December 9, 2020
Tax and Customs Benefits for Investors in Uzbekistan
For investment activities it is important to forecast long-termcosts. For this reason, companies before investing in other states analyze carefully local taxes and mandatory payments.
The state is also interested in providing benefits and preferences to investors for creating new competitive and innovative, export-oriented and import-substituting industries, expanding and updating existing industries using modern technologies and introducing modern management experience.
However, it is important to take into account that the system of tax and customs benefits and preferences in the Republic of Uzbekistan are considered to have a tendency to change. For this reason, we provide an overview of tax and customs benefitswhich are currently in force.
- Legal framework of the system of benefits
The system of tax and customs benefits is regulated by the following regulatory legal acts:
- Law of the Republic of Uzbekistan “On investments and investment activities”;
- Law of the Republic of Uzbekistan “On special economic zones”;
- Tax Code of the Republic of Uzbekistan;
- Customs Code of the Republic of Uzbekistan;
- Decree of the President of the Republic of Uzbekistan dated April 11, 2005 No. UP-3594 “On additional measures to stimulate the attraction of direct private foreign investment” (hereinafter referred to as “Decree of the President of the Republic of Uzbekistan dated April 11, 2005 No. UP-3594”);
- Decreeof the President of the Republic of Uzbekistan dated April 10, 2012 No. UP-4434 “On additional measures to stimulate the attraction of foreign direct investment” (hereinafter referred to as “Decree of the President of the Republic of Uzbekistan dated April 10, 2012 No. UP-4434”).
- Who are foreign investors?
On granting benefits and preferences, the question what should be understood under term “foreign investor” under the legislation of Uzbekistan arises.According to the Law of the Republic of Uzbekistan “On Investments and Investment Activity”, foreign investors are foreign states, administrative or territorial bodies of foreign states, international organizations founded in accordance with agreementsor other treaties between states or subjects of public international law, legal entities, any other partnerships, organizations or associations founded and acting in accordance with the acts of legislation of foreign states, citizens of a foreign state and stateless persons permanently residing outside the Republic of Uzbekistan.
It should also be mentioned that benefits and preferences are provided to enterprises established and operating in special economic zones. Some tax and customs paymentsprovisionsfor special economic zones are provided in the Law of the Republic of Uzbekistan “On special economic zones”.
- Types of benefits and preferences
The central core of investment regulation, benefits and preferences is the Law of the Republic of Uzbekistan “On Investments and Investment Activities”. According to this Law, benefits and preferences applied for state support of investments and investment activities may include:
- transfer of state property objects or property rights to them to the investor at a preferential or zero redemption value;
- tax and payment benefits;
- subsidizing interest rates on loans received by the investor for the implementation of the investment project.
It is necessary to take into account that tax and payment benefits are provided in the manner prescribed by legislation. Preferences, in turn, used for state support of investment can be provided by resolutions of the Council of Ministers of the Republic of Karakalpakstan, khokims of regions and the city of Tashkent, including in relation to objects of municipal property, at the expense of the budget of the Republic of Karakalpakstan, local budgets of regions and the city of Tashkent.
- Fields and period of validity of benefits
For the purposes of improvement of the investment climate in the country and attraction of private direct foreign investments, the Decree of the President of the Republic of Uzbekistan dated April 11, 2005 No. UP-3594 indicatedfields and period of benefits. According to this Decree, the following grace periods are established for enterprises created with foreign direct investment specializing in the production of goods (services) in the fields of the economy, depending on the volume of direct private foreign investment:
- from USD 300 thousand to 3 million – for a period of 3 years;
- over USD 3 million up to 10 million – for a period of 5 years;
- over USD 10 million – for a period of 7 years.
