This article covers such sensitive topic as tax exemption of dividends distributed by a Kazakh company in address of its foreign shareholders (participants). In particular, the recent tendency in the approach of the Kazakh tax authorities adopted in this regard.
Under a general rule, the dividends received by a foreign shareholder (participant) from a Kazakh company are subject to withholding tax at rate of 15%1 in Kazakhstan. However, such dividends may be exempted2 from withholding tax upon compliance with all following conditions:
" the foreign shareholder (participant) is not registered in a tax haven3 ;
" the foreign shareholder (participant) owns its share (participant interest) for more than 3 years as of the date of the dividends' accrual;
" the Kazakh company, which distributes the dividends, is not a subsoil user;
" no more than half of the assets of the Kazakh company, which distributes the dividends, are comprised of the property of the subsoil users.
In addition to the abovementioned conditions, withholding tax exemption is not applicable to the dividends distributed by the Kazakh companies which enjoy corporate income tax exemptions (for instance, non-profit organizations, participants of the special economic zones, investors implementing investment contracts etc.).
At the first glance, the last limitation might seem reasonable - if income of the Kazakh company has been already exempted from taxation, why should it be subject to other additional tax exemptions like the one in respect of the dividends? Moreover, the dividends are, generally, recognized as a part of the net income distributed by the Kazakh company among its participants (shareholders)4. However, neither the tax legislation, nor any other legislative act provide for a clear definition of the net income. Thus, generally, it is implied that the net income is the income which excludes the expenses on its generation as well as taxes and other obligatory payments5. Hence, the prohibition on application of the dividends tax exemption by the taxpayers enjoying the corporate income tax exemptions appears to be justified.
But what if the Kazakh company applies a special accounting procedure like, for instance, the one applicable to the long-term contracts? The long-term contracts are recognized as the contracts on manufacture, installation, construction which cannot be completed within a calendar year in which they were started6. The Kazakh companies implementing such contracts are allowed to determine their corporate income tax obligations on the basis of either actual or completion method. Under the actual method the taxable income is determined on the basis of income received in the reporting calendar year which at the same time shall not be less than the expenses incurred during that year. While under the completion method the taxable income is recognized as the total amount of income to be received under the contract multiplied by the percentage of the contract's completion. The percentage of the contract's completion is, in its turn, determined on the basis of the expenses of the previous and current calendar years divided by the total amount of expenses under the contract.
As evident from the above, the actual method does not limit the amount of income which the company is allowed to recognize as the taxable one and, thus, pay to the budget, while the latter method, on the contrary, allows the company to recognize only part of the received income as the taxable one. Respectively, if the Kazakh company, implementing the long-term contract, uses the completion method, there might be discrepancies between the amounts of actually received and declared income. For instance, the company signed a construction contract for 3 years amounting to USD 120 000 and intends to spent USD 100 000 on its implementation. This year the company completed 30% of the construction works and spent USD 30 000 on their performance. As a remuneration, it received USD 40 000 from the client. If the company used the general procedure, it would have declared the taxable income in the amount of USD 10 0007 and paid the corporate income tax in the amount of USD 2 0008 . However, since the company uses the completion method of accounting, it declares the taxable income in the amount of USD 6 0009 pays the corporate income tax in the amount of USD 1 20010 now, while recognizing USD 800 (the corporate income tax on the difference between the actually received income and the declared income) as the deferred tax payable in the following years.
In view of this, the question is - is it fair and reasonable to give such companies the same treatment as the companies, which do not pay corporate income tax at all, when the issue concerns the application of the dividends tax exemption?
Prior to this year one might give a negative answer to the last question as it seems that a deferred tax payment incentive cannot be equated to a full tax exemption, since in the first case the taxpayer is still obliged to transmit the full amount of the tax to the budget, even if in "installments", while in the latter case the taxpayer does not pay the tax at all.
But in the end of the last year the Parliament of Kazakhstan adopted a package of amendments to the tax legislation most of which came into effect this year. The amendment relevant to the case at hand is among this majority. Namely, this amendment envisages that the dividends tax exemption is applicable only in case such dividends were distributed from the income which was earlier levied with the corporate income tax11. Pursuant to the legislator's explanations this amendment is of purely editorial nature and was adopted in order to clarify the abovementioned uncertainty with the definition of the net income. It might really be one of the legislator's intentions, however, if seen under a different angle, this amendment poses a potential threat to the Kazakh companies implementing the long-term contracts, in particular, the ones applying the completion method.
