Tax Risks In Kazakhstan Infrastructure Projects: What Foreign Contractors Should Know

Why Tax Planning Must Begin Before the Tender

Kazakhstan continues to prioritise the attraction of foreign investment and the development of its industrial, transport and energy infrastructure. In the first half of 2026, the Government identified a pipeline of 231 prospective investment projects in metallurgy, petrochemicals, coal chemistry and the agro-industrial sector, alongside a list of 200 leading foreign companies considered as potential strategic partners. According to the Ministry of National Economy, 40 international companies had already expressed an interest in pursuing investment projects in Kazakhstan, with the Government intending to proceed to detailed discussions across the relevant sectors.¹

Participation in a major infrastructure project in Kazakhstan may offer significant commercial opportunities for a foreign contractor, but it also gives rise to a range of tax, customs and regulatory risks. Even where a project appears profitable at the tender stage, these risks should be carefully assessed when determining the tender price and selecting the appropriate project delivery structure.

In practice, foreign contractors typically secure the right to participate in major construction projects in Kazakhstan through tenders, public procurement procedures, auctions or other competitive selection processes. However, once a preferred bidder has been selected, tax considerations are often addressed only at the contract negotiation stage.

In our experience, this is a recurring issue. Foreign contractors frequently begin assessing the tax consequences of a project only after the commercial terms have largely been agreed and the EPC contract is already being negotiated. This can significantly complicate the contracting process, as the parties must negotiate the project documentation while simultaneously developing a workable tax structure. Certain elements of that structure - including the allocation of scope, payment flows, import arrangements and the involvement of local entities or subcontractors - may conflict with the employer’s commercial, procurement or operational requirements.

Tax planning should therefore begin before the contractor submits its tender, not after it has been selected as the preferred bidder. The proposed tax structure must be developed alongside the technical and commercial terms of the bid, so that the tender price, contractual scope and project delivery model reflect the actual tax consequences from the outset.
If tax planning begins only at the contract negotiation stage, the contractor may be forced to propose project structures that were neither disclosed nor agreed with the employer during the tender process. The employer may resist changes to the contractual scope, allocation of responsibilities, payment flows or involvement of local entities, arguing that the proposed structure was not reflected in the contractor’s bid or considered when the contractor was selected.

This may materially delay the negotiations or prevent the EPC contract from being signed altogether. As a result, a contractor may invest substantial time and resources in preparing and winning the tender, only to find that the contract cannot ultimately be concluded because the tax risks cannot be adequately mitigated within the project structure accepted by the employer.

Principal Tax Risks

The central tax risk for a foreign EPC contractor is the creation of a permanent establishment in Kazakhstan. Closely related risks include exposure to Kazakhstan withholding tax and the potential denial of benefits under an applicable double tax treaty.
Other material considerations include Kazakhstan VAT, import VAT, customs duties and the allocation of responsibility for customs clearance. In projects involving transactions between related companies, transfer pricing risks may also need to be assessed, particularly in relation to the supply of equipment, engineering services, financing and the allocation of profit between foreign and Kazakhstan entities.

Project Structuring

Without proper tax planning, a foreign contractor may face withholding tax at a rate of 20% on the gross contract revenue, without any deduction for the costs incurred in performing the project. Depending on the structure of the transaction, the project may also attract 16% VAT, import VAT and customs duties. These liabilities can materially reduce or, in some cases, eliminate the profit margin originally built into the tender price.²
To identify and mitigate the relevant tax risks, a foreign contractor should consider the appropriate project structure in light of the specific commercial, technical, operational and procurement conditions of the project. There is no single structure suitable for every EPC project: the optimal model depends on the scope of work, the location of the relevant activities, the duration of the project, the movement of personnel and equipment, the proposed payment flows and the employer’s contractual requirements.

The project structure should determine, at a minimum, which entity will enter into the EPC contract, receive payments from the employer, supply and import the equipment, engage personnel, perform the on-site works and assume the principal contractual risks. These matters cannot be considered in isolation, as each decision may affect several taxes simultaneously.

