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LETTER OF THE TAX COMMITTEE OF THE MINISTRY OF FINANCE OF THE REPUBLIC OF KAZAKHSTAN

of February 4, 2014 No. NK-13-YuL-E-81-NK-847

"Concerning the demurrage taxation"

Tax Committee

Ministries of Finance

Republic of Kazakhstan

The association of taxpayers of Kazakhstan (further - ANC), in connection with addresses of taxpayers, asks you to provide explanations concerning the demurrage taxation, according to the made changes in the Tax Code of the Republic of Kazakhstan since 01.01.2012.

According to subitem 16-1 of Item 1 of Art. 192 of the Tax code RK of 01.01.2012 the income in payment type for vessel idleness under materials handling operations over the lay days (demurrage) provided in the agreement (contract) to maritime transport is considered as the income of the nonresident from sources in the Republic of Kazakhstan and is subject to the taxation at source of payment for rate of 20% (Art. 194 of RK Oil Company). According to the subitem 6) of Article 1 of the Law of the Republic of Kazakhstan "About Merchant Shipping" demurrage the payment for kontrstaliyny time (period of time during which the vessel is under loading over lay days) is recognized.

Now there is the following situation: The legal entity - the resident of Kazakhstan (Seller) has the contract in foreign trade on oil supply with the legal entity - the resident of Switzerland (Buyer). The property right to oil and all risks, pass from the Seller to the Buyer during passing of oil through permanent flange connection of the tanker in shipping port. Loading is made in one of the ports of the Black Sea, i.e. outside RK. At the same time, in this contract the condition is stipulated that the Seller compensates costs of the Buyer on demurrage in each hour or it is pro rata for part of hour at the rate specified in the agreement of the freight during the all the time spent on loading, which exceeded allowed time of loading. The agreement of the freight (maritime transport) is signed between the Buyer (resident of Switzerland) and the Cargo carrier (The owner/manager of the vessel - resident of Turkey). Thus, the Cargo carrier makes out bills on demurrage to the Buyer in accordance with the terms of the agreement of the freight, and then the Buyer perevystavlyat accounts on demurrage to the Seller, providing all necessary documents for compensation of these costs.

In this case, compensation for demurrage is not penalty (penalty, penalty fee) for non-execution or improper execution of any obligations by the Seller or Buyer. The parties fulfill the obligations before each other in full and at the scheduled time. Let's note that demurrage arises in case of idle time in port of the vessel which is not belonging to the Seller or the Buyer and regardless of will of the Seller or the Buyer. Besides, the Seller complies all conditions on proper and timely transportation of goods to basis of delivery.

Also, it should be noted that the Buyer does not gain any income from sales of goods, performance of works, rendering services in the Republic of Kazakhstan, does not perform any activities in the Republic of Kazakhstan and will not form in the territory of the Republic of Kazakhstan of permanent organization.

At the same time, according to subitem 13 of item 5 of Article 193 of RK Oil Company the income from performance of works, rendering services outside the Republic of Kazakhstan, except for the income specified in subitems 3), 4) of Item 1 of Article 192 of this Code is not subject to the taxation.

Considering the above, we ask you to report whether the payments for demurrage in the port of the Black Sea compensated by the Kazakhstan selling company, the Swiss Company - to the Buyer based on accounts of the Cargo carrier - the resident of Turkey are subject to taxation by the corporate income tax at payment source? If the Buyer - the nonresident provides the document confirming residence of Switzerland whether the taxpayer of RK (Seller) will be able to apply the Convention on avoidance of double taxation?

Chairman of Management board

Associations of taxpayers of Kazakhstan

Ertlesova Zh. D.

According to the subitem 6) of article 1 of the Law of the Republic of Kazakhstan "About merchant shipping" the term "demurrage" means payment for kontrstaliyny time (period of time during which the vessel is under loading over lay days).

According to subitem 16-1) of Item 1 of article 192 of the Code of the Republic of Kazakhstan "About taxes and other obligatory payments in the budget" (further - the Tax code) the income in payment type for vessel idleness under materials handling operations over the lay days provided in the agreement (contract) of maritime transport is recognized the income of the nonresident from sources in the Republic of Kazakhstan.

According to Item 1 of article 193 of the Tax Code the income of the legal nonresident person performing activities without formation of permanent organization, determined by article 192 of the Tax Code is assessed with the corporate income tax at payment source without implementation of deductions.

At the same time the amount of the corporate income tax withheld at payment source is estimated in the tax agent by application of rates, stipulated in Clause 194 Tax codes, to the amount of the income assessed at source of payment, specified in article 192 of the Tax Code.

According to the subitem 1) of article 194 of the Tax Code the income of the nonresident received from sources in the Republic of Kazakhstan, performing activities without formation of permanent organization is subject to the taxation at source of payment for rate of 20 percent.

Thus, the compensation amount resident of the Republic of Kazakhstan of costs of the nonresident who does not have permanent organization in the Republic of Kazakhstan on payments for vessel idleness under materials handling operations over lay days (demurrage) is recognized the income from source in the Republic of Kazakhstan and is subject to taxation by the corporate income tax at source of payment for rate of 20 percent.

According to Item 5 of article 2 of the Tax Code if the international treaty ratified by the Republic of Kazakhstan establishes other rules, than those which contain in the Tax code are applied rules of the specified agreement.

According to Item 1 of article 21 of the Convention income types of resident of the Contracting State, irrespective of source of their origin about which it is not told in the previous articles of this Convention are assessed with tax only in this Contracting State.

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