On 25 June 2018, Kazakhstan signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI and BEPS, respectively). This demonstrates Kazakhstan’s commitment to the global effort to prevent the use of double tax treaties (DTTs) for purposes of improper tax avoidance.
BEPS is comprised of 15 actions agreed among more than 100 participating countries, including Kazakhstan, for purposes of preventing tax avoidance practices.
The purpose of the MLI is to amend DTTs of participating countries to meet certain actions of the BEPS project. It is estimated that the MLI will modify several thousand DTTs. The MLI has been signed by 84 countries of which only 11 countries have so far ratified it.
The law ratifying the MLI is under consideration by the Government, after which it will be submitted to the Parliament.
The MLI shall enter into force for Kazakhstan on the first day of the month following three calendar months after the deposit of its instrument of ratification to the OECD Secretary-General. However, it shall have effect with respect to Kazakhstan’s DTTs: (i) with respect to taxes withheld at source – on 1 January of the year which follows the year in which the MLI enters into force for Kazakhstan; and (ii) with respect to all other taxes – after six calendar months from the latest of the dates on which the MLI enters into force for each of the member states to the relevant DTT.
MLI in a nutshell
The MLI implements actions 2 (hybrid mismatches), 6 (treaty abuse), 7 (avoidance of permanent establishment status), and 14 (improving dispute resolution) of the BEPS project.
The MLI contains both provisions reflecting the minimum BEPS standards to be implemented by all participating states (the Minimum Standard) and provisions that do not reflect the Minimum Standard (the Advanced Standard), which imposes additional requirements elected by the relevant country.
The Minimum Standard provisions will apply by default to all DTTs covered by the MLI. Most importantly, these provisions include:
- a statement that DTTs should not create opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining relief provided in the DTT for the indirect benefit of residents of third jurisdictions);
- the principal purpose test (the PPT), which allows local tax authorities to deny tax treaty benefits if it is reasonable to conclude that obtaining these benefits was one of the principal purposes of the underlying arrangement; and
- certain requirements with respect to resolution of tax disputes including accessibility of mutual agreement procedures. The Advanced Standard is optional. Applying the Advanced Standard should be based on the matching notifications of participating states with respect to a particular DTT and, thus, cannot be applied unilaterally by a particular state.
The Advanced Standard addresses various provisions, including the following:
- Simplified limitation of benefits provision (SLoB), which introduces additional formal criteria which tax residents of a DTT country should meet in order to apply DTT benefits;
- Minimum 365-day holding requirement for applying reduced withholding tax rates for dividends;
- Minimum 365-day holding requirement for applying exemption from capital gains tax from the sale of shares in real estate-rich companies;
- Broadening the scope of the permanent establishment rules: capturing commissionaire structures, additional criteria for applying exemptions for preparatory and auxiliary activities, etc.
Kazakhstan’s MLI Position
Kazakhstan has decided to directly amend all of its 54 DTTs through the MLI. However, some of these treaties will not be impacted as certain countries did not include DTTs with Kazakhstan in their MLI accession documents (e.g., Germany, Switzerland, and Austria), while others (e.g., the USA) have not signed the MLI.
Kazakhstan has acceded to all Minimum Standard provisions of the MLI.
With respect to the Advanced Standard provisions, Kazakhstan opted out of provisions dealing with hybrid mismatches (except for provisions dealing with dual tax residency) and the right to tax its own tax residents. Kazakhstan will apply other Advanced Standard provisions, including the following:
- 365-day holding requirement for dividends and capital gains to apply exemption or reduction of withholding tax;
- Extension of the permanent establishment rule to commissionaires and agents working exclusively for the principal, etc.;
- Additional criteria for applying exemptions from the permanent establishment status for preparatory and auxiliary activities.
In addition, Kazakhstan will apply the SLoB provision for MLI purposes, which is similar to the provisions in the USA-Kazakhstan DTT. Using the SLoB may substantially limit the tax benefits for many holding and financing structures using intermediary companies. However, based on the MLI, the SLoB would work only if another participating state also chose to apply the SLoB. Since only a few countries decided to apply the SLoB, these provisions will not apply to most of Kazakhstan’s DTTs (including the DTTs with the UK, Switzerland and the Netherlands).
The applicability of the Advanced Standard elections made by Kazakhstan depends on the matching notifications of the other participating states with respect to the Kazakhstani DTTs and should be specifically determined for each particular DTT.
Actions to consider
Investors in Kazakhstan who are contemplating transactions which may involve DTTs should do the following:
- Determine applicability of MLI provisions to relevant DTTs;
- Review cross-border structures and consider the availability of DTT benefits in view of the respective PPT/SLoB tests;
- Consider the potential implications of the new extended permanent establishment rules under the relevant DTTs for commissionaire and agency structures, construction sites, etc.;
- Consider future limitations for new holding, financing and IP structures in view of the PPT/SLoB and the 365-day holding period for DTT benefits for dividends and capital gains;
- Consider the available restructuring opportunities to comply with the MLI requirements and continue to apply DTT benefits.