October 12, 2021
Corporate structures: main differences: PE, representative office, subsidiary
Table of Content
1. Tax Code of the Republic of Uzbekistan;
2. Civil Code of the Republic of Uzbekistan;
3. Labor Code of the Republic of Uzbekistan;
4. Law of the Republic of Uzbekistan No. ZRU-701 dated 14.07.2021 “On Licensing, licensing and notification procedures”;
5. Appendix No. 1 to Resolution No. 410 of the Cabinet of Ministers of the Republic of Uzbekistan dated 10/23/2000 “Regulations on the Procedure for accreditation and activities of Representative offices of Foreign Commercial Organizations in the Territory of the Republic of Uzbekistan”;
6. Appendix No. 1 to the Resolution of the Cabinet of Ministers of the Republic of Uzbekistan dated 09.02.2017 No. 66 “Regulations on the procedure for state registration of business entities”;
To date, there are a plenty of business mechanisms in Uzbekistan, ranging from LLC and JSC, ending with permanent establishments (hereinafter – the “PE“), representative offices (hereinafter – the “Repoffice”) and subsidiaries. This article reveals the main differences between the “dark horses” of our legislation, between the PE, the Repoffices and subsidiaries.
The first and most significant difference between the PE and the Repoffice is that the Repoffice does not carry out economic or other commercial activities, while the PE involves the implementation of commercial activities by a foreign enterprise. In particular, foreign enterprises open the Repoffice in order to represent and protect their interests on the territory of Uzbekistan. As soon as a foreign enterprise begins to carry out commercial activities through the Repoffice, it will be reclassified into the PE with all the consequences that follow from this. In turn, the subsidiary, unlike the aforementioned structures, is a legal entity. However, the common feature of all three corporate structures is that they are more or less dependent on another enterprise.
The second difference between the PE and the Repoffice is the way each one is established. First of all, it is important to note that both are not legal entities and, thus, registration of each as a legal entity is not required. The PE must only be registered with the tax authority, and the Repoffice must be accredited by the Ministry of Investment and Foreign Trade. In turn, the subsidiary is established by registering as a legal entity in the Center for Public Services. All three structures must be registered with the tax authority.
Not being an organizational and legal form, the PE and the Repoffice are not subjects of civil turnover, namely, they cannot enter into contractual relations on their own behalf or be employers, which fundamentally distinguishes them from the subsidiary, which is a full-fledged subject of civil turnover and, despite dependence on the main business company, can act on its own behalf in civil and labor relations.
Another difference between the aforementioned corporate structures is what taxes each pays. Unlike the PE and subsidiary, the Repoffice does not pay income tax, and also does not submit financial and statistical reports to the tax authorities due to the lack of commercial activity. In particular, the Repoffice pays, or withholds and pays the following taxes and mandatory payments:
– personal income tax, in the case of renting premises from an individual (withholding);
– personal income tax from staff income (withholding);
– individual funded retirement account payments and social tax.
It is important to take into account that the Repoffice plays the role of a tax agent, not a taxpayer. In other words, the Repoffice pays taxes for a foreign company, while the PE and subsidiary are independent taxpayers in accordance with the Tax Code of the Republic of Uzbekistan.
Despite the fact that the PE and the Repoffice are not full-fledged subjects of civil turnover, there is a casual practice in Uzbekistan to consider them as such. In detail, contrary to the Law of the Republic of Uzbekistan “On Licensing, Licensing and Notification procedures”, according to which only an individual or a legal entity can be an applicant for a license or other document of a permissive nature, in practice licenses and permits are issued to the PE at its request. Or, for example, in practice, the tax authorities perceive the Repoffice and the PE as legal entities. This is also evidenced by the official website of the tax service, where in the section for obtaining information about business entities, as well as about their structural divisions, you can choose only from two alternatives “Legal entity” and “Individual entrepreneur”. Information about the PE and the Repoffice can be obtained only by clicking “Legal entity”, although they are not legal entities.
And while the erroneous perception of the tax authority does not entail serious legal consequences, but only exposes the incompetence of the authority in this matter, licensing the PE and issuing permits to it is a very questionable action.