Tax Law Group
Arystanov Eldar, Lawyer, LLM from the European Law Department, Kazakh Humanitarian Law University
Arystanov Eldar, Lawyer, LLM from the European Law Department, Kazakh Humanitarian Law University
The investment tax preferences under the New Tax Code of the Republic of Kazakhstan
On the 1st of January 2009 by the Law of the RK ‘About the enactment of the Code of the RK ‘On taxes and other obligatory payments to the budget’ the New Tax Code that considers an essential reformation of the current system of taxation will come into effect. Notably, there are the principle of the directly applicable law, the reduction of the tax charges for non-raw sectors with a simultaneous increase of the tax return from the extractive sector of Kazakhstani economy and many other changes.
At the same time, the New Tax Code is also remarkable by an essential reduction of the investment tax preferences that will certainly affect on potential investors. What are changes for foreign and local investors of the capital? You may read about them in our article.
Here is the brief prehistory of the investment tax preferences in the Republic of Kazakhstan.
The investment policy of the Nineteenths:
At the period of Kazakhstan development as a new independent country that intends to integrate into the world market community, an attraction of the capital was one of the priority tasks of the country. For these purposes the special state program developing the Kazakhstani investment law was brought into effect.
In this regard, on the 27th of December 1994 the Law of the RK ‘About Foreign Investments’ was enacted which on the 23rd of March 1995 came into effect. The law defined the main legal and economic basis for attraction of the foreign investments into Kazakhstan, provided the state guarantees of the foreign investments protection and organizational forms of their realization. There was also the procedure of disputes solving with a participation of the foreign investors. That law would exist till 8th of January 2003, when the new Law of the RK ‘About Investments’ (hereinafter – the ‘Investment Law’) was enacted.
On the 28th of February 1997 the Law of the RK ‘About the State Support of the Direct Investments’ was approved. The law prescribes the basic stimulation measures for realizing investment projects, as well as conditions and procedures of conclusion and termination of the investment contracts.
Besides, on the 5th of April 1997 the Decree of President of the RK ‘About approvement of the system of preferences and the procedure of their granting when investment contracts are concluded’ established a statement the main purpose of which was regulation the procedure of investment preferences granting by the State Committee of the RK on investments (hereinafter – the “Investment Committee”). That decree became the legal ground of the system of investment preferences in Kazakhstan.
Later, on the 7th of August 1998 Investment Committee by its decision №131 ‘About development the procedure of preferences granting’ established the maximum value of the direct investments into the fixed assets (10 million US dollars). The decision confirmed:
1. The List of the most important manufactures as an object of attraction of the direct domestic and foreign investments for the period till 2000.
2. The Regulation ‘About sizes and procedures of standard tax preferences granting’.
3. The Application for the standard tax privileges.
However, in spite of a sufficiently developed normative legal ground, there were still questions that required more careful analysis and study. Particularly, the investors were troubled by incompleteness and instability of normative-legal norms, the book accounting and the reporting system, a high level of the taxation and imperfection of the tax system of Kazakhstan. The investors also complained on a high level corruption and crime.
In view of the exceptional importance of the investment into the national economy, the state had reacted in time by reforming the system of book accounting and taxation in the Republic of Kazakhstan.
The reformation:
The reformation of the book accounting is notable by cancellation of the old President's Decree and enactment of Regulation about the book keeping and reporting dated December 26, 1995, as well as the new General Plan of Accounts of the economical-financial activity. The National Commission of Book keeping was replaced by the Department of Book Keeping and Auditing of the Ministry of Finance of the RK which from the first days of its activity started the development of the new methodical recommendations regarding the composition of a financial documentation and accounting of financial investments.
Investors’ complaints in respect of the tax system were bridged over through the adoption of the Tax Code of the Republic of Kazakhstan dated June 12, 2001 №209-II (hereinafter – the ‘Tax Code of 2001’), which in its section 5 ‘Investment Tax Preferences’ granted to investors essential privileges on the Corporate Income Tax, Land Tax and Property Tax.
