The Parliament has approved the Law of the Republic of Kazakhstan On Amendments and Additions to the Code of the Republic of Kazakhstan “On Taxes and Other Obligatory Payments to the Budget” (Tax Code).

Below is a brief overview of certain key changes that should become effective from January 1, 2023 that materially affect the tax treatment of foreign investors, as well as Kazakhstan companies with foreign participation.

1. New taxation rules for nonresidents’ income

Abolishment of dividends exemption

Effective January 1, 2023, those Tax Code provisions previously used to fully exempt dividends payable to nonresidents—for both individuals and legal entities (subject to several conditions)—will be excluded from the Tax Code.

Under the new version of the Tax Code, it will only be possible to apply a reduced tax rate on dividends (10 percent), subject to compliance with several conditions (i.e. the conditions that were previously applied to fully exempt dividends from taxation).

In addition, the Tax Code preserves exemption of dividends payable to nonresident holders of shares listed on a Kazakhstan stock exchange, subject to the additional condition that such shares need to have been traded during the respective tax period (trading criteria to be approved by the RK Government).

Nevertheless, we note that it will still be possible to apply the tax exemption on dividends (subject to compliance with several conditions) until the end of 2022.

At the same time, it remains possible to apply a reduced tax rate on dividends as provided for by most international double-taxation treaties concluded by the Republic of Kazakhstan.

Non-deductibility of intra-group expenses

The list of expenses that can no longer be deducted for corporate income tax (CIT) purposes was extended to include expenses incurred on transactions with interrelated foreign entities. This applies to the following expenses:

management, consulting, advisory, audit, design, legal, accounting, advocation, advertising, marketing, franchising, financial (excluding interest expenses), engineering, agency services, royalties, rights to use intellectual property.

Under the new rules, Kazakhstan companies would be able to deduct those expenses within 3 percent of taxable income (i.e. amount of income less expenses).

Moreover, the scope of “interrelated parties” was significantly extended. In addition to the existing criteria, this now also includes (1) companies of the group and (2) entities whose relationship “has signs of interconnectedness” (to be established by the court on the basis of the tax authority’s claim).

2. Changes to taxation rules for dividends payable to Kazakhstan residents

Taxation of dividends received by individuals

Taxation of dividends received by individuals / Kazakhstan residents has changed significantly:

• The key preference for dividends exemption, provided several conditions are met (three-year holding period, no subsoil use rights, etc.), was abolished. Instead, the exemption applies only to dividends received from a resident company in an amount not exceeding 30,000 monthly calculation indexes (MCIs) (approx. US$200,000)

• The new version of the Tax Code preserves the exemption of dividends payable to holders of shares listed on a Kazakhstan stock exchange, subject to an additional condition that such shares should be traded during the tax period (the criteria of trading to be established by the RK Government)

In addition, the new version of the Tax Code increased the rate of personal income tax (PIT) on dividends from 5 percent to 10 percent.

Thus, in the event of noncompliance with the above requirements, or if the abovementioned threshold is exceeded, dividends would be subject to PIT at the rate of 10 percent.

Taxation on dividends received by legal entities who are Kazakhstan residents

In respect of dividends received by legal entities / residents of the Republic of Kazakhstan:

• Generally, there is still a possibility to exempt such dividends from CIT
• The exemption does not apply to dividends on securities listed on a Kazakhstan stock exchange if the securities were not traded during the respective tax period (criteria to be established by the Government)
• Under the new version of the Tax Code, dividends received from legal entities that are exempt from CIT could be excluded from the recipient’s taxable income