Ravil Kassilgov, partner

Didar Kuatov, associate

Recently Netherlands published a Convention for the avoidance of double taxation with Kazakhstan (“the Convention”), that incorporates provisions of the Multilateral Convention (“MLI”) chosen by the Netherlands and Kazakhstan. These provisions directly impact or replace the Convention. It should be noted that such an official document is easy to use and minimizes the probability of mistakes in applying the Convention.

Let’s look at these changes and give some examples:

• Article 4.1 of MLI changes Article 4.3 of the Convention. This amendment applies to legal entities with dual residence. In case of conflict related to a dual residence, such residence will not be determined by the place of management, but by mutual agreement of competent authorities. If the conflict is not solved, an entity will not receive any benefits.
• Article 14.1 of MLI applies to Article 5.3.a) of the Convention, thereby introducing “the rule against of splitting-up of contracts” on a construction or installation site, or in the provision of services related to the supervision of such works. Now, when determining a 12–month period, periods of activity of related enterprises, that act on the same site and such an activity exceeds 30 days for each such undertaking are taken into account. This prevents the artificial division of contracts to avoid the formation of a permanent establishment.
• The rule against of  splitting-up of contracts division also applies to Article 5.4 of the Convention. If a person closely related to a non-resident carries on business in a warehouse or in premises used for preparatorily and auxiliary activity, the non-resident forms a permanent establishment (Article 13 of MLI).
• A definition of “a person, closely related to an enterprise” is contained in Article 15 of MLI, which is an addition to Articles 13 and 14 of MLI. Kazakhstan and Netherlands did not formally adopt Article 15 of MLI, but neither rejected it, thus it is present in the updated Convention by default.
• Article 10 of the Convention “Dividends”. A one-year period of ownership or control of capital shares of the enterprise has been added. To apply the reduced rate of 5% under the Convention, the holding of 10% of the shares or capital must have been observed for 365 days preceding the payment of the dividend. This rule applies only to companies, the rate for individuals remains the same at 15%.
• Article 13 of the Convention has also been amended. The 365-day rule now also applies to taxation on the alienation of property. For example, if a Kazakhstan enterprise owns participation rights in a Dutch company, 60% of the assets of which are real estate in the Netherlands, the income from the sale of these rights can be taxed in the Netherlands if the real estate was worth 60% in previous 365 days. Even if at the time of sale the real estate share has decreased to 40%, the income will be taxable in the Netherlands.
• Mutual agreement procedure has been amended: an entity who believes that it is subject to double taxation may apply to the competent authority of any of the contracting states, not only to itself state. This is a positive change, as the initiation of the procedure in Kazakhstan can take a long time in practice.
• The most important MLI provision is Article 7 – the criteria of the main purpose test. It is also included in the Convention. The article states that the Convention does not grant benefits if the purpose of obtaining the benefit is tax avoidance.

If you have questions on the interpretation and understanding of provisions of MLI, we will be glad to assist you.

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