The Decreealso provides a list of fieldsof investments to which the benefits can be applied. The list of fields subject to the benefits includes:
|1. Products of the radio-electronic industry and the production of components for computers;
2. Light industry;
3. Silk industry;
4. Building materials industry;
5. Industrial production of poultry meat and eggs;
6. Food industry;
7. Meat and dairy industry;
8. Production of larvae and juvenile fish, as well as processing and preserving of fish and fish products;
9. Chemical industry;
10. Petrochemical industry;
11. Medical industry, as well as the production of medicinal products for veterinary medicine;
|12. Production of packaging materials;
13. Construction of power plants based on alternative energy sources;
14. Coal industry;
15. Production of electro-ferrous alloys and hardware for industrial purposes;
16. Mechanical engineering and metalworking;
17. Machine-tool and tool industry;
18. Glass and porcelain-faience industry;
19. Microbiological industry;
20. Manufacture of toys;
22. Waste management
The Decree also noted that the benefits for certain taxes established by the Tax Code of the Republic of Uzbekistan are applied when locating these enterprises in any city and rural settlement of the republic, with the exception of Tashkent city and Tashkent region. This territorial restriction does not apply to enterprises operating in the field of tourism and waste management.
Meanwhile, another Decree of the President of the Republic of Uzbekistan dated April 10, 2012 No. UP-4434 established that newly created enterprises with foreign investments, in which the share of a foreign investor in monetary form is at least 5 million US dollars, in case of changes in tax legislation, may apply for 10 years from the date of their state registration norms and regulations on the payment of corporate income tax, value added tax (turnover on the sale of goods, works, services), property tax, in effect on the date of their state registration.
To support investments and develop infrastructure, the State takes an obligationof construction of the necessary engineering and communication networks at the expense of budget funds and other internal sources of fundingwithin the framework of investment projects worth more than 50 million US dollars and a foreign investor’s share of at least 50 percent.
- Features of taxation of legal entities with participation of direct private foreign investments
The Tax Code establishes a special taxation procedure with the provision of benefits for legal entities with the participation of direct private foreign investment.
First of all, it is necessary to clarify what the Tax Code means by the term “direct private foreign investment”. According to the Tax Code, foreign direct investment refers to investments made without a guarantee of the Republic of Uzbekistan by individuals who are citizens of a foreign state, stateless persons permanently residing outside the Republic of Uzbekistan, as well as foreign non-state legal entities.
These persons are provided with tax benefits in the form of exemption from payment of land tax, property tax and tax for the use of water resources, depending on the volume of direct private foreign investments made for a period determined by the decision of the President of the Republic of Uzbekistan.
The exemptions are considered to be applied for the abovementioned taxes, if all of the following conditions are met:
- when legal entities are established in the territories determined by legislation;
- when foreign investors make direct private foreign investments without providing a guarantee of the Republic of Uzbekistan;
- if the share of foreign participants in the authorized capital of legal entities is at least 33 percent, and for joint stock companies – at least 15 percent;
- when making foreign investments in the form of freely convertible currency or new modern technological equipment;
- when sending at least 50 percent of the income received as a result of the provision of tax benefits during the period of their application for reinvestment for the purpose of further development of production.
- Land tax benefit
In addition to the benefits that are provided to investors specified in paragraph 6 of this article, the Tax Code provides a list of land plots that are not subject to taxation. Such land plots include lands:
- occupied by objects of culture, education, health care and social protection of the population;
- occupied by sports and physical culture and recreation complexes, places of rest and health improvement of mothers and children, rest homes and educational and training bases;
- occupied by urban electric transport routes and subway lines, including land occupied by public transport stops and subway stations and structures on them;
- occupied by water supply and sewerage facilities in settlements (main water pipelines, water supply networks, sewer collectors and structures on them, pumping stations, water intake and treatment facilities, inspection wells and siphons on the water supply and sewerage network, water towers and other similar structures);
- occupied by main heating system, including pumping stations (booster, step-down, mixing, drainage), heat metering and control devices, heaters, hot water circulation pumps and other similar structures;
- occupied by protective forest plantations;
- where drip irrigation is used – for a period of five years from the beginning of the month in which the drip irrigation system was introduced;
- newly developed for agricultural purposes – for the period of execution of works on their development and within five years from the time of their development in accordance with the project approved by the authorized body;
- existing irrigation, on which reclamation works are carried out – for a period of five years from the start of work in accordance with the project approved by the authorized body;
- on which new plantings of orchards, vineyards and mulberry trees were made for a period of three years, regardless of the use of row spacing for sowing agricultural crops. The calculation of the period for which the tax credit is granted for new plantings made in the autumn begins on January 1 of the following year, and for plantings made in the spring begins on January 1 of the current tax period;
- for agricultural purposes and the forest fund of scientific organizations, experimental, experimental and educational-experimental farms of scientific research organizations and educational institutions of agricultural and forestry profile, used directly for scientific and educational purposes. In accordance with this clause, land plots occupied by crops and plantations used for scientific experiments, experimental work, breeding new varieties and other scientific and educational purposes, the subject of which has been approved, are exempted from tax.
