In Kazakhstan, as well as in all other countries, there are tax rules governing the tax treatment of their resident companies and foreign taxpayers carrying out activities within the country. For example, a separate taxation procedure of income of residents of Kazakhstan as well as for legal and natural persons who are non-residents, which meet the international principle of taxation of non-residents is disclosed and more detailed in the Tax Code of the Republic of Kazakhstan. Let us consider some of the tax issues that Kazakh companies have in transactions with non-residents in obtaining the loan.
Question: Kazakhstan company (hereinafter – LLP) plans to enter into a loan agreement with a foreign company (hereinafter – non-resident). At the conclusion of this agreement, a question of obligation to pay corporate income tax deducted at source of payment (hereinafter – CIT withheld at source ) on the income of non-residents arise , as well as who will be the taxpayer , given that the non-resident have no branches and representative officers in Kazakhstan.
Answer: Considering the provisions of subparagraph 10 ) of paragraph 1 of Article 192 of the Tax Code, income in the form of compensation (per cent) received from a resident (LLP) is recognized as income of non-residents from sources in Kazakhstan . Thus, pursuant to paragraph 1 of Article 193 of the Tax Code, income of non-resident carrying on business in Kazakhstan without a permanent establishment is subject to CIT at source at the rate of 15%, with no deductions.
In this regard, the interest for the loan granted by a nonresident is its income from sources in the RoK, which is subject to CIT at source at the rate of 15%. Accordingly, a payer of CIT at the source of payment from such income is a non-resident. According to paragraph 3 of Article 193 of the Tax Code However, an obligation to assess, withhold and pay CIT withheld at source to the budget, shall be imposed on a legal person paying the income to the non-residents and recognized as a tax agent, that is, in this case, on LLP .
Question: Is it possible for the Kazakhstan LLP not to withhold CIT withheld at source in Kazakhstan when paying interest, on the basis of a certificate of residence of a non-resident and in accordance with the provisions of the Convention for the Avoidance of Double Taxation (hereinafter – Tax Convention) concluded with the state of residence of a non-resident company?
Answer: Provisions of the Tax Convention does not provide for the right to full exemption of income of non-residents in the form of interest received in Kazakhstan. According to paragraph 2 of Article 11 of the Tax Convention, Kazakhstan was granted the right to tax income of non-residents in the form of interest at the reduced rate of 10 % if the non-resident is the beneficial owner of them, that is, has the right to possess, use and dispose of income and is not an agent in respect of such income.
Provisions of Tax Convention enable LLP as a tax agent to apply an independently reduced rate when paying interest on the basis of the document submitted by the non-resident which confirms residency that meets the requirements of paragraphs 4 and 5 of Article 219 of the Tax Code. In this case , the document must be submitted by a non-resident not later than one of the dates that occurs first, as required by paragraph 3 of Article 212 of the Tax Code, that is, not later than:
1 ) 31 December of the calendar year in which income was paid to the non-resident or unpaid earnings of non-residents were refer to deductions;
2) The date of the routine tax audit of the quarter ,in which income was paid to the non-resident, ending in the calendar year in which such tax audit was conducted on the issue concerning fulfillment of tax liability on the CIT at source of payment;
3) Not later than five working days before completion of an unscheduled tax audit of the quarter, in which income was paid to the non-resident, ending in the calendar year in which such tax audit was conducted on the issue concerning fulfillment of tax liability on the CIT at source of payment. Date of completion of the unscheduled tax audit is determined in accordance with a prescription.
Thus, when paying income to the non-resident in the form of interest under the Loan agreement , the Company shall have the right , on the basis of a document confirming residency of the non- resident, apply the reduced rate of tax of 10 %, but shall not completely exempt such income from tax.
Particular attention should be paid to the design of a document confirming residency of the non-resident. Such a document should verify that the resident is a resident of the State with which Kazakhstan signed a Tax Convention for a period of time specified in the document or within the calendar year in which it is issued.
A document confirming residency must be certified by a competent authority of the foreign country a resident of which is the non-resident. If the country of residence of the non-resident joined to the Convention abolishing the requirement of a diplomatic or consular legalization by apostille (Hague, 5 October 1961) the document must be apostilled. In case of submission of a notarized copy of the document confirming residency, signature and seal of a foreign notary bare subject to apostille, except for the signature and seal of the authority that certified the residency of the non-resident.
In turn, LLP must specify in the tax statements on CIT an amount of accrued (paid) income to the non-resident and exempt taxes and tax withheld, exempt from withholding under the provisions of the Tax Convention, CIT rate and the name of the Tax Convention. Along with the tax reporting, LLP shall provide a copy of a document confirming residency of the non-resident in the manner and within the terms prescribed by paragraph 3 of article 212-1 of the Tax Code.