Tax and Legal Environment in Kazakhstan March 2013

PwC Local Content Local Content (“LC”) means Kazakhstan citizens, as well as goods, works and services of Kazakhstan origin. LC requirements were originally established for the subsurface use sector. Each subsurface user (oil and gas and mining) must ensure specified LC in purchased goods, works and services and in its personnel. Separate LC requirements are also envisaged for state procurement (government and Samruk-Kazyna). Subsurface use, government and Samruk-Kazyna procurement rules differ but are generally aligned and have the same goal. Through work permit regulations, LC is also enforced with respect to everyone regarding the hiring of personnel. 22

PwC Unified Local Content Formulas 1.LC in personnel: Percentage of Kazakhstan employees in total headcount engaged in performing the contract with a breakdown by category. 2.LC in goods: Percentage of local materials costs and production / processing costs incurred in Kazakhstan in the price of goods. 3.LC in works and services: aggregate total percentage of LC in goods used for works in the supplier/provider contracts’ price and/or salaries of Kazakhstan citizens of the supplier’s/provider’s salary fund less the cost of goods used for works and subcontract’s prices. 4.LC in subsurface user’s purchases: aggregate total percentage of LC in goods and LC in works and services in all subsurface user’s purchases. (1) (2) (3) (4) 3

PwC Local Content in subsurface use sector: “Kazakhstan Producer” Obtaining the status of a “Kazakhstan producer” grants a deemed 20% reduction of your price for selection as the tender winner by a subsurface user. There are two legal definitions of “Kazakhstan producer” ―“Kazakhstan producer of works and services” ―“Kazakhstan producer of goods.” 4

PwC Local Content in subsurface use sector: Becoming a “Kazakhstan Producer” To obtain the status of a “Kazakhstan producer of works and services” the producer ―must be a legal entity registered under Kazakhstan laws and ―use at least 95% of Kazakhstan citizens in its personnel. To obtain the status of a “Kazakhstan producer of goods” the producer ―must be a legal entity registered under Kazakhstan laws and ―produce goods of Kazakhstan origin as confirmed by a Certificate of Origin issued by the Kazakhstan Chamber of Commerce and Industry (CT-KZ certificate). Subsurface users may also require higher LC standards in tenders to show best in class among potential providers regarding LC. 5

PwC State Procurement – Works and Services To obtain the status of a “National producer of works and services” for state procurement the producer ―must be a legal entity registered under Kazakhstan laws and ―use at least 95% of Kazakhstan citizens in its personnel. No more than 2/3 of the total volume of works or services may be subcontracted for state procurement. 6

PwC State Procurement – Notional Discounts for LC in Works and Services A notional discount of 5% would be applied to the price proposed by a national supplier, therefore giving the national supplier a 5% pricing advantage over its competitors. Moreover, a national supplier showing local content will get a corresponding notional discount of 0.1% for each 1% of local content in the price proposed. “Local content in work and services” is defined under the law as remuneration of employees, who are Kazakhstani citizens, in the salary fund of the services provider under a contract for performance of rendering of services, less the value of goods used and costs related to subcontracts. This calculation is designed to create a ratio showing how much compensation Kazakhstani citizens are receiving. The more Kazakhstani citizens who are used (and paid) in provision of the services will lead to a higher LC figure. 7

PwC State Procurement – Goods To obtain the status of a “National producer of goods” for state procurement the producer ―must be a legal entity registered under Kazakhstan laws and ―must fully produce or process the goods in Kazakhstan pursuant to the Customs Code, as confirmed by a Certificate of Origin issued by the Kazakhstan Chamber of Commerce and Industry (CT-KZ certificate). A notional discount of 10% would be applied to the price proposed by a national supplier of goods, therefore giving the national supplier of goods a 10% pricing advantage over its competitors. Moreover, a national supplier showing local content will get a corresponding notional discount of 0.1% for each 1% of local content in the price proposed as reflected in the CT-KZ certificate. 8

PwC Samruk-Kazyna Procurement – Works and Services To obtain the status of a “National producer of works and services” for Samruk-Kazyna procurement the producer ―must be a legal entity registered under Kazakhstan laws and ―use at least 95% of Kazakhstan citizens in its personnel. No more than 2/3 of the total volume of works or services may be subcontracted for Samruk-Kazyna procurement. 9

PwC Samruk-Kazyna Procurement – Notional Discounts for LC in Works and Services A national supplier showing local content in works and services will get a notional discount of 0.1% for each 1% of local content in the price proposed. “Local content” is defined under the rules as remuneration of employees, who are Kazakhstani citizens, in the salary fund of the services provider under a contract for performance of rendering of services. This calculation is designed to create a ratio showing how much compensation Kazakhstani citizens are receiving. The more Kazakhstani citizens who are used (and paid) in provision of the works or services will lead to a higher figure. 10

PwC Samruk-Kazyna Procurement – Goods 11 To obtain the status of a “National producer of goods” for Samruk- Kazyna procurement the goods must be fully produced or processed in Kazakhstan pursuant to the Rules on identification of country of origin, as confirmed by a Certificate of Origin issued by the Kazakhstan Chamber of Commerce and Industry (CT-KZ certificate). A notional discount of 5% would be applied to the price proposed by a national supplier of goods, therefore giving the Kazakhstan supplier of goods a 5% pricing advantage over its competitors. Moreover, a national supplier showing local content in goods will get a corresponding notional discount of 0.15% for each 1% of local content in goods as reflected in the CT-KZ certificate.

