Doing Business in Kazakhstan: Tax and Legal Highlights

Doing business in Kazakhstan: tax and legal highlights

2019 KPMG in Kazakhstan and Central Asia kpmg.kz 2 | Doing business in Kazakhstan: tax and legal highlights

n 2018, Kazakhstan adopted a number of laws introducing significant changes to tax legislation of the country. A new Tax Code replaced the old tax law that acted since 2008. Following the IBase Erosion and Profit Shifting (BEPS) Action Plan Our goal is to facilitate tax compliance of the Organization for Economic Cooperation and Development (OECD), the President signed a law and improve business performance obligating certain member firms of multinational by providing guidelines to cope with enterprises operating in Kazakhstan to file with the tax changes in tax and legal issues. authorities three-tiered transfer pricing documentation. Below we outline some of the key tax and legal issues that are important for those who are planning to do business in Kazakhstan. We hope the information in this publication will be beneficial to your company. For more detailed information specific to your particular tax situation, please contact a KPMG tax advisor.

CERTAIN LEGAL CONSIDERATIONS

Business Structures domestically-owned legal entities are placed on the import and and Kazakhstan subsidiaries of export of foreign currency to and The Civil Code and related laws foreign legal entities. The most from Kazakhstan. Foreign currency in Kazakhstan permit both local common forms of organization of transactions between residents are and foreign entities a high degree a legal entity are a limited liability prohibited, with certain exceptions. of flexibility in structuring their company (LLC) and a joint stock Transactions between residents and business activity in Kazakhstan. company (JSC). nonresidents may be conducted in Available business structures any currency. include a representative office, a Currency Regulations branch office, a legal entity, and a The national currency, the tenge, simple partnership of companies (or is freely exchangeable within consortium). As a general rule, the Kazakhstan, and few restrictions law does not discriminate between

TAXATION

The new Tax Code introduced a new from fines and interest penalties and certain other expenses are principle – the principle of taxpayer’s and the taxpayer is responsible deductible only within established good faith. According to this only for the amount of the limits. Besides deducting expenses, principle: underpaid tax. legal entities may carry operating losses forward for up to ten years —— In a tax dispute between a Corporate Income Tax for offset against income of future taxpayer and the tax authorities Registered taxpayers periods. all gaps and ambiguities of tax legislation will be interpreted in The corporate income tax rate In addition to corporate income the favor of the taxpayer; payable by most legal entities is tax, a permanent establishment of 20% of taxable income. Various a foreign legal entity is subject to —— The tax authorities bear the small companies may qualify for branch profits tax equal to 15% of burden of proving tax violations; special tax regimes specifying its net after-tax income. This results —— If a taxpayer acted on the basis lower tax rates. The taxable income in an effective tax rate of 32% for of a tax ruling that the tax is measured as gross income permanent establish companies. authorities personally issued to less expenses connected with the the taxpayer and subsequently generation of income. Interest cancelled, the violation is exempt expense, entertainment expenses,

certain qualifying dividends

The following are exempt from income income from operations involving state securities tax in Kazakhstan:

income from securities listed on a Kazakh stock exchange

gains on sales of stakes or shares in Kazakh legal entities, subject to certain conditions

