INTANGIBLE SERVICES AND DIVIDENDS – PROPOSED CHANGES TO TAX CODE

Dear colleagues,

The beginning of 2022 in Kazakhstan started with considerable difficulties, with which the country coped with maximum professionalism and patience. The “January Events” pushed the country's leadership to new changes, which, in turn, gave rise to major reforms in all areas of the state structures.

The changes also touched the tax legislation, which implies significant changes to the Tax Code of the Republic of Kazakhstan. As a result, now, there is already a draft “On Amendments and Additions to the Tax Code of the Republic of Kazakhstan” (hereinafter - the “Draft of changes”), and it has already been sent for consideration and approval to the Mazhilis of the Republic of Kazakhstan. We believe this will most likely lead to the approval of these norms by the Government in the near future and taking them into force from 1 January 2023.

The new course is set taking into account the strategy of limitation of income repatriation from the country. For this purpose, amendments were included in the Draft of changes, including to Article 264 of the Tax Code, which stipulates an abolishment of the possibility to deduct for CIT purposes expenses for intangible services received by a taxpayer from a non-resident related party, including the following:

·????management, advisory, consulting, auditing, design, legal, accounting, lawyer, advertising, marketing, franchising, financial (excluding interest expenses), engineering, agency;

·????services for the provision and (or) processing of information;

·????royalties;

·????an access to informatisation objects and internet resources;

·????a maintenance;

·????a software update;

·????a transfer of rights to use objects of intellectual property.

?The above norm will apply to taxpayers-residents of the Republic of Kazakhstan, with the exception of second-tier banks and organizations engaged in certain types of banking operations.

Instead of the possibility to deduct such expenses, according to the Draft of changes, taxpayers will have a right to reduce a taxable income for CIT purposes on the above-mentioned services but in limits of 3% of a taxpayer's taxable income. Thus, the expenses of taxpayers connected with intangible services received from a non-resident related party will be treated as an adjustment to taxable income.

The State Revenue Committee considers such expenses of taxpayers as hidden dividends, and by this, it is planned to limit the usage of such contractual relationships by taxpayers.

Also, the Draft of changes contains the matters of tax exemption in Kazakhstan in relation to dividend payments, which, among other things, touched upon the provisions of Articles 645 and 654 of the Tax Code. As such, it is proposed to exclude a right for a full exemption of dividends, which, according to the current provisions of tax legislation, are exempted from withholding tax. Instead of such a benefit, the Draft of changes provides for additions to Article 646 of the Tax Code, according to which the mentioned dividends will become taxable in Kazakhstan at 10% withholding tax rate, subject to certain conditions provided for by the Tax Code are met.

The planned changes will significantly affect tax burden of our taxpayers, as well as affect the investment climate of the country, since companies will lose certain benefits in Kazakhstan that they currently enjoy.

In connection with the planned changes, we kindly recommend analyzing your existing agreements with non-resident related parties for the purpose of possible optimization and further tax planning. Our team is always at your disposal, in case of questions, or if assistance is needed both in resolving this specific task and in other tax matters.

Kind regards,

SCHNEIDER GROUP Tax Team?

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