Our company is registered in the Russian Federation. Currently, we are planning to start a wholesale of spare parts for mining equipment to the only buyer in the Republic of Kazakhstan without registration with the justice authorities.
For this we are going to:
rent a warehouse in Karaganda, without hiring employees – residents of RoK,
bring spare parts from Russia and place them on this warehouse for an indefinite period,
deliver them to the buyer directly from a warehouse in Karaganda preparing packing lists and invoices directly from Russian seller to the buyer of the Republic of Kazakhstan (as required).
If so, is there an obligation to register a permanent establishment under Article 191 of RoK?
If yes, what kind of taxes we will have to pay, and how to determine the tax base?
Will there be any other duties to Kazakhstan in such a case?
As I understand from your question, you are going to sell equipment (goods) from the warehouse opened in the Republic of Kazakhstan (i.e. equipment placed in the warehouse will not be just the exhibits, like in the exhibition).
If so, then taxation is as follows:
1. Corporate income tax (tax on income of legal entities).
a) In your case, this warehouse will be a permanent establishment of a non-resident legal entity of the Republic of Kazakhstan
For reference only.
Pursuant to subparagraph 7, paragraph 1 of Article 191 of the Tax Code of the Republic of Kazakhstan one of the following locations through which a nonresident carries on activity in the territory of the Republic of Kazakhstan regardless of the period is recognized as a permanent establishment:
7) place of supply of goods on the territory of the Republic of Kazakhstan, unless otherwise provided by paragraph 3 of this Article
b) Income from the sale of such goods from the warehouse in the Republic of Kazakhstan will be the source income of non-resident in the Republic of Kazakhstan
For reference only.
Subparagraph 1), paragraph 1 of Article 192 of the Tax Code of the Republic of Kazakhstan provides that the following types of income are recognized as the sources income of non-resident in the Republic of Kazakhstan:
1) income from the sale of goods on the territory of the Republic of Kazakhstan, as well as income from the sale of goods located in the Republic of Kazakhstan beyond its borders within the framework of a foreign trade.
c) corporate income tax rate is of 20% of taxable income net of 15% deductions of net income.
For reference only.
Pursuant to the Article 198 of the Tax Code of the Republic of Kazakhstan:
1. Unless otherwise provided by this Article and Article 200 of this Code, taxable income, calculation and payment of corporate income tax on the proceeds of a nonresident legal entity activity in the Republic of Kazakhstan through a permanent establishment is determined in accordance with the provisions of this Article and Articles 83-149 of this Code.
2. Deductions are expenses directly related to the receipt of proceeds of activity in the Republic of Kazakhstan through a permanent establishment, whether they incurred in the Republic of Kazakhstan or abroad, except for the expenses not subject to deduction pursuant to this Code, as well as the expenses aimed at generating income determined by subparagraph 3) and 4), paragraph 2 of Article 192 of this Code.
3. A nonresident legal entity is not entitled to deduct the amounts to the permanent establishment presented to it as:
1) royalties, fees, charges and other payments for the use or the right to use the property or the intellectual property of the nonresident legal entity;
2) proceeds of services rendered by a nonresident entity to its permanent establishment;
3) interest on loans granted by this nonresident legal entity to its permanent establishment;
4) expenses that are not related to the receipt of proceeds of nonresident legal entity activity through a permanent establishment in the Republic of Kazakhstan;
5) expenses unconfirmed by the documents;
6) management and general administrative expenses of a nonresident legal entity as defined by paragraph 2 of Article 208 of this Code not related to the activity in the Republic of Kazakhstan through a permanent establishment.
Paragraph 1 of Article 147 of the RoK Tax Code provides that the income reduced by the amount of proceeds and expenses provided for in Article 133 of this Code, and the amount of losses borne in accordance with Article 137 of this Code shall be subject to tax at the rate of 20%, if otherwise provided by paragraph 2 of this Article.
In addition, paragraph 5 of Article 147 of the Tax Code of the Republic of Kazakhstan provides that additionally to corporate income tax net income of non-resident legal entity operating in the Republic of Kazakhstan through a permanent establishment shall be subject to tax at the rate of 15% in the manner prescribed in Article 199 of this Code.
Pursuant to paragraph 1 of Article 199 of the Tax Code of the Republic of Kazakhstan net income is determined in the following order: the taxable income reduced by the amount of proceeds and expenses provided for in Article 133 of this Code, as well as the amount of losses borne in accordance with Article 137 of this Code minus the sum of corporate income tax calculated by the product of the rate specified by paragraph 1 or paragraph 2 of Article 147 of this Code and the taxable income, reduced by the amount of proceeds and expenses provided for in Article 133 of this Code, as well as the amount of losses borne in accordance with Article 137 of this Code.
In addition, I would like to dwell on one point related to the application to a given situation the Conventions for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital.
Pursuant to Article 5 of the Convention Between the Government of the Republic of Kazakhstan and the Government of the Russian Federation for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital and the Prevention of Tax Evasion dated October 18, 1996 the term ‘permanent establishment’ includes:
a) management site;
b) a department;
c) an office;
d) a factory;
e) a workshop; and
f) a mine, an oil or gas well, a quarry or any other site of natural resources extraction.
