Gaukhar Narbekova, Partner of MinTax Group, Certified Auditor, DipIFR (ACCA), CIPA, CAP, Professional Tax Advisor, Tax Consultant of the RoK[1] in this article considers possible variants of granting a loan by a legal entity – resident of the RoK (hereinafter – RoK Resident) to its Participant or its related party which are non-residents of the RoK.
Very often, RoK Residents have free financial resources that can be effectively used to increase the profitability of ongoing business activities. This article considers possible variants of granting a loan by the RoK Resident to its Participant or its related party which are non-residents of the RoK.
For example, due to the availability of free financial resources, the RoK Resident decided to grant a financial loan to an RoK non-resident legal entity which is a related party to it (an individual is a Participant of the RoK Resident and the RoK non-resident legal entity). At that, the loan is granted for a period of three years at a minimum interest rate, which is significantly lower than the market rate for similar resources. Below we will consider tax implications arising from making such transaction.
According to Article 173 of the Tax code[2], the tax authorities shall exercise control of transfer pricing in relation to transactions, in accordance with the procedure and in the cases provided for by the RoK legislation concerning transfer pricing.
According to sub-paragraph 62) of paragraph 1 of Article 1 of the Tax code, interests mean all payments relating to a credit (loan, micro credit), except for the borrowed (lent) principal of a credit (loan, micro credit), commission fees for transfers of funds by second-tier banks and other payments to a person who is not a lender, related party for the borrower.
According to sub-paragraph 16) of paragraph 1 of Article 1 of the Tax Code, dividends are income in the form of part of net income allocated by a legal entity between its founders, participants, as well as income received by a shareholder, participant, founder or their related party from a legal entity in the form of a positive difference between the market price of goods, works, services and the price at which such goods, works, services are sold to the shareholder, participant, founder or their related party, as well as any property and material benefits provided by a legal entity to its shareholder, participant, founder or their related party, with the exception of income referred to in Articles 322 – 324 of the Tax Code and income from selling goods, works, services.
At that, the positive difference is determined in the adjustment of taxable items. Adjustment of taxable items shall be carried out in the cases of, and in accordance with, the procedure as established by the RoK legislation concerning transfer pricing.
In accordance with sub-paragraph 10) and 11) of paragraph 1 of Article 644 of the Tax Code, income in the form of dividends received from a resident legal entity, as well as income in the form of interests, shall be recognized as the non-resident’s income from sources in the RoK and shall be taxed at a rate of 15 percent, in accordance with Article 646 of the Tax Code.
That is, in addition to income in the form of interests on the loan granted, the specified income paid by the RoK Resident in the form of a positive difference between the amount of interests calculated at the market financing rate and its amount calculated at the actual rate provided to its Participant – non-resident of the RoK is recognized as income of the non-resident Participant in the form of dividends from a source in the RoK and is subject to taxation at the source of payment at a rate of 15 percent.
According to Article 40 of the Law “On Partnerships with limited and additional liability” No 220-I dated 22 April 1998, allocation of net income received by the partnership as a result of its yearly activities among the partnership’s participants shall be performed in accordance with a resolution of a regular general meeting of the partnership’s participants, dedicated to the approval of results of the partnership’s operations for a respective year.
According to the economic theory and financial management, net income is the income that is received after payment of taxes. Usually, this value is calculated as the difference between the profit received by the enterprise and the taxes that are paid after it has been received, that is – CIT[3].
For CIT purposes, the taxable income shall be defined as the difference between the aggregate annual income subject to adjustments stipulated by Article 99 of the Tax Code and deductions specified by Section 4 of the Tax Code.
According to paragraph 5 of Article 645 of the Tax code, when the tax agent pays the amount of CIT charged on a non-resident’s income in accordance with provisions of the present Code, at the expense of own funds without its withholding, the tax agent’s obligation to withhold and transfer CIT at the source of payment shall be deemed as fulfilled.
Therefore, dividends accrued to the non-resident Participant are not deductible in the assessment of CIT, since they are the allocated portion of net income (undistributed profits) for the previous reporting period that remains at the entity’s disposal after charging CIT, that is, they have nothing to do with deductions.
In the case of provding non-repayable financial assistance to the non-Resident Participant without any compensation, the entire amount of paid income will also be recognized as the non-resident’s material benefit subject to CIT at the source of payment at a rate of 15%.
Notwithstanding the foregoing, paragraph 5 of Article 2 of the Tax Code stipulates that if an international treaty ratified by the RoK establishes any rules other than those contained in the Tax Code, the rules of the said treaty shall apply.
