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

Article 294. Basic definitions used in this chapter

1. A controlled foreign company is a person meeting all of the following requirements:

1) such a person is one of the following:

a non-resident legal entity;

another foreign form of entrepreneurial activity organization without forming a legal entity (hereinafter referred to as another form of organization);

excepting a non-resident legal entity and (or) another form of organization registered or incorporated or otherwise established in a foreign state with which an international treaty is in effect regulating issues of avoiding double taxation and preventing tax evasion, provided that the nominal income tax rate in such a foreign state is more than 75 percent of the corporate income tax rate in the Republic of Kazakhstan, provided for in paragraph 1 of Article 313 of this Code.

For the purpose of applying this subparagraph, the list of countries with which an international treaty is in effect regulating avoidance of double taxation and tax evasion prevention, the nominal income tax rate of which is more than 75 percent of the corporate income tax rate in the Republic of Kazakhstan, shall be approved by the authorized body no later than December 31 of the year following the reporting period;

2) as of December 31 of the reporting period, such person shall meet one of the following conditions:

25 or more percent of participatory interest (voting shares) in the person directly or indirectly, or constructively belong to a legal entity or an individual who is a resident of the Republic of Kazakhstan (hereinafter referred to as the resident, for the purposes of this chapter);

a person is connected with a resident through control (in case the resident has direct or indirect, or constructive control over the person);

3) such a person meets one of the following requirements:

the effective income tax rate of a non-resident legal entity or another form of administration, determined in accordance with subparagraph 2) of paragraph 4 of this article, is less than 10 percent;

a non-resident legal entity or another form of organization or whose constituent document (document on the establishment) or a participant responsible for keeping records of income and expenses or managing assets for this other form of organization is registered in a state with preferential taxation.

For the purposes of defining a controlled foreign company, the term “control” is defined in accordance with subparagraph 3) of paragraph 4 of this article.

2. A permanent establishment of a controlled foreign company is a structural unit or permanent establishment that meets one of the following requirements:

1) it is registered in a state with preferential taxation;

2) it is registered in a foreign state and for which the effective income tax rate, determined in accordance with subparagraph 2) of paragraph 4 of this article, is less than 10 percent.

In this case, such a structural unit or permanent establishment must be created by a person meeting all the eligibility criteria of subparagraphs 1) and 2) of part one of paragraph 1 of this article.

The eligibility criteria referred to in paragraph 1 of this article and parts one and two of this paragraph shall not apply to controlled foreign companies and permanent establishments of controlled foreign companies that meet the following requirements:

1) the controlled foreign company or the permanent establishment of the controlled foreign company is not registered in countries with preferential taxation;

2) the total income amount of each controlled foreign company or permanent establishment of a controlled foreign company is less than 150,495 times the monthly calculation index established by the law on the republican budget and effective on the first day of the tax period.

If a person that meets the requirements specified in paragraph 1 of this article or parts one and two of this paragraph, at the end of the relevant period in the approved separate non-consolidated financial statements, has a financial loss, then such a person shall not be recognized as a controlled foreign company and (or) a permanent establishment of a controlled foreign company.

2. A permanent establishment of a controlled foreign company is a structural unit or permanent establishment that meets one of the following requirements:

1) it is registered in a state with preferential taxation;

2) it is registered in a foreign state and for which the effective income tax rate, determined in accordance with subparagraph 2) of paragraph 4 of this article, is less than 10 percent.

In this case, such a structural unit or permanent establishment must be created by a person meeting all the eligibility criteria of subparagraphs 1) and 2) of part one of paragraph 1 of this article.

The eligibility criteria referred to in paragraph 1 of this article and parts one and two of this paragraph shall not apply to controlled foreign companies and permanent establishments of controlled foreign companies that meet the following requirements:

1) the controlled foreign company or the permanent establishment of the controlled foreign company is not registered in countries with preferential taxation;

2) the total income amount of each controlled foreign company or permanent establishment of a controlled foreign company is less than 150,495 times the monthly calculation index established by the law on the republican budget and effective on the first day of the tax period.

If a person that meets the requirements specified in paragraph 1 of this article or parts one and two of this paragraph, at the end of the relevant period in the approved separate non-consolidated financial statements, has a financial loss, then such a person shall not be recognized as a controlled foreign company and (or) a permanent establishment of a controlled foreign company.

For the purposes of this chapter, the total income amount shall be converted into tenge at the market exchange rate determined as of the last business day of the tax period established by Article 314 of this Code.

If the currency in which the total income amount is expressed is not included in the list of foreign currencies, to which official exchange rate of the national currency is set by the National Bank of the Republic of Kazakhstan, which was effective in the reporting tax period, then the total income amount shall be converted into tenge applying the latest exchange rate in relation to EUR as determined by the central bank of the country of residence of the controlled foreign company or by the permanent establishment of the controlled foreign company as of the last business day of the tax period in the country of residence.

