KAZAKHSTAN: TAX CASE LAW ON INTERNATIONAL STRUCTURES,

M&A DEALS, AND RESTRUCTURING - PRACTICE REVIEW UPDATE

Case Overview:

• In 2020 the Kazakhstani company TOO Bogatyr Komir paid dividends and fees for engineering services to its sole shareholder – the Dutch company Forum Muider B.V.
• The TOO applied withholding tax benefits under the tax treaty between Kazakhstan and the Netherlands – a tax exemption on services and a reduced 5% tax rate on dividends.
• During a tax audit, the tax authorities assessed additional withholding tax both on services and on dividends. The TOO successfully challenged the additional tax assessment in respect of the services before the higher tax authority. The additional assessment on dividends remained in force, and the TOO contested it in court.
• The tax authorities justified the assessment of withholding tax on dividends by the fact that Forum Muider B.V. is not the beneficial owner due to the following:

1. The company carries out only holding activities and receives income mainly in the form of dividends;

2. The company does not conduct business activities and does not have the opportunity to do so due to the lack of employees;

3. The company's board of directors' members are also the employees of its shareholders - Russian and Kazakhstani companies;

4. Half of the received dividends are transferred to the Kazakhstani company, a shareholder of the Dutch company.

Court’s Decision:

• The court of first instance supported the taxpayer and concluded that the Dutch company independently disposed of the funds received from the TOO and was the beneficial owner of the income; accordingly, it was entitled to apply withholding tax benefits.
• However, the court of appeal ruled that the Dutch company was only a formal owner of the funds received and had limited powers to dispose of the dividend income.

The court ruled that the withholding tax assessment was justified. (Resolution of the Pavlodar Region Court № 5599-25-00-4а/62 dated 3 June 2025). The Resolution may be appealed in the court of cassation.

Conclusions:

• Tax treaty benefits do not apply to intermediaries. The mere receipt of money does not mean that the recipient is the beneficial owner of the income for the purposes of reduced withholding tax rates.
• The ultimate “destination” of the income (including the “pass-through” nature of cash flows) is important but not the only factor. Other circumstances are also relevant, such as the legal right to dispose of the income, the nature of the income-receiving company’s activities (other sources of income, conduct of business activities), the number of employees, management arrangements, etc.
• The beneficial ownership concept is complex, and its application requires casespecific analysis without clear-cut answers.

Case Overview:

• In 2018-2022 the Kazakhstani company TOO Mary Kay (Kazakhstan) paid fees for consulting services to the US company Mary Kay Inc.
• The TOO did not withhold tax based on the tax residency certificate received from the US company and the tax treaty between Kazakhstan and the USA, which provides for withholding tax exemption on payments for services.
• Following the tax audit, withholding tax was additionally assessed in respect of service fee payments made by the TOO to the US company, as the tax authority recharacterized these payments as royalties. The TOO challenged the additional assessment in court.

Court’s Decision:

• The court upheld the classification of payments for services as royalties based on the following:

1. Under the service agreement, the American company transfers professional knowledge, experience and information;

2. The TOO agrees to comply with the terms of confidentiality and data protection;

3. Consequently, when providing services, confidential commercial information (“know-how”), which is intellectual property, is transferred.

The court supported the withholding tax assessment. (Resolution of the Judicial Collegium for Administrative Cases of the Almaty City Court №7599-25-00-4а/933 dated 28 October 2025) The Resolution may be appealed in court of cassation.

Case Overview:

• In 2018 the Kazakhstani company TOO METRO Cash & Carry paid invoices of the German company of the METRO group (METRO AG) under:

1. Services under framework IT services contract;
2. Shared service center agreement;
3. Services under framework business services agreement;
4. Sublicense agreement for the use of the “METRO” trademark.

• The TOO did not withhold tax on these payments.
• Following a tax audit, all payments (IT services, shared service center services, and business services) were classified as royalties, and withholding tax at the rate of 15% was assessed. The TOO challenged this decision in court.

Court’s Decision:

• The court sided with the tax authority regarding the classification of payments under two contracts:

1. Under the IT services contract, software and databases were provided, so the entire remuneration under this contract (including the main part – for adaptation and modification of IT products) should be recognized as royalties.
2. Payments under the shared service center contract are also royalties, as this contract involved the transfer of rights to use software and software components.

• However, the court did not uphold the argument regarding the classification of payments under the business services agreement as royalties, since the description, procedure, terms of provision, as well as the results of these services did not correspond to the definition of royalties.
• At the same time, the court ruled that for payments qualified as royalties, the reduced rate under the tax treaty between Kazakhstan and Germany of 10% should apply.
• The court’s ruling emphasizes that it is contradictory to classify payments as royalties under a tax treaty and to not apply the reduced withholding tax rate provided for in the treaty.
• Positions of the TOO, the tax authority, and the court's final decision, broken down by contract:

The court canceled part of the additional assessments and applied the preferential withholding tax rate to royalties (Resolution of the Judicial Collegium for Administrative Cases of the Almaty City Court No. 7599-24-00-4а/838 dated 18 September 2024).

Conclusions:

• The court practice shows that payments for services to foreign counterparties may be classified as royalties, which leads to additional withholding tax assessment.
• Contracts that, in addition to the provision of services, provide for the granting of rights to intellectual property (software, databases) and confidential commercial information (considered as “know-how”) are at particular risk.
• Court practice remains inconsistent: in some cases, taxpayers successfully defend the classification of payments as services, while in others, courts uphold the classification as royalties. The position on the tax rate is also ambiguous: sometimes the base rate (15%) is applied, while in other cases, courts uphold the application of the preferential rate under tax treaties (10%).
• It is also worth noting that, as of 2026, changes have been made to the tax legislation: if royalties are separately indicated in the contract for the provision of technical support and maintenance services, then the withholding tax is applied only to this part; if not, then to all income under the contract (clause 5, article 683 of the Tax Code of the Republic of Kazakhstan).