At the same time, paragraph 4 of the Article of the Convention establishes that, in spite of the preceding provisions of this Article, the term ‘permanent establishment’ is not considered to include:
a) using of facilities solely for storage, demonstration or delivery of goods or products, which belong to the enterprise;
b) keeping stock of goods or products, which belong to the enterprise solely for storage, demonstration or delivery;
c) keeping stock of goods or products, which belong to the enterprise solely for processing by another enterprise;
d) keeping permanent place of business solely to purchase goods or products, or to collect information for the enterprise;
e) keeping permanent place of business solely to perform any other preparatory or support activities for the enterprise;
f) keeping permanent place of business solely to perform any combination of activities listed in subparagraphs a) to e), provided that the overall activity of a permanent place of business resulting from this combination is preparatory or support.
Here the attention should be paid to subparagraphs a) and b), which contain the word ‘delivery’.
As it appears from official comment on the Articles of the United Nations Model Convention for the Avoidance of Double Taxation in Relations Between Developed and Developing Countries that the question on keeping stock of goods or products, which belongs to the enterprise solely storage, demonstration or delivery does not constitute a permanent establishment is rather controversial.
For reference only.
Pursuant to paragraph 20 and 21 of the Comment to paragraph 4 of Article 5 of the Model Convention:
“20. As noted above, in the United Nations Model Tax Convention in contrast to the OECD Model Tax Convention the ‘delivery’ is not mentioned either in subparagraph a, or in subparagraph b. The subject of detailed discussions was the question of whether the use of facilities for the ‘delivery of goods’ should be considered as activities constituting a permanent establishment or not. The study conducted in 1997 indicated that almost 75% of the tax treaties concluded by developing countries contain the phrase ‘delivery of goods’ in the list of exceptions in subparagraphs a and b of paragraph 4. However, some countries believe that the absence of this phrase in the Model United Nations Convention is important aspect which differs it from the OECD Model Tax Convention, considering that the availability of inventory for immediate delivery contributes to product sales and profit respectively in the host country.
21. In the revision of the United Nations Model Tax Convention the Committee decided to maintain the existing difference between the two model conventions, noting however, that even if we consider the delivery of goods as the activities leading to the creation of a permanent establishment, such activities are likely to be properly assigned only a small income. There might be a situation when the tax authorities, without delving too deeply into the matter, would assign to this activity too much income, which would lead to prolonged litigation and non-uniform application of tax treaties. Therefore, despite the absence of the word ‘delivery’ in the United Nations Model Tax Convention, the countries when concluding the bilateral tax treaties may wish to consider both points of view in order to determine the practical results of using any of these approaches.”
In this regard, we believe that in this situation it is quite risky to apply the provisions of subparagraphs a) and b), paragraph 4 of Article 5 of the Convention as the basis not to consider purchasing of goods by nonresident of the Republic of Kazakhstan from the warehouse in the Republic of Kazakhstan a permanent establishment in terms of the tax consequences and further litigation.
Article 7 of the aforementioned Convention provides that the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise does not carry on or has not carried on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits may be taxed in the other State but only in the part, which is attributable to:
a) that permanent establishment;
b) sales of goods or products in that other State, which are identical with the goods or products sold through the permanent establishment; or
c) other business activities carried on in that other State, which is the same by its nature with a business carried on through such permanent establishment.
Pursuant to paragraph 2, Article 23 of the Convention with regard to Russia the double taxation shall be avoided as follows: If Russian resident derives income or owns capital in Kazakhstan, which in accordance with the provisions of this Convention may be taxed in Kazakhstan, the amount of tax on that income or capital payable in Kazakhstan may be deducted from the tax levied on that resident in Russia. Such deduction, however, shall not exceed the Russian tax calculated from that income or capital in Russia in accordance with its tax laws and regulations.
Thus, given that the sale of goods by Kazakhstan nonresidents in the above diagram from the warehouse in the Republic of Kazakhstan will be treated as receiving by a nonresident, who has a permanent establishment in the Republic of Kazakhstan, of income from sources in the Republic of Kazakhstan, so the terms of the Convention are similar to the national legislation of the Republic of Kazakhstan and do not establish any other rules that are different from the norms of the national legislation of the Republic of Kazakhstan.
2. Value Added Tax
Pursuant to subparagraph 2), paragraph 5, Article 276-4 of the RoK Tax Code, indirect taxes are not levied on the goods imported into the territory of the Republic of Kazakhstan from the territory of a Member State of the Customs Union in connection with their transfer within one legal entity.
However, in sale of goods from a warehouse in Kazakhstan, the Buyer concluded a Contract for Purchase of Goods (export and import) with your company (nonresident of the Republic of Kazakhstan) is obliged to pay VAT at the general rate of 12% as in the import of goods to Kazakhstan from the territory of a Member State of the Customs Union.
For reference only
Pursuant to paragraph 1, Article 276-18 of the RoK Tax Code, if the goods are purchased by the taxpayer of the Republic of Kazakhstan on the basis of an agreement (contract) with the taxpayer of another Member State of the Customs Union, VAT shall be paid by a taxpayer of the Republic of Kazakhstan to which territory the goods were imported, by the owner of the goods or the commissioner, attorney (operator).
However, given that in this situation there is too long period between the goods import from Russia to Kazakhstan (from one Member State of the Customs Union to another) and actual implementation of such goods (the date of ownership transfer and accounting operations recognition), and given sufficient rarity of such operations, I would recommend to secure answer of the State Revenue Committee of the Ministry of Finance of the Republic of Kazakhstan on this question, since, in practice, you may encounter a different interpretation and application of these provisions of the Tax Code.