In the Loop

When opening a business in a new region, one of the most important things to do is study the region in detail, which involves understanding market conditions, applicable legislation, and the main practical aspects involved. In this article, we would like to provide a brief overview of Kazakhstan for investors looking at doing business there by describing the most commonly used business forms in Kazakhstan, touching on key tax questions, and also the repatriation of profit.

Forms of Doing Business in Kazakhstan

Kazakhstan law allows foreign investors to perform commercial activities through various forms of legal entities. Foreign investors in Kazakhstan frequently operate through limited liability partnerships (LLPs), or branches and representative offices of legal entities.

LLP

An LLP is a legal entity created in accordance with Kazakhstani law by either one or several partners. Partners are only liable for losses related to the LLP’s activities up to the value of their share. Unless an LLP operates in specific strategic sectors, such as communications, the mass media, insurance, or security, it may be 100% foreign owned. The LLP’s partners determine the value of charter capital, but it should be no less than the legal minimum, which is approximately $1,000 for medium and large businesses and approximately $0.5 for small businesses. It needs to be paid in full within one year from the state registration of an LLP. The LLP registration procedure has recently been significantly simplified and currently takes one or two days. An LLP is the most common organizational and legal form used to operate in Kazakhstan. An LLP is a legal entity created in Kazakhstan and will always be a Kazakhstani resident.

Branches & Representative Offices

A foreign investor may decide not to open a legal entity, that is, an LLP, in Kazakhstan, but operate through a branch or representative office of a foreign legal entity. A representative office is a separately located division of a legal entity that protects and represents the legal entity’s interests. In turn, a branch is a separately located division of a legal entity that performs a part of the functions of the legal entity, including those of a representative office. Branches and representative offices are not legal entities, but are part of the legal entity that created them, and are authorized to use the legal entity’s assets and operate on the basis of articles approved by it. Practice has shown that branches perform business operations and representative offices do not. In other words, branches perform commercial functions, while representative offices limit themselves to so-called preparatory and auxiliary activities.

Tax Environment

A number of taxes are charged in Kazakhstan, and in this article we concentrate on three of the main types foreign investors will come up against during their operations.

Corporate Income Tax (CIT)

Residents’ aggregate annual income (AAI) includes both income received in Kazakhstan and income received outside of Kazakhstan, for example the company’s global income. Non-residents’ income (branch income) includes only income from sources in Kazakhstan. Only expenses related to income-generating activities and supported by documentation are deductible. Kazakhstan is a document-oriented country, which is why supporting documentation is a key condition for being entitled to a deduction. The current CIT rate is 20%. CIT is calculated using the following formula:

CIT = (AAI — Expenses)*20%

Branches, in addition to CIT, also pay branch profit tax (BPT), which is the equivalent of withholding tax on the dividend payable by LLPs. The taxation of dividends is discussed in more detail in the Taxation of Dividends section. The standard BPT rate is 15%, but it may be reduced to 5% or 10% through the application of a double-taxation treaty. BPT is calculated using the following formula: BPT = (Taxable income — CIT)* 15%

We can better understand how the income of LLPs and branches is taxed from the example below, where:

AAI = 100

Expenses = 80

The specifics of the taxation of an LLP’s dividends and branch net income are reviewed in the Branch vs. LLP section.

Value-Added Tax (VAT)

Taxpayers pay VAT if their turnover exceeds roughly $300,000 per year.

VAT rates:

• 12% — applied against the sale of goods, work and services, and also the import of goods

• 0% — applied against the sale of goods for export and international transportation

The mechanism for paying VAT is as follows: after purchasing goods, work, or services, a company pays the supplier the cost of the goods, work, or services plus VAT. This VAT is called input VAT. When selling its own goods, work, or services, the LLP should charge VAT on its taxable turnover. This VAT is called output VAT. The difference between output VAT and input VAT is then due for payment.

Payroll Taxes

When operating in Kazakhstan, foreign investors should consider all taxes applicable to employee salaries. The table below shows the taxes applicable to employees, whether they are Kazakhstan nationals or foreign nationals with permanent residence in Kazakhstan.

* Obligatory pension contributions are made according to an agreed-upon calculation, but should be no more than $800 per month.

In addition to the above taxes, the following taxes and charges may also apply:

•Vehicles tax

• Land tax

• Property tax

• Gaming tax

• Excise duties

• Export rent tax

• Special payments and subsoil use taxes.