3. A state with preferential taxation is recognized as a foreign state or territory that meets one of the following conditions:

1) income tax rate in such a state or territory is less than 10 percent;

2) such a state or territory has laws on non-disclosure of financial information or laws allowing to keep a secret about the real owner of property, income or real owners, participants, founders, shareholders of a legal entity (company).

The provisions of subparagraph 2) of part one of this paragraph shall not apply to a foreign state or territory with which the Republic of Kazakhstan has concluded an international treaty providing for the exchange of information between competent tax authorities, except for a foreign state or territory that does not ensure the exchange of information with the authorized body for tax purposes.

A foreign state or territory is recognized as not ensuring the exchange of information with the authorized body for tax purposes provided one of the following requirements is met:

1) the authorized body received a written refusal to provide information, the exchange of which is set forth by an international treaty, from a competent or authorized body of a foreign state or territory;

2) the competent or authorized body of a foreign state or territory failed to provide the requested information within more than two years from the authorized body’s request.

The list of states with preferential taxation, determined in accordance with this paragraph, is approved by the authorized body.

4. Other definitions used for the purposes of this chapter and Chapter 32 of this Code are as follows:

1) audited financial statements - financial statements resulting from an audit conducted by a person entitled to conduct it;

1-1) controlled person that meets one of the following conditions:

the person is connected with the resident through control (if the resident has direct or indirect or constructive control over the person);

a person in which the participation share of a resident is directly or indirectly, or constructively, more than 50 percent;

a person connected with a resident as the next of kin (in relation to a resident individual);

2) the effective tax rate of a controlled foreign company or the effective tax rate of a permanent establishment of a controlled foreign company is the arithmetic-mean of effective tax rates for a controlled foreign company or effective income tax rates for a permanent establishment of a controlled foreign company determined in accordance with subparagraph 12) for a reporting period and two previous consecutive periods, preceding the reporting period.

If at the end of a relevant period (periods), financial profit before tax of a controlled foreign company or a permanent establishment of a controlled foreign company is zero or it has a financial loss, relevant rates for such period (periods) are not taken into account when calculating the effective rate. In this case, the effective income tax rate of a controlled foreign company or the effective income tax rate of a permanent establishment of a controlled foreign company is determined on the basis of relevant indicators of the remaining number of periods in which the financial profit was obtained.

If the legislation of the state of a controlled foreign company’s incorporation sets forth an obligation to compile consolidated financial statements disclosing the data of subsidiaries (associates, joint ventures) without drawing up separate unconsolidated financial statements, then, in order to calculate the effective tax rate of a controlled foreign company, financial profit indicators before tax and income tax are recalculated as follows:

subject to exclusion from financial profit before tax are amounts of subsidiaries’ financial profit (loss) before tax reduced by the amount of profit (loss) from intercompany transactions, the share in the income of associates (joint ventures) recognized in consolidated financial statements of a controlled foreign company, provided that consolidated financial profit before taxation of a controlled foreign company takes such amounts into account;

subject to exclusion from the profit tax are amounts of subsidiaries’ income tax recognized in consolidated financial statements of a controlled foreign company as current tax expense, not including deferred taxes, provided that consolidated amount of the tax on profits of a controlled foreign company includes such amounts;

3) control - control determined in accordance with international financial reporting standards or other internationally recognized standards for the preparation of financial statements adopted by stock exchanges to admit securities to trading;

3-1) approved financial statements - a document of a controlled foreign company or a permanent establishment of a controlled foreign company that meets the requirements of paragraph 3 of Article 297 of this Code, certified by the signature of the chief executive officer (or a person authorized to sign financial statements) of a controlled foreign company and (or) a permanent establishment of controlled foreign company and including a balance sheet, profit & loss statement, cash flow statement, statement of changes in equity, explanatory note (or other document);

4) reporting period - financial period in which financial profit is recognized;

5) immediate family members:

spouse;

children, including adopted ones;

children of the spouse, including adopted ones;

grandchildren;

grandchildren of the spouse;

dependents;

dependents of the spouse;

parents;

parents of the spouse;

full, half siblings;

full, half siblings of the spouse;

6) indirect control - control by a resident through a controlled person (controlled persons);

7) indirect ownership (indirect participation) - ownership by a resident of participatory interests in a controlled foreign company through a controlled person (controlled persons);

8) constructive control - direct and indirect control by a resident or direct and (or) indirect control by a resident and (together with) his/her immediate family member (immediate family members);

9) constructive ownership (constructive participation) - direct and indirect ownership of participatory interests in a controlled foreign company by a resident or direct and indirect ownership of participatory interests in a controlled foreign company by a resident and (together with) his/her immediate family member (immediate family members);

9-1) the total income amount - the sum of all income of a controlled foreign company or a permanent establishment of a controlled foreign company, reflected in the approved separate non-consolidated financial statements of such a controlled foreign company or such a permanent establishment of a controlled foreign company for the reporting period.

