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Kazakhstan's Leading International Business Association February 2020 WINTER ISSUE #87

FINANCE, , LAW UNDERPINNING THE INVESTMENT CLIMATE

Green Finance: The Kazakhstan Approach : Trends/ Reporting Rules

Double Taxation and Tax Treaties The Leasing Option

Kazakhstan’s Tightening Immigration Laws Directors’ and Officers’ Liability

Insolvency Proceedings Simplified Recent Trends in Tax Administration

Difficult Digits: Tax Challenges in the Digital Economy APPLICATION OF THE MULTILATERAL INSTRUMENT IN KAZAKHSTAN

by Kaisar Yegizbayev Meanwhile, according to MLI, the given amendments to the Senior Lawyer, Tax and , GRATA International Double must be applied only if both jurisdictions are agreed to implement these amendments to the existing On February 6, 2020, the Parliament of Kazakhstan ratifi ed Double Tax Treaties and only after notifying OECD as a ARTICLES the Multilateral Convention to Implement Tax Treaty-Related depositary of such amendments. Measures to Prevent Base Erosion and Profi t Shifting (MLI). Assuming the President of Kazakhstan signs the law on ratifi cation in 2020, it is expected the MLI’s provisions on withholding tax will become eff ective from January 1, 2021. MLI was developed by the OECD Tax Committee and is intended to modify existing International Double Tax Treaties in order to tackle international businesses’ aggressive strategies.

The extreme globalization of the economy and the global fi nancial crisis has placed aggressive tax avoidance on the main agenda of the business community. Loopholes in international tax rules resulted in a shift of nearly 660 billion USD in 2012, which is equivalent 0,9 of world GDP. Abuse of inconsistencies in international tax legislation led to fi nal Therefore, under each article of the law on ratifi cation, recommendations on fi fteenBase Erosion and Profi t Shifting Kazakhstan directly indicates the list of Double Tax Treaties (BEPS) released by OECD in October 2015. Even though and the MLI provisions that must be applied to these Kazakhstan is not an OECD member, Kazakhstan aims to treaties. reach OECD taxation standards in order to be recognized as a country with a favorable investment climate. The following is a brief review of the most essential MLI provisions that will be adopted by Kazakhstan with a possible impact on the country’s taxation of international business.

I. Prevention of Treaty Abuse

According to MLI, application of benefi ts under the Double Kazakhstan has already adopted OECD recommendations Tax Treaty must be determined by analysis under either on BEPS Action 3 by including a new provision to the LOB or PPT, or by their combination. In order to apply country’s Tax Code on Controlled Foreign Company Rules. LOB and PPT to the existing Double Tax Treaties, both Recommendations on Action 13 about transfer pricing jurisdictions must have an agreement to apply them. documentation and country-by-country reporting were also incorporated into Kazakhstan’s law on transfer pricing. • Simple Limitation of Benefi ts

By ratifying MLI, Kazakhstan is also going to adopt another According to the current law on ratifi cation, all the existing two BEPS actions: Action 6: Preventing the Granting Double Tax Treaties must be applied considering the of Treaty Benefi ts in Inappropriate Circumstances and provisions of Simple Limitation of Benefi ts (SLOB). Action 7: Preventing the Artifi cial Avoidance of Permanent However, application of SLOB by Kazakhstan does not Establishment Status. mean that SLOB will automatically be applied to all the Double Tax Treaties concluded by Kazakhstan. This is The above BEPS actions are refl ected in the following MLI determined by each jurisdiction that has agreed to apply articles: SLOB to the Double Tax Treaty with Kazakhstan.

I. Article 7 – Prevention of Treaty Abuse, which includes: If both Kazakhstan and other corresponding jurisdictions • Limitation of Benefi ts (LOB); agree to apply SLOB and have notifi ed the OECD, taxation • Principle Purpose Test (PPT). of the residents of these states will be governed by the MLI II. Article 8 – Dividend Transfer Transactions provisions on SLOB. III. Article 12 – Artifi cial Avoidance of Status through Commissionaire Under SLOB, Double Tax Treaty benefi ts are provided only Arrangements and Similar Strategies. for “qualifi ed persons”, who are defi ned as:

