Article 10. DIVIDENDS

This Article provides rules for limiting the taxation at source of dividends paid by a company that is a resident of one Contracting State to a shareholder who is a resident of the other Contracting State. It also provides rules for the imposition of a tax at source on branch profits, analogous to the tax on dividends paid by a subsidiary to its parent company. Notwithstanding the source State's treaty obligation to limit the rate of tax it applies to dividends, that State may, in accordance with point 4 of the Protocol, withhold on dividends at the applicable domestic rates, as long as the State timely refunds any excess amount withheld over the maximum rates established by the treaty.

Paragraph 1 of Article 10 preserves the general right of a Contracting State to tax its residents on dividends received from a company that is a resident of the other Contracting State. The same result is achieved by the saving clause of paragraph 3 of Article 1 (General Scope).

Except as otherwise provided in paragraph 4 and in point 2 of the Protocol (discussed below), paragraph 2 also permits the source State to tax a dividend but limits the rate of source State tax that may be imposed on dividends paid to a resident of

the other State. When the beneficial owner of the dividend is a company resident in the other State that owns at least 10 percent of the voting stock of the paying corporation, the maximum source rate is 5 percent. In other cases, the source State tax is limited to 15 percent of dividends beneficially owned by residents of the other State.

Paragraph 3 defines the term "dividends" as used in this Article. The term encompasses income from any shares or rights that are not debt claims and that participate in profits. It also includes income from other corporate rights treated for domestic law tax purposes as dividends in the country of residence of the distributing company and income from other arrangements, even debt claims, if such arrangements carry the right to participate in profits and the income is characterized as a dividend under the domestic law of the country of residence of the distributing company. The last case takes into account domestic law distinctions between debt and equity. The definition of dividends in this Article also confirms that distributions by a Kazakhstan joint venture to the venturer's foreign participants are dividends for purposes of this Article. Thus, such distributions are eligible for the reduced tax rates specified in paragraph 2.

Paragraph 4 explains that, where dividends are attributable to a permanent establishment or fixed base that the beneficial owner maintains in the other State, they are not subject to the provisions of paragraphs l and 2 of this Article, but are covered by Article 6 (Business Profits) or Article 14 (Independent Personal Services), as appropriate. This is also the case if the permanent establishment or fixed base has ceased to exist when the dividends are received as long as the dividends are attributable to a permanent establishment or fixed base that did exist in an earlier year.

Paragraph 5 permits a Contracting State to impose a branch profits tax on a corporation that is a resident of the other State. The tax is in addition to the ordinary tax on business profits and may be applied not only where there is a permanent establishment but also where the source State applies a net basis tax in accordance with other articles of the Convention. The additional tax is imposed on the "dividend equivalent amount" of profits, at the 5 percent rate that would apply to dividends paid by a wholly-owned subsidiary corporation to its parent. The U.S. tax will be imposed in accordance with section 884 of the Internal Revenue Code, or a successor statute, subject to the reduced rate provided for in this Article. Point 2 b) of the Protocol explains the meaning of the term "dividend equivalent amount," and, in the case of the United States, defines the term consistently with U.S. law. Kazakhstan's new tax law, enacted by presidential decree on April 24, 1995, imposes a branch tax at

the rate of 15 percent, which will be reduced by the treaty to 5 percent.

Paragraph 2 a) of the Protocol also relaxes the limitations on source country taxation for dividends paid by a U.S. Regulated Investment Company (RIC) or a Real Estate Investment Trust (REIT). A dividend paid by a RIC is subject to the 15-percent portfolio dividend rate regardless of the percentage of voting shares of the RIC held by the recipient of the dividend. The 5percent direct investment rate is intended to relieve multiple levels of corporate taxation. A RIC, however, pays no corporatelevel tax on income it distributes to shareholders, and, to maintain its tax-favored status, RICs typically do distribute substantially all of their income. There is, therefore, effectively, no corporate-level RIC tax; the shareholder-level tax is the only U.S. tax imposed on the RIC's income. Moreover, a foreign shareholder could own a 10 percent interest in a RIC without owning a 10 percent interest in the companies whose shares are held by the RIC, effectively converting a portfolio dividend into a direct investment dividend without incurring any additional tax.

In the case of a dividend paid by a REIT, the treaty does not limit the rate of tax that may be applied. Thus, in the case of the United States, a 30 percent tax will apply to REIT distributions. In some other recent U.S. treaties, the tax on REIT dividends is limited to the 15-percent portfolio dividend rate for certain individual shareholders presumed to be in the lowest bracket of the U.S. individual income tax. In this Convention, however, the single statutory rate of 30 percent will apply to all REIT dividends.