However, according to paragraph 1 of Article 667 of the Tax Code, when income is paid to a non-resident in the form of dividends, interests and (or) royalties or when unpaid income of the non-resident in the form of interests and (or) royalties is referred to deductions, the tax agent shall be entitled to independently apply tax exemption or a reduced tax rate stipulated by the international treaty, if the following conditions are met:
1) the non-resident is the ultimate (actual) recipient (owner) of income;
2) the tax agent was presented with a document confirming residency of the non-resident within a period established by paragraph 4 of Article 666 of the Tax code.
Paragraph 1 of Article 675 of the RoK Tax Code states that, for the purposes of applying the provisions of Section 19 of the Tax code, a document confirming the non-resident’s residency shall be an official document confirming that the non-resident who is a recipient of income is a resident of a state with which the RoK has concluded an international treaty represented in one of the following forms:
1) original certified by the competent authority of the foreign state of which the non-resident is a resident. The signature of the official person and the seal of the competent authority confirming the non-resident’s residency must be legalized in the manner prescribed by the legislation of the RoK;
2) notarized copy of the original document meeting requirements of sub-paragraph 1) of this paragraph. The signature and seal of the foreign notary must be legalized in the manner prescribed by the legislation of the RoK;
3) paper copy of the electronic residency document of the non-resident, placed on the Internet site of the competent authority of a foreign state.
At that, according to paragraph 3 of Article 675 of the Tax code, the non-resident is recognized to be a resident of the state with which the RoK signed an international agreement within a period of time specified in the document confirming residency of the non-resident. If the document confirming residency of the non-resident does not specify any period of residence, the non-resident shall be recognized to be a resident of a country with which the RoK signed the international treaty, within a calendar year in which such document was issued (placed on the internet resource of the competent body of the foreign state).
In the meantime, in accordance with sub-paragraph 4) of paragraph 1 of Article 644 of the Tax code, income of a person registered in a country with privileged taxation included in the list approved by a competent authority, derived from performance of work, rendering of services regardless of the place of their actual performance, rendering, as well as other income established by the said Article, shall be recognized as the non-residents’ income from sources in the RoK.
In the meantime, paragraph 2 of Article 646 of the Tax Code states that income of a person registered in a state with preferential taxation included in the list approved by the authorized body, as defined by Article 644 of the Tax Code, shall be subject to taxation at the source of payment at a rate of 20 percent.
In addition, it should be borne in mind that, according to sub-paragraph 2) of Article 251 of the CoAO[4] of the RoK, the legal entity’s failure to fulfill a requirement for foreign currency repatriation committed in the form of non-crediting to bank accounts in the authorized banks of foreign currency transferred by the RoK resident in favor of the RoK non-resident for making payments on import transactions which must be refunded in connection with non-fulfillment or incomplete fulfillment by a RoK non-resident of his obligations shall entail a fine at the rate of twenty percent of the amount of the non-credited national and (or) foreign currency, but not exceeding two thousand times the monthly reference index. At the same time, liability for committing the offense shall occur in cases when, on expiration of the repatriation period, the amount of non-credited national and (or) foreign currency exceeds the threshold value above which foreign exchange agreements on export or import are subject to control of the fulfillment of the repatriation requirement in accordance with the regulatory legal act of the RoK National Bank, and if these actions (inaction) do not contain signs of a criminal offense.
According to the Rules for the implementation of export-import currency control in the RoK, if the repatriation period has expired and the amount of the non-resident’s unfulfilled obligations under the foreign exchange agreement on export or import to the exporter or importer has exceeded an equivalent of 50,000 (fifty thousand) US dollars, an authorized bank (its branch) or the territorial branch of the RoK National Bank which is the registration bank, not later than the 5th (fifth) day of the month following the month in which the repatriation period expired, shall send a request in a free format to the exporter or importer to present the following:
1) information about the reasons for non-fulfillment of the repatriation requirement;
2) documents confirming the occurrence of circumstances affecting the terms and conditions of fulfillment of obligations by the non-resident under a foreign exchange agreement on export or import.
We hope that this article will be useful to you in carrying out your business activities and assessing tax obligations with respect to loans granted to non-residents.
This material is subject to copyright. Reprinting and other use is prohibited by the copyright holder. This material expresses the author’s opinion and is a recommendation. This material is based on regulatory legal acts in force at the time of publication.
[1] Republic of Kazakhstan.
[2] Code of the Republic of Kazakhstan No 120-VI dated 25 December 2017 “On Taxes and Other Obligatory Payments to the Budget (Tax Code)”
[3] Corporate Income Tax.
[4] Code of the Republic of Kazakhstan “On Administrative Offences” # 235-V dated 5 July 2014.