52 #87/2020 • Individuals; • Principle Purpose Test (PPT) ARTICLES • State authorities; Under PPT, the Double Tax Treaty exemptions cannot • Companies whose shares are traded on a recognized be applied if it is reasonable to conclude that one of the stock exchange; principal purposes of the transaction is to obtain Double Tax • Non-commercial organizations with status regulated on Treaty benefits. In other words, if the parties entered into the international level; a transaction with the main intention being to exempt the • Pension funds. income from taxation or to apply a reduced under the Treaty, the exemption will be disallowed. Meanwhile, even if the taxpayer is not a qualified person, it is still possible to apply Double Tax Treaty benefits if the The Final BEPS Report on Action 6 envisages that PPT is taxpayer can prove a main involvement in “active business a subjective test that must be applied on a case-by-case activity”. Active business activity is defined as activity not basis by analyzing each transaction. Therefore, in deciding including activities of holding companies, administration the tax treatment of a given transaction, the tax authorities of group of companies, group financing, or making and must pay close attention to the substance of the transaction managing investments. and its economic purpose. If the transaction’s purpose is not a bonafide exchange of goods and services, but to obtain For instance, an LLP registered in Russia (RuCo) performs Double Tax Treaty benefits, the benefits can be denied. engineering services for a Kazakh LLP (KzCo). KzCo pays RuCo fees for services. RuCo does not have a permanent In the Final BEPS Report on Action 6, OECD provides 10 establishment in Kazakhstan. The services are performed examples of applying PPT. However, the examples describe in Russia. straightforward and simple transactions, in which it is easy to spot the PPT violations. Moreover, some of these examples According to Kazakhstan’s Tax Code, the income from the are already governed by the Kazakh tax legislation. engineering services is recognized as income derived from Kazakh sources even if performed outside of Kazakhstan. One of the examples describes a case in which RCo, a However, under Article 7 of the Double Tax Treaty between tax resident of state R, wins a tender for construction of a Kazakhstan and Russia, RuCo’s income must be exempted powerplant in state S. Construction work is intended to take from taxation in Kazakhstan. After enforcement of MLI, it about 22 months, so RCo splits the project into two contracts will be necessary to analyze taking for 11 months each. One contract is for RCo itself, and the into account MLI, aside from the Double Tax Treaty and the other is for SUBCo, a new RCo subsidiary. Tax Code. The OECD holds that the second contract is solely for the Both Russia and Kazakhstan have notified OECD that the purpose of obtaining exemptions under Article 5 of the Double Double Tax Treaty between Russia and Kazakhstan must Tax Treaty, which envisages a term of 12 months for creation be applied, taking into account the SLOB provisions of MLI. of a permanent establishment. The transaction does not pass Taxation of RuCo’s income must therefore be determined the PPT test and the Double Tax Treaty benefit for a 12-month on the basis of SLOB. period required to create a permanent establishment cannot apply to RCo. Under SLOB, however, RuCo is obviously not a qualified person since it is not an individual, state authority or non- It is worth noting that Kazakhstan’s Tax Code already commercial organization. But SLOB still allows RuCo prevents splitting contracts between related parties to avoid to apply the Double Tax Treaty exemption, provided that permanent establishment. The tax authorities are therefore RuCo can prove its main activity involves “active business generally able to tackle permanent establishment strategies activity”. This means RuCo must prove it is not involved in without MLI involvement. a holding company, managing a group of companies, group financing or investment activity. II. Dividend Transfer Transactions

It is not clear how the Kazakh tax authorities will determine Kazakhstan’s Double Tax Treaties allow foreign companies foreign companies’ main activity. Therefore, the country’s to reduce tax on dividends distributed by Kazakh companies tax authorities should improve their cooperation with from 15%, as provided by the Kazakh Tax Code, to 10% or foreign tax authorities to avoid incorrectly implementing 5%. Under MLI, dividend benefits apply only if the foreign MLI. The tax authorities should also study the BEPS Final company holds the Kazakh company shares for at least 365 Report on Action 6 to understand the purpose of adopting days. Otherwise, the foreign company cannot benefit from the SLOB and to formulate a clear approach on applying MLI reduced tax rate on dividends and the Kazakh company will in Kazakhstan. be obliged to withhold 15% , as a tax agent.

#87/2020 53 ARTICLES on 31 December 2021. As the sole shareholder, sole the As 2021. December 31 on (KzCo) shares ofaKazakhcompany (DutchCo) purchases As an example, a Company from the Netherlands broadening the definition of a dependent agent to include to agent dependent a of definition the broadening The as representedbythedependentagent. leads to the foreign legalentity’s permanent establishment, of the foreign company. This activity by the dependent agent a contractinthename as apersonwiththerighttoconclude Generally, Double Tax Treaties define the dependent agent Establishment Status ThroughCommissionaire Arrangements Permanent of Avoidance Artificial III. Treaty’s Tax Double reduced taxratedoesnotapplytothe the days, 365 than less for the shares holds DutchCo that Considering 5%. to down tax rateondividends a reduced provides Kazakhstan and However, the Double Tax Treaty betweenthe Netherlands Code, thedividendsaretaxedat15%. Tax Kazakhstan’s Under purchase. share the since pass days 365 only result, 2022. a December As 30 on paid are dividends The decides to distribute dividendsfromKzCo. BEPS Final Report on BEPS Final Action 7recommends DutchCo dividends. DutchCo KzCo authorities toensureproperobservanceoftaxpayerrights. communicate this single interpretationto the local tax of interpretation to approach joint a adopt therefore Committee should The StateRevenue additional taxburdenonprofitsderivedinKazakhstan. it is possiblethatbusinessesmayhavean international how the to Due sources. complexity of Kazakhstan from derived income Kazakhstan shouldcarefullyconsidertaxationof their with businesses involvinginternationaltransactions in 2020, companies During 1,2021. January from effective It is expectedthat the mainMLIprovisionswillbecome Conclusion the foreigncompany. foreign company,for permanentestablishment to recognize of the acts inhisownname,butonbehalf that theperson establish to sufficient therefore is It company. foreign the a dependent agent even without a power of attorney from company.foreign as recognized be can person a such, As but also actions in the agent’s name andonbehalfof the contractsinthecompany’snot onlyconcluding name, provisions maybeimplementedinKazakhstan, MLI provisions rules and lack of clear understanding of understanding lack ofclear and MLI rules provisions and MLI provisions