A foreign contractor may perform the project directly, establish a branch or subsidiary in Kazakhstan, participate as a member of a consortium, engage a local subcontractor or divide the scope between foreign and Kazakhstan entities. The choice should be based on the actual manner in which the project will be performed rather than on the legal form alone.

Direct contracting may be appropriate where the foreign contractor’s role is limited to activities performed outside Kazakhstan, such as manufacturing, offshore engineering or the supply of equipment. However, the presence of personnel, premises, equipment or representatives in Kazakhstan may create a taxable presence even if the foreign contractor does not establish a formally registered entity.

A Kazakhstan branch will ordinarily constitute a taxable presence of the foreign company. Its profits attributable to Kazakhstan are generally subject to corporate income tax, while its net after-tax income may also be subject to branch profits tax.

A Kazakhstan subsidiary, by contrast, is a separate legal entity and taxpayer, although payments between the subsidiary and other group companies must be separately analysed for withholding tax, VAT and transfer pricing purposes. Under the current rules, the general corporate income tax rate is 20%, while the net income of a permanent establishment is generally subject to a further 15% branch profits tax, unless reduced under an applicable double tax treaty.²

A consortium structure may allow the foreign and local participants to divide the project scope in accordance with their respective capabilities. However, the consortium agreement and the EPC contract must clearly identify the functions, remuneration, liabilities and payment entitlement of each participant. Joint and several liability under the EPC contract should not obscure the actual allocation of the scope for tax purposes.

Whatever structure is selected, it must be commercially defensible, operationally workable and consistent with the tender documentation. A structure recorded only on paper, but not followed during project implementation, is unlikely to provide effective protection in the event of a tax audit.

Permanent Establishment Risk

The risk of creating a permanent establishment is generally the central tax issue for a foreign EPC contractor operating in Kazakhstan. A permanent establishment represents a taxable presence through which Kazakhstan may tax the business profits attributable to the foreign contractor’s local activities.

A permanent establishment may arise through a fixed place of business, the performance of services or works through employees and other personnel, the activities of a dependent agent or participation in certain joint activities. Under Kazakhstan’s current domestic rules, a services permanent establishment may arise where the relevant activities continue for more than 183 days within any consecutive twelve-month period for the same or connected projects. The rules also require interconnected, interdependent and similar projects to be considered when assessing the relevant period.²

In the context of an EPC project, the relevant factors may include:

• the existence and duration of a construction or installation site;
• the presence of foreign engineers, supervisors and other personnel;
• the use of a project office, warehouse or other premises;
• the performance of installation, supervision, testing or commissioning activities;
• the authority of a local representative to negotiate or conclude contracts;
• the storage or regular delivery of equipment in Kazakhstan; and
• the relationship between different contracts, project phases and group companies.

The applicable double tax treaty must always be reviewed separately. A treaty may contain a specific time threshold for a construction, installation or supervisory project and may provide greater protection than Kazakhstan’s domestic legislation. Where the treaty requirements are satisfied, Kazakhstan should generally tax the foreign contractor’s business profits only if those profits are attributable to a permanent establishment in Kazakhstan.³

However, treaty analysis should not be limited to the wording of the original bilateral agreement. The Multilateral Instrument may modify the operation of a covered tax treaty, including its anti-abuse and permanent establishment provisions. Its application therefore needs to be checked separately for each treaty and each project structure.⁴

If a permanent establishment is created, the foreign contractor may be required to register with the Kazakhstan tax authorities, maintain separate accounting records, file tax returns and pay corporate income tax on the profits attributable to the permanent establishment. Depending on the structure, VAT, payroll, social tax and branch profits tax obligations may also arise.

A failure to recognise and register a permanent establishment in a timely manner may result in retrospective tax assessments, penalties and late-payment interest. It may also make it more difficult to substantiate the expenses attributable to the Kazakhstan activities and to defend the allocation of profit between the head office and the permanent establishment.

