Authors: Aibek Kambaliyev, Partner; Ravil Kassilgov, Managing Partner; Bekzada Issabekov, Paralegal.
The KP Disputes team successfully defended the interests of an AIFC-registered company that had been subject to persistent tax claims and inspections by the tax authority over several years.
1. THE ESSENCE OF THE TAX CLAIMS
A private company ("the Company") registered within the Astana International Financial Centre ("AIFC") is part of a global group engaged in blockchain mining. The Company is the largest industrial miner outside of China and also develops software and hardware for working with the Bitcoin blockchain.
The Kazakhstani tax authorities accused the Company of underreporting value-added tax ("VAT") for the years 2020–2021, indicating that the Company had unlawfully exempted a portion of its turnover from taxation. According to the tax authority, the Company was in fact engaged in digital mining, as its computing capacities were being used by non-residents to generate cryptocurrency blocks. Based on this reasoning, the authority argued that the services provided were not merely information processing, but an integral part of mining and therefore subject to taxation in Kazakhstan ("RK").
Additionally, the tax authority argued that the place of service provision was within RK, given that the activities were conducted on its territory and involved local energy resources. Referring to Article 378 of the Tax Code of the Republic of Kazakhstan ("Tax Code"), the authority concluded that the Company was obliged to charge and remit VAT on the relevant transactions.
The Company maintained that it exclusively provided information processing services to non-resident clients and was not directly involved in the creation of digital assets. Moreover, the Company argued that the place of supply was determined by the location of its foreign clients, not RK, and thus, under subparagraph 2 of paragraph 1 of Article 370 of the Tax Code, the services were not subject to VAT.
2. PRESSURE FROM THE TAX AUTHORITY
2.1. Desk audit notices (March 2023 – June 2023)
In March 2023, the tax authority issued nine desk audit notices to the Company, alleging underpayment of VAT totaling more than one billion tenge. According to the authority, the Company had unlawfully excluded certain transactions from its taxable base by classifying services to non-residents as “information processing” not subject to VAT.
Attempts to challenge these notices through pre-litigation appeals to the Department of State Revenue and the Committee of State Revenue were unsuccessful. As a result, in June 2023, the Company filed an administrative lawsuit with the Astana Specialized Interdistrict Administrative Court, seeking to have the notices declared unlawful and annulled.
Court Decision
The court ruled in favor of the Company, declaring the notices unlawful and annulling them. A key argument was the notices’ failure to comply with paragraph 1 of Article 96 of the TC, as they did not specify the level of risk associated with the alleged violations. The court emphasized that the absence of a stated risk level constitutes a material violation that infringes on the taxpayer’s rights and contradicts Article 79 of the Administrative Procedure and Process Code of the Republic of Kazakhstan ("APPC"). The court’s decision entered into force in October 2023.
2.2. Repeated tax audits
After the desk audit notices were annulled, the tax authority attempted multiple times to initiate further audits:
First attempt (March–June 2024)
In March 2024, the tax authority launched an audit regarding alleged VAT underreporting on services provided to non-residents. The Company filed a lawsuit, arguing that:
As a result, the tax authority acknowledged the procedural violations and entered into a mediation agreement with the Company. The audit was canceled, and the Company withdrew its claim.
Second attempt (July–September 2024)
In July 2024, the Company received another audit order on the same grounds. The Company challenged the order, citing a violation of the principle of legitimate expectations (under Article 13 of the APPC) and the lack of a prior decision and notification (under Article 74 of the APPC), which deprived it of the right to be heard.
In September 2024, the tax authority revoked the audit order without explanation, thereby implicitly acknowledging the unjustified nature of its actions. The Company withdrew its lawsuit.
Third attempt (September–October 2024)
In September 2024, the tax authority issued yet another preliminary decision to conduct an unscheduled thematic audit based on the same rationale—a supposedly unaddressed desk audit notice concerning VAT. The Company submitted objections, highlighting the illegality and groundlessness of initiating a third audit on identical grounds. In addition, a hearing was held in October 2024, and the audit was not initiated.
Concurrently, the Company appealed to the Prosecutor’s Office to review the legality of the tax authority’s repeated and systematic attempts to initiate audits.
2.3. Tax reviews and unlawful VAT deregistration
In addition to audits, the tax authority conducted a series of tax reviews, which were used to apply further pressure on the Company. During these reviews, the Company was unlawfully removed from the VAT register.
Chronology
Court Decision
The first-instance court sided with the Company, noting that the explanation was submitted on time and with all required documents. The tax authority based its decision solely on outdated internal data that did not match the Company’s actual address. The court deemed the authority’s actions to be formalistic and in violation of the principles of legality, fairness, and protection of legitimate expectations (Articles 7, 8, and 13 of the APPC). At the time of writing, the decision had not yet entered into force, and the tax authority had not appealed.
3. FINAL REMARKS
The KP Disputes team remains committed to providing its clients with professional protection and support in complex tax disputes.
The KP Disputes team successfully defended the interests of an AIFC-registered company that had been subject to persistent tax claims and inspections by the tax authority over several years.
1. THE ESSENCE OF THE TAX CLAIMS
A private company ("the Company") registered within the Astana International Financial Centre ("AIFC") is part of a global group engaged in blockchain mining. The Company is the largest industrial miner outside of China and also develops software and hardware for working with the Bitcoin blockchain.
