Use of debt instruments

Contribution to a chartered capital is not the only way of investment into company’s business.

Alternative option would be debt instruments: direct loan, controlled bank loan or purchase of loan securities.

The main advantages of debt instruments are:

(a) investments into a chartered capital assume that return of such investments (as dividends) could be done after payment of a corporate income tax and withholding tax, whereas debt investments when returned are not subject to corporate income tax and should be deducted from gross profit;

(b) when it comes to debt an income tax is calculated against the interest;

(c) loan interest accrued and paid is generally considered as borrower’s losses;

(d) should the loan be attracted through listing of securities on the appropriate market then lenders could be offshore companies and their profit would be exempted from taxes;

(e) loan, together with interest could be withdrawn from the borrower at any time without waiting for financial year end and taken decision of dividends distribution;

(f) in some cases the loan in practicable instrument to block borrower’s assets.

Nonetheless, the following are the cons of debt instruments:

(1) the Tax code of Kazakhstan is familiar with the ‘constructive dividends’ rule, thus interest paid to shareholders may be considered as dividends and taxed accordingly;

(2) thin capitalisation rule is also applicable by the Tax code;

(3) tax rate of a corporate income tax paid to an offshore entity is equal to 20%.

Nonetheless, the aforesaid issues could be brought under control when using a special purpose vehicle that is registered in jurisdictions that have signed a double tax treaty with Kazakhstan.