Please note, that previous Law of the RK ‘About taxes and other obligatory payments to the budget’ dated April 24, 1995 of №2235 stipulated similar tax rates, both for residents and non-residents, and investors did not have the preferential regime of taxation.
Consequently, having presented a short excursion through the prehistory of the Kazakhstani investment preferences, we are referring to the norms of the Tax Code of the 2001, in the part of the investment tax preferences of the Republic of Kazakhstan acting till the January 1, 2009.
The system of investment tax preferences dated June 12, 2001 – January 1, 2009:
As we mentioned above, the investment tax preferences are given in Chapter 5 of the Tax Code of 2001.
According to Article 138 of the Tax Code of 2001 the investment tax preferences shall be regarded as an exemption from corporate income tax or the provision of a right to additional deductions from gross annual income for those legal entity taxpayers realizing an investment project to create new production facilities, or expand or renew existing facilities, and shall also be an exemption for these taxpayers from paying property tax on newly commissioned fixed assets within an investment project aimed at creating new production facilities, or expanding or renewing existing facilities, and likewise an exemption from paying land tax on land used for the realization of an investment project..
The volume and terms of tax preferences shall be defined in each specific case based on the table that is approved by the order of Government of the Republic of Kazakhstan and depending on the amount of investments. Particularly according to point 2 of Article 14 of the Investment Law: ’Government of the Republic of Kazakhstan for each priority type of activity approves maximum volumes and periods of the investment tax preferences, which are granted by Investment Committee’.
In this regard on the 8th of May 2003 Government of the Republic of Kazakhstan issued Resolution ‘About some questions of realization of the Law of the Republic of Kazakhstan ‘About investments’ (further –‘Resolution’) with the table on maximum volume and duration of the tax preferences.
In such cases preferences granted on the corporate income tax had the specific for companies which had been created exceptionally for realizing an investment activity and for companies investing in expansion and renovation of existing facilities.
Notably, according to point 3 of Article139 of the Tax Code of 2001 corporate income tax preferences for newly created taxpayers performing activities solely within the context of an investment project(s) to create new production facilities shall give entities the right to reduce corporate income tax calculated in accordance with article 125 of this Code by 100%. For the purposes of this article, newly created taxpayers shall be recognized a those taxpayers that have undergone state registration during the 12 calendar months before an application is filed to provide investment preferences.
According to point 4 of article 139 of the Tax Code of 2001 corporate income tax preferences for taxpayers implementing an investment project to expand and renew current production facilities, and who do not meet the conditions of point 3 of this article, shall give entities the right to deduct the value of fixed assets commissioned within the context of the investment project from aggregate annual income, except for non-depreciable fixed assets referred to subpoints 1)-8) of point 1 of article 107 of this Code, in equal shares depending on the period of validity of the concessions.
Resuming the aforementioned information, we can see the following key advantages which were available for investors under the tax legislation acted till January 1, 2008:
1. the right to reduce an amount of the accrued corporate income tax by 100 % (for newly created companies realizing an investment project), as well the right to deduct from the aggregate annual income the value of fixed assets commissioned within the context of the investment project, in equal shares depending on the period of validity of the preferences (for acting companies).
2. Exemption from land tax.
3. Exemption from property tax.
Such preferences were essential support for ‘happy owners of the capital’ who decided to invest in development of the priority economical sectors of Kazakhstan. For this reason the last month prior to enactment of New Tax Code (i.e. in December) Investment Committee was overloaded by application forms of investors who wanted to catch on outgoing investment tax preferences.
The investment tax preferences under the New Tax Code of the RK:
According to the New Tax Code there is only one type of the investment tax preference such as the right of resident legal entities of Kazakhstan to deduct the value of buildings and constructions of manufactory meaning, machines and equipment intended to use within the context of the investment projects on the priority sectors of Kazakhstani economical activity (Article 123 of the New Tax Code).
According to point 1 of Article 125 of the New Tax Code the corporate income tax preferences shall give the right to deduct the initial value of buildings and constructions of manufactory meaning, including machines and equipment when manufacturing works are being performed by equal ratio within the three years or at once.
