are in the list established by the Government of the Republic of Kazakhstan;

• the goods realized by the owner of the free warehouse in the territory of the Republic of Kazakhstan is in unchanged state;

• for the date of realization in the territory of the Republic of Kazakhstan;

• the goods contain unique goods number assigned by the owner of the free warehouse which helps to identify the goods produced in the territory of the free warehouse (the “unique goods number”);

• there is a declaration with the marks of the customs authority and certificate confirming the origin of goods;

• the owner of the free warehouse does not produce similar goods outside the free warehouse.

This provision shall come into force from 1 January 2012.

Offset of VAT

In accordance with the effective Tax Code, the amount of VAT can not be taken offset on operations with the taxpayers recognized as a false enterprise.

However, in accordance with the proposed amendments, if taxpayer can prove in a legal process the validity of contract, it will be allowed to offset the VAT paid on such contracts.

This provision has retrospective effect and comes into force from 1 January 2009.

Payment of VAT by offset method

In accordance with the amendments from 1 January 2012, the rules establishing payment of VAT by an offset method for the goods established by the Government of the Republic of Kazakhstan is prolonged its effectiveness until 1 January 2017.

Fulfillment of tax obligations by beneficial owner

The Law clarifies the timeframes for fulfillment of tax obligations on calculation, deduction and payment of taxes and other obligatory payments by the trustee on trustee agreement.

In accordance with the Law, the trustee should fulfill tax obligations in the following timeframes from the moment of:

• registration of the trust rights;

• conclusion of trust agreement (in case there is no need to register the trust rights).

This provision shall come into force from 1 January 2012.

We hope this information will be useful for you. Should you have any additional questions, please do not hesitate to contact Azamat Akhmedov (ada@signumlaw.com)

Information contained in this Client Update is of general nature and cannot be used as legal advice or recommendation. Please seek for a specific advice in relation to any questions. Please note that Kazakhstan and Turkmenistan are emerging economies and their legislation and legal systems are in constant development. Should you have any questions or would like to discuss subjects addressed in this Client Update please contact us.