In a world where technology comes from Asia, money from Europe, and profits settle in special zones, tax authorities strive to maximize tax revenues within their jurisdiction.
In general, we see that the Committee of State Revenues of the Republic of Kazakhstan is also making efforts not to lag behind, and this issue is under the scrutiny of the tax authorities. Specifically, the government bodies want to identify the ultimate beneficiary of income, ensuring that tax treaties and their benefits are applied only to those for whom they are intended.
Overall, this issue should rightly be raised exclusively concerning passive income: dividends, interest (loans), and royalties (intellectual property rights).
The question is: how can one determine whether a foreign company is the ultimate beneficiary of income?
For loans, this is relatively simple. In a syndicated loan (a loan provided to a borrower by at least two banks participating in the transaction in specific proportions under a generally unified loan agreement), the ultimate beneficiary is determined by special provisions of the Tax Code.
Thus, in these relationships, there is a bank that organizes the financing, and there are banks that provide the money (ultimately the final recipients of the rewards). Specifically, for this situation, the determination of roles is guided by special norms in the Tax Code, and the application of tax treaty benefits is not burdened with the risks of tax audits and measures of liability. Regarding royalties, the ultimate beneficiary is the one who holds registered rights/licenses. Here, the money flow can generally be traced, and the benefits are less likely to be contested.
Dividends, however, present a more complex scenario.
The Tax Code provides a definition, but it refers us to civil legislation. As a result, formal ownership of a share or stock in a Kazakh legal entity automatically recognizes the foreign participant/shareholder as the ultimate beneficiary. However, in today’s global context, it is no longer sufficient to rely solely on domestic legislation for such complex ownership structures. Since 2021, the principal purpose test (PPT) from the Multilateral Instrument (MLI) applies to most tax conventions.
The essence of this test is that if there are indications of tax avoidance, the tax benefits do not apply. There are no approved guidelines for applying this test, but it is understood that the principle "substance over form" is at its core. A similar approach is reflected in the OECD Model Convention Commentaries, which, while not a legal source in Kazakhstan, are sometimes referred to by government bodies and courts for understanding the concepts of certain provisions.
Ultimately, the ultimate beneficiary of dividends can be understood as a company that, for example, meets the following conditions: the company's purpose is to attract foreign investments, which should be practically evidenced by the presence of loans, issuance of securities; access to foreign stock exchanges, bank credit lines; the company's staff consists of qualified specialists in the field of investment; a diversified investment portfolio that is periodically updated based on research and is not solely related to affiliated companies; active participation in the activities of subsidiary companies, etc. There are also several other criteria that we observe. However, it should be noted right away that there are no strictly established standards in this area. Everything is subjective, so it is always better to discuss this issue in detail concerning the specific situation. If this is not done in a timely manner, the tax burden following a tax audit could be significantly increased.
It is also important to note that the Comments on both the Tax Code and the OECD Model Convention are not sources of law and cannot result in negative tax consequences.
In general, we see that the Committee of State Revenues of the Republic of Kazakhstan is also making efforts not to lag behind, and this issue is under the scrutiny of the tax authorities. Specifically, the government bodies want to identify the ultimate beneficiary of income, ensuring that tax treaties and their benefits are applied only to those for whom they are intended.
Overall, this issue should rightly be raised exclusively concerning passive income: dividends, interest (loans), and royalties (intellectual property rights).
The question is: how can one determine whether a foreign company is the ultimate beneficiary of income?
For loans, this is relatively simple. In a syndicated loan (a loan provided to a borrower by at least two banks participating in the transaction in specific proportions under a generally unified loan agreement), the ultimate beneficiary is determined by special provisions of the Tax Code.
Thus, in these relationships, there is a bank that organizes the financing, and there are banks that provide the money (ultimately the final recipients of the rewards). Specifically, for this situation, the determination of roles is guided by special norms in the Tax Code, and the application of tax treaty benefits is not burdened with the risks of tax audits and measures of liability. Regarding royalties, the ultimate beneficiary is the one who holds registered rights/licenses. Here, the money flow can generally be traced, and the benefits are less likely to be contested.
Dividends, however, present a more complex scenario.
The Tax Code provides a definition, but it refers us to civil legislation. As a result, formal ownership of a share or stock in a Kazakh legal entity automatically recognizes the foreign participant/shareholder as the ultimate beneficiary. However, in today’s global context, it is no longer sufficient to rely solely on domestic legislation for such complex ownership structures. Since 2021, the principal purpose test (PPT) from the Multilateral Instrument (MLI) applies to most tax conventions.
The essence of this test is that if there are indications of tax avoidance, the tax benefits do not apply. There are no approved guidelines for applying this test, but it is understood that the principle "substance over form" is at its core. A similar approach is reflected in the OECD Model Convention Commentaries, which, while not a legal source in Kazakhstan, are sometimes referred to by government bodies and courts for understanding the concepts of certain provisions.
Ultimately, the ultimate beneficiary of dividends can be understood as a company that, for example, meets the following conditions: the company's purpose is to attract foreign investments, which should be practically evidenced by the presence of loans, issuance of securities; access to foreign stock exchanges, bank credit lines; the company's staff consists of qualified specialists in the field of investment; a diversified investment portfolio that is periodically updated based on research and is not solely related to affiliated companies; active participation in the activities of subsidiary companies, etc. There are also several other criteria that we observe. However, it should be noted right away that there are no strictly established standards in this area. Everything is subjective, so it is always better to discuss this issue in detail concerning the specific situation. If this is not done in a timely manner, the tax burden following a tax audit could be significantly increased.
It is also important to note that the Comments on both the Tax Code and the OECD Model Convention are not sources of law and cannot result in negative tax consequences.