On taxes and other obligatory payments to the budget (Tax Code)

Article 258. Deduction of expenses for geological study, exploration and preparatory works for the extraction of natural resources and other deductions of a subsoil user

1. Expenses actually incurred by a subsoil user, prior to the commencement of extraction after commercial discovery, for geological study, exploration, preparatory works for extraction of mineral resources, including expenses for appraisal, infrastructure development, general administrative expenses, the amount of paid signature bonus and commercial discovery bonus, expenses for acquisition and (or) creation of fixed assets and intangible assets, except for the assets specified in subparagraphs 2) - 6), 8) - 15) of paragraph 2 of Article 266 of this Code, and other expenses deductible in accordance with this Code, form a separate group of depreciable assets. It should be noted that the expenses indicated in this paragraph include:

1) expenses for acquiring and (or) creating fixed assets and intangible assets, except for the assets specified in subparagraphs 2) - 6), 8) - 15) of paragraph 2 of Article 266 of this Code. Such expenses comprise those to be included in the initial value of these assets in accordance with paragraph 2 of Article 268 of this Code, as well as subsequent expenses for such assets incurred in accordance with Article 272 of this Code;

2) other expenses.

In the cases provided for by this Code, the amount of expenses specified in this subparagraph that are included in a separate group of depreciable assets shall not exceed the established limits for classifying such expenses as deductibles for corporate income tax purposes.

2. Expenses referred to in paragraph 1 of this Article shall be deducted from the total annual income in the form of depreciation charges from the commencement of mining after the commercial discovery of minerals. The depreciation deductions amount is calculated by applying to the amount of accumulated expenses on the group of depreciable assets provided for by this paragraph, at the end of the taxable period, of the depreciation rate determined at the discretion of the subsoil user, but not higher than:

1) 37.5 percent - under a contract for exploration and production or production of hydrocarbons on complex offshore projects for the term provided for in paragraph 4 of Article 722-1 of this Code;

2) 25 percent - under other contracts for subsoil use, including under a contract for exploration and production or production of hydrocarbons on complex offshore projects after expiry of the term provided for in subparagraph 1) of this paragraph.

This procedure shall also apply in the following cases:

if the subsoil user operates under a production contract, concluded on the basis of the discovery and evaluation of a deposit under an exploration contract. The amount of accumulated expenses for a group of depreciable assets that has developed at the end of the last taxable period under such an exploration contract is deductible from the total annual income in the form of depreciation charges under the said mining contract;

allocation after January 1, 2018 in accordance with the legislation of the Republic of Kazakhstan on subsoil and subsoil use of a part of the exploration area by amending the exploration and production contract under which the allocation is made, and concluding a separate production contract for the allocated subsoil area. At the same time, the amount of accumulated expenses for the group of depreciable assets subject to transfer for the purpose of deductions under the production contract is determined by the share of direct expenses attributable to such allocated part of the exploration site in the total amount of direct expenses incurred by the subsoil user before the allocation under the relevant exploration contract.

In the event of subsoil use operations termination under a separate production contract or combined exploration and production contract, provided that the subsoil user terminated subsoil use operations after commencement of production after commercial discovery established by this article, the value balance of depreciable assets group, formed at the end of the last tax period, in which the subsoil use contract terminated, is subject to deduction, except for the case of the subsoil use contract termination in connection with the re-registration of the subsoil use right to the subsoil use license regime.

For the purposes of this Article, Articles 260 and 722-1 of this Code, mining after commercial discovery shall mean:

1) commencement of mining operations after the approval of reserves by a state body authorized for this purpose – under exploration contracts, as well as combined exploration and extraction ones with unapproved mineral reserves;

2) commencement of extraction of minerals after the conclusion of these contracts if such works are provided for by the work program of a contract and agreed upon with the authorized body for the study and use of subsoil resources - under contracts for combined exploration and extraction with respect to which mineral reserves are on the state balance sheet and approved by an expert opinion of the authorized state body, including reserves requiring additional geological study and geological and economic reassessment.

3. If a well is abandoned because of no commercial inflow of hydrocarbons while testing (hereinafter, for the purposes of this paragraph, a non-productive well), in accordance with the legislation of the Republic of Kazakhstan on subsurface and subsoil use, actual expenses incurred on the construction and abandonment of such a well, including VAT, are deductible in the following order:

1) expenses for construction and (or) abandonment of a non-productive well or part of such expenses incurred prior to the commencement of extraction after commercial discovery are subject to deduction in the manner specified in paragraph 1 of this article;

2) expenses for construction and (or) abandonment of a non-productive well or part of such expenses incurred after the commencement of extraction after commercial discovery are deductible in that taxable period in which such a well is abandoned.

In this case, expenses for construction and (or) abandonment of a non-productive well, incurred prior to the commencement of extraction after commercial discovery, are not excluded from a separate group of depreciable assets formed in accordance with paragraph 1 of this article.