The Kazakhstani tax authorities accused the Company of underreporting value-added tax ("VAT") for the years 2020–2021, indicating that the Company had unlawfully exempted a portion of its turnover from taxation. According to the tax authority, the Company was in fact engaged in digital mining, as its computing capacities were being used by non-residents to generate cryptocurrency blocks. Based on this reasoning, the authority argued that the services provided were not merely information processing, but an integral part of mining and therefore subject to taxation in Kazakhstan ("RK").
Additionally, the tax authority argued that the place of service provision was within RK, given that the activities were conducted on its territory and involved local energy resources. Referring to Article 378 of the Tax Code of the Republic of Kazakhstan ("Tax Code"), the authority concluded that the Company was obliged to charge and remit VAT on the relevant transactions.
The Company maintained that it exclusively provided information processing services to non-resident clients and was not directly involved in the creation of digital assets. Moreover, the Company argued that the place of supply was determined by the location of its foreign clients, not RK, and thus, under subparagraph 2 of paragraph 1 of Article 370 of the Tax Code, the services were not subject to VAT.
2. PRESSURE FROM THE TAX AUTHORITY
2.1. Desk audit notices (March 2023 – June 2023)
In March 2023, the tax authority issued nine desk audit notices to the Company, alleging underpayment of VAT totaling more than one billion tenge. According to the authority, the Company had unlawfully excluded certain transactions from its taxable base by classifying services to non-residents as “information processing” not subject to VAT.
Attempts to challenge these notices through pre-litigation appeals to the Department of State Revenue and the Committee of State Revenue were unsuccessful. As a result, in June 2023, the Company filed an administrative lawsuit with the Astana Specialized Interdistrict Administrative Court, seeking to have the notices declared unlawful and annulled.
Court Decision
The court ruled in favor of the Company, declaring the notices unlawful and annulling them. A key argument was the notices’ failure to comply with paragraph 1 of Article 96 of the TC, as they did not specify the level of risk associated with the alleged violations. The court emphasized that the absence of a stated risk level constitutes a material violation that infringes on the taxpayer’s rights and contradicts Article 79 of the Administrative Procedure and Process Code of the Republic of Kazakhstan ("APPC"). The court’s decision entered into force in October 2023.
2.2. Repeated tax audits
After the desk audit notices were annulled, the tax authority attempted multiple times to initiate further audits:
First attempt (March–June 2024)
In March 2024, the tax authority launched an audit regarding alleged VAT underreporting on services provided to non-residents. The Company filed a lawsuit, arguing that:
- The notice used as the basis for the audit did not comply with paragraph 1 of Article 96 of the TC (no stated risk level);
- The audit initiation procedure was violated—no pre-audit hearing was held (Article 73 of the APPC).
As a result, the tax authority acknowledged the procedural violations and entered into a mediation agreement with the Company. The audit was canceled, and the Company withdrew its claim.
Second attempt (July–September 2024)
In July 2024, the Company received another audit order on the same grounds. The Company challenged the order, citing a violation of the principle of legitimate expectations (under Article 13 of the APPC) and the lack of a prior decision and notification (under Article 74 of the APPC), which deprived it of the right to be heard.
In September 2024, the tax authority revoked the audit order without explanation, thereby implicitly acknowledging the unjustified nature of its actions. The Company withdrew its lawsuit.
Third attempt (September–October 2024)
In September 2024, the tax authority issued yet another preliminary decision to conduct an unscheduled thematic audit based on the same rationale—a supposedly unaddressed desk audit notice concerning VAT. The Company submitted objections, highlighting the illegality and groundlessness of initiating a third audit on identical grounds. In addition, a hearing was held in October 2024, and the audit was not initiated.
Concurrently, the Company appealed to the Prosecutor’s Office to review the legality of the tax authority’s repeated and systematic attempts to initiate audits.
2.3. Tax reviews and unlawful VAT deregistration
In addition to audits, the tax authority conducted a series of tax reviews, which were used to apply further pressure on the Company. During these reviews, the Company was unlawfully removed from the VAT register.
Chronology
- April 19 and May 14, 2024: The Company received notices to confirm its location (or lack thereof).
- May 21, 2024: The Company submitted a timely explanation under paragraph 5 of Article 70 of the TC, along with a complete set of supporting documents. Despite this, it was deregistered for VAT.
- A pre-litigation appeal of the deregistration was dismissed.
- December 12, 2024: The Company filed an administrative lawsuit, seeking to have the tax authority’s actions declared unlawful and to annul the VAT deregistration decision.
Court Decision
The first-instance court sided with the Company, noting that the explanation was submitted on time and with all required documents. The tax authority based its decision solely on outdated internal data that did not match the Company’s actual address. The court deemed the authority’s actions to be formalistic and in violation of the principles of legality, fairness, and protection of legitimate expectations (Articles 7, 8, and 13 of the APPC). At the time of writing, the decision had not yet entered into force, and the tax authority had not appealed.
3. FINAL REMARKS
- The Company has faced pressure for over two years: desk audit notices totaling over 1 billion tenge, repeated inspections, and tax reviews.
- All attempts by the tax authority were ultimately unsuccessful: the desk audit notices were annulled by the court, audits were discontinued before reaching the merits stage, the VAT deregistration was declared unlawful.
- This case highlights how systematic regulatory pressure can create serious obstacles for business operations. However, it also demonstrates that with a well-structured legal strategy, it is possible to effectively defend and protect one's rights even under prolonged pressure.
The KP Disputes team remains committed to providing its clients with professional protection and support in complex tax disputes.