Specific Features:

Taxation of Dividends

By having an interest in a company operating in Kazakhstan, a founder/partner is entitled to receive dividends, which are a part of net income distributed among partners. Dividends payable to a non-resident are subject to 15% withholding tax at the source of payment. Kazakhstan domestic law provides LLP founders/partners with an exemption from the taxation of dividends if the following conditions are met simultaneously:

• Shares (interest) have been held for more than three years

• The entity paying the dividends is not a subsoil user

• The assets of a subsoil user account for less than 50% of the value of the assets of the entity paying dividends.

The exemption applies both to the individual and legal entity partners of an LLP. If the above conditions have not been met, then income tax rates may be reduced under a double-taxation treaty if a non-resident is the end recipient of income and a resident of a country with which Kazakhstan has entered into a treaty. To apply treaty provisions, the recipient of dividends should provide the entity paying the dividends with a duly prepared tax residence certificate. If an LLP in Kazakhstan pays dividends to a partner registered in a country with concessional taxation, the above mentioned exemption is not applied. The withholding tax rate in such a case is 20%. This rate cannot be reduced by a treaty since Kazakhstan does not sign any treaties with offshores.

Branch vs. LLP

If we compare an LLP with a branch, an LLP founder receives dividends, and in the case of a branch the founder may at any time make use of the branch’s funds as the branch and head office are one and the same entity. If the above conditions are met, dividends will be exempt. However, no BPT exemptions exist for branches, which puts the branch in a worse position compared to the LLP in terms of taxation. Moreover, BPT is paid annually, irrespective of whether the head office has used branch funds or not. Withholding tax on dividends is only paid if dividends are paid. A major plus that a branch has is the freedom to move funds in terms of currency control and the ability to conclude transactions in foreign currencies.

Treaties

Kazakhstan has entered into a relatively large number of double-taxation treaties. The current number is 45. Treaties help avoid double taxation either through an exemption or a tax offset. Consequently, opening an LLP or branch of an entity registered in a country with which Kazakhstan already has a treaty creates a number of advantages.

Countries with Concessional Taxation (Offshore Countries)

Kazakhstan’s attitude to countries with concessional taxation is relatively strict. All income payable from Kazakhstani companies/entities to any such country is subject to a 20% withholding tax at the source (except income from sale of goods). Above, we provide an example of the taxation of dividends payable to a country with concessional taxation. Likewise, transactions between Kazakhstan companies and companies registered in countries with concessional taxation are subject to strict banking and currency controls. Due to the above, working with countries with concessional taxation is not the most effective way of opening a company or structuring transactions.

CFC Rules

Another aspect that needs to be kept in mind when doing business in Kazakhstan is CFC rules. If an LLP in Kazakhstan holds 10% or more of a company registered in a country with concessional taxation, then according to the rules, its profit should be included in the LLP’s AAI in proportion to its interest in the company. Under Kazakhstani law, total profit should be supported by the non-resident in question’s financial statements. The rules were introduced into Kazakhstan law to prevent tax evasion through offshore companies.

Administration

An important element of any business is knowledge of legal administration, that is, how tax audits are carried out and how to appeal. In this section we take a brief look at the basic aspects of legal administration, in particular tax audit types and dispute procedures. Tax audits are divided into two types: scheduled and unscheduled. Scheduled audits are then divided into comprehensive and issue-related audits, according to tax audit plans. Audit plans are drafted once every half-year based on a risk assessment and management system and are approved by the authorities. In turn, unscheduled tax audits are carried out based on:

• Valid resolutions of the authorized body

• Procedures stipulated by criminal procedural law

Once an audit has been completed, an audit act is drawn up and notification is issued. If a taxpayer does not agree with the actions and/or notification of the tax authorities, it may appeal such actions and/or notification with a higher tax body, or in court.

Conclusions

Taxes are an integral part of any state, and consequently, knowledge of taxation rules and an ability to navigate the relevant law is a very important aspect for any business. All the comments made in this article are based on Kazakhstani law valid at the time the article was written. In this article, we have tried to shed light on the key aspects of Kazakhstan law that foreign investors need to consider when opening a business in Kazakhstan. Of course, it must be remembered that each and every case requires a detailed review of the specific situation, which involves studying associated documents, the provisions of treaties between Kazakhstan and other countries, market conditions, and the specific nature of each transaction.

If required, we can provide consultation on how to open and manage a business in Kazakhstan. Please send any questions you may have by email to: [email protected].