Many of our clients have approached us with the inquiry to explain the differences between branch, representative office and separate legal entity in accordance with Kazakhstan corporate legislation. Moreover, the emphasis has been made to the tax and legal consequences of establishing one of the above. We are pleased to share the main issues related to the matter.
Branch vs Representative office
According to the Article 43 of the Civil code of Kazakhstan the difference between branch and representative office lies in the ability to conduct business activity. Article 43 (1) of the Kazakh Civil code defines branch as a separate division of a legal entity that is located elsewhere than the legal entity itself is located and conducts all or certain business activities of such legal entity, including the functions of representation. Representative office is defined by article 43 (2) of the Kazakh Civil code as a separate division of a legal entity located elsewhere than the legal entity itself is located and conducts legal representative and defensive functions, executes transactions and other legal activities on behalf of such legal entity. Hence, a representative office may not perform construction activities, manufacture goods or conduct any other activities of its head office.
So long as a branch or a representative office are not considered as a separate legal entity, the actions of a branch/representative office are to be deemed the actions of the legal entity itself. Thereby the legal entity shall be liable for any activities of its branch/representative office. In accordance with article 416 (2) of the Kazakh Civil procedural code the courts of Kazakhstan have jurisdiction over the lawsuit should the defendant (legal entity) have its managing office, branch or representative office located in Kazakhstan.
It should noted that a branch or a representative office does constitute a permanent establishment for the taxation purposes in accordance with article 191 of the Tax code of Kazakhstan and in accordance with most of the tax treaties signed by Kazakhstan. Therefore, branch remittance tax is applicable to the net profit of a permanent establishment at the rate of 15% (in some cases may be reduced to 5% by virtues of double taxation treaties).