Our company is registered in the Russian Federation. We are currently planning to start wholesale sales of spare parts for mining equipment to a single buyer in the Republic of Kazakhstan without registering with the justice authorities.
To do this, we plan to:
— rent a warehouse in Karaganda without hiring employees who are residents of the Republic of Kazakhstan,
— bring spare parts from Russia and place them in this warehouse for an indefinite period,
— ship them to the buyer directly from the warehouse in Karaganda as the need arises, issuing sales documents (waybills, invoices) directly from the Russian seller to the buyer in the Republic of Kazakhstan.
Question:
— Does the obligation to register a permanent establishment arise in this case in accordance with Article 191 of the Republic of Kazakhstan?
— If so, what taxes will we have to pay and how to determine the tax base?
— Will any other obligations to the Republic of Kazakhstan arise in this case?
Thank you
As I understand correctly from your question, you intend to sell equipment (goods) from a warehouse opened in the Republic of Kazakhstan (that is, the equipment in the warehouse will not be just exhibits, as, for example, at an exhibition).
If so, then the taxation will be as follows:
- Corporate income tax (tax on the profits of legal entities).
a) In your case, such a warehouse will be a permanent establishment of a non-resident legal entity in the Republic of Kazakhstan
For reference.
According to subparagraph 7 of paragraph 1 of Article 191 of the Tax Code of the Republic of Kazakhstan, a permanent establishment of a non-resident in the Republic of Kazakhstan is recognized as one of the following places of activity in the Republic of Kazakhstan, through which it carries out entrepreneurial activity in the territory of the Republic of Kazakhstan, regardless of the terms of the activity:
7) place of sale of goods in the territory of the Republic of Kazakhstan, unless otherwise provided for in paragraph 3 of this article
b) Income from the sale of such goods from a warehouse in the Republic of Kazakhstan will be the income of a non-resident from sources in the Republic of Kazakhstan
For reference.
Subparagraph 1) of paragraph 1 of Article 192 of the Tax Code of the Republic of Kazakhstan provides that the following types of income are recognized as non-resident income from sources in the Republic of Kazakhstan:
1) income from the sale of goods in the territory of the Republic of Kazakhstan, as well as income from the sale of goods located in the Republic of Kazakhstan outside its borders as part of foreign trade activities.
c) The corporate income tax rate will be 20% of taxable income minus deductions + 15% of net income.
For reference.
As follows from Article 198 of the Tax Code of the Republic of Kazakhstan:
- Unless otherwise provided by this Article and Article 200 of this Code, the determination of taxable income, calculation and payment of corporate income tax on the income of a non-resident legal entity from activities in the Republic of Kazakhstan through a permanent establishment shall be carried out in accordance with the provisions of this Article and Articles 83-149 of this Code. 2. Deductions include expenses directly related to receiving income from activities in the Republic of Kazakhstan through a permanent establishment, regardless of whether they are incurred in the Republic of Kazakhstan or abroad, with the exception of expenses that are not deductible in accordance with this Code, as well as expenses aimed at receiving income specified in subparagraphs 3) and 4) of paragraph 2 of Article 192 of this Code.
- A non-resident legal entity does not have the right to attribute to deductions to a permanent establishment amounts presented to the permanent establishment as:
1) royalties, fees, charges and other payments for the use or granting of the right to use the property or intellectual property of this non-resident legal entity;
2) income for services rendered by a non-resident legal entity to its permanent establishment;
3) remuneration for loans provided by this non-resident legal entity to its permanent establishment; 4) expenses not related to receiving income from the activities of a non-resident legal entity through a permanent establishment in the Republic of Kazakhstan; 5) expenses not supported by documents; 6) management and general administrative expenses of a non-resident legal entity, defined in paragraph 2 of Article 208 of this Code, not related to the implementation of activities in the Republic of Kazakhstan through a permanent establishment.
Paragraph 1 of Article 147 of the Tax Code of the Republic of Kazakhstan provides that the taxable income of a taxpayer, reduced by the amount of income and expenses provided for in Article 133 of this Code and by the amount of losses carried forward in the manner established by Article 137 of this Code, is subject to taxation at a rate of 20 percent, unless otherwise provided in paragraph 2 of this Article.
Clause 1 of Article 147 of the Tax Code of the Republic of Kazakhstan provides that the taxable income of a taxpayer, reduced by the amount of income and expenses provided for in Article 133 of this Code and by the amount of losses carried forward in the manner established by Article 137 of this Code, is subject to taxation at a rate of 20 percent, unless otherwise provided for in Clause 2 of this Article.
In addition, Clause 5 of Article 147 of the Tax Code of the Republic of Kazakhstan provides that, in addition to corporate income tax, the net income of a non-resident legal entity operating in the Republic of Kazakhstan through a permanent establishment is subject to taxation at a rate of 15 percent in the manner established by Article 199 of this Code.
According to paragraph 1 of Article 199 of the Tax Code of the Republic of Kazakhstan, net income is determined in the following order: taxable income reduced by the amount of income and expenses stipulated by Article 133 of this Code, as well as by the amount of losses carried forward in accordance with Article 137 of this Code, minus the amount of corporate income tax calculated by multiplying the rate established by paragraph 1 or paragraph 2 of Article 147 of this Code and taxable income reduced by the amount of income and expenses stipulated by Article 133 of this Code, as well as by the amount of losses carried forward in accordance with Article 137 of this Code).
