An important update to the Controlled Foreign Corporations (CFC) regime, which is expected to be adopted in March, is being considered in Kazakhstan to narrow the scope of the CFC rules temporarily.

What Is a CFC?

When a Kazakhstan resident individual or company owns 25% or more of the shares in a CFC, it must report such ownership to the Kazakhstan tax authorities and pay income tax on the undistributed profits of the CFC.

Prior to 2018, under the old Kazakhstan Tax Code, the CFC regime only applied to a CFC resident in a tax blacklisted jurisdiction such as Seychelles, BVI, Cayman Islands, etc.

However, the definition of the CFC jurisdiction in the current tax code (which became effective on 1 January 2018) covers: (i) tax blacklisted jurisdiction; and (ii) jurisdictions with an effective income tax rate of less than 10%. Given that many traditional holding company jurisdictions impose very little (or no) tax on dividends, interest, and capital gains (unlike in Kazakhstan where such items are taxable), they may technically fall into a CFC jurisdiction under the current CFC regime.

What Changes Are Considered?

It is proposed that the CFC regime will not apply to jurisdictions having an effective double tax treaty with Kazakhstan. This exemption will apply retroactively from 1 January 2018 and will last for two years until 2020.

Changes to the computational rules have also been proposed, which taxpayers with CFCs should be aware of.

The draft law amending the Kazakhstan Tax Code is now in the Senate (the upper house of the Parliament). It is anticipated that the draft law will be adopted and signed into law in March 2019.