Offshore and Onshore Allocation

One of the structures frequently considered for an international EPC project is the allocation of the contractual scope between offshore and onshore components.

The offshore component may include activities performed outside Kazakhstan, such as:

• design and engineering;
• manufacturing and procurement;
• supply of equipment;
• preparation of technical documentation; and
• remote technical support.

The onshore component may include:

• local design adaptation;
• construction and civil works;
• installation and assembly;
• electrical works;
• on-site supervision;
• testing and commissioning; and
• other activities physically performed in Kazakhstan.

The offshore component may be performed by the foreign contractor, while the onshore component may be allocated to a Kazakhstan subsidiary, consortium member or local contractor. This may help isolate the foreign contractor’s offshore activities and reduce its Kazakhstan permanent establishment exposure.

However, an offshore/onshore split is not effective merely because it appears in separate contracts or payment schedules. The contractual allocation must reflect the actual functions performed, assets used and risks assumed by each participant. The foreign contractor should not, in practice, perform or control the onshore scope allocated to another entity without first assessing the resulting tax consequences.

The division of the project should also be reflected consistently in the technical specifications, project schedule, acceptance procedures, invoicing arrangements, insurance, warranties and liability provisions. Where the employer expects a single point of responsibility, the structure must reconcile that commercial requirement with the intended tax allocation.

The parties should also determine whether the contracts are legally and commercially separable. If the offshore supply, engineering and onshore construction obligations form one indivisible arrangement in substance, the tax authorities may seek to examine the project as a whole rather than relying exclusively on its formal contractual division.

Withholding Tax and Treaty Relief

Where a foreign contractor receives Kazakhstan-source income without operating through a registered permanent establishment, the Kazakhstan payer may be required to withhold tax from the relevant payments.

Certain service income received by a non-resident is subject to withholding tax at a rate of 20%. This includes income from services physically performed in Kazakhstan and certain categories of services, including engineering and consulting services, which may be treated as Kazakhstan-source income irrespective of where they are actually performed.²

Withholding tax is generally imposed on the gross amount of income rather than on the contractor’s profit. This is particularly significant for EPC projects because the contract price may include substantial equipment, manufacturing, transportation and subcontracting costs. A 20% tax on gross revenue may therefore exceed the contractor’s expected profit margin.

Not every payment under an EPC contract should automatically be treated in the same manner. Payments for equipment, engineering, construction, royalties, financing and other components may have different tax treatment. The contract should therefore provide a clear and commercially supportable breakdown of the scope and price.

An applicable double tax treaty may protect the foreign contractor’s business profits from Kazakhstan withholding tax where the contractor does not have a permanent establishment in Kazakhstan. The availability of treaty relief will depend on the relevant treaty, the nature of the income, the contractor’s tax residence and compliance with the required documentary procedures.³

For active business income, the contractor will generally need to provide a valid certificate of tax residence and confirm that the income is not attributable to a permanent establishment in Kazakhstan. Different or additional requirements may apply to dividends, interest, royalties and other passive income.²

Treaty documentation should be prepared before payment becomes due. The EPC contract should specify when the residence certificate must be provided, what supporting documents may be requested and what happens if the certificate is rejected or is not provided on time.
The parties must also carefully address any gross-up arrangement. Under the rules effective from 2026, treaty benefits may be unavailable where the Kazakhstan tax agent pays the withholding tax from its own funds rather than withholding it from the non-resident’s income.²

VAT and Customs

VAT and customs costs can have a substantial effect on both the total project price and the contractor’s cash flow.