4. Expenses specified in paragraph 1 of this article (except for accrued but unpaid interest on investment financing in accordance with the legislation of the Republic of Kazakhstan on subsoil and subsoil use) are reduced by the amount of:

1) income received during the period of geological study and preparatory works for extraction, except for income subject to exclusion from total annual income in accordance with Article 241 of this Code;

2) income received from the sale of minerals extracted prior to the commencement of extraction after commercial discovery;

3) income received from the realization of the subsoil use right or part thereof;

4) the value of assets accounted for in a separate group of depreciable assets formed in accordance with paragraph 1 of this article, when transferred as a contribution to the authorized capital. In this case, such a value is determined based on the value of the contribution specified in the constituent documents of a legal entity;

5) the value of assets transferred free of charge, accounted for in a separate group of depreciable assets formed in accordance with paragraph 1 of this article, specified in a certificate of transfer of the said assets, but not less than the book value of the said assets according to the accounting data as of the date of transfer.

At the same time, under contracts for the exploration and production or production of hydrocarbons on complex projects (with the exception of onshore gas projects), the amounts of expenses provided for in subparagraphs 4) and 5) of part one of this paragraph shall be determined taking into account the previously applied conditional coefficient established by paragraph 6 of this article .

5. The procedure specified in paragraph 1 of this article shall also apply to expenses for acquisition and (or) creation of intangible assets incurred by a taxpayer in connection with the acquisition of the subsoil use right.

6. Given the specifics provided for by paragraph 4 of Article 722-1 of this Code, the amount of expenses indicated in paragraph 1 of this Article in relation to a contract for the exploration and production or production of hydrocarbons on complex projects (with the exception of onshore gas projects) is determined by applying to such expenses the following conditional coefficient:

1.5 - under a contract for exploration and production or production of hydrocarbons on complex onshore projects;

2.0 - under a contract for exploration and production or production of hydrocarbons on complex offshore projects.

Footnote. Article 258 as amended by the Law of the Republic of Kazakhstan dated 10.12.2020 No. 382-VI (effective from 01.01.2021); dated 21.12.2022 No. 165-VII (shall be enforced from 01.01.2023).



Article 259. Features of deductions of expenses for geological study and preparatory works for the extraction of natural resources and other deductions of a subsoil user operating under a contract for exploration and (or) combined exploration and extraction of hydrocarbons

1. As to expenses specified in paragraph 1 of Article 258 of this Code, incurred by the subsoil user from January 1, 2018 under a contract for exploration and (or) combined exploration and extraction (during the exploration period), a subsoil user has the right to form a separate group of depreciable assets for the purposes of allocating them to deductibles under other contracts for extraction and (or) combined exploration and extraction (during the extraction period) of the subsoil user.

As to these expenses, the subsoil user calculates depreciation allowances by applying the depreciation rate determined at the discretion of the subsoil user, but not more than 25 percent, to the amount of accrued expenses for the group of depreciable assets provided for by this paragraph at the end of each taxable period.

In this case, these depreciation allowances are allocated to deductibles under other contracts for extraction and (or) combined exploration and extraction (during the extraction period) of this subsoil user through their distribution by the share of direct income attributable to each specific contract for extraction and (or) combined exploration and extraction (received in the extraction period) in the total amount of direct income received by the subsoil user under such contracts for a taxable period.

2. The right to form a separate group established by this article shall be granted in the taxable period in which first expenses specified in paragraph 1 of this article are incurred. In this case, if at the time of formation of such a separate group,the subsoil user does not have another contract for extraction and (or) combined exploration and extraction (during the extraction period), the right to form such a separate group is granted in the taxable period in which the contract for extraction was concluded and (or) the period of extraction under the contract for combined exploration and extraction began.

However, such a right is not subject to revision until the end of an exploration contract or a contract for combined exploration and extraction (prior to the extraction period).

3. Prior to the calculation of depreciation allowances for a taxable period, a separate group of depreciable assets, formed in accordance with this article, shall be reduced by the amount of income specified in paragraph 4 of Article 258 of this Code received under the relevant contract.

If the amount of such income exceeds the size of a separate group of depreciable assets, formed in accordance with this article, the excess amount reduces a separate group of depreciable assets, formed in accordance with Article 258 of this Code, under a relevant exploration contract or a contract for combined exploration and extraction (prior to the extraction period). Without a separate group of depreciable assets formed in accordance with Article 258 of this Code, the amount of such excess is included in total annual income.

4. A subsoil user is obliged to maintain separate tax accounting for a separate group of depreciable assets, formed in accordance with this article, and a separate group of depreciable assets, formed in accordance with Article 258 of this Code, within the framework of a relevant contract for exploration and (or) combined exploration and extraction (during the exploration period).

5. From the taxable period in which the period of extraction under a combined exploration and extraction contract began or in which an extraction contract is concluded on the basis of discovery and appraisal of a field as part of the exploration contract, the value of a separate group of depreciable assets, formed in accordance with this article, not earlier allocated to deductibles, is subject to deduction in accordance with the procedure specified in Article 258 of this Code within the framework of such a contract for extraction or combined exploration and extraction.

6. In case of termination of an exploration and (or) combined exploration and extraction contract (during the exploration period), the value of a separate group of depreciable assets, formed in accordance with this article, not allocated to deductibles, at the time of such termination is not deductible, except for the case established by paragraph 5 of this article.