Tax Treaty between Kazakhstan and Luxembourg
The Tax Convention between the Grand-Duchy of Luxembourg (“Luxembourg”) and the Republic of Kazakhstan (“Kazakhstan”) dated 26 June 2008 (“the Convention”) and the protocol to the Convention signed on 3 May 2012 (“the Protocol”) were both ratified by Luxembourg through the Law of 14 June 2013 and by Kazakhstan on 11 November 2013. The exchange of ratification instruments was completed on 9 December 2013 and both the Convention and the Protocol came into force on 11 December 2013 (Mémorial 2013, A, n° 221, p. 3910).
It took Kazakhstan more than five years to ratify the Convention as initially the provisions of the Convention regarding the exchange of information were not in line with the OECD standards. This is the reason why the Protocol was even signed before the Convention came into force. Contrary to the initial version of exchange of information clause in the Convention, the provisions of the Protocol reflect the commitment of Luxembourg for more transparency and compliance with OECD standards.
The key points of the Convention relate to dividends, interest, royalties, capital gains, and international standard of exchange of information upon request and are as follows:
The Convention1 provides for a withholding tax rate of 5% where the beneficial owner is a company (other than a partnership) which holds directly at least 15% of the capital of the company paying the dividends. In all other cases, the dividend withholding tax amounts to 15%.
For Luxembourg subsidiary paying dividends to its Kazakh parent, the Convention has a limited impact since withholding tax rates on dividends paid to Kazakh companies can typically be reduced to 0% given the conditions for the Luxembourg participation exemption regime (as provided under Article 147 of Luxembourg Income Tax Law - “LITL”) should be met. However, the concluded Convention will have an impact from a Luxembourg tax perspective since without it we would not be able to apply the dividend withholding tax exemption of Article 147 LITL.
Based on Kazakh domestic tax law, a dividend paid by a Kazakh subsidiary to its Luxembourg parent company is subject to 15% withholding tax. Therefore, the Convention might be beneficial in such a case. Moreover, Luxembourg domestic tax law can exempt dividends received by Luxembourg parent from a Kazakh subsidiary provided that the conditions of article 166 LITL are met (i.e., the Kazakh subsidiary is subject to tax equivalent to Luxembourg corporate income tax, Luxembourg parent holds at least 10% of the capital of its Kazakh subsidiary, or acquisition price of at least € 1.2 million for dividends and liquidation proceeds / € 6 million for capital gains, during an uninterrupted period of least 12 months).
The Convention2 provides for interest payments to be generally subject to a 10% maximum withholding tax rate. This rate can be reduced to nil notably if the interest is paid to the State, the National Bank of Kazakhstan, to a local authority resident in the state in which they are generated or to a financial institution fully owned by the State and, in the case of Kazakhstan, to the Fund for sustainable development and in the case of Luxembourg to the “Société Nationale de Crédit et d’Investissement”.
The benefits of the Convention for interest payments made by Luxembourg companies to non-residents are limited since interest payments are generally not subject to withholding tax.
The domestic withholding tax rate applied by Kazakhstan on interest payments to non residents is 15%. The reduced withholding tax rate of 10% applicable to the payments made by Kazakhstan residents to Luxembourg entities should positively impact the development of financing structures involving Luxembourg finance companies.
The Convention3 foresees a 10% withholding tax rate on royalties. The withholding tax reduction applies to a broad range of royalties including films and rental of industrial, commercial and scientific equipment (this provision is quite rare as the latest version of OECD model convention does not include the payments for rental of equipment).
The impact from a Luxembourg standpoint is neutral as royalties paid by a Luxembourg company to non-residents are not subject to withholding tax under the Luxembourg domestic tax law. However, the Convention becomes beneficial where royalties are paid by a Kazakhstan company to a non-resident company, as the local withholding tax rate is 15%.
The Article 13 of the Convention is in line with the OECD model convention, whereby:
- The gains from alienation of immovable property are taxed in the State where immovable property is located;
- The gains from alienation of shares (or other participating interest) in the companies or partnerships which have assets mainly composed out of immovable property located in a State are taxed in this Sate;
- The capital gains realized upon the disposal by a shareholder of its interest in a subsidiary (or other assets not covered by the provisions of this Article) are only subject to tax in the State where the seller is resident.
Consequently, capital gains realized by a Luxembourg shareholder in a Kazakh subsidiary (other than a property rich company) should be tax exempt in Kazakhstan based on the Convention and in Luxembourg under the participation exemption regime.
Capital gains realized by a Kazakh shareholder in a Luxembourg subsidiary should be tax exempt in Luxembourg according to the Convention and taxable in Kazakhstan as part of the business income.
Exchange of information5
The Protocol applies the international standard of exchange of information upon request as provided in the 2010 OECD Model Convention. In addition, it sets detailed requirements for information requests, so as to avoid the use of the Convention for “fishing expeditions”.
This Convention is a significant step in the development of business relationships between Kazakhstan and Luxembourg. Kazakh investors will now be able to use Luxembourg companies for investments throughout the world or investors from any country can now invest in Kazakhstan through a wide range of Luxembourg investment vehicles.
Furthermore, the Convention strengthens the Luxembourg treaty network with Central Asian countries. Before the concluded Convention, the Netherlands were nearly the only option for the Kazakh inbound and outbound investments. The present Convention is very similar to the one between the Netherlands and Kazakhstan and clearly creates new interesting business opportunities for Luxembourg.
For further information, please do not hesitate to contact us.
1) Article 10 (2)
2) Article 11 (2)
3) Article 12 (2)
4) Article 13
5) Article 25
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination