Global Tax Alert | 17 January 2014

Double Tax Treaty between Luxembourg and Kazakhstan is in force

  • Share

Executive summary

On 16 May 2013, Luxembourg ratified the first Income and Capital Tax Treaty with Kazakhstan, signed on 26 June 2008, and the Protocol to this Treaty signed on 3 May 2012. The Treaty entered into force on 10 December 2013. The Treaty will be applicable from 1 January 2014 onwards.

The provisions of the Treaty regarding the withholding tax rates applicable to payments of dividend, interest and royalties offer the lowest possible rates under Kazakhstan’s tax treaties. It is also interesting to note that the definition of permanent establishment includes “service permanent establishments.” Finally, the Treaty includes a “real estate rich clause.”

The main features of the Treaty are described hereafter.

Detailed discussion

Permanent establishment

The Treaty definition of permanent establishment, as foreseen in the Protocol, includes “service permanent establishments” in line with the 2001 United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model).1

Dividends

The Treaty provides that the withholding tax on dividends will be limited to 5% provided that the recipient is the beneficial owner which holds directly at least 15% of the capital of the company paying the dividend. The 5% rate is the lowest possible rate under Kazakhstan’s tax treaties. In other cases, the withholding tax will be limited to 15%. Kazakhstan levies 15% withholding tax on dividends under its domestic law. Under Luxembourg domestic law, dividends distributed by Luxembourg companies to companies in treaty jurisdictions are exempt from withholding tax under certain conditions.2

Interest

The Treaty provides that the withholding tax on interest will be limited to 10%. The 10% rate is the lowest possible rate under Kazakhstan’s tax treaties. Kazakhstan levies 15% withholding tax on interest under its domestic law. In principle, Luxembourg does not levy withholding tax on interest under its domestic law.3

Royalties

The Treaty provides that the withholding tax on royalties will be limited to 10%. The 10% rate is the lowest possible rate under Kazakhstan’s tax treaties. Kazakhstan levies 15% withholding tax on royalties paid to nonresident corporations under its domestic law. In principle, Luxembourg does not levy withholding tax on royalties under its domestic law.4

The definition of royalties includes payments in respect of equipment rental.

Real estate rich clause

The Treaty provides that any capital gains resulting from the disposal of shares in companies whose value mainly derives (directly or indirectly) from immovable property located in a contracting state are taxable in this country. Based on its domestic law, there may be cases under which Kazakhstan would effectively tax those capital gains. Conversely, Luxembourg’s domestic law does not include any provision that would lead to an effective taxation under the Treaty.

Shipping and air transport

The Treaty provides that any benefit derived by a tax resident of a contracting state from the exploitation of ships and aircrafts in international traffic will only be taxable in this contracting state.

Exchange of information

The Protocol contains an exchange of information provision in line with article 26 of the OECD Model Convention.

Entry into force

The provisions of the Treaty and the Protocol will enter into effect as from 1 January of the year following the year in which the Treaty entered into force, i.e., from 1 January 2014.

Endnotes

1. “The furnishing of services, including consultancy services, by an enterprise of a territory through employees or other personnel or persons engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) in the other territory for a period exceeding twelve months.”

2. The parent company has to be fully subject to tax corresponding to Luxembourg income tax, and has to hold, or commit to hold, at least 10% of the share capital or a participation with an acquisition cost of at least €1.2 million for at least 12 months.

3. A 15% withholding tax is due in Luxembourg on certain types of bonds issued by a Luxembourg company.

4. A 10% withholding tax is due in Luxembourg on revenue derived by non-Luxembourg resident taxpayers from some literary, artistic and sportive activities carried out in Luxembourg.

For additional information with respect to this Alert, please contact the following:

Ernst & Young TAX Sarl, Luxembourg
  • Marc Schmitz
    +352 42 124 7352
    marc.schmitz@lu.ey.com
  • John Hames
    +352 42 124 7256
    john.hames@lu.ey.com
  • Frank Muntendam
    +352 42 124 7258
    frank.muntendam@lu.ey.com
  • Dietmar Klos
    +352 42 124 7282
    dietmar.klos@lu.ey.com
  • Alain Pirard
    +352 42 124 7364
    alain.pirard@lu.ey.com
Ernst & Young LLP, Luxembourg Tax Desk, New York
  • Jurjan Wouda Kuipers
    +1 212 773 6464
    jurjan.woudakuipers@ey.com
  • Sabriye Ilkay
    +1 212 773 9376
    sabriye.ilkay@ey.com
  • Sebastian Klein
    +1 212 773 1235
    sebastian.klein@ey.com
Ernst & Young LLP, EMEIA Financial Services Luxembourg Tax Desk, New York
  • Raffaele Gargiulo
    +1 212 773 3505
    raffaele.gargiulo@ey.com
  • Guillaume Roux
    +1 212 773 3677
    guillaume.roux@ey.com
Ernst & Young LLP, Luxembourg Tax Desk, Chicago
  • Alexandre J. Pouchard
    +1 312 879 3007
    alexandre.pouchard@ey.com
  • Damien Sergent
    +1 312 928 1611
    damien.sergent@ey.com
Ernst & Young LLP, Luxembourg Tax Desk, San Jose
  • Xavier Picha
    +1 408 918 5880
    xavier.picha@ey.com
Ernst & Young Tax Services Limited, Luxembourg Tax Desk, Hong Kong
  • Domitille Franchon
    +852 2846 9957
    domitille.franchon@hk.ey.com
Ernst & Young LLP (United Kingdom), London
  • Gergely Szatmari
    +44 20 778 30582
    gszatmari@uk.ey.com

EYG no. CM4112