Another consultation was conducted for a Kazakhstani company that supplies products from the Kingdom of Norway to the Republic of Belarus, following a contract with the buyer. The company’s responsibilities include delivering the goods to Klaipeda, where it engages Lithuanian freight forwarding companies for receiving, storing, and dispatching the goods. Subsequently, the buyer independently arranges the transportation of the goods to Belarus. This raised a question about the potential establishment of a permanent establishment for the company in Lithuania under the international agreement on the prevention of double taxation and tax evasion.
According to Paragraph 5 of Article 2 of the Tax Code of Kazakhstan,
if an international treaty ratified by the Republic of Kazakhstan establishes rules different from those in the Tax Code, the rules of the said treaty shall apply.
Under Paragraph 1 of Article 660 of the Tax Code
, the provisions of an international treaty that regulate issues of avoiding double taxation and preventing tax evasion, to which the Republic of Kazakhstan is a party, apply to individuals who are residents of one or both states that are parties to such a treaty.
Paragraph 2 of the Normative Decree of the Supreme Court of the Republic of Kazakhstan No. 9 dated December 22, 2022, “On Certain Issues of the Application of Tax Legislation by the Courts,” establishes that
in applying the norms of the legislation for taxation purposes, priority should be given to the norms established by Paragraph 3 of Article 2 of the Tax Code. If an international treaty ratified by the Republic of Kazakhstan establishes rules different from those in the Tax Code, the rules of the said treaty shall apply (Paragraph 5 of Article 2 of the Tax Code).
In accordance with Paragraph 3 of Article 4 of the Constitution of Kazakhstan,
the procedure and conditions for the operation of international treaties on the territory of the Republic of Kazakhstan, in which Kazakhstan is a participant, are determined by the legislation of the Republic.
According to Paragraphs 1 and 6 of Article 5 of the Convention between the Republic of Kazakhstan and the Republic of Lithuania on the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income and on Capital, ratified by the Law of the Republic of Kazakhstan dated October 31, 1997 (hereinafter referred to as the Convention),
the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried out. The term "permanent establishment" specifically includes: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; and f) a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources. An enterprise is not considered to have a permanent establishment in a Contracting State merely because it conducts business in that State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.
The said Convention is based on the Model Tax Convention on Income and on Capital (hereinafter referred to as the "Model Convention") of the Organisation for Economic Co-operation and Development (hereinafter referred to as the "OECD"). According to the latest update adopted in 2017, the Model Convention indicates the following:
- International juridical double taxation can generally be defined as the imposition of comparable taxes in two (or more) countries on the same taxpayer concerning the same subject matter and for identical periods. Its detrimental effects on the exchange of goods and services and the movement of capital, technology, and people are so well known that it is hardly necessary to stress the importance of removing the obstacles that double taxation presents to the development of economic relations between countries.
- In OECD member countries, it has long been recognized as desirable to clarify, standardize, and confirm the financial position of taxpayers engaged in commercial, industrial, financial, or any other activity in other countries by applying common solutions to identical cases of double taxation. These countries have also long recognized the need to improve administrative cooperation in tax matters, in particular through the exchange of information and assistance in the collection of taxes, to prevent tax evasion and avoidance.
- These are the main objectives of the OECD Model Tax Convention on Income and on Capital, which provides means for addressing the most common problems arising in the field of international juridical double taxation on a uniform basis. In accordance with the recommendations of the OECD Council, OECD member countries should adhere to this Model Convention, as interpreted in the comments thereon, and take into account the reservations contained therein, and their tax authorities should follow these from time to time varying comments and take into account the remarks on them when applying and interpreting the provisions of their bilateral tax conventions based on the Model Convention.
Thus, the Republic of Kazakhstan joined the OECD Country Programme for Co-operation in accordance with an agreement signed in January 2015 in Davos by the Prime Minister of the Republic of Kazakhstan and the OECD Secretary-General. This cooperation is intended for countries not belonging to the Organisation to adopt the experience and standards of the OECD, and the Tax Authority of the Republic of Kazakhstan should follow the comments of the Model Convention when applying and interpreting the provisions of its bilateral tax conventions based on the Model Convention.
The Model Convention contains a section outlining comments on Article 5 "Permanent Establishment." Specifically:
35. For a place of business to constitute a permanent establishment, the enterprise that uses it must carry out its business activities wholly or partly through it. As noted in paragraph 3 above, the activity need not be of a productive character. Moreover, this activity need not be continuous, in the sense that operations must be carried out on a regular basis.
101. If an enterprise of a Contracting State carries on business through an independent agent acting in the ordinary course of his business, it should not be taxed in the other Contracting State concerning these business dealings if the agent acts in the ordinary course of his business (see paragraph 83). The activities of such an agent, representing a separate and independent enterprise, should not lead to the conclusion that there is a permanent establishment of the foreign enterprise.
Thus, based on the comments contained in the Model Convention, we believe that the Lithuanian freight forwarder, conducting its regular business activities, cannot be recognized as a permanent establishment of the Company in Lithuania, and such activities of the Company do not lead to the formation of a permanent establishment of the Company in Lithuania.
According to Paragraph 1 of Article 7 of the Convention,
the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on or has carried on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as mentioned above, the profits of the enterprise may be taxed in the other State but only to the extent that they are attributable to that permanent establishment.
Therefore, the Company's income is taxable only within the territory of the Republic of Kazakhstan.
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