Tax benefits in Kazakhstan. How do I get an exemption from income tax? — Versus.legal column

Astana (photo: Viktor Hesse/Unsplash)

Roman Motorin, lawyer Versus.legal

Since 2022, Russian gaming and IT companies have been actively resolving the issue of registering companies abroad and opening bank accounts. There are many reasons, but the main ones are the receipt of foreign currency earnings and the relocation of employees. Due to the sanctions, the choice of jurisdictions has significantly narrowed.

Kazakhstan has become one of the most popular countries where Russian game dev and IT business have “landed”. In addition to the obvious advantages, there are as many as two preferential tax regimes that gaming and IT companies can use: Astana Hub and AIFC. We’ll talk about them today.

We also talked with the MadOut gaming company, which has been working in Kazakhstan for a long time and enjoys the benefits of Astana Hub. Our interlocutor is Vladislav Ivanchuk, General Director of MADOUT GAMES LLP in Kazakhstan. He shared his personal experience of working in this jurisdiction.

Tax benefits of Astana Hub

Astana Hub is a technology park for IT startups in the Republic of Kazakhstan. Companies established on the territory of the Republic can become residents of the technopark (and foreign companies can also become residents until 01.01.2024). Most often these are companies in the organizational and legal form of a limited liability partnership (LLP) – an analogue of Russian LLC.

What tax benefits are available to Astana Hub residents?

• Reduction of corporate income tax (income tax, CIT) on income from IT activities by 100%. The income from IT activities are:
  • implementation of intellectual property (IP). For example, alienation of rights to a game or other software;
  • sales of goods with the object of intellectual property. This category of income includes the supply of packages or devices with your software and your patents;
  • royalties from your licensees for the right to use IP. For example, payments from the publisher of your game or payments from corporate clients for the right to use your IT product;
  • income from the commercial use of games and other programs. For example, income from advertising placed inside a free-play game, IAP;
  • award of compensation for the misuse of IP. For example, payment of compensation in the satisfaction of a claim against the violator of your rights to a game or other program.

If the company has income not from IT activities (for example, interest on deposits, loans, dividends from subsidiaries), then the company pays income tax on them. This benefit also does not apply to withholding tax in other countries – if you are paid royalties from Russia, the USA or Germany, withholding tax will be withheld from these payments in the country of payment. But exemptions that are prescribed in double taxation Avoidance Agreements (SIDN) may apply.

• VAT exemption for goods, works and services supplied by Astana Hub resident companies. Goods, works and services sold by the company are exempt from VAT in Kazakhstan. VAT exemption is applied only in cases when Kazakhstan is recognized as the place of sale. In practice, this means that the company does not pay Kazakhstan VAT, but when delivering to other countries, your counterparties may pay VAT or other indirect taxes in their countries.
• Exemption from VAT on goods imported for IT activities. The company can independently import goods from a special list for its own IT activities (computers, peripherals, other hardware) and not pay VAT on import.
• VAT exemption for services and works from independent contractors. The Company may receive services and orders from independent contractors outside Kazakhstan and not pay Kazakhstan VAT on such services.
• Exemption of salaries and bonuses of employees from income and social taxes. Wages and other similar payments are excluded from the individual income tax base (analogous to personal income tax) of the company’s employees. The Company is not obliged to withhold taxes and contributions from these payments.
• Income from the increase in the value of shares /shares. If the shares in the Astana Hub resident company belong to another legal entity in Kazakhstan, the increase in the value of the shares is not subject to corporate income tax. An increase in value is a positive difference between the expenses incurred by the owner of the company to receive a share and the income he received during resale. For example, LLP-1 contributed $100 to the authorized capital of LLP-2 and received 100% of shares in LLP-2 ($1 for 1% of shares). After 5 years, LLP-2 released a successful product, and LLP-1 made an exit and sold shares in LLP-2 with a margin – at a price of $100 for 1% of the shares. A margin of $99 for each 1% share is an increase in value. If LLP-2 is a resident of Astana Hub, this increase in value is not taxed.
• Exemption from withholding tax. Under normal conditions, a company registered in Kazakhstan, when paying royalties abroad, will be obliged to withhold withholding tax from royalties (for example, when paying royalties in Kazakhstan in the Russian Federation, 10% will need to be withheld). Astana Hub resident companies may not withhold such a tax if royalties are paid for IT activities. The same exemption also applies to the income of a foreign company from the provision of consulting, marketing, engineering services, services in the field of information security, work on the creation of data processing centers. If these services are purchased by an Astana Hub resident company, it does not withhold withholding tax from the payment of these services.

NB! What do you still need to pay? The Astana Hub resident company is obliged to pay 1% of its quarterly income – this is a fee in favor of Astana Hub, which is set out in clause 2.1. of the Agreement on the Terms of Business in Astana Hub.

What do I need to become a resident of Astana Hub?

• A legal entity in Kazakhstan.
• A business plan of the project with a description of the types of activities and planned results.
• The company’s activities should belong to one of the priority types (these, among other things, include the development and maintenance of games and other software).
• The company should not have any tax arrears.
• The company must have an office (own or rented).
• The company should not have branches.

