The Kazakhstan Tax Code may change so that controlled foreign corporation rules will not apply to foreign persons that are residents of countries having a double tax treaty with Kazakhstan.
Kazakhstan residents (both individuals and legal entities) may own shares in foreign companies. However, in order to avoid abuse (especially in the fiscal area) Kazakhstan residents may be required to report the profits of foreign companies in Kazakhstan and, accordingly, pay the respective Kazakhstan tax (even though such profits are not distributed to Kazakhstan residents and are just accounted for/accumulated abroad). This rule applies to the so-called “controlled foreign corporations” (CFCs).
CFCs
A CFC is a foreign person (a company or another form of unincorporated entrepreneurship) in which a Kazakhstan resident owns a substantial participation/share, provided that such foreign person meets certain tax criterion.
The tax criterion is an application of an income tax not less than 10% to such foreign person or registration of such foreign person in a tax haven (e.g., Seychelles, Malta, British Virgin Islands).
The substantial participation means the ownership of 25% or more interest (voting shares) or maintenance of control (determined in accordance with the international standards of financial reporting or other internationally recognized standards of financial reporting adopted by stock exchanges for admittance of shares to trades). Such substantial participation may be direct, indirect, or constructive (i.e., under the resident’s direct or indirect control or the resident’s and his/her close relative’s direct and/or indirect control).
DOUBLE TAX TREATIES
The Kazakhstan Tax Code currently sets out that the CFC rules apply “irrespective of the benefits, investment tax preferences, [and] the most favorable treatment as well as other tax terms that are more favorable than those granted under the Kazakhstan Tax Code that are provided to a resident by the Republic of Kazakhstan or those established by the law of the Republic of Kazakhstan” (Article 297.9). As a practical matter, ownership by a resident of a CFC in a country having an effective double tax treaty with Kazakhstan does not prevent application of the CFC rules. The proposed changes to the Tax Code should address and alleviate this issue.
THE PROPOSED CHANGES
The business community anticipates that the Tax Code will be changed so that the CFC rules will not apply to foreign persons who are residents of countries having a double tax treaty with Kazakhstan. In other words, if, for instance, a Kazakhstan resident owns 25% of voting shares in a Dutch company and the effective income tax rates applicable to such Dutch company is less than 10%, then currently such foreign company is considered a CFC. Accordingly, such Dutch company’s profits would be subject to taxation in Kazakhstan at the level of the Kazakhstan resident (pro rata to its share). If the proposed changes are adopted, such Dutch company would not be considered a CFC.
Based on the draft law available as of September 2020, there will be a threshold of a nominal (not effective) income tax rate in the foreign country (more than 75% of 20%, i.e., more than 15%). This means that, given that the nominal income tax rate in the Netherlands is more than 15%, the CFC rules would not apply in the above example.
Other important changes are also under consideration, including a minimal income threshold of the CFC meaning that having a relatively small amount of income will not trigger application of the CFC rules (this exemption, however, will not apply to CFCs incorporated in tax offshores).
The exact dates of adoption of the proposed changes are not clear. The coronavirus (COVID-19) pandemic has delayed the timeline for consideration of the respective draft law (currently it is with the lower chamber of the Parliament, and the latest available comparative table is available as of September 2020). It is also possible that certain CFC-related changes will be adopted with retroactive effect.
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