VAT deregistration of taxpayers (legal entities) in which CEO or sole participant are foreign individuals
Sub –clause 8, clause 4, article 571, the Tax Code of the Republic of Kazakhstan (the “Tax Code”), came into force on 1 July 2015.
One of new grounds for VAT deregistration without prior deregistration notice to a taxpayer by virtue of a decree of the tax authorities is the case, when a CEO or sole participant(shareholder) of a legal entity is a foreign individual. An individual entrepreneur is also subject VAT deregistration, if he/she is a foreign citizen or a stateless person, and his/her staying in Kazakhstan is not connected with employment or labour activity, or his/her permitted period of staying on the territory of the Republic of Kazakhstan expired.[1]
The literal interpretation of this provision, in particular this wording, may create hindrances for foreign investors.
Case No.1. Pursuant to the laws of the Republic of Kazakhstan, an individual, inter alia, a foreign citizen can be a sole participant of a legal entity, and he/she does not have to stay permanently on the territory of the Republic of Kazakhstan. He/she can manage a daughter company in another place and under the laws of the Republic of Kazakhstan.
According to the clause 4, article 12, Constitution of the Republic of Kazakhstan, foreign citizens and stateless persons may enjoy the same rights and freedoms and have the same obligations, as Kazakhstani citizens have, if none other is provided by the Constitution, laws and international treaties, i.e. foreign citizens and stateless persons have equal rights with citizens of the Republic of Kazakhstan.
In our view literal interpretation of part 7, sub-clause 9, clause 4, article 571, the Tax Code of compromises the rights of a foreign citizen to be a sole participant (shareholder) of his/her own company and, unreasonably bind foreign citizens (i) to make any third person a member of the partnership, i.e. a new participant or (ii) enter into an employment agreement with a legal entity, where this foreign citizen is a sole participant.
Case № 2. The second disputable point that we should pay attention to, is a status of non-resident legal entities, which are carrying out their activity through a branch or representative office.
Under the sub-clause 1, clause 1, article 228, the VAT payers can be, inter alia, non-residents, carrying out activity in the Republic of Kazakhstan through a branch or representatives.
Thus, a non-resident legal entity will be a VAT payer and not its branch or representative office.
For instance, a company “A” (Turkish resident) has a branch in Kazakhstan and is a registered Kazakhstani VAT payer. The parent company, i.e. Turkish company A will be recognized as a VAT payer, but not its branch.
The CEO(s) or managers of non-resident legal entities (not CEO(s) of branches) carrying out activity in Kazakhstan through a branch or representative office are foreign citizens by default. They are not employed and anyhow engaged into any activity in Kazakhstan.
Based on the aforementioned, it appears that all non-residents, carrying out activity through a branch or representative office must be deregistered of VAT from 1 July 2015.
In view of all this, we think that the wording of part 7, sub-clause 8, clause 4, article 571, the Tax Code, that became effective from 1 July, 2015, has varying interpretation. This may give a rise to disputes between taxpayers and tax authorities, and also creates hindrances for foreign legal entities and individuals, which view Kazakhstan as new market for their business, and which already carry out activity here.
[1] para 7, sub-clause 8, clause 4, article 571, the Tax Code
Yerzhan Manasov