Due to political and economic stability in Kazakhstan, the abundance of natural resources, as well as high annual economic growth over the past several years, foreign investors continue to view Kazakhstan as a favorable place to do business.
One of the most important issues to foreign investors is the repatriation of their profits and the tax implications of their income. Civil legislation allows foreign investors to operate in Kazakhstan through either a local branch of a foreign company or a local subsidiary established as an independent legal entity under the laws of Kazakhstan. Naturally, a foreign investor should determine which type of investment structure is preferable.
Foreign Investors’ Council
The Foreign Investors’ Council (FIC) is an advisory body established by the Order of the President of the Republic of Kazakhstan (#3985 dated 30 June, 1998) to promote direct dialogue between the Government of Kazakhstan and foreign investors in order to efficiently address key issues related to their investment activities in the country, to improve the investment climate of Kazakhstan for the benefit of foreign investors, local and national companies, the economic development and wealth of the country and its people.
The FIC is chaired by the President of the Republic of Kazakhstan, who supervises its activities, including approval of the Agenda and chairmanship at the Council's plenary sessions.
The major objectives of the FIC:
- Developing and submitting recommendations to the President and Government of the Republic of Kazakhstan on key investment and economic development issues.
- Analyzing and discussing other core investment policy issues upon the instruction of the President of the Republic of Kazakhstan.
Kazakhstan is represented in the Council by the following government officials: Prime Minister, Chairman of the National Bank, Deputy Head of the President’s Administration, Deputy Prime-Minister, Minister of Foreign Affairs, Minister of Industry and New Technologies, Minister of Finance, Minister of Economic Development and Trade, and Head of the Executive Body of the Council (Chairman of the Committee on Investments of the Ministry of Industry and New Technologies).
The foreign side of the Council is represented by top managers of international organizations, economic and financial institutions, foreign companies and corporations. For more information about current members of the FIC, please visit www.fic.kz.
The Plenary Sessions of the Council are conducted once or twice a year. Since its foundation, 23 plenary sessions under the chairmanship of President Nursultan Nazarbayev have taken place. In addition, twice a year interim sessions of the Council chaired by the Deputy Prime-Minister or the Minister of Industry and New Technologies are held.
The branch’s profits are subject to a corporate profit tax in Kazakhstan at a rate of 30 percent plus an additional tax on the net after-tax income of the branch, a branch profit tax. Under the Kazakh tax code, the branch profit tax rate is 15 percent, and it is applied whether profits are repatriated or not. This tax is similar to the tax withheld on dividends, but since tax on profits repatriated by Kazakh entities applies to profits that are actually distributed, a subsidiary can defer tax by not paying dividends.
A foreign company cannot charge fees to its Kazakh branch office, because the head office and branch are part of the same entity. However, an affiliate company can charge fees to the branch office in Kazakhstan, so intra-group transactions are possible.
A foreign investor can choose to create a subsidiary in Kazakhstan in the form of a joint stock company (JSC) or a limited liability company (LLC). Sometimes potential foreign investors confuse Kazakh LLCs with Russian “limited liability partnerships” and question whether LLCs are “flow through” entities whose revenues and expenses flow through the entities and are attributed to the partners owning them, in accordance with the partnership taxation principles that are common in many countries. However, LLCs are not flow-through entities, therefore JSCs and LLCs are taxed similarly in Kazakhstan. Both are subject to corporate profit tax and their profit distributions are subject to income tax withheld at the source of payment at the rate of 15 percent. Profits distributed by JSCs are called dividends, while profits distributed by LLCs are referred to as income from equity investments, because LLCs do not issue shares. The difference in nomenclature has no impact on the taxation of the profit distributions though. As a result of the 2004 law, JSCs usually function as public companies and LLCs as private, the most common organizational form for companies in Kazakhstan.
Any income derived from a Kazakh source that a subsidiary company pays to a foreign parent company is subject to the same rate of income tax withholding. This is regardless of the type of entity paying the income, unless tax privileges have been granted by an international agreement. The following income tax rates apply to income paid by non-resident companies with no taxable permanent establishment in Kazakhstan:
- Interest income, 15 percent
- Dividends and income from an equity investment in a Kazakh entity, 15 percent
- Premiums paid for insurance coverage, 10 percent
- Premiums paid for reinsurance, 5 percent
- Income from international transportation services, 5 percent
- Other income (royalty, fees for other types of services), 20 percent
Tax Treaty Benefits
Under Kazakh tax law, the deductibility of interest paid to a non-resident lender depends on the borrower’s capital structure. If the borrower’s debt-to-equity ratio exceeds a specified ceiling level, the interest paid to a non-resident lender is not fully tax-deductible. However, under the non-discrimination clause of many of Kazakhstan’s tax treaties, interest can be fully deductible if it is not paid to a related company. Thus, there can be a profit tax advantage from operating under a tax treaty.
Business profits from the active conduct of business in Kazakhstan, as opposed to the passive investment in Kazakhstan, can be completely exempt from income tax in Kazakhstan if the non-resident business has no permanent establishment in Kazakhstan under the applicable tax treaty. In addition, foreign investors operating in Kazakhstan through a branch office can in many cases claim treaty relief and reduce the branch profit tax rate applicable to their branch’s profits. The branch profit tax under most of Kazakhstan’s tax treaties is five percent. Furthermore, Kazakhstan’s tax treaties typically provide for reduced income tax withholding rates for passive income such as dividends, interest, and royalties. Most of Kazakhstan’s tax treaties provide for a reduced tax rate of five percent on dividends, and ten percent on interest and royalties. Hence, it is often advisable to invest from a country that has a tax treaty in place with Kazakhstan.
The procedure for claiming treaty relief in Kazakhstan depends on the type of income for which treaty benefits are claimed. For passive income and income from services provided entirely outside of Kazakhstan, a non-resident whose country has a tax treaty with Kazakhstan can claim treaty benefits simply by providing to the payer a copy of a certificate from the non-resident’s tax authorities confirming that the non-resident is a tax resident of that country. Likewise, a non-resident with a branch office in Kazakhstan can claim a treaty-reduced branch profit tax rate by obtaining the same certificate.
The tax authorities of some countries are more cooperative about issuing such certificates confirming tax residency, so foreign investors may wish to take this into account when selecting a jurisdiction from which to invest into Kazakhstan. Investors from some countries may experience difficulty obtaining tax residency certificates if they operate in the form of a partnership in that country and if a partnership is not recognized in that country as a taxable entity. Thus, the type of entity organized in a particular country may also have an impact on the choice of jurisdiction from which to invest into Kazakhstan.
Foreign investors can earn many types of income from Kazakhstan. Some of the most common types are dividends from JSCs and income from equity investments in LLCs, royalties, interest income and management service fees.
From the perspective of diminishing the tax burden, it is generally advantageous for a foreign investor to invest in Kazakhstan from a country with a tax treaty already in place. Usually, foreign investors represent multinational holdings with subsidiaries in multiple countries and have a variety of affiliates available for investment and activities in Kazakhstan. In that case, the foreign investor may be able to choose between various countries from which to invest into Kazakhstan.
Though these issues primarily relate to foreign investors, Kazakh customers often provide input to foreign suppliers and service providers regarding how to structure operations in Kazakhstan. By being flexible and knowledgeable about tax issues, Kazakh companies can help foreign suppliers and service providers reduce tax costs in Kazakhstan, and these tax savings can be partially passed on to the Kazakh customers in the form of lower product and service costs.
When making a decision regarding the jurisdiction from which to invest in Kazakhstan or the type of organizational form to use for activities in Kazakhstan, foreign investors are advised to seek professional advice.