A controlled foreign company Controlled Foreign Companies A Kazakhstan resident holding or (hereinafter, the “CFC”) is a acquiring a participation or a control A portion of profit of the CFC or non-resident legal entity or stake in the CFC is required to submit the CFC permanent establishment another organisational form of to the state revenue authorities a that corresponds to a participation/ entrepreneurial activities abroad statement on participation (control) meeting simultaneously the control share of a Kazakhstan of a CFC. following conditions: resident is subject to income tax in —— A Kazakhstan resident Kazakhstan. If a Kazakhstan resident Income Tax at Source is in loss position, the related portion owns directly, indirectly or If a foreign entity does not have a of the CFC or the CFC permanent constructively 25 or more registered permanent establishment establishment’s profit reduces the percent of a participation in Kazakhstan, it is subject to income stake (voting shares) of the resident’s net operating losses. An tax at the source of payment on CFC or the CFC is controlled1 excess of the CFC or CFC permanent its gross income from sources in by a Kazakhstan resident; establishment’s profit over the Kazakhstan. The payer of the income resident’s net operating losses is —— The CFC or the CFC is responsible for withholding and taxable to the resident in Kazakhstan. permanent establishment remitting the tax to the state by 2 3 is registered in a tax haven A failure to declare or an acting as a tax agent. or the effective income tax understatement of the CFC or the CFC rate for the CFC or the CFC These taxes may be reduced or permanent establishment taxable permanent establishment is eliminated under Kazakhstan tax income in Kazakhstan are subject less than 10%. treaties. There are currently over 50 to administrative penalties. The tax treaties in force. Many of these Tax Code also stipulates provisions 1 tax treaties also provide for a reduced “Control” is defined under the International Finan- under which the administrative and cial Reporting Standards or another internationally rate of branch profit tax. recognized standards for the preparation of financial interest penalties do not apply to a statements accepted by stock exchanges 2 The Tax Code stipulates that a CFC or the CFC per- Kazakhstan resident if the resident manent establishment is considered as registered is not able to obtain necessary in a tax haven, if the CFC or the CFC permanent establishment foundation documents or the CFC’s information to assess the Kazakhstan participant responsible for accounting of income and expenses or asset management of the CFC or tax liabilities related to the CFC or the CFC permanent establishment is registered in the CFC permanent establishment in the tax haven 3 The list of tax havens is approved by the state time. authorities

TAX APPLIES TO: 15% capital gains, dividends, interest and royalties 5% reinsurance premiums

service fees and other income not indicated above 5% income from international transportation services 20%

income paid to residents of jurisdictions that insurance premiums 15% 20% Kazakhstan recognizes as tax havens

Transfer Pricing —— Local File; Kazakhstan’s Transfer Pricing —— Master File; Law applies to any cross-border —— Country-by-country (hereinafter, transactions for the sale or “CbC”) report. Starting from 2019, purchase of goods and services if the transaction price deviates from The member firm of a multinational a failure to file the an arm’s length price. As a rule, enterprise having obligations to required transfer the Transfer Pricing Law does not file any of the three-tiered transfer stipulate any safe harbor for any price pricing documentation is required pricing documentation deviation. Companies engaged in to file with the tax authorities a or filing misleading cross-border transactions, subsoil Notification of Membership in reports will be subject users, and companies enjoying tax a Multinational Enterprise (the preferences or reporting tax losses Notification) by 1 September of the to administrative must comply with the provisions year following the reporting year. penalties. of transfer pricing legislation in According to the OECD Kazakhstan. are specifically exempt from VAT. recommendations, the first reporting The list of exempt activities includes, In January 2017, Kazakhstan joined period for CbC report is 2016. Law among others, sale and lease of land the Inclusive Framework on BEPS requirements regarding submission and land use rights (except for land under which it commits to comply of the Notifications entered into force used for parking passenger vehicles), with the minimum standards on 1 January 2018. The first reporting financial services, insurance services, contained in OECD Action 5 (Harmful period for Local File and Master File and medical services. tax practices), Action 6 (Treaty will be 2019. abuse), Action 13 (Transfer pricing documentation), and Action 14 Value-Added Tax (Dispute resolution). In line with Registration as a VAT payer is BEPS Action 13, Kazakhstan adopted required for all individuals and amendments to local transfer pricing companies that conduct business legislation introducing three-tiered activities in Kazakhstan and have documentation requirements for cumulative taxable revenues in multinational enterprises operating excess of 30 000 times monthly index in Kazakhstan. factor4 during a calendar year. The amended Transfer Pricing The standard VAT rate is 12% and Law establishes criteria under applies to revenues derived from which certain member firms of the sale of goods or services within multinational enterprises operating Kazakhstan and to the importation in Kazakhstan are required to file with of goods into Kazakhstan. 0% VAT the tax authorities one or more of the applies to exports of goods from following three-tiered transfer pricing Kazakhstan and to international documentation: transport services. Certain activities 4 Monthly index factor for 2019 is 2,525 tenge

