In international tax planning for Kazakhstani companies with foreign participation, the correct application of reduced dividend tax rates under international double taxation avoidance agreements becomes particularly relevant. Let's examine key aspects of this issue using the example of a Kazakhstani LLP with a parent company in a European jurisdiction.
Legal Grounds for Applying Reduced Rates
Within international tax policy frameworks, states strive to ensure taxation of cross-border operations within their own jurisdictions. However, recognizing the negative impact of double taxation on economic cooperation development, countries conclude bilateral tax agreements.
It should be noted that such agreements are concluded on a long-term basis and establish general principles providing states with the right, not obligation, to apply certain tax measures.
For example, when agreements state "dividends may also be taxed," this means the convention provides for the possibility (but not obligation) for countries to apply reduced tax rates of 5% for dividends provided ownership exceeds 15%.
Interaction Between National Legislation and International Agreements
International agreements don't limit Kazakhstan's government's right to establish additional tax benefits in national legislation. While the general dividend rate under Tax Code Article 646 is 15%, since 2023 an additional reduced 10% rate has been introduced when meeting the following conditions:
- Non-residents must not be registered in preferential tax countries
- On dividend accrual dates, non-residents must own participation shares for over 3 years
- Dividend-paying companies must not be subsoil users
- In dividend-paying company assets, subsoil use-related property share must not exceed 50%
This doesn't limit parent companies' rights to apply even more favorable rates under bilateral tax conventions. For example, corporate income tax rates may be 5% provided parent companies own at least 15% participation in Kazakhstani LLPs.
Legal Consequences of Applying MLI Multilateral Convention
Since 2021, Kazakhstan applies provisions of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). Consequently, bilateral tax agreements are subject to the Principal Purpose Test (PPT test).
The PPT test essence involves assessing the main purpose of transactions or operations. If the main purpose is obtaining tax benefits under international agreements, such benefits may be denied.
Companies must therefore prepare defensive files with documents confirming business structure economic justification and absence of artificial international agreement use goals for tax reduction.
Forming Defensive Files
Defensive file formation requires deep tax legislation knowledge and current enforcement practice. Document selection and proper formatting for reduced tax rate application justification is a complex task requiring individual approaches in each specific case.
For professional consultation on defensive file formation and complete lists of necessary documents plus their proper formatting, we recommend contacting law firm GK and Partners, specializing in international taxation with extensive experience successfully supporting such procedures.
Specifics of Applying Tax Code Article 667
Since 2023, Tax Code Article 667, paragraph 1 has been supplemented with norms whereby when paying dividends to non-resident related parties who are residents of states whose bilateral tax conventions include MLI changes, tax agents may apply preferential rates while simultaneously meeting the following conditions:
- Income is included in non-resident taxable bases without rights to exclusion, reduction, or paid tax refunds
- Nominal tax rates in foreign states are at least 15%
Consider that many European jurisdictions apply dividend taxation exemption regimes for parent companies receiving dividends from subsidiaries, provided they own certain subsidiary share percentages (e.g., at least 10%). Tax rates may vary depending on various factors.
When parent companies own significant stakes in Kazakhstani LLPs and received dividends are exempted from taxation in parent company residence countries, Kazakhstani LLPs objectively cannot confirm compliance with new conditions established by Tax Code Article 667.
Alternative Tax Convention Application Mechanism
When Kazakhstani LLPs lack legal grounds to independently apply reduced tax rates under bilateral conventions, consider alternative mechanisms:
- LLPs withhold source taxes at 10% rates (if conditions for applying such rates under national legislation are met)
- Parent companies apply to Kazakhstani tax authorities for overpaid income tax refunds equaling differences between withheld taxes and taxes calculated at convention rates
Refund procedures are regulated by Tax Code Articles 672-674. Consider that based on tax authority enforcement practice, initial tax refund applications will likely be rejected. This requires appealing refusals to higher authorized bodies and courts.
Conclusion
Applying reduced dividend tax rates is an important tax planning element for Kazakhstani companies with foreign participation. However, given constantly changing tax legislation and tightening international tax evasion prevention measures, companies must pay increased attention to documentary confirmation of their activity and business structure economic justification.
National legislation provisions on international agreement application procedures conceptually don't contradict bilateral tax conventions. Contracting states, having agreed on tax rate reductions, retain sovereign rights to determine preferential rate application procedures in national legislation. In some cases, national legislation may limit tax agent authority for independent international agreement application, establishing mandatory procedures for non-residents to approach tax authorities for agreement provision implementation.
Gabitzhan Kudaibergen, Managing Partner at GK and Partners