The land tax benefit is also provided for objects of production of environmentally friendly energy. Producers of energy from renewable sources are exempted from the tax on land plots occupied by installations of renewable energy sources (with a nominal capacity of 0.1 MW and more) for a period of ten years from the moment they are put into operation.
- Property tax benefit
The tax legislation of Uzbekistan provides for tax benefit for property tax. The state has established that when calculating the tax, the tax base is reduced by the average annual residual value (average annual value):
- objects of culture and art, education, health care, physical culture and sports, social security;
- property on the balance sheet of agricultural enterprises used for the production and storage of agricultural products, as well as for the silkworm raising.
The state also established that renewable energy producers are exempted from the property tax for installations of renewable energy sources (with a nominal capacity of 0.1 MW and more) for a period of ten years from the date of their commissioning.
- Income tax benefit
The state provides tax benefit for investors when calculating income tax. In this regard, the Tax Code established that property contributed as investment obligations in accordance with the agreement concluded between the investor and the authorized state body for state property management is not considered as income.
Moreover, the tax legislation of Uzbekistan provides for an investment deduction when paying income tax. The investment deduction is applied in the amount of:
- 10 percent of the cost of new technological equipment, the cost of modernization, technical and (or) technological re-equipment of production and (or) the amount of funds allocated for the purchase of domestically produced software within the framework of investment projects to create information systems;
- 5 percent of the amount of funds allocated for the expansion of production in the form of new construction, reconstruction of buildings and structures used for production needs.
The investment deduction is applied in the reporting (tax) period in which new technological equipment was put into operation or modernization, technical and (or) technological re-equipment of own production, expansion of production in the form of new construction, reconstruction of buildings and structures used for production needs, software of domestic production in the framework of investment projects for the creation of information systems.
- Value added tax benefit
The Tax Code stated that for calculating value added tax, property contributed as investment obligations in accordance with the agreement concluded between the investor and the authorized state body for state property management is not taken into account as income.
- Exemption from taxation of certain goods when imported into the Republic of Uzbekistan
In addition to the direct provision of tax benefits, the Tax Code also provides for exemption from taxation when importing certain goods. Thus, the import into the territory of the Republic of Uzbekistan of technological equipment, the analogues of which are not produced in the Republic of Uzbekistan, is exempt from taxation.
- Benefits for customs duties payment
In addition to tax benefits, legislation provides for benefits on the customs duties payment when importing certain goods into the customs territory. Thus, tariff benefits in the form of exemption from customs duties are provided in relation to:
- property imported into the customs territory by enterprises with foreign investment with a share of foreign investment in the authorized capital (authorized capital) of at least thirty-three percent for their own production needs, within two years from the date of their state registration;
- property imported into the customs territory for the personal needs of foreign investors, citizens of foreign states and stateless persons permanently residing outside the Republic of Uzbekistan and staying in the Republic of Uzbekistan in accordance with labor contracts concluded with foreign investors;
- goods imported into the customs territory by foreign legal entities that have made direct investments in the economy of the Republic of Uzbekistan for a total amount equivalent to more than fifty million US dollars, provided that the imported goods are products of their own production;
- goods intended for work under a production sharing agreement and imported into the customs territory in accordance with the project documentation by a foreign investor or other persons participating in the performance of work under a production sharing agreement, as well as products exported from the customs territory by the investor, belonging to him in accordance with a production sharing agreement;
- technological equipment imported into the customs territory, as well as components and spare parts, provided that their delivery is stipulated by the terms of the contract (agreement, agreement) for the supply of technological equipment. In the event of sale or gratuitous transfer of imported technological equipment for export within three years from the date of its import, this privilege is canceled with the restoration of obligations to pay customs duties for the entire period of application of the privilege;
On the basis of this article it can be concluded that today support for investors and expansion of production is one of the main tasks for economic development. For this reason, today a system of benefits and preferences has been developed to attract foreign investors. We hope that this material will make the system of taxes and preferences clear for foreign investors and help themto plan better their expenses.