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Challenges and tax risks for companies when transferring staff to Kazakhstan: migration law and tax aspects

published on 26. August 2024 | reading time approx. 7 minutes

Kazakhstan is emerging as an increasingly attractive destination for foreign investment, particularly in the realm of large industrial projects. However, companies looking to operate in Kazakhstan must navigate a range of legal and tax challenges. The secondment of employees to support local projects necessitates meticulous planning and a thorough understanding of Kazakh legislation.

One of the primary hurdles is compliance with migration law requirements, including the acquisition of work and residence permits or visas. Additionally, companies must address whether and when the local deployment of employees constitutes a permanent establishment for tax purposes, potentially resulting in significant tax implications. This article delves into the critical migration law and tax considerations for companies sending employees to Kazakhstan and provides practical recommendations for successful project execution.

Migration law framework for transferring to Kazakhstan »
Permanent establishments for tax purposes: formation, risks and effects »
Conclusion and recommendations »

Migration law framework for transferring to Kazakhstan

Legal basis and requirements

The transferring of employees to Kazakhstan is subject to strict legal requirements. Foreign employees generally require a work and residence permit before they can work in Kazakhstan. These permits are issued on the basis of the employee's professional qualifications and the specific requirements of the project. Kazakhstan places high demands on the qualifications of foreign workers, which must be proven by appropriate documentation.

Another important aspect is the observation of local content regulations, which require a certain proportion of local labour to be involved in the project. These regulations are intended to ensure that the local population benefits from the investments and that local skilled labour is developed at the same time. In addition to obtaining visas that authorise deployment in the local project, a secondment of employees may also be considered.

Secondment

The secondment of employees, also known as secondment, is a frequently used method of transferring personnel to Kazakhstan on a temporary basis. The employee remains employed at the sending company while working for another company or a subsidiary (or branch) in Kazakhstan for a certain period of time. This type of transferring offers the advantage that no local employment is required, but in most cases a work permit must still be applied for.

The application for the necessary permits is made exclusively electronically and requires that the employee's qualifications meet the requirements of the position they are to fill in Kazakhstan. Exceptions to the authorisation requirement exist only for citizens of the Eurasian Economic Union and for certain executives of wholly foreign-owned companies.

Practical challenges and solutions

In practice, various problems can arise when applying for work and residence permits. Delays in the authorisation process, missing or incomplete documents and compliance with local content regulations are frequent stumbling blocks. Companies should deal with these requirements at an early stage and, if necessary, call in specialised service providers to optimise the process.

Careful planning and the timely submission of all required documents are crucial to avoid delays. It is also advisable to provide regular training for staff responsible for the authorisation procedures to ensure that they are aware of the latest legal changes. Rödl & Partner offers such individual training in the form of workshops and will be happy to answer any questions you may have.

Permanent establishments for tax purposes: formation, risks and effects

Basics of the permanent establishment for tax purposes

A permanent establishment for tax purposes is defined in international tax law as a fixed place of business through which all or part of a company's business activities are carried out. In Kazakhstan, Article 220 of the Tax Code regulates the conditions under which a permanent establishment is created. This can already be the case if a company provides services in Kazakhstan over a longer period of time or maintains a physical presence in the country.

Role of the MLI in the context of the secondment of employees to Kazakhstan

The Multilateral Instrument (MLI), officially known as the "Multilateral Convention to implement measures under the OECD/G20 BEPS initiative to prevent base erosion and profit shifting", plays a crucial role in international taxation and can have a significant impact on the tax obligations of companies operating in several countries, including Kazakhstan.

Kazakhstan is a party to the MLI and has chosen certain options and reservations under this treaty that affect the application of its double tax treaties, such as the treaty with India.

Effects of the MLI on the permanent establishment regulations

One of the key changes introduced by the MLI concerns the definition and conditions for the creation of a permanent establishment. The MLI introduced so-called anti-fragmentation rules, which are intended to prevent companies from splitting their activities into different, seemingly independent projects or contracts in order to avoid the creation of a permanent establishment for tax purposes.

In the context of Kazakhstan, this means that the periods during which employees are on site for different but related projects can also be added together to determine whether a permanent establishment has been created. This regulation is particularly relevant for companies that regularly send staff to Kazakhstan for various projects, as the cumulative consideration of the length of stay means that the threshold for the creation of a permanent establishment can be reached more quickly.

Application of the "Principal Purpose Test" (PPT) rule

The MLI also introduces the "Principal Purpose Test" (PPT) rule, which aims to prevent the misuse of DTAs. Under this rule, the benefit of a DTA is denied if one of the main motivations for a transaction or structuring is to enjoy the benefits of the treaty without a reasonable commercial reason for doing so.

