LETTER OF THE TAX COMMITTEE OF THE MINISTRY OF FINANCE OF THE REPUBLIC OF KAZAKHSTAN

of August 5, 2005 No. NK-UMN-5-16/7422

The Tax Committee of the Ministry of Finance of the Republic of Kazakhstan, having considered your letters, reports the following.

1. Concerning replacement of the lessor (leasing recipient), early repayment of leasing payments before the expiration of three-year term of provision of fixed assets in financial leasing.

According to Item 1 of article 74 of the Code of the Republic of Kazakhstan "About taxes and other obligatory payments in the budget" (Tax code) the cession of property under the agreement of leasing signed according to the legislation of the Republic of Kazakhstan for the term exceeding three years is financial leasing if it answers one of the conditions specified in this Item.

According to Item 3 of article 122 of the Tax Code taxpayers reduce the taxable income by the amount of remuneration, received on financial leasing of the fixed assets provided for the term of more than three years with the subsequent transfer to their leasing recipient.

According to Item 1 of article 228 of the Tax Code if other is not provided by this Article, the cession of property in financial leasing is exempted from the VAT regarding the amount of remuneration which is subject to obtaining by the lessor in case of observance of the following conditions:

1) such transfer conforms to requirements, stipulated in Clause 74 Tax codes;

2) the leasing recipient acquires property as fixed asset.

However, in case of replacement of the lessor (leasing recipient), early repayment by the leasing recipient of the amount of principal debt and remuneration before the expiration of three-year term of provision of fixed assets in financial leasing, the above-stated conditions cannot be complied and, respectively, the lessor has no right to reduce the taxable income by the amount of the earned reward and to apply release from VAT liability regarding the amount of the reward earned by it.

By the subitem 2) of Item 2 of article 81 of the Tax Code it is determined that in case of change of terms of transaction the income from sales of goods (works, services) is subject to adjustment.

Adjustment of the income is made following the results of that tax period in which there were specified changes.

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