On the whole, the income of non-residents is taxed in Kazakhstan according to national tax law and international treaties.
The Tax Code taxes dividends received by non-residents from resident companies in Kazakhstan at 15% (or 20% if the non-resident is registered in a low-tax country). International treaties can be applied to reduce the standard rate.
To help attract long-term investment into the country, both non-resident companies and individuals have had access for over a decade to tax exemptions on dividends received from Kazakhstan. To apply such exemptions the recipients of dividends shall not be registered in a low-tax jurisdiction, shall hold shares / interests for at least three years and have no links to subsoil user assets in Kazakhstan and / or observe requirements for the subsequent processing of minerals at own production facilities, if dividends are paid from Kazakhstan subsoil users.
The Tax Code amendments signed into law by the President on 10 December 2020 expand the qualifications so that from 1 January 2021, only dividends on income previously taxed are eligible for any exemption (provided certain conditions are observed).
We believe the amendment has made national policy on the taxation of dividends payable by Kazakhstan companies to non-residents much tougher and leaves a number of questions open on how it can be applied in practice.
1. Contradiction of the concept of “income previously taxed”
The legislator has provided no detailed instructions on how to identify cases when income received may be treated as “already taxed”, leaving ample possibility for random interpretation, in particular:
which level of entity has already paid CIT on its income
An example of this is when dividends are paid in favour of a non-resident at the Kazakhstan holding company level, which, in turn, receives dividends from subsidies operating in Kazakhstan. Given the rule regarding the adjustment of aggregate annual income by the value of dividends received, the holding company may actually have no income subject to CIT, while income recognised as the source for dividends received had been fully taxed at the subsidiary level.
Consequently, from an economic perspective, these dividends could have been treated as already taxed, but at the operating enterprise level. The lack of any clear rule enabling income to be treated as “already taxed” clearly leads to the double taxation of the same object of taxation – at the subsidiary and holding company levels.
the identification of net income distributed by a resident legal entity, and the period when it should be “previously taxed”
We believe the amendments do not consider cases when taxpayers have unavoidable differences in financial and tax accounting due to distinct income and expense recognition principles. Probably the most significant aspect, from the perspective of investors and production companies, is the objective difference between financial and tax accounting in fixed asset depreciation expenses due to the different methods used to accrue depreciation, different rates and availability of additional tax deductions on fixed assets such as investment tax preferences. Thus, due to timing differences caused by disparity between financial and tax accounting rules, a Kazakhstan company paying dividends may record losses in tax accounting and net profit in financial accounting, from which dividends are paid.
In other cases, the payer may pay dividends on net income (profit) received in the past 3, 5, 10 or more years ago. It is not clear, given statute of limitation restrictions, how the tax authorities in those cases intend to check whether CIT has been charged on the net income for payment or on which part of income.
In other words, CIT may be charged on income in a previous tax period (or taxed in future tax periods), but the tax exemption may not be applicable by virtue of the new amendment.
Interestingly, tax law does not contain a definition of net income for dividend taxation purposes.
Under the general procedure, the source for dividends is net income (or net profit) as per accounting data and financial statements. According to Kazakhstan LLP law, net income received based on annual results is distributed according to a general meeting decision approving operating results for the year.
Given that dividends are not based on corporate tax reporting results, we believe it incorrect to equate net income paid in favour of a founder in accordance with accounting date to taxable income in a corporate tax return.
The logic behind the comparison and the Tax Code changes is not clear. If we assume that the new approach was introduced so that exemptions could be disallowed in those cases when net income has not been taxed in Kazakhstan or not stripped of taxes, so to speak, then the concept forgets that this is impossible according to accounting rules, because Kazakhstan accounting and financial reporting law assumes income and expenses, including for income tax expenses, are recognised using the accrual method. Under the accrual method, even if taxpayers do not have taxable income and CIT expenses in the current tax period, they still need to record deferred income tax in financial reporting, reducing net income to be paid among shareholders / partners. This deferred tax recognition mechanism does not cover situations when untaxed net income (profit) is paid as dividends. Thus, the reasoning for providing a tax exemption based on the absence of taxable income according to the current wording of the amendment is based on a combination of the terms “taxable income after CIT according to tax accounting” and “net income (net profit) according to financial reporting”, which distorts the general principle of dividends.
We believe the new dividend exemption rules will create uneven playing field for many taxpayers: for example, those that had enjoyed tax investment preferences and additional CIT deductions, will find themselves in a discriminatory position around the application of dividend concessions in this period, i.e. they will be forced to pay an additional 15% tax. Likewise, taxpayers that did not apply the additional deduction in the current period (retained it for a future period), will be able to make use of the dividend tax exemption. This sends out a signal to investors that capital investment in production assets, which is why the additional tax deductions were provided, is no longer worth it because it can have the reverse effect, i.e. lead to additional tax on dividends.
2. Retrospective application of the new dividend taxation concept
Until the amendments were adopted, we were unaware of cases when non-residents had not been given a local exemption because CIT had not been charged on income received (except in specific cases reducing CIT by 100% for certain types of activities).
The Atameken Association’s Tax Code Commentary, which is an article-by-article interpretation of Tax Code norms (as at 19 April 2019) likewise makes no reference to how dividends paid to non-residents are taxed in Kazakhstan, i.e. in terms of whether income at the level of the entity paying the dividends has been taxed or not.
However, in recent explanations published before the amendments were made to the Tax Code, the tax authorities’ position was that dividends would not be exempt from taxation if the entity paying the dividends had not generated taxable income. As far as we understand, this position is based on the definition of net income paid to non-resident founders, as income after taxation, which, as we noted above, does not correspond to the principles for forming dividends.
Although tax authority clarifications are not binding, any such Tax Code interpretation may have far-reaching consequences and allow the tax authorities to consider the amendments from 1 January 2021 as clarifications. Thus, the tax authorities’ opinion in the clarifications may be treated as a tool for legalising the retrospective application of restrictions and making additional assessments during a tax audit, including for earlier periods.
Interestingly, this position places doubt on the exemptions applicable to dividends paid not only to overseas investors but also to Kazakhstan residents.
Given that that the first desktop audits on this issue have already started and companies that paid dividends to non-residents may feel the negative consequences, we recommend that Kazakhstan companies that paid dividends to overseas shareholders in previous periods prepare a defence for their actions.
3. Clarification or Tax Code amendment that worsens taxpayer positions
Amendments may be made to the Tax Code to:
change objects of taxation / tax bases and repeal tax concessions, but only by 1 July of the current year so that they can be introduced no earlier than 1 January of the year following the year they are adopted, and
make additions related to tax administration, the specifics of establishing tax reporting and improving taxpayer (tax agent) positions, which may be adopted no later than 1 December of the current year.
Adopting tax exemption restrictions as improving or clarifying amendments after 1 July 2020, and their entry into force from 1 January 2021, in our opinion, are unlawful because the amendments actually change the object of taxation and abolish concessions stipulated by the Tax Code.
Thus, in execution of the principle of determinacy of taxation, the issue of restricting tax concessions with reference to the income of non-residents requires, in our opinion, further discussion and prudential solutions around the creation of a mechanism and procedure for determining the emergence of tax liabilities.
Nazira Nurbayeva, Partner, Deloitte Tax and Legal Department
Andrey Zakharchuk, Partner, Deloitte Tax and Legal Department
Karina Kalimzhanova, Manager, Deloitte Tax and Legal Department