For companies sending employees to Kazakhstan, this means that any structure that is primarily aimed at avoiding or minimising tax obligations may not provide the expected tax protection. The PPT rule requires careful scrutiny and justification of the economic substance and purpose of business activities to avoid unpleasant tax surprises.

Significance for business practice

Companies operating in Kazakhstan that wish to minimise the risk of a permanent establishment must incorporate the MLI and the associated regulations into their tax planning. This requires close co-operation with tax advisors to ensure that all activities, contracts and the secondment of employees comply with the requirements of the MLI.

The implementation of the MLI means that companies need to pay more attention to how they structure their international activities. It is important to consider not only the local Kazakh tax regulations, but also the new requirements of the MLI, which are implemented on a global level.

Interim conclusion

The MLI has the potential to significantly impact international tax rules, particularly with regard to the creation of permanent establishments and the abuse of DTAs. For companies operating in Kazakhstan or sending employees there, it is crucial to understand these new rules and incorporate them into their business and tax planning. Careful preparation and sound tax advice are essential to ensure that all legal requirements are met and unnecessary tax risks are avoided.

Service Permanent Establishment (Service-PE)

A special form of permanent establishment is the so-called Service Permanent Establishment (Service PE), which arises when a company provides services in another country over a certain period of time. According to the double taxation agreement between India and Kazakhstan, for example, a service PE arises if a company provides services for more than 90 days within a 12-month period.

The concept of "interdependent projects" is of central importance in this context. It states that the periods of different but related projects can be cumulated, which can lead to a permanent establishment being created even if no individual project exceeds the 90-day limit. This regulation poses a considerable risk for companies operating in Kazakhstan, as they may inadvertently become subject to tax.

Case studies and practical examples

In practice, a permanent establishment can easily be created if several projects are close to each other in terms of time or content. An example of this is the case of a company that successively provides similar services to the same customer. Although the individual projects may each last less than 90 days, a permanent establishment can be created by linking them, with the corresponding tax consequences.

Companies should therefore take care to structure their projects and the associated contracts carefully in order to avoid the unwanted creation of a permanent establishment. One option is to draw clear boundaries between projects and ensure that there is no economic interdependence.

This is appropriate, at least from the perspective of local tax law. The provisions of international law are often interpreted against the background of local fiscal interests, so the risk of de facto double taxation should always be borne in mind.

Strategies for avoiding a permanent establishment

To minimise the risk of creating a permanent establishment, companies should plan their projects and associated contracts carefully. It is advisable to closely monitor project durations and ensure that there are no overlaps or dependencies between different projects that could be considered "interdependent".

In addition, companies should regularly check whether they may be establishing a permanent establishment in Kazakhstan and take appropriate measures to prevent this. This may include restructuring projects or adapting contractual clauses. Comprehensive documentation and cooperation with local tax advisors, such as Rödl & Partner, are also crucial to ensure that all legal requirements are met and no unwanted tax obligations arise.

Role of subsidiaries and subcontractors in Kazakhstan

Involvement of local partners

The integration of subsidiaries and subcontractors is a common practice in Kazakhstan in order to utilise local expertise and fulfil legal requirements. However, this practice also brings with it legal and tax challenges. In particular, the involvement of subcontractors can lead to the establishment of a permanent establishment for tax purposes if the contractual relationships are not clearly separated and the foreign company is regarded as the economic employer of the labour used.

Risks and challenges

One of the biggest risks when using subcontractors is the possible interdependence of contractual relationships, which can lead to the foreign company being regarded as the economic employer. This could result in a permanent establishment being established, with the corresponding tax obligations.

Another risk is that the subcontractor's tax obligations are transferred to the foreign company, particularly if the subcontractor is not properly registered or does not fulfil its tax obligations. This can lead to significant financial and legal consequences from a withholding tax perspective.

Conclusion and recommendations

The secondment of employees to Kazakhstan and the realisation of industrial projects in this emerging market are associated with a variety of legal and tax challenges. Companies wishing to operate in Kazakhstan should familiarise themselves intensively with the local legal framework and ensure that they obtain all the necessary permits and minimise tax risks.

It is advisable to seek legal and tax advice at an early stage and work closely with local advisors to ensure that all aspects of the assignment, from work permits to avoiding the establishment of a permanent establishment, are carefully considered. By planning carefully and complying with all legal requirements, companies can not only avoid legal issues but also ensure the efficiency and success of their projects in Kazakhstan.