Roza Kinchinbayeva, Managing Partner of MinTax Group, Certified Auditor, CIPA, CAP, Professional Accountant.
When carrying out economic operations, business entities often experience a shortage of working capital, which forces them to attract financial resources by any means not prohibited by the legislation of the Republic of Kazakhstan (hereinafter – the “RoK”). This article considers the standards of RoK tax legislation which regulate occurrence or absence of a liability to pay value-added tax (VAT) in respect of transactions concluded between legal entities in the form of providing a temporary refundable financial assistance (interest-free loan).
According to Article 380 of RoK Civil Code, citizens and legal entities shall be free in concluding agreements. Compulsion to conclude an agreement shall not be allowed, except for the cases where the obligation to conclude an agreement is contemplated by this Code, legislative acts or by the obligation adopted voluntarily. Parties may conclude agreements both as provided for and as not provided for by legislation.
According to Article 382 of RoK Civil code, provisions of an agreement shall be defined at the discretion of the parties, except for the cases where the contents of a certain provision are prescribed by legislation. In the cases where a provision of an agreement is prescribed by a rule which, in accordance with legislation applies, unless the agreement of the parties specifies otherwise (dispositive rule), the parties may by their agreement exclude its application or establish a condition which is different from the one specified in it.
Article 384 of RoK Civil Code allows to conclude a non-chargeable agreement; at that, an agreement shall be recognized as non-chargeable in which one party is obliged to supply something to the other party without receiving from it any payment or any other counter consideration.
In accordance with sub-paragraph 6) of paragraph 2 of Article 231 of the Tax code turnovers from sales of work, services mean any performance of work or rendering of services, in particular free of charge, and also any activity against remuneration which is different from sales of goods, in particular: granting a credit (loan, microcredit).
Pursuant to paragraph 3-1 of Article 238 of the Tax code, in cases, provided for by sub-paragraphs 5) and 6) of paragraph 2 of Article 231 of the Tax Code, the amount of taxable turnover shall be determined on the basis of interest under an agreement for granting a credit (loan, microcredit).
According to paragraph 2-1 of Article 238 of the Tax code, the amount of the taxable turnover of the works and services performed without compensation shall be determined on the basis of the cost of the goods, works and services used for performance of such works, services, provided that VAT was recognized as offset at the time of acquisition thereof.
Based on the foregoing, an agreement for providing financial assistance between legal entities without receiving any compensation for such financial assistance is not prohibited by the civil legislation of the RoK.
The provisions of Article 238 of Tax code contain an exhaustive list of situations in determining taxable turnovers subject to VAT. In the meantime, the given situation may be classified in two ways: as an interest-free loan or service provided free of charge.
- In the given situation, if financial assistance is considered as a loan, then size of taxable turnover is determined on the basis of interests envisaged by the contract. Given that the contract implies 0% interests, that is – no interests, then, taxable turnover will comprise 0 KZT.
- If financial assistance is considered as a non-chargeable service, then, according to Article 238 of Tax code, the amount of the taxable turnover relating to such service is determined on the basis of the cost of the goods, works and services used for performance of such works, services, provided that VAT was recognized as offset at the time of acquisition thereof. That is, given the fact that an entity rendering services related to provision of financial assistance does not have any goods, work or services used for the provision of such services, with VAT previously recognized as offset at the time of acquisition thereof Therefore, in this case, the taxable turnover will be also equal to zero due to absence of costs incurred in providing such services.
Thus, according to the foregoing analysis of normative legal base, in the given situation when one legal entity provides financial assistance to another legal entity, there will be no VAT liabilities.
Civil Code of the Republic of Kazakhstan (General Part) passed by the Supreme Court of the Republic of Kazakhstan on 27 December 1994.
Code of the Republic of Kazakhstan dated 10th December 2008 No.99-IV “On Taxes and Other Obligatory Payments to the Budget” (Tax Code).