In addition, I would like to dwell on one point related to the application to this situation of the Conventions for the Elimination of Double Taxation and the Prevention of Fiscal Evasion on Income and on Capital.
According to Article 5 of the Convention between the Government of the Republic of Kazakhstan and the Government of the Russian Federation for the Elimination of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital of 18 October 1996, the term “permanent establishment” shall include, in particular:
a) a place of management;
b) a branch;
c) an office;
d) a factory;
d) a workshop; and
e) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.
At the same time, paragraph 4 of the said Article of the Convention establishes that, notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall not be deemed to include:
a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;
b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;
c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise;
d) the maintenance of a fixed place of business solely for the purpose of carrying on for the enterprise any other activity of a preparatory or auxiliary character;
e) the maintenance of a fixed place of business solely for any combination of activities listed in subparagraphs a) to e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.
Here, attention should be paid to subparagraphs a) and b), which contain the word “supply”.
As follows from the official commentary to the articles of the United Nations Model Convention for the Avoidance of Double Taxation between Developed and Developing Countries, the question of whether the maintenance of a stock of goods or merchandise belonging to an enterprise solely for the purpose of storage, display or delivery does not constitute a permanent establishment is rather ambiguous.
Background. According to paragraphs 20 and 21 of the Commentary to paragraph 4 of Article 5 of the Model Convention:
“20. As noted above, the United Nations Model Convention, unlike the OECD Model Convention, makes no reference to “delivery” in either subparagraph (a) or subparagraph (b). There has been considerable debate as to whether the use of facilities for the “delivery of goods” should be considered an activity constituting a permanent establishment. A 1997 study found that nearly 75 per cent of tax treaties concluded by developing countries included the phrase “delivery of goods” in the list of exceptions in subparagraphs (a) and (b) of paragraph 4. However, some countries consider the absence of this wording in the United Nations Model Convention to be an important departure from the OECD Model Convention, considering that the availability of stock for immediate delivery facilitates the sale of the product and hence the earning of profits in the host country.
- In revising the United Nations Model Convention, the Committee decided to maintain the existing distinction between the two Model Conventions, noting, however, that even if the delivery of goods were considered to be an activity leading to the creation of a permanent establishment, it was likely that only a small amount of income could be properly attributed to that activity. A situation might arise whereby tax authorities, without going into the matter too deeply, attributed too much income to that activity, which would lead to lengthy litigation and inconsistent application of tax treaties. Therefore, despite the absence of the word “delivery” in the United Nations Model Convention, countries may wish to consider both views when concluding bilateral tax treaties in order to determine the practical effects of using either approach.”
In this regard, we believe that in this situation, applying the provisions of subparagraphs a) and b) of paragraph 4 of Article 5 of the Convention as grounds for not considering the sale of goods by a non-resident of the Republic of Kazakhstan from a warehouse in the Republic of Kazakhstan as a permanent establishment of the non-resident is quite risky in terms of tax consequences and subsequent litigation.
Article 7 of the above-mentioned Convention provides that the profits of an enterprise of a Contracting State shall be taxable only in that State, unless such enterprise carries on or has carried on business activities in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business activities as stated above, its profits may be taxed in the other State but only so much of them as is attributable to:
a) such permanent establishment;
b) the sale in that other State of goods or merchandise which are the same as those sold through the permanent establishment; or
c) other business activities carried on in that other State which are of the same nature as business activities carried on through such permanent establishment.
Under paragraph 2 of Article 23 of the Convention, double taxation shall be eliminated in the following manner in respect of Russia: where a resident of Russia derives income or owns capital in Kazakhstan which, in accordance with the provisions of this Convention, may be taxed in Kazakhstan, the amount of the tax on that income or capital paid in Kazakhstan may be credited against the tax levied on that resident in Russia. Such credit, however, shall not exceed the Russian tax levied on such income or capital in Russia in accordance with its tax laws and regulations.
Thus, given that the sale of goods by a non-resident of Kazakhstan under the above scheme from a warehouse in the Republic of Kazakhstan will be considered as the receipt by a non-resident of Kazakhstan with a permanent establishment in the territory of the Republic of Kazakhstan of income from sources in the Republic of Kazakhstan, the terms of the Convention are similar to the national legislation of the Republic of Kazakhstan and do not establish any other rules that differ from the rules of the national legislation of the Republic of Kazakhstan.
- Value Added Tax
According to subparagraph 2) of paragraph 5 of Article 276-4 of the Tax Code of the Republic of Kazakhstan, indirect taxes are not levied on the import into the territory of the Republic of Kazakhstan of goods imported from the territory of a member state of the Customs Union in connection with their transfer within the same legal entity.
However, when selling goods from a warehouse in Kazakhstan, the buyer of the goods who has concluded a contract with your enterprise (a non-resident of the Republic of Kazakhstan) for the purchase of goods (export-import) will be obliged to pay VAT at the general rate of 12% as when importing goods into Kazakhstan from the territory of a member state of the Customs Union.
Reference
According to paragraph 1 of Article 276-18 of the Tax Code of the Republic of Kazakhstan, in the event that