Payroll-Related Taxes and The rate of contributions is: Foreign nationals who do not have a permanent residence permit in Contributions —— 3.5% – from 1 January 2018; Kazakhstan are not required to join Personal Income Tax —— 5% – from 1 January 2025. Kazakh pension plans. As a rule, all types of compensation It applies to monthly gross salary up Obligatory Medical Insurance and benefits that an employee to a maximum monthly income of Contributions receives for employment services in 7-times minimum monthly salary5. Kazakhstan constitute taxable income. Starting from 1 July 2017, the state Social security contributions are The standard personal income tax introduced new statutory payments fully creditable against social tax rate is a flat 10% for both resident and – obligatory social medical insurance and therefore do not represent an nonresident employees. Employers contributions to the Social Medical additional tax burden for an employer. in Kazakhstan, including Kazakh Insurance Fund (the Fund). The legal entities as well as branch and Obligatory Pension Contributions contributions are required for local representative offices of foreign individuals and for foreigners Kazakh nationals must pay 10% of legal entities, are regarded as tax who have a permit for permanent their gross income as obligatory agents and are required to withhold residence in Kazakhstan. Foreigners contributions to the Unified personal income tax and remit it to and members of their families staying Accumulative Pension Fund in the state from payments they make to in Kazakhstan on a temporary basis Kazakhstan. The gross monthly individuals in cash or in kind. will enjoy the benefits and be subject income amount subject to obligatory to the requirements of the obligatory Social Tax pension contributions is capped at social medical insurance (the OSMI) 50-times minimum monthly salary. Employers in Kazakhstan, including system as Kazakhstan citizens, if it Employers of Kazakh nationals must foreign employers operating in is established in the corresponding withhold the pension contributions Kazakhstan through a branch or international agreement ratified by from the amounts due to the representative office, must pay social Kazakhstan. individuals and remit these amounts tax for their local and expatriate to the pension fund. employees and secondees. Social tax is levied at a flat rate of In addition to obligatory pension contributions, employers in —— 9.5% – from 1 January 2018; Kazakhstan must pay obligatory —— 11% – from 1 January 2025. professional pension fund contributions for certain local The tax applies on the gross income employees working in health- of employees, including all fringe hazardous working conditions. The benefits, whether received in cash professional pension contributions is or in kind. There is no maximum borne entirely by the employer at a flat threshold for the social tax base. The rate of 5% on the gross income of the tax is borne entirely by the employer, qualifying employees. and no part is withheld from employee salaries. Starting from 1 January 2020, employers in Kazakhstan must pay a Social Security Contributions new component of the accumulative Employers in Kazakhstan must make pension system – employer’s contributions to the State Social obligatory pension contributions Security Fund. Contributions are (EOPC) – to the Unified Accumulative required for local employees as well Pension Fund. The EOPC rate is as for expatriate personnel who have 5% of gross employment income. a permit for permanent residence The EOPC will be borne entirely by in Kazakhstan. A foreign national Kazakhstan-based employers. The without a permanent residence permit Unified Accumulative Pension Fund is not subject to this contribution will record EOPC on nominal pension requirement. accounts opened for each employee. 5 Minimum monthly salary for 2019 is 42,500 tenge

The contributions for employees must remit the contributions for OSMI contributions is capped at consist of two components: themselves. Kazakhstan citizens 10-times minimum monthly salary. employer’s contributions borne living abroad and other payers remit Legislation establishes a fixed by the employer and employees’ the contributions by themselves or a taxable base as multiples of the contributions withheld by the third party may pay the contributions minimum monthly salary (the MMS) employer from the amounts payable on their behalf. The state will make or the average monthly salary (the to the employees. Employers are contributions for certain categories AMS). required to remit the total amount of socially vulnerable citizens (e.g. of the contributions to the Social children, retired individuals, women Medical Insurance Fund on a on maternity). monthly basis. The taxable base for the OSMI Tax agents are obliged to withhold contributions of employers, the OSMI contributions from employees and individuals working income payable to individuals under service agreements is income working under service agreements. payable to the employees and Other self-employed individuals individuals working under service (private entrepreneurs, private agreement less allowed deductions notaries, private court officers, and exempted income. The gross lawyers, professional mediators) monthly income subject to the

