Changes to the Tax Code approved by the Senate of the Parliament of RK

On 23 June 2022 the Senate of the Parliament of the Republic of Kazakhstan ("RK") adopted in two readings the draft law "On Amendments and additions to the Code of the RK "On Taxes and other mandatory Payments to the Budget" (Tax Code)" and to the Law "On the enactment of the Code of the Republic of Kazakhstan "On Taxes and other mandatory payments to the Budget" (Tax Code)". That legislation has been sent for signature to the President of the RK.

Some key amendments adopted by the Senate, which we would like to draw your attention to, are set out below:

1. Limitation of deductions of non-tangible services rendered by a related entity

As part of the package of amendments to the Tax Code, the Senate approved the limitation of deductions for corporate income tax ("CIT") purposes in respect of non-tangible services purchased from related non-resident entities restricted up to the total amount not exceeding 3 % of taxable income (new subparagraph 23 of Article 264 and new subparagraph 3-2 of paragraph 1 of Article 288 of the Tax Code ("TC").  

The following costs of acquiring from a related non-resident entity will fall under the restriction: management, consulting, auditing, design, legal, accounting, advocacy, advertising, marketing, franchising, financial (except for interest expenses), engineering, agency services, royalties, rights to use intellectual property objects.

For the purposes of this restriction, the special rules for determination of interrelation will be introduced.  Thus, interrelated parties are (1) persons specified in paragraph 2 of Article 1 of the Tax Code and (2) a legal entity that together with another legal entity is part of the same group of companies. Meantime, the tax authorities will be able to file a lawsuit in case a taxpayer does not accept the interrelation.

2. Cancellation of tax benefits for dividends

In order to discourage the withdrawal of capital from the country, the revision of benefits for dividends taxation was approved.  As a result, the following benefits will be cancelled:

• Exemption from CIT of all types of dividends received by resident legal entities;
• Exemption from personal income tax (“PIT”) of dividends received by resident and non-resident individuals and from withholding tax (“WHT”) of dividends received by non-resident legal entities when holding shares and participation interest of companies for more than three years and if such companies are not subsoil users;
• Exemption from PIT of dividends received by resident and non-resident individuals, and from WHT of dividends received by non-resident legal entities on securities listed on the official list of stock exchanges of the RK, if such securities are not traded on the stock exchange;
• Exemption from WHT of dividends received by non-resident legal entities when holding shares and participation interest of a subsurface user company for more than three years and if such a subsurface user carries out subsequent processing of at least 70% of the extracted mineral raw materials at its own production facilities in the territory of the RK.

As a result of the revision of the benefits for dividends taxation the following benefits will remain:

1. For all recipients: Exemption from CIT, PIT, WHT of dividends on securities that are on the date of accrual of such dividends in the official list of stock exchanges operating in the territory of the RK, provided that such securities were traded during the calendar year on the stock exchange in accordance with the criteria determined by the Government of the RK (new subparagraph 4 of Article 241.2, a new version of subparagraph 7 of Article 341.1, subparagraph 3 of Article 645.9 and subparagraph 3 of Article 654 of the TC).
2. For resident individuals: exemption from PIT of dividends received from a resident legal entity for a calendar year within 30,000 times the MCI, which is about 92 million tenge or 195 thousand US dollars as of the date of this bulletin (new version of subparagraph 8 of Article 341.1 of the TC).
3. For non-resident individuals and legal entities: A reduced rate of PIT and WHT in the amount of 10% instead of 15% on dividends in respect of which a full exemption was previously granted (new subparagraphs 4, 5 and 6 of Article 646 of the TC).

3. Amendments to the Mineral Extraction Tax ("MET")

As additional sources of revenue to the budget, it was proposed to increase the MET rates for all solid minerals: for exchange metals by 50%, for other solid minerals – by 30% of the MET rates that are currently effective. However, the package of amendments posted on the Parliament's website does not contain this amendment.  Instead, this document proposes several other amendments related to the MET:

1. If the profitability level for a deposit is 5% or less, for minerals extracted from such a deposit a subsoil user has the right to apply the MET rates established as of December 31, 2022.
2. The MET is calculated for the deposit at a rate of 0% within 60 months from the start of commercial production, while the following conditions are met: 

• commercial production of mineral raw materials at the deposit started after December 31, 2022;
• the level of the internal rate of return on the deposit does not exceed 15%;
• the subsurface use right of the deposit is not subject to alienation during the period of application of 0% MET, except for alienation in favor of a related entity.

4. Changes regarding the payment of value added tax (“VAT”) on imported goods by the offset method

The list of products to which the offset method applies will be expanded. To support agricultural producers, it is proposed to return pesticides, breeding animals of all kinds, artificial insemination equipment and live cattle again. 

An amendment has been proposed regarding the period during which imported goods, to which the offset method applied, cannot be sold.  The effective Tax Code provides for a statute of limitation period. The proposed amendments replace it to 5 years to establish a uniform approach to all taxpayers. 

Please take into account that these changes will most likely come into effect on January 1, 2023, subject to the signing of the draft law by the President of the RK.

Subject to the entry into force of these amendments, we will be happy to discuss their impact on your company and provide the necessary support in adapting to changes / revision of the business model in the Republic of Kazakhstan.

We will keep you informed of changes regarding these amendments to the Tax Code and the Law on Introduction.  The amendments discussed in this bulletin can be found on the website of the Parliament of the RK at the link: download (parlam.kz)

Authors:

• Roman Yurtayev
• Yekaterina Zhgutova
• Aliya Batyrbekova