The standard Kazakhstan VAT rate is 16%. Depending on the nature and place of supply, VAT may apply to construction, installation, engineering, commissioning and other project services. Import VAT may also arise when equipment and materials are brought into Kazakhstan.²
The VAT treatment of each component should be analysed separately. Relevant questions include:

• whether the place of supply is inside or outside Kazakhstan;
• whether the supplier is required to register for VAT;
• whether the Kazakhstan customer must account for VAT;
• whether input and import VAT may be recovered;
• which entity will issue invoices and acceptance certificates; and
• whether the contract price is inclusive or exclusive of VAT.

Import arrangements should be determined before the equipment is shipped. In particular, the parties should identify the importer of record and the entity responsible for customs declarations, import VAT, customs duties, customs brokerage and product certification.

Import customs duties are generally determined under the Common Customs Tariff of the Eurasian Economic Union and depend on the relevant tariff classification and customs value of the imported goods. The availability of exemptions or preferential treatment for customs duties and import VAT should also be considered at an early stage. Kazakhstan legislation provides for a number of potential exemptions, reliefs and investment-related incentives, but their application depends on the specific project, the status of the importer, the nature and intended use of the equipment, and the applicable customs procedure. Eligibility should therefore be assessed on a case-by-case basis before the equipment is ordered or shipped.⁵⁶⁷

The selected Incoterms should be consistent with the intended customs and tax treatment. They should clearly allocate responsibility for transportation, insurance, customs clearance, import taxes and the risk of delay at the border.⁸

It is equally important to determine whether the importer will have sufficient funds to pay import VAT and duties when the goods enter Kazakhstan. Even where import VAT is ultimately recoverable, the time between payment and recovery may create a significant financing requirement.

The EPC contract should allocate the risk of changes in tariff classification, customs valuation, applicable duty rates and import restrictions. It should also address the consequences of delays caused by missing certificates, permits or technical documentation.

Transfer Pricing

Transfer pricing may become relevant where equipment, services, financing or other project elements are provided between related group companies. The pricing of such transactions should reflect the functions performed, assets used and risks assumed by each entity.
Where the value of related-party transactions is material, the contractor should consider preparing appropriate supporting documentation to demonstrate that the terms are consistent with the arm’s-length principle.⁹

Contractual Allocation of Tax Risks

A tax structure will provide limited protection unless it is properly reflected in the EPC contract and related project documents.
The contract should clearly address:

• which taxes are included in the contract price;
• the treatment of VAT and import VAT;
• responsibility for customs duties and customs clearance;
• the employer’s right to withhold tax;
• the contractor’s entitlement to treaty relief;
• the provision and acceptance of tax residence certificates;
• any gross-up or tax indemnity.

The contractual allocation should correspond to the structure used in practice. For example, if a local entity is intended to import the equipment, receive a part of the EPC price or perform the onshore works, that role should be reflected consistently in the EPC contract, consortium agreement, supply contracts and payment schedule.

Pre-Tender Tax Checklist

Before submitting a tender for an EPC project in Kazakhstan, a foreign contractor should determine:

1. Which entity or entities will participate in the tender and sign the EPC contract?
2. Which entity will receive each component of the contract price?
3. Which activities will be performed outside Kazakhstan and which will be performed locally?
4. Whether the presence of personnel, premises, equipment or representatives may create a permanent establishment?
5. Whether connected contracts, related projects or the activities of group companies must be considered together?
6. Whether an applicable double tax treaty protects the contractor’s business profits and what documents are required to obtain that protection?
7. Whether any payments may be subject to withholding tax on a gross basis?
8. Which supplies, works and services will be subject to Kazakhstan VAT?
9. Who will act as the importer of record and pay import VAT, customs duties and clearance costs?
10. Whether related-party prices are consistent with the functions, assets and risks of each project participant?
11. Whether the tender price includes all expected tax, customs and compliance costs?
12. Whether the tender documents permit the proposed use of a subsidiary, branch, consortium member or subcontractor?
13. Whether the employer has accepted the proposed allocation of scope, payments and tax responsibilities?
14. Whether the EPC contract will contain adequate protection against tax assessments, treaty denial and changes in law?