PwC General tax environment Kazakhstan tax legislation continues to change and is subject to interpretation. Kazakhstan is, in general, a “form over substance” tax environment. Kazakhstan tax authorities are aggressive/demanding. Non-compliance with the tax legislation causes additional tax assessments, penalties and administrative fines. It is important to have good chief and tax accountants. There is an electronic system for filing of tax returns and tax applications. Accounting software, e.g. 1C, is widely used for bookkeeping and tax reporting. Currently Kazakhstan tax authorities are developing project for implementation of electronic invoices. 12

PwC Repatriation of dividends Kazakhstan has concluded Double Tax Treaties with 44 countries (including Spain) and an additional 2 Double Tax Treaties with Luxembourg and the United Arabic Emirates have been signed, but not yet ratified. International treaties ratified by Kazakhstan have priority over its domestic laws and are directly implemented except in cases when the application of an international treaty requires the promulgation of a law. The dividend withholding tax rate is 15%, however it may be conditionally reduced to 5% under the Double Tax Treaty with Spain. Kazakhstan tax legislation provides full exemption from Kazakhstan taxation for dividends payable by Kazakhstan resident entity to a non-resident shareholder provided that (i) holding period is more than 3 years; (ii) entity paying the dividends is not a subsurface user in Kazakhstan; and (iii) 50% or more of assets of the entity paying the dividends is not derived from the Kazakhstan subsurface use property. 13

PwC Tax requirements Importation of goods to Kazakhstan attracts import VAT at 12%. However, there is a list of goods that can be exempted from import VAT according to offset VAT method. Kazakhstan, as a member of Customs Union starting from 1 July 2010, applies import customs duties at rates ranging from 0% to 25% (on average; higher rates exist for certain goods) depending on the classification of a particular imported good, and excise duties (in case of importation of excisable goods). There are nine special economic zones established in Kazakhstan which may enjoy certain tax incentives, e.g. exemption from import taxes and customs duties. Kazakhstan established a list of 62 countries with privileged taxation, also known as the black list. Any income realized by non-residents registered/located in a black-listed jurisdiction is subject to special tax rules. The withholding tax rate is generally 20%. 14

PwC Tax requirements Foreign legal entities may choose to operate through simple PE, a branch or a subsidiary. If a foreign legal entity does not register a PE, income paid to such legal entity from Kazakhstan source should in most cases be subject to withholding tax based on domestic law. Simple PE cannot be registered for value-added tax (VAT) purposes. Other taxpayers are required to register for VAT purposes if their taxable supply in the preceding 12 months exceeded 30,000 monthly calculation indexes (currently, approximately USD 346,000). Services rendered in Kazakhstan (place of supply rule) by foreign legal entities, which do not have a branch or representative office in Kazakhstan and are not registered for VAT purposes, could be subject to reverse-charge VAT at 12%. 15

PwC Branch vs. Kazakhstan legal entity Taxation scope (Kazakhstan-sourced income vs. world-wide income) Net income taxation (frequency, base, rate) Financing Head office G&A expenses Other, e.g. tax incentives Licensing Local content Work permit Foreign currency control 16

PwC Joint Venture Basic Structuring Options Option 1: Onshore Relations between JV Partners will be governed by Kazakhstan laws and potentially subject to Kazakhstan courts. Some standard international JV concepts (i.e., tag-along, drag-along, forced sale / withdrawal for default) may not be enforceable. Option 2: Offshore Relations between JV Partners can be governed by foreign laws, e.g., foreign law shareholders agreement and subject to international arbitration. Offshore HoldCo owns 100% of JV. 17 Offshore HoldCo JV (KZ LLP) KZ PartnerSpanish Partner JV (KZ LLP) KZ PartnerSpanish Partner

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers Tax and Advisory LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2013 PwC. All rights reserved. Not for further distribution without the permission of PwC. "PwC" refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm's professional judgment or bind another member firm or PwCIL in any way. PwC Kazakhstan Walter Daniel Director, Legal Services 34 Al-Farabi Ave., Building A, 4 th floor, Almaty, Kazakhstan T: +7 (727) , F: +7 (727) Omon Tursunov Director, Tax Services 6 Sary Arka Str., Business Centre Arman, 16 th floor, Astana, Kazakhstan T: +7 (7172) , F: +7 (7172)