Case: Tax for non-resident, withheld at a payment source, can be refunded

Situation

A Kazakhstani company attracted Russian company that provides services for logging operations. The contract was concluded for 10 months. Such period is not enough to form permanent establishment in Kazakhstan. Company applied 20% withholding tax and paid the tax to the budget of Kazakhstan. After completion of the project in Kazakhstan, about a year later, Russian company found out that, according to the concluded tax treaty between Kazakhstan and Russia to avoid double taxation, if its activity does not form permanent establishment in Kazakhstan, income of Russian company should not be taxed in Kazakhstan. In other words, Russian companies’ earnings are taxed only in Russia.

What should be done in this situation?

Solution

In this situation, non-residents can apply for a refund of tax withheld at payment source to the tax authority. If the withheld tax at a payment source has been paid to the budget, a refund of the income tax for non-resident can be returned in the order provided by the Tax Code, within the five-year limitation period for tax liabilities. However, there is a high probability that the tax authorities will refuse.

In particular, the Russian company filed an application on return of tax, withheld at payment source, to mentioned higher tax authorities. The tax authority refused to return, citing a lack of documents, confirming the length of stay of foreign employees in Kazakhstan.In this situation, it is possible to appeal against the tax authority's illegal actions. Such actions were appealed by the Russian company to court. By court decision, requirements of the Russian company were satisfied, and the company implemented the refund of income tax. As designated by court, non-resident company presented all necessary documents required by the tax legislation.

Recommendations

Income tax for nonresident paid to the budget of Kazakhstan shall be returned in a condition that the activities of non-resident does not form permanent establishment in Kazakhstan.If there is an unjustified refusal to refund the tax by higher tax authorities, nonresident should appeal the decision to higher tax authorities or to court.