Article 13. GAINS

This Article provides rules governing when a Contracting State may tax capital gains derived by a resident of the other Contracting State.

Paragraph 1 provides that each State may tax gains on the alienation of real property situated in that State. The Convention does not interfere with the domestic law rules on the taxation of such gains, other than to require non-discriminatory treatment under Article 24 (Non-discrimination).

Paragraph 2 elaborates, in effect, on the rule of paragraph 1 by permitting each State to tax gains from the alienation of real property held not only directly but also indirectly through a corporation, partnership, trust, estate, or other legal person. Thus, to the extent the property of a corporation or other legal person consists principally of real property situated in a Contracting State, gain on the alienation of an interest in that corporation or other person may be taxable by that State. This is true whether or not the corporation or other legal person is itself resident of that State. Subparagraph b) of paragraph 2 provides similar treatment for gain on the alienation of an interest in a partnership, trust, or estate (again, whether or not it is a resident of a Contracting State) to the extent the gain is attributable to real property situated in a Contracting State. The term "real property" for purposes of paragraph 2 includes the shares of any company and the interest in any partnership, trust, or estate referred to in the paragraph. It also specifically includes a "United States real property interest" as defined in Code section 897 or any successor to that provision.

Paragraph 3 provides a rule similar to provisions in the United States treaties with Spain and Mexico. It permits a Contracting State to tax the gain derived by a resident of the other State on the disposition of shares or other rights in the capital of a corporation or other legal person resident in the first State. The right to impose this tax, however, is permitted only if the person disposing of the shares has or had at any time during the 12-month period preceding the disposition a direct or indirect interest of at least 25 percent in the vote or value of the corporation or other legal person. At present, neither the United States nor Kazakhstan imposes a tax on the alienation by a nonresident of shares in a local corporation or other legal person. This paragraph, therefore, currently has no practical effect. Point 6 of the Protocol provides that, in the event either State introduces such a tax in the future, it must inform the other State in a timely manner and must consult with that other State with a view to providing for nonrecognition treatment in appropriate cases. The cases envisioned were those involving corporate reorganizations and other intercompany transfers. The negotiators believed it prudent to postpone consideration of nonrecognition provisions until such time as actual laws make

clearer what exceptions and allowances are necessary. Moreover, views within each Contracting State on the types of transactions that are appropriately excepted from current taxation may change. Thus, elaborate nonrecognition provisions of the type that appear in the United States treaties with Spain and Mexico are not provided in the present agreement, but the Convention does impose a good faith obligation to craft such exceptions in the event domestic laws change. It is expected that the corresponding provisions in the treaties with Mexico and Spain will serve as guidance in the crafting of exceptions in this Convention.

To the extent one State does tax the share gains of residents of the other State as permitted by paragraph 3, the residence State will source the gains in the non-residence State to the extent necessary to permit a foreign tax credit or otherwise avoid double taxation.

Paragraph 4 provides that gain from the alienation of personal property attributable to a permanent establishment or fixed base that a resident of one Contracting State has in the other Contracting State may be taxed by that other State. Gain from the alienation of personal property comprising part or all of the assets of the permanent establishment or fixed base also may be taxed by that other State. Paragraph 4 does not permit the United States to impose tax under Code section 864(c)(7) with respect to gain from the subsequent disposition of assets that were formerly used in connection with a U.S. permanent establishment or fixed base. Kazakhstan does not tax gain in such circumstances.

Paragraph 5 provides that gains derived by a resident of one of the Contracting States from the alienation of ships, aircraft, containers, or related equipment operated in international traffic may be taxed only by that State. Occasional use of a ship, aircraft, container, or related equipment in domestic traffic should not cause the disposition of such property to fall outside the scope of this provision.

Paragraph 6 reserves the exclusive right to tax gains with respect to any property not specified in the previous paragraphs of this Article to the State in which the alienator is a resident.