Rates for the OSMI contributions will gradually increase to 2022 as follows:

EMPLOYEE’S SELF-EMPLOYED EMPLOYER’S AND SERVICE THE STATE’S OTHER PAYER’S CONTRIBUTIONS FOR CONTRIBUTIONS AGREEMENTS CONTRIBUTIONS CONTRIBUTIONS THEMSELVES CONTRIBUTIONS

Tax Base Revenues Revenues 1.4 * the MMS The AMS The MMS

2019 1.5% - - - -

2020 2% 1% 5% 4% 5%

2021 2% 2% 5% 4% 5%

from 1 January 2022 3% 2% 5% 4% to 5%* 5%

* The exact rate will be established annually by the Budget Law

Other Taxes Vehicle Tax the license. Rental payment rate during the production stage of the Entities that own or use vehicles Excise Tax license is 450 times MIF for one square registered in Kazakhstan are subject kilometer of the land plot. The rental Certain items imported into or to an annual vehicle tax. The tax payments apply annually. produced in Kazakhstan are subject rate depends on the vehicle’s engine to excise tax. These goods include volume and the type of vehicle. Mineral Extraction Tax all kinds of alcohol spirits and beverages, tobacco products, petrol Subsoil Use Taxes and Payments Mineral extraction tax applies to the (except for aviation fuel), diesel fuel, value of extracted hydrocarbons, The subsoil use taxes and payments certain motor vehicles, crude oil, gas metals, coal and other extracted apply in addition to the above- condensate, and medical products minerals, separately for each type of mentioned taxes and obligatory containing spirits. Tax rates are extracted resource. The rate of mineral payments stipulated by Kazakhstan measured as a fixed amount per unit extraction tax depends on the type tax legislation. or volume, depending on the type of and/or annual volume of the extracted excisable good. Subsoil use payments resources. Land Tax Subsoil use payments include Excess Profit Tax subscription bonus and Entities that own or use a land parcel Starting from 2018 excess profit tax reimbursement of historical expenses. are required to pay a land tax. The does not apply to mining companies. The new Tax Code abolished tax rate depends on the quality Excess profits tax ranges from 0% to commercial discovery bonus score assigned to the land by the 60% and is payable annually on the since 2018 to stimulate the subsoil governmental authorities and is net profits earned under each subsoil use development. The payment established in the form of annual fixed use contract, if in any reporting year procedures, tax amounts and other payments per unit of land area. the ratio of a subsoil user’s gross terms pertaining to the special subsoil annual income to tax deductions is use payments are stipulated within the Property Tax more than 1.25. subsoil user’s contract with the State Entities owning or using buildings, for use of the subsoil. Alternative Subsoil Use Tax structures, dwellings, premises and other structures firmly fixed on the The new Tax Code also introduced The new Tax Code provides a ground must pay property tax on such rental payments for the use of subsoil user with a right to apply assets. The property tax rate payable land plots for mining companies alternative subsoil tax substituting by most legal entities in Kazakhstan is operating under subsoil use license the historical costs, mineral extraction 1.5% of the average annual book value for the development or production of tax and excess profits tax. The right is of the taxable assets. Property tax minerals. Rates of the rental payments available for subsoil users developing applies regardless of whether profit is during the development stage of a or producing hydrocarbons on deep derived from the use of the assets. license range from 15 to 60 times or continental shelf deposits. The MIF for one block depending on the alternative subsoil use tax applies period a subsoil user operates under from the beginning of the production

