Kazakhstan Tax: Thin cap formula may disallow deduction for interest paid to unrelated parties

Certain changes made to Kazakhstan's tax rules in the 2009 Tax Code may limit the deductibility of interest paid to unrelated parties located in non-low-tax jurisdictions.

In general, Kazakhstan's thin capitalization rules limit the deductibility of interest paid to related parties or entities located in certain low-tax jurisdictions in situations where the Kazakhstan taxpayer has exceeded a certain debt-to-equity ratio (6 to 1 in most cases). A literal reading of the new rules found in article 103 of the 2009 Tax Code, however, would seem to affect the deductibility of interest paid to unrelated parties in non-low-tax jurisdictions for 2009.

Included in the factors for calculating deductible interest is the "annual average equity capital." Under the formula, negative average equity capital may disallow a deduction of interest that was paid to unrelated parties located in non-low-tax jurisdictions. While the formula provided in the 2008 Tax Code could have the same impact if negative equity were to apply, the rules issued by the Ministry of Finance for completion of the 2008 corporate income tax return stated that, if the average equity capital had a negative value, it should be treated as equal to zero.

Unlike the 2008 rules, the 2009 rules do not contain a similar clarification. Although a version of draft changes to the Tax Code would clarify the issue and would apply retroactively as from 1 January 2009, this does not eliminate the risk that an interest deduction would be disallowed on interest paid to unrelated parties due to negative equity capital. Affected taxpayers should monitor the progress of the proposed clarification and any retroactive effect or the possibility that the Ministry of Finance may amend the 2009 rules as an interim solution.