We hereby present to You a brief analysis of the existing tax legislation of the Republic of Kazakhstan, in particular on the issue of exemption from paying the income tax at the source of income.

In accordance with the legislation of the Republic of Kazakhstan, only non-residents, receiving the income from sources located in the Republic of Kazakhstan, being residents of the countries with which Kazakhstan has international agreements (Conventions) on exemption from double taxation, are eligible for exemption from paying taxes, including the income tax. As a rule, Conventions have direct provisions concerning the types of taxes to which their effect is applicable. In this connection, the procedures for application of the provisions of such Conventions are determined by the domestic tax legislation of the Republic of Kazakhstan.

In accordance to the Convention, the right for exemption from income taxes in the Republic of Kazakhstan in regards to the income earned from a Kazakhstani source may be received by a non-resident through the following procedure (depending on the type of income paid to the non-resident and the moment [date] of payment):

1. On condition that certain administrative procedures are followed prior to the fact of payment of income to the non-resident;
2. On condition that certain administrative procedures are followed following the fact of payment of income to the non-resident;
3. On condition that the provisions of the Conventions are directly applicable without administrative procedures.

Administrative Procedures Preceding Payment of Income to a Non-Resident.

The existing tax legislation makes provisions for cases when a non-resident, prior to receiving income, has the right to file a request on exemption from paying the income tax with the tax agencies in the place of tax registration of the resident payer of the income. If the stated procedure is successfully passed, the non-resident receives the right to apply the provisions of the Convention, namely, the right to receive the full income amount belonging to it on the basis of agreements made with the non-resident, without any withholdings/deductions.

Application of Administrative Procedures Following Payment of Income to a Non-Resident.

The present procedure stipulates that the resident withheld the income tax from the non-resident for Kazakhstani incomes when paying the income at the rates specified by the legislation. After such withholding, the amount of the withheld taxes may be paid in accordance with the following procedure:

1. The amount of the income tax withheld from the non-resident at the source of income is paid to the state budget. In this connection, the non-resident is granted the right for the return of the withheld tax amount provided administrative procedures are followed. In this case, administrative provisions stipulate filing an application/request for income tax return and other specified documents for submission to the tax agencies of Kazakhstan by the non-resident. The tax agencies, in their turn, having examined the submitted documents for possibility of applying the Conventions, make a decision as to lawfulness of applying the provisions of the Conventions and the possibility of return of the tax paid earlier at the source of income.
2. The amount of the income tax withheld from the resident at the source of income is paid by the way of crediting the tax amount to an escrow bank deposit account.

The institution of escrow bank deposit accounts is new to Kazakhstan, and is meant to improve tax administration and efficiency during examination of international taxation issues. Taking into consideration the stated innovation, we would like to discuss in greater detail the key moments of the institution of escrow bank deposit accounts. Thus, an escrow bank deposit agreement for the amount of the non-resident\’s income tax is concluded between the non-resident receiving the income, the taxation agent (resident of the Republic of Kazakhstan paying the income) and the resident bank. The bank deposit account is opened in national or foreign currency. In this connection, compliance with the deadlines for withholding/deduction and transfer of the stated tax amount is an important condition for opening an escrow bank deposit account. The deadlines are as follows: for the paid income amount — within 5 (five) working days following the end of the month in which the payment was made, while for the income amounts that have been charged but not paid during their accounting for payments — within 10 (ten) working days following the end of the specified deadline for filing the declaration on corporate income tax. Moreover, the stated Agreement is subject to mandatory registration with a taxation authority within 10 (ten) working days.

At the next stage, the non-resident shall file an appropriate packet of documents with the agency at the taxation agent\’s registration area, so that the taxation authorities may consider the possibility of exempting the non-resident from payment of taxes in Kazakhstan. The Tax Legislation provides an exhaustive list of the documents for submission.

After examination of the documents, the taxation authority informs the non-resident and the bank on the reached decision. We would like to draw Your attention to the fact that, in practice, documents are examined both by the local taxation authority, and by the Ministry of State Incomes. We would like to especially note that during the period of documents examination by the taxation authorities, the parties are not permitted to conduct any kind of transactions with the deposit sum until the taxation authority reaches a decision.

In the event a favorable decision is reached and an approved request for withheld income tax return is received, the bank shall grant to the non-resident the right to handle the sum placed on the escrow bank deposit account with the accrued bank interest.

In the event a unfavorable decision on the request is reached, the taxation authority shall send an advice of collection to the bank requesting to transfer the sum specified in the request/application with all the accrued bank interest to the state budget within 10 (ten) working days from the day of receipt by the non-resident of the refusal of the right to apply the provisions of the international agreement. The bank shall transfer the stated sum into the state budget within 1 (one) working day towards offset of the non-resident\’s debt before the state budget.

Direct Application of Provisions of Convention Without Administrative Procedures.

The income of the non-resident having the right to such tax exemption shall be exempt without the need to file a request for the right to apply the provisions of the international agreement in the following cases:

1. The income was received by the non-resident as a result of providing international transportation services, the Republic of Kazakhstan being one of its parties (destination sites);
2. The non-resident\’s income was paid in the form of dividends, interest, royalties;
3. The non-resident\’s income was obtained as a result of activities carried out in the Republic of Kazakhstan, and was received through its permanent institution/office in the Republic of Kazakhstan.

In this connection, the sole condition for direct application of the provisions of the international agreement is the following: submitting by the non-resident of the document confirming the non-resident\’s residency status to the taxation authority in the place of registration of the resident payer of the income. As a rule, any of the following may be used as such document: a Registration Certificate, a Statement from the trade register, or any other document that, in compliance with the legislation of the country in which the non-resident is registered, confirms the residency status of the non-resident. As a rule, the stated document should be legalized by diplomatic agencies or, in accordance with the Convention of Hague as of October 5, 1961 annulling the legalization requirements, should be certified by an Apostil.

The Appeal Procedure

In the event if You do not agree with the unfavorable decision of a taxation authority, You have the right to appeal to a higher authorized state taxation authority with a request for a re-examination of the document. In the event if the higher authorities ratify the opinion of the lower authority, You will then have the right to go to judicial authorities of the Republic of Kazakhstan to protect your rights and interests. In this connection, compliance with the established deadline for appealing the decision, which constitutes 10 (ten) days from the moment of receipt of a corresponding notification from the taxation authority, is a very important condition. The deadline for consideration of an appeal is also established for the taxation authorities, constituting 15 (fifteen) days from the moment of registration of the taxpayer\’s appeal. The distinctive innovation lies in the fact that the appeal of the decisions made by the taxation authorities suspends the implementation of the decision made by the taxation authorities until a higher authority or a court of law issue their decision.

The above stated procedure for exemption from payment of the income tax and other types of taxes takes a considerable amount of time, and we advise You to consult specialists beforehand on each specific case concerning the questions of applying the effects of international conventions.