For the purposes of part one of this subparagraph, incomes similar to those specified in subparagraphs 2), 3), 9) and 11) of paragraph 2 of Article 225 of this Code are excluded from the total amount of income for the reporting period. For this paragraph to apply, a resident must have a document certified by the signature of the chief executive officer (or a person authorized to sign the financial statements) of the controlled foreign company and (or) a permanent establishment of the controlled foreign company, disclosing information about each excluded type of income and expense, in the context of amounts (with mandatory translation into Kazakh or Russian) or an explanatory note to the audited financial statements, certified by the person who audited the financial statements of a controlled foreign company and (or) a permanent establishment of a controlled foreign company, disclosing information on each excluded type of income, broken down by amounts (with obligatory translation into Kazakh or Russian);

10) participatory interest (participation) - participatory interest (participation) in the authorized capital, the participatory interest (participation) of voting shares in the authorized (share) capital or participatory interest (participation) in another form of administration;

11) income tax - a foreign income tax or another foreign tax similar to a corporate or individual income tax in the Republic of Kazakhstan, excluding the excess profits tax or special payments and taxes of subsoil users;

11-1) nominal income tax rate - a fixed income tax rate or other foreign tax similar to corporate income tax on the income received by a non-resident legal entity or other form of organization.

For the purposes of part one of this subparagraph, if a progressive scale of taxation rates is established in the tax legislation of a foreign state, then the upper level of the profit tax rate or other foreign tax similar to corporate income tax is taken as the nominal income tax rate, without regard to special tax regimes and other benefits provided by such a foreign state.

If the taxation system of a foreign country provides for several tax levels, including national, federal, cantonal, local, regional, municipal, communal, provincial, state, prefectural and other territorial income taxes, then the nominal income tax rate shall be calculated as the sum of the corresponding income tax rates;

11-2) passive income - the following types of income shall be recognized as passive income:

dividends;

remuneration income;

value appreciation income;

royalty income;

income from insurance activities, if such activity is not the main activity of a controlled foreign company or a permanent establishment of a controlled foreign company;

income from rendering of consulting, legal, accounting, auditing, engineering, advertising, marketing services, as well as from research and development work, if these activities are not the main activity of a controlled foreign company or a permanent establishment of a controlled foreign company.

For the purposes of part one of this subparagraph, the main activity of a controlled foreign company or a permanent establishment of a controlled foreign company shall be an activity for which the income received is more than 50 percent of the total amount of the total annual income of such a controlled foreign company or a permanent establishment of a controlled foreign company;

11-3) share of passive income - the ratio of passive income of a controlled foreign company or a permanent establishment of a controlled foreign company to the total amount of income of a controlled foreign company or a permanent establishment of a controlled foreign company.

The share of passive income is not determined for controlled foreign companies or permanent establishments of controlled foreign companies registered in states with preferential taxation;

12) effective rate - the income tax rate, determined as the lowest of the following rates:

calculated as the ratio of the income tax amount for the reporting period, considered according to the approved financial reporting as a current tax expense, not including deferred taxes, to a positive amount of financial profit before tax, determined in accordance with paragraph 3 of Article 297 of this Code, for the reporting period;

calculated as the ratio of the income tax amount paid for the reporting period to the positive value of financial profit before taxation, determined in accordance with paragraph 3 of Article 297 of this Code, for the reporting period.

For the purposes of part one of this subparagraph, the income tax amount includes income tax, including national, federal, cantonal, local, regional, municipal, communal, provincial, state, prefectural and other territorial income taxes and withholding tax at source, provided that the financial profit before tax includes (included) in the current or previous period the income with levied withholding tax at source;

13) person:

an individual;

a non-resident legal entity;

another form of administration;

14) direct control – control by a resident directly or through a trust manager or a nominee holder if such controlling interest, held by a nominee holder or trust manager, actually belongs to such a resident;

15) direct ownership (direct participation) - ownership of a participatory interest by a resident directly or through a trust manager or a nominee holder if such participatory interests, held by a nominee holder or trust manager, actually belong to such a resident;

16) a foreign company - a non-resident legal entity or other form of organization, with the exception of a person that meets the conditions specified in paragraph 1 of this article;

17) a single organizational structure of a consolidated group - persons other than individuals who are directly or indirectly and (or) constructively owned and (or) controlled by a resident.

For the purposes of part one of this subparagraph, the unified organizational structure of a consolidated group does not include persons other than individuals who are indirectly owned and (or) controlled through another resident. If a resident directly owns and (or) controls another resident, then this other resident is not included in the unified organizational structure of the consolidated group.

Footnote. Article 294 as amended by the Law of the Republic of Kazakhstan dated 10.12.2020 No. 382-VI (enforcement, Article 2).