The right of deductions shall be given only within types of activity under Section D of the General Classifier of Types of Economic Activity, approved by the competent state body on standardization.
New Tax Code does not include the tax preferences as 100% exemption from corporate income tax, land tax and property tax.
As per the investment tax preferences are granted under investment contracts concluded before the 1st January of 2009, they shall be effective till the date of their expiry.
At the same time, according to the President of the RK an abolishment of considerable part of the investment tax preferences shall be compensated by the reduced rate of the corporate income tax. So, according to point 1 of Article 147 of the New Tax Code the taxable income of a taxpayer, that has been reduced to amount of incomes and expenses provided by Article 133 of the New Tax Code (‘Reduction of the Taxable Income’) as well as losses, transferred in accordance with the procedures established by Article 137 of the New Tax Code (‘Transfer of Losses’) shall be subject to taxation at the rate of 15 percent, if otherwise is not established by point 2 of current article.
However we should note that 15% rate shall be applicable only since the 1st of January 2011. Notably, according to Article 4 of Law of the RK ‘About entering into force the Code of the Republic of Kazakhstan ‘About taxes and other obligatory payments in the budget’: ‘At the period of suspension an action of point 1 of Article 147 of the Code of the Republic of Kazakhstan ‘About taxes and other obligatory payments in the budget’ in respect of the rate of the corporate income tax, the following tax rates shall be applicable:
1) from January 1, 2009 till January 1, 2010 - 20 percent;
2) from January 1, 2010 till January 1, 2011 – 17,5 percent’.
Henceforth investors who decided to invest their capitals in the Republic of Kazakhstan after the 1st of January 2009 shall have the right of deduction for the period up to 3 years and we will be able to apply generally established reduced corporate income tax rate (20% in 2009, 17,5% in 2010 and 15% in 2011).
Thus in the light of the last changes the profitability of the capital investment in Kazakhstan shall be clarified after relevant financial analysis of a certain investment project. But there is no doubt that the time of large investment tax preferences is running down.
Eldar Arystanov,
Lawyer of Tax Department at GRATA Law Firm,
LLM from the European Law Department, Kazakh Humanitarian Law University
On the 1st of January 2009 by the Law of the RK ‘About the enactment of the Code of the RK ‘On taxes and other obligatory payments to the budget’ the New Tax Code that considers an essential reformation of the current system of taxation will come into effect. Notably, there are the principle of the directly applicable law, the reduction of the tax charges for non-raw sectors with a simultaneous increase of the tax return from the extractive sector of Kazakhstani economy and many other changes.
At the same time, the New Tax Code is also remarkable by an essential reduction of the investment tax preferences that will certainly affect on potential investors. What are changes for foreign and local investors of the capital? You may read about them in our article.
Here is the brief prehistory of the investment tax preferences in the Republic of Kazakhstan.
The investment policy of the Nineteenths:
At the period of Kazakhstan development as a new independent country that intends to integrate into the world market community, an attraction of the capital was one of the priority tasks of the country. For these purposes the special state program developing the Kazakhstani investment law was brought into effect.
In this regard, on the 27th of December 1994 the Law of the RK ‘About Foreign Investments’ was enacted which on the 23rd of March 1995 came into effect. The law defined the main legal and economic basis for attraction of the foreign investments into Kazakhstan, provided the state guarantees of the foreign investments protection and organizational forms of their realization. There was also the procedure of disputes solving with a participation of the foreign investors. That law would exist till 8th of January 2003, when the new Law of the RK ‘About Investments’ (hereinafter – the ‘Investment Law’) was enacted.
On the 28th of February 1997 the Law of the RK ‘About the State Support of the Direct Investments’ was approved. The law prescribes the basic stimulation measures for realizing investment projects, as well as conditions and procedures of conclusion and termination of the investment contracts.
Besides, on the 5th of April 1997 the Decree of President of the RK ‘About approvement of the system of preferences and the procedure of their granting when investment contracts are concluded’ established a statement the main purpose of which was regulation the procedure of investment preferences granting by the State Committee of the RK on investments (hereinafter – the “Investment Committee”). That decree became the legal ground of the system of investment preferences in Kazakhstan.
