Dividend Taxation in Kazakhstan: Additional Condition to Apply Double Tax Treaty

Recent changes to the Kazakhstan Tax Code introduced an additional condition for applying a double tax treaty when paying dividends in Kazakhstan.

General Tax Regime

To illustrate the current regime, consider the following scenario wherein shares in a Kazakhstan company are owned by a company registered in the Netherlands.

When paying dividends to the Dutch company, the Kazakhstan company would generally withhold a tax at source at the rate of 15%.

However, if the Dutch company has held the shares of the Kazakhstan company for more than three years, then currently the tax rate may be decreased to 10% (provided that there is no connection with the subsoil use). Such dividends used to be tax exempt.

The Kazakhstan company may also apply the tax treaty between Kazakhstan and the Netherlands and decrease the tax rate from 15% to 5%. To effect the decrease, the Dutch company must be the beneficial owner of the income and certain formalities need to be observed (timely provision of a tax residence certificate in due form).

New Condition for Reduced Tax Rate

However, January 1, 2023 marked the addition of a new condition. If dividends are paid to a nonresident who is a related party and such party is a resident of a jurisdiction with which Kazakhstan has concluded a tax treaty amended by the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, then the Kazakhstan company (being a tax agent) may apply the reduced tax rate if the following requirements are met: (1) such income is included in the taxable income of the nonresident in the foreign jurisdiction without the right of adjustment or refund of the income; and (2) the nominal tax rate applicable to the income is not less than 15%. 

We understand that the added condition cannot be satisfied with respect to many jurisdictions, including the Netherlands. As such, Kazakhstan has introduced a supplemental condition that, in substance, makes it impossible to apply a reduced dividends tax rate under certain tax treaties (we do not comment on the legality of this supplement herein).

Therefore, if this additional condition cannot be satisfied, the tax rate under local law will apply, i.e., either 15% or 10%.