What are the conditions for using tax benefits?

Since 01.01.2023, in order to enjoy tax benefits, it is not enough to be just a resident of Astana Hub – additional rules for the application of this benefit have appeared, which significantly complicate the issue.

In short, all other benefits depend on whether the company can enjoy the main benefit – the right to reduce corporate income tax by 100%. At the same time, the ability to use this benefit directly depends on how closely the company’s work is connected with Kazakhstan.

Depending on what the company earns, the conditions for applying benefits differ:

• income from the use of IP

For example, the company receives income from the distribution of the game in the store, from advertising in the game or from in-game purchases. Then the share of profit that is exempt from tax depends on the correlation coefficient. It determines to what extent the object of intellectual property is really connected with the territory of Kazakhstan. It is calculated according to a special formula based on the costs of creating an intellectual property object.

If all expenses are the salary of employees in Kazakhstan, remuneration to independent contractors (freelancers), then the coefficient will be equal to 1. If among the expenses there are payments for the purchase of finished products, as well as payments to affiliated developers, then the coefficient decreases. And then not all profits can be exempt from tax.

Comment by Vladislav Ivanchuk:

“In general, the situation with the Astana Hub is twofold now. The regulator has greatly complicated the rules for obtaining benefits. There is no practice yet on how the tax service will apply and interpret these edits, but I think many will get in. In general, this has hit the attractiveness of the Astana Hub very hard.”

• income from the provision of services

For example, a company provides development services for its customers.

In this case, it must confirm the availability of the necessary resources for the independent provision of services. What does the sufficiency of resources mean is solved in the case-by-case format, but the verification can take place according to criteria such as:

• • number of employees;
  • education, experience and qualifications of employees;
  • expenses necessary for the provision of this type and volume of services.

In addition, the company is obliged to prove that it operates on the territory of the Republic of Kazakhstan by concluding civil law transactions under the legislation of Kazakhstan and concluding employment contracts in accordance with the Labor Code of the Republic of Kazakhstan.

AIFC Tax Benefits

The Astana International Financial Center (AIFC) is a part of the territory of the city of Astana, where a special legal regime operates. A special legal regime provides, among other things, special commercial arbitration and special tax benefits.

Not only banks and insurance companies can enjoy the benefits of the AIFC: it is quite possible to establish a holding company there, which will own shares and stakes in other companies in your group (for example, those that will develop and publish games), rights to key assets (including intellectual property), etc.

It is possible to establish a company in the AIFC in various organizational and legal forms, but the most budgetary and easiest option would be a private company – such a company will not be able to enter an IPO, conduct some types of financial activities, etc., but for most GameDev and IT holdings at the initial stage this is enough.

What tax benefits are available to AIFC residents?

• Income from the increase in the value of shares is not taxed until 2066. The situation here is the same as with the increase in value in Astana Hub: the founder spent money to create a company and get its shares (for example, $ 1 for each share). A few years later, he sells the same shares to new investors, but at a significantly higher price (for example, $ 100). It turns out that the value of each share has increased by $99 apiece. Under normal conditions, this money is the income of the founder, from which he must pay tax on income from value gains. This difference of $99 per share will not be taxed in Kazakhstan until 2066, since these shares are issued by a company that was opened in the AIFC. It should be understood that this benefit is beneficial to those founders who are foreign trade residents of Kazakhstan (live in Kazakhstan).
• Dividends paid to founders are not taxed in Kazakhstan (also until 2066). An ordinary company can pay dividends to its shareholders. If the shareholder is a simple individual, such dividends form the income of the shareholder, and the company is obliged to withhold individual income tax (IPN, an analogue of the Russian personal income tax) when paying dividends. If the dividends are paid by a company established in the AIFC, it is not obliged to withhold this tax from dividends. This benefit is also relevant for founders who are tax residents of Kazakhstan (live there). When paying dividends to another Kazakh legal entity, the latter may also not pay corporate income tax on such dividends.

These tax benefits are significantly more modest than the benefits provided for Astana Hub residents, but there are fewer requirements in the AIFC, and it is much easier to fulfill them. AIFC resident companies may not develop in Kazakhstan, do not keep complex records of the costs of developing their intellectual property, do not prove to the tax authorities the sufficiency of labor resources, etc. Therefore, a private company in the AIFC is a more suitable option for holding companies.

At the same time, the AIFC and Astana Hub can be used simultaneously. For example, if you attract investments from funds or private investors, you can make a holding company in the AIFC to make a deal under English law (more developed corporate regulation). You can also create a subsidiary company that will be engaged in the development and development of the game and which will become a resident of Astana Hub. In this case, you will be able to combine various benefits.

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There are two preferential regimes for gaming and IT business in Kazakhstan. It is quite easy to open a legal entity here, and there should be no problems with a bank account. However, we recommend checking in advance whether you will fall under the benefits or not: there are many nuances in the regulation of benefits in which you can get confused.