January 2014

Double Tax Treaty between Luxembourg and Kazakhstan

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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.

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]

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 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]

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 non-resident 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.

 

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[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 EUR 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.