Thus, recently the Kazakh companies, implementing the long-term contracts under the completion method, have already found themselves in the orbit of the disputes with the Kazakh tax authorities on the issue of the dividends tax exemption. The Kazakh tax authorities have challenged the application of the dividends tax exemption in this case on the ground that the Kazakh companies distributed the dividends from the income which is not recognized as the net income. They justified such conclusion on the basis of the definition of the net income provided in the previous tax law which is invalid at present. According to this law12, the net income is defined as the taxable income which excludes income tax accrued in its respect. Respectively, in opinion of the Kazakh tax authorities, if the dividends are distributed from the income, in which respect the corporate income tax was not accrued, such dividends cannot be exempted from taxation as they were distributed from the income which does not answer the definition of the net income.
Prior to adoption of the abovementioned amendment such claims of the Kazakh tax authorities did not seem to be sufficiently justified as application of the invalid legal acts is considered as a violation of the general legislative rules13. Hence, the taxpayers had a reliable defense in this regard. But it seems that now the Kazakh tax authorities might have a "sturdier" argument for their claims against the dividends tax exemption in this particular case. Thus, using the abovementioned example, if the Kazakh company now distributes the dividends from the income, in which respect the corporate income tax was partially paid and partially deferred, it will be quite difficult to prove that the full amount of these dividends is eligible for the dividends tax exemption. The Kazakh tax authorities might claim that this exemption may be applied only in respect of the amount of dividends, which was distributed from the income levied with the corporate income tax, while the rest amount of dividends, which was distributed from the income in which respect the corporate income tax was deferred, shall be taxed in a general order, i.e., without tax exemption.
Nevertheless, there is a hope that the latter scenario might not take place as not long ago the National Chamber of Entrepreneurs "Atameken", which is responsible for the business support in Kazakhstan, has expressed its objection against the abovementioned practice of the Kazakh tax authorities14. Moreover, this position was also supported by the Ministry of the national economy, which is responsible for the taxation policy in Kazakhstan. In particular, both the chamber and the ministry are of opinion that the for the purposes of the dividends tax exemption the net income shall be determined on the basis of the actually received income rather than the declared one. Hence, it is anticipated that the Kazakh tax authorities will refuse to proceed with their unjustified claims on this matter. However, it still remains to be seen. Hence, for now, the Kazakh companies, implementing the long-term contracts under the completion method, might want to exercise extra caution when distributing dividends among their foreign shareholders (participants).
Footnotes
1 Article 644.1.10 and Article 646.1.5 of the Code of the Republic of Kazakhstan dated 25 December 2017 No. 120-VI 'On taxes and other obligatory payments to the budget (Tax Code)' (hereinafter - the 'Kazakh Tax Code').
2 Article 645.9.4 of the Kazakh Tax Code.
3 The full list of the tax havens may be found in the Order of the Minister of finance of the Republic of Kazakhstan dated 8 February 2018 No. 142 'On approval of the tax havens list'.
4 Article 1.16 of the Kazakh Tax Code.
5 https://dialog.egov.kz/blogs/all-questions/522680.
6 Article 282 of the Kazakh Tax Code.
7 Income (USD 40 000) - expenses (USD 30 000) = USD 10 000.
8 Taxable income (USD 10 000) x corporate income tax (20%) = USD 2 000.
9 Total amount of income (USD 120 000) x percentage of completion (expenses of the previous and the current years (USD 0 + USD 30 000)/total amount of expenses (USD 100 000) - expenses (USD 30 000) = USD 6 000.
10 Taxable income (USD 6 000) x corporate income tax (20%) = USD 1 200.
11 Subparagraph 260 of paragraph 1 of Article 1 of the Law of the Republic of Kazakhstan dated 10 December 2020 No. 382- VI 'On amendments to the Code of the Republic of Kazakhstan "On taxes and other obligatory payments to the budget" (Tax Code) and the Law of the Republic of Kazakhstan "On enactment of the Code of the Republic of Kazakhstan "On taxes and other obligatory payments to the budget (Tax Code)"'.
12 Article 5.47 of the Law of the Republic of Kazakhstan dated 24 April 1995 No. 2235 'On taxes and other obligatory payments to the budget'.
13 Article 46.2.4 of the Law of the Republic of Kazakhstan dated 6 April 2016 No. 480-V 'On legislative acts'.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
