Notification of the tax authority about participation in a foreign company

Regarding the notification of tax authorities about the participation of Kazakhstan residents in a controlled foreign company.

The Tax Code of the Republic of Kazakhstan establishes the requirements and deadlines for submitting an application for the participation of a resident of the Republic of Kazakhstan in a controlled foreign company.

In accordance with Article 294 of the Tax Code of the Republic of Kazakhstan, a controlled foreign company is a person that simultaneously meets the following conditions:

1) such person is one of the following persons:

a non-resident legal entity;

another foreign form of organization of entrepreneurial activity without forming a legal entity (hereinafter referred to as another form of organization);

2) such person meets one of the following conditions:

25 percent or more of the participation interest (voting shares) in a person directly or indirectly or constructively belong to a legal or natural person who is a resident of the Republic of Kazakhstan;

the person is related to the resident through control (if the resident has direct or indirect or constructive control over the person);

3) such person meets one of the following conditions:

the effective income tax rate of a non-resident legal entity or other form of organization, determined in accordance with subparagraph 2) of paragraph 4 of Article 294 of the Tax Code of the Republic of Kazakhstan, is less than 10 percent;

a non-resident legal entity or other form of organization is registered or the founding document (document of creation) of which is registered, or a participant entrusted with keeping records of income and expenses or managing assets under such other form of organization is registered in a state with preferential taxation.

For the purposes of defining a controlled foreign company, the concept of “control” is defined as follows – control, determined in accordance with international financial reporting standards or other internationally recognized financial reporting standards adopted by stock exchanges for admission of securities to trading.

In accordance with Article 298 of the Tax Code of the Republic of Kazakhstan, a resident is required to submit an application for participation (control) in a controlled foreign company no later than sixty business days following the date of:

1) the acquisition, directly or indirectly, or constructively, of 25 percent or more of a participation interest or direct or indirect, or constructive control in a controlled foreign company;

2) establishment (creation) of a controlled foreign company;

3) changes in the share of participation or control in a controlled foreign company;

4) termination of 25 percent or more of the share of participation or control in a controlled foreign company;

5) termination (liquidation) of a controlled foreign company.

Moreover, if a resident who owns directly or indirectly or constructively shares or has direct, indirect or constructive control in a controlled foreign company that was acquired before January 1, 2018, is required to submit an application for participation (control) in a controlled foreign company not later than December 31, 2018.

In subsequent tax periods, an application for participation (control) in a controlled foreign company shall be submitted no later than March 31 of the year following the reporting tax period.

An application for participation (control) in a controlled foreign company is submitted to the tax authority in the form established by the authorized body at the place of residence of an individual or at the location of a legal entity.

If the resident did not provide information on participation in a controlled foreign company and the specified information was revealed by the tax authority from the competent or authorized body of the foreign state, then the tax authority sends the resident a notice on elimination of the violation of the tax legislation of the Republic of Kazakhstan, which should reflect the information in accordance with paragraph 4 of Article 298 of the Tax Code of the Republic of Kazakhstan.

If the resident agrees with the violations specified in the notification, then the resident provides the appropriate:

1. An application for participation (control) in a controlled foreign company no later than thirty business days following the day of receipt of a notification on the elimination of violations of the tax legislation of the Republic of Kazakhstan;

2. Tax declaration in terms of including the tax liability arising in accordance with Article 297 of the Tax Code of the Republic of Kazakhstan for the period of ownership of shares in a controlled foreign company.

If the resident does not agree with the violations specified in the notification, the resident shall provide one of the following documents:

1) an explanation of the identified violations in writing on paper or in the form of an electronic document – to the tax authority that sent the notification on the elimination of violations of the tax legislation of the Republic of Kazakhstan;

2) a complaint against the actions (inaction) of officials of the tax authority that sent a notification on the elimination of violations of the tax legislation of the Republic of Kazakhstan – to the authorized body or court.

At the same time, the resident is obliged, together with explanations, to submit documents proving that the resident does not own shares of participation or that there is no direct or indirect control in a controlled foreign company.

Thus, a resident is recognized as owning shares and having control over a foreign company if one of the following conditions is met:

1. the absence of a complaint against the action (inaction) of officials of the tax authority that sent the notification, and the taxpayer’s failure to comply with the notification;

2. the absence of grounds refuting the information that a resident owns a stake in and control over a foreign company, based on the results of consideration of the resident’s explanations and supporting documents available to the tax authority.

If a resident is recognized as owning stakes and having control over a foreign company, the tax authority sends a decision to the resident to recognize him as owning stakes and having control over a foreign company no later than three working days from the date of the decision on such recognition.

A resident recognized as the owner of participation shares and having control over a foreign company has the right to appeal such a decision to a higher tax authority or court within fifteen working days from the date of receipt of such a decision.