Conclusion

Tax planning for an EPC project should begin before the tender is submitted, not after the contractor has been selected. The tax structure should be developed together with the technical solution, commercial proposal, contractual scope and pricing model.
Early planning enables the contractor to identify permanent establishment, withholding tax, VAT, customs and transfer pricing exposures before they become embedded in the project. It also allows the proposed structure to be disclosed to and agreed with the employer as part of the tender process.

No structure can eliminate every tax risk. The objective is to select a model that is legally supportable, commercially acceptable, operationally workable and properly reflected in the project documents.

For a foreign EPC contractor, tax structuring is therefore not simply a compliance matter. It is an essential part of determining whether the project can be delivered profitably and whether the EPC contract can ultimately be signed and performed on the terms originally contemplated.

Footnotes

1 Official Information Source of the Prime Minister of the Republic of Kazakhstan, “Kazakhstan’s Economic Growth for the First Half of the Year Accelerated to 4.1% — Ministry of National Economy”, 14 July 2026, confirming the identification of 231 prospective investment projects, 200 potential foreign strategic partners and interest expressed by 40 international companies. Available at: https://primeminister.kz/en/news/kazakhstans-economic-growth-for-the-first-half-of-the-year-accelerated-to-41-ministry-of-national-economy-31645

2 Code of the Republic of Kazakhstan dated 18 July 2025 No. 214-VIII “On Taxes and Other Obligatory Payments to the Budget (Tax Code)”, effective from 1 January 2026, including provisions governing permanent establishments, taxation of non-residents, corporate income tax, withholding tax, branch profits tax, VAT, import VAT and the application of international tax treaties. Available at: https://adilet.zan.kz/rus/docs/K2500000214

3 State Revenue Committee of the Ministry of Finance of the Republic of Kazakhstan, “Conventions for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains”, providing the list of double tax treaties concluded by Kazakhstan. Available at: https://kgd.gov.kz/en/content/conventions-avoidance-double-taxation-and-prevention-fiscal-evasion-respect-taxes-income-and

4 OECD, “BEPS MLI Matching Database”, providing information on the application of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting to individual bilateral tax treaties. Available at: https://www.oecd.org/en/data/tools/beps-mli-matching-database.html and https://www.kgd.gov.kz/en/section/nalogooblozhenie-nerezidentov

5 Code of the Republic of Kazakhstan dated 26 December 2017 No. 123-VI “On Customs Regulation in the Republic of Kazakhstan”, governing customs declarations, customs payments, import taxes, customs procedures, tariff preferences and the rights and obligations of importers and declarants. Available at: https://adilet.zan.kz/rus/docs/K1700000123

6 Eurasian Economic Commission, Foreign Economic Activity Commodity Nomenclature and Common Customs Tariff of the Eurasian Economic Union, containing the classification of imported goods and applicable import customs duty rates. Available at: https://eec.eaeunion.org/en/comission/direction/trade/catr/ett/default.php and https://eec.eaeunion.org/en/comission/department/dotp/rules_of_origin/default.php

7 Entrepreneur Code of the Republic of Kazakhstan dated 29 October 2015 No. 375-V, including provisions governing investment preferences and potential exemptions from customs duties and import VAT subject to the applicable statutory conditions. Available at: https://adilet.zan.kz/eng/docs/K1500000375 and https://adilet.zan.kz/eng/docs/V1500012780

8 International Chamber of Commerce, “Incoterms® 2020”, setting out internationally recognised rules for allocating delivery obligations, transportation costs, risks and export and import clearance responsibilities between sellers and buyers. Available at: https://iccwbo.org/business-solutions/incoterms-rules/incoterms-2020/

9 Law of the Republic of Kazakhstan dated 5 July 2008 No. 67-IV “On Transfer Pricing”, governing transfer pricing control in international business transactions and the adjustment of taxable items where transaction terms differ from market conditions. Available at: https://adilet.zan.kz/eng/docs/Z080000067_

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.