Later, on the 7th of August 1998 Investment Committee by its decision №131 ‘About development the procedure of preferences granting’ established the maximum value of the direct investments into the fixed assets (10 million US dollars). The decision confirmed:
1. The List of the most important manufactures as an object of attraction of the direct domestic and foreign investments for the period till 2000.
2. The Regulation ‘About sizes and procedures of standard tax preferences granting’.
3. The Application for the standard tax privileges.
However, in spite of a sufficiently developed normative legal ground, there were still questions that required more careful analysis and study. Particularly, the investors were troubled by incompleteness and instability of normative-legal norms, the book accounting and the reporting system, a high level of the taxation and imperfection of the tax system of Kazakhstan. The investors also complained on a high level corruption and crime.
In view of the exceptional importance of the investment into the national economy, the state had reacted in time by reforming the system of book accounting and taxation in the Republic of Kazakhstan.
The reformation:
The reformation of the book accounting is notable by cancellation of the old President's Decree and enactment of Regulation about the book keeping and reporting dated December 26, 1995, as well as the new General Plan of Accounts of the economical-financial activity. The National Commission of Book keeping was replaced by the Department of Book Keeping and Auditing of the Ministry of Finance of the RK which from the first days of its activity started the development of the new methodical recommendations regarding the composition of a financial documentation and accounting of financial investments.
Investors’ complaints in respect of the tax system were bridged over through the adoption of the Tax Code of the Republic of Kazakhstan dated June 12, 2001 №209-II (hereinafter – the ‘Tax Code of 2001’), which in its section 5 ‘Investment Tax Preferences’ granted to investors essential privileges on the Corporate Income Tax, Land Tax and Property Tax.
Please note, that previous Law of the RK ‘About taxes and other obligatory payments to the budget’ dated April 24, 1995 of №2235 stipulated similar tax rates, both for residents and non-residents, and investors did not have the preferential regime of taxation.
Consequently, having presented a short excursion through the prehistory of the Kazakhstani investment preferences, we are referring to the norms of the Tax Code of the 2001, in the part of the investment tax preferences of the Republic of Kazakhstan acting till the January 1, 2009.
The system of investment tax preferences dated June 12, 2001 – January 1, 2009:
As we mentioned above, the investment tax preferences are given in Chapter 5 of the Tax Code of 2001.
According to Article 138 of the Tax Code of 2001 the investment tax preferences shall be regarded as an exemption from corporate income tax or the provision of a right to additional deductions from gross annual income for those legal entity taxpayers realizing an investment project to create new production facilities, or expand or renew existing facilities, and shall also be an exemption for these taxpayers from paying property tax on newly commissioned fixed assets within an investment project aimed at creating new production facilities, or expanding or renewing existing facilities, and likewise an exemption from paying land tax on land used for the realization of an investment project..
The volume and terms of tax preferences shall be defined in each specific case based on the table that is approved by the order of Government of the Republic of Kazakhstan and depending on the amount of investments. Particularly according to point 2 of Article 14 of the Investment Law: ’Government of the Republic of Kazakhstan for each priority type of activity approves maximum volumes and periods of the investment tax preferences, which are granted by Investment Committee’.
In this regard on the 8th of May 2003 Government of the Republic of Kazakhstan issued Resolution ‘About some questions of realization of the Law of the Republic of Kazakhstan ‘About investments’ (further –‘Resolution’) with the table on maximum volume and duration of the tax preferences.
In such cases preferences granted on the corporate income tax had the specific for companies which had been created exceptionally for realizing an investment activity and for companies investing in expansion and renovation of existing facilities.
Notably, according to point 3 of Article139 of the Tax Code of 2001 corporate income tax preferences for newly created taxpayers performing activities solely within the context of an investment project(s) to create new production facilities shall give entities the right to reduce corporate income tax calculated in accordance with article 125 of this Code by 100%. For the purposes of this article, newly created taxpayers shall be recognized a those taxpayers that have undergone state registration during the 12 calendar months before an application is filed to provide investment preferences.