stage of a subsoil use contract to the Tax Incentives —— Exemption from customs duties; end of the contract and cannot be —— Exemption from corporate changed. Special Economic Zones (SEZ) income tax (up to 10 years), land The rate of alternative subsoil use tax Kazakhstan has established 11 SEZs tax (up to 10 years) and property ranges from 0% to 30% depending to facilitate the development and tax (up to 8 years); on the market oil prices (0% for the support of the economy sectors other —— Reimbursement of up to 30% of oil price of up to USD 50 per barrel than resources-oriented sectors. the actual investments in fixed and 30% for the oil price exceeding Companies operating in SEZ are assets; USD 90 per barrel). The tax applies to exempt from corporate income tax, property tax and land tax. Sales of the adjusted net profits under each —— Stability of tax legislation. subsoil use contract determined as certain qualifying goods within SEZ The list of priority sectors of prescribed in the Tax Code for the are subject to VAT at a rate of 0%. the economy currently includes alternative subsoil tax purposes. Legal entities operating within the Information Technology Park special industrial infrastructure, processing Rental Tax economic zone are entitled to a industries, housing construction, the 100% exemption from social tax for social sphere (education, medical, Individuals and legal entities their employees if they met certain sports and entertainment facilities), exporting crude oil, coal and gas conditions. tourism, communication, production condensate, other than certain of nuclear materials and agriculture. qualifying subsoil users operating Investments in Priority Sectors under a production sharing agreement, are subject to a special The following incentives are granted tax on exports of crude oil and gas for investments in priority sectors condensate. The tax rate ranges of the economy on the basis of an from 0% to 32% of the government- investment contract concluded determined market value of the between the investor and the state. exported crude oil or gas condensate. The tax rate for the export of coal is a flat 4.7%.

CUSTOMS

Kazakhstan is a member state of plus all associated costs, such as Taking into account the position the Eurasian Economic Union transportation). of the other EEU member-states, (hereinafter, the “EEU”) with Russia, Kazakhstan committed to prevent In 2015, Kazakhstan successfully Belarus, Armenia and Kyrgyzstan. the export of goods imported into completed its membership Import customs duty rates are Kazakhstan at the reduced WTO rates negotiations with the World Trade established by the decision of the to other member-states of the EEU. Organization and became the 162nd Eurasian Economic Commission Taxpayers may import goods into member of the WTO. In the frame of on the Unified Customs Tariff of the Kazakhstan either at the WTO rates, the WTO, import customs duty rates EEU, while export customs duty rates but without the right to export the for a number of goods (so-called List are set by the Government of the imported goods from Kazakhstan, or of Exemptions) are below the rates Republic of Kazakhstan. at the rates established by the Unified established by the Unified Customs Customs Tariff of the EEU with the Most customs duties vary between Tariff of the EEU. right to export these goods in other 0% and 30% and are imposed on the member-states of the EEU. transaction value of the imported goods (the price of the goods

The KPMG tax and legal practice in Kazakhstan employs highly qualified local and expatriate experts who form a dynamic, passionate team able to provide business-oriented tax and legal strategies for improving operations in Kazakhstan and aimed at adding value to your business.

We have experience with all types of taxes in Kazakhstan, including corporate income tax, payroll taxes, VAT, property tax, and taxes withheld from payments to nonresidents of Kazakhstan. We also have experience with taxation of subsoil users and with taxation under tax treaties.

Our consulting services can enhance business planning and decision-making processes. By helping our clients start operations in a tax-compliant manner and then stay informed of legislative and procedural changes, we aim to be an integral part of their successful business in Kazakhstan.

Примечание: 11% респондентов отметили, что затрудняются ответить; вопрос предполагал возможность выбора нескольких вариантов ответов.

Inna Alkhimova Tax&Legal KPMG in Kazakhstan and Central Asia Partner T: +7 727 298 0898 E: [email protected]

kpmg.kz

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Примечание:© 2019 11% KPMG респондентов Tax and Advisory отметили, LLC, a company что затрудняются incorporated under ответить; the Laws вопросof the Republic предполагал of Kazakhstan, возможность a member firm выбора of the нескольких KPMG network вариантов of independent ответов. member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.