Pillar 2 In Kazakhstan

On 04 July 2024 a draft of the Ruling of the Government of the Republic of Kazakhstan 'On signing of the Multilateral convention to facilitate the implementation of the pillar two subject to tax rule'¹('Pillar 2') was published.

Pillar 2 is one of the instruments of the Organisation for Economic Cooperation and Development (OECD) aimed at counteracting base erosion and profit shifting (BEPS). Pillar 2 was drafted in order to ensure that multinational corporations pay certain amount of tax in intra-group transactions in those jurisdictions where they operate.

Pillar 2 is applicable to the following types of income:

• interest;
• royalty
• fee for use or right to use product or service distribution rights (except for fees which represent 8.5% or less mark-up on costs on granting of such rights);
• insurance or re-insurance premiums (except for premiums which represent 8.5% or less markup on costs on rendering of such services);
• financial guarantees fees or other financing fees (except for fees which represent 8.5% or less mark-up on costs on rendering of such services);
• rental or any other payment for the use of or right to use industrial, commercial or scientific equipment (except for the ships used for transportation of passengers or cargo in international traffic on a bareboat charter basis as well as fees which represent 8.5% or less mark-up on costs on rendering of such services);
• any income received as a remuneration for rendering of services (except for fees which represent 8.5% or less mark-up on costs on rendering of such services);
• any income received from a related person except for the following cases:
  • a person's gross income does not exceed EUR 250 000, if his gross domestic product does not exceed EUR 40 million in the current tax period;
  • a person's gross income does not exceed EUR 1 million, if his gross domestic product exceeds EUR 40 million in the current tax period.

The above types of income shall be taxed in the income source state, if:

• such income is not subject to taxation or subject to taxation at the reduced rate in the income source state;
  and
• such income is subject to taxation at the rate of less than 9% in the residence state of the income recipient.

In this case the applicable tax rate in the income source state will be calculated as the difference between 9% and the tax rate applicable to the above types of income in the residence state of the income recipient (including the applicable incentives).

For instance, if an income paid by a Kazakh tax resident to an UAE tax resident is exempted from taxation in Kazakhstan and is not subject to taxation in the UAE, Kazakhstan is entitled to levy such income with 9% withholding tax (9% - 0%).

As an alternative (annex 2), the above types of income may be taxed in the residence state of the income recipient at the rate calculated on the basis of the financial statements under the following formula:

(Total amount of tax paid in the current year) : (Total amount of net income in the current year)

As an alternative (annex 3), the above types of income may be taxed in the residence state of the income recipient at the rate calculated on the basis of the financial statements under the following formula:

(Total amount of tax paid in the current and the two immediately preceding years) : (Total amount of net income in the current and the two immediately preceding years)

Pillar 2 will not be applicable to the following persons:

• receiving income from individuals;
• individuals;
• non-affiliated persons;
• recognised pension funds;
• non-commercial organisations;
• international organisations;
• other jurisdictions (political/local authority, central bank, agency, authorised body, institution, person or structure);
• a professionally managed entity or arrangement designed to invest funds obtained from unconnected persons primarily to generate investment income or to provide protection against an event, for the benefit of those persons provided that the entity, arrangement or its managers are regulated;
• an entity or arrangement the taxation of which achieves a single level of taxation either in the hands of the entity, arrangement or its interest holders (with at most one year of deferral) provided that the entity or arrangement is widely held and either:
  • holds predominantly immovable property;
    or
  • the entity, arrangement or its interest holders (excluding persons described in this paragraph) are subjectto a tax rate of atleast 9% in the residence state ofthe entity or arrangement;
• an entity or arrangement that is wholly or almost wholly owned (directly or indirectly), established or created by one or more persons, entities or arrangements referred to above (except for individuals, non-affiliates and recognised pension funds):
  • - that is established and operated exclusively or almost exclusively to hold assets, manage or invest funds, or that only carries out ancillary activities;
    and
  • that is established and operated exclusively or almost exclusively to conduct above activities or to conduct related investment activities.
• residents of jurisdictions not recognised as economy with high income on the basis of the World Bank Atlas method as of 1 July 2020, but recognised as such within 5 consecutive years after Pillar 2 effective date (this exemption lasts for 5 years).

Footnote

1. https://legalacts.egov.kz/npa/view?id=15111156

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.