According to point 4 of article 139 of the Tax Code of 2001 corporate income tax preferences for taxpayers implementing an investment project to expand and renew current production facilities, and who do not meet the conditions of point 3 of this article, shall give entities the right to deduct the value of fixed assets commissioned within the context of the investment project from aggregate annual income, except for non-depreciable fixed assets referred to subpoints 1)-8) of point 1 of article 107 of this Code, in equal shares depending on the period of validity of the concessions.
Resuming the aforementioned information, we can see the following key advantages which were available for investors under the tax legislation acted till January 1, 2008:
1. the right to reduce an amount of the accrued corporate income tax by 100 % (for newly created companies realizing an investment project), as well the right to deduct from the aggregate annual income the value of fixed assets commissioned within the context of the investment project, in equal shares depending on the period of validity of the preferences (for acting companies).
2. Exemption from land tax.
3. Exemption from property tax.
Such preferences were essential support for ‘happy owners of the capital’ who decided to invest in development of the priority economical sectors of Kazakhstan. For this reason the last month prior to enactment of New Tax Code (i.e. in December) Investment Committee was overloaded by application forms of investors who wanted to catch on outgoing investment tax preferences.
The investment tax preferences under the New Tax Code of the RK:
According to the New Tax Code there is only one type of the investment tax preference such as the right of resident legal entities of Kazakhstan to deduct the value of buildings and constructions of manufactory meaning, machines and equipment intended to use within the context of the investment projects on the priority sectors of Kazakhstani economical activity (Article 123 of the New Tax Code).
According to point 1 of Article 125 of the New Tax Code the corporate income tax preferences shall give the right to deduct the initial value of buildings and constructions of manufactory meaning, including machines and equipment when manufacturing works are being performed by equal ratio within the three years or at once.
The right of deductions shall be given only within types of activity under Section D of the General Classifier of Types of Economic Activity, approved by the competent state body on standardization.
New Tax Code does not include the tax preferences as 100% exemption from corporate income tax, land tax and property tax.
As per the investment tax preferences are granted under investment contracts concluded before the 1st January of 2009, they shall be effective till the date of their expiry.
At the same time, according to the President of the RK an abolishment of considerable part of the investment tax preferences shall be compensated by the reduced rate of the corporate income tax. So, according to point 1 of Article 147 of the New Tax Code the taxable income of a taxpayer, that has been reduced to amount of incomes and expenses provided by Article 133 of the New Tax Code (‘Reduction of the Taxable Income’) as well as losses, transferred in accordance with the procedures established by Article 137 of the New Tax Code (‘Transfer of Losses’) shall be subject to taxation at the rate of 15 percent, if otherwise is not established by point 2 of current article.
However we should note that 15% rate shall be applicable only since the 1st of January 2011. Notably, according to Article 4 of Law of the RK ‘About entering into force the Code of the Republic of Kazakhstan ‘About taxes and other obligatory payments in the budget’: ‘At the period of suspension an action of point 1 of Article 147 of the Code of the Republic of Kazakhstan ‘About taxes and other obligatory payments in the budget’ in respect of the rate of the corporate income tax, the following tax rates shall be applicable:
1) from January 1, 2009 till January 1, 2010 - 20 percent;
2) from January 1, 2010 till January 1, 2011 – 17,5 percent’.
Henceforth investors who decided to invest their capitals in the Republic of Kazakhstan after the 1st of January 2009 shall have the right of deduction for the period up to 3 years and we will be able to apply generally established reduced corporate income tax rate (20% in 2009, 17,5% in 2010 and 15% in 2011).
Thus in the light of the last changes the profitability of the capital investment in Kazakhstan shall be clarified after relevant financial analysis of a certain investment project. But there is no doubt that the time of large investment tax preferences is running down.
Eldar Arystanov,
Lawyer of Tax Department at GRATA Law Firm,
LLM from the European Law Department, Kazakh Humanitarian Law University
