June 14, 2024

Permanent establishment of non-residents in the Republic of Uzbekistan

A permanent establishment (hereinafter. PE) is a tax status by its legal nature and was created specifically to solve tax issues of foreign legal entities. A permanent establishment is not an organizational and legal form and therefore is not an independent subject of civil turnover. A detailed analysis of the current legislation and current practice on various aspects of the activities of PE in Uzbekistan is provided below.

Content:

1. Establishment and registration of PE,

2. Employment,

3. Taxation,

4. Liquidation of PE.

Under Art. 36 of the TC, in the Republic of Uzbekistan, the term PE means a permanent place of business through which a foreign legal entity carries out all or part of its business activities in the Republic of Uzbekistan.

PE may be understood to mean any of the following:

  • any place of management, branch, department, bureau, office, cabinet, agency, factory, workshop, shop, or laboratory;
  • any place where the manufacture, processing, finishing, packaging, and wrapping of goods are carried out;
  • any place, including a warehouse, used as a retail outlet;
  • any plant or structure (including its installations) used for the exploration, development, extraction, and/or exploitation of natural resources, but only if the plant or structure is used or ready for use for more than one hundred and eighty – three days;
  • any place of performance of activities (including control or observation ) relating to a pipeline, or gas pipeline;
  • any place of performance of activities related to installations, adjustment, and operation of gaming machines (including consoles), computer networks and communication channels, and amusement rides.

In addition, PE may include:

  • a construction site, construction, installation, or assembly facility or related supervisory (control) activities, provided that such site, facility, or activity exists or continues for more than 183 days in any consecutive 12-month period;
  • the provision of services, including consultancy services, by that foreign legal entity through its employees or other personnel employed by it for such purposes, provided that such activities (for the same or a related project of the foreign legal entity or related party of the foreign legal entity) continue for at least 183 days during any consecutive 12-month period.

If one or more related foreign legal entities provided service at a construction site or other facility referred to in the preceding paragraph during different periods, each of which does not exceed 183 days, the period of activity for such services shall be added to the total period during which the activity was provided at that construction site or other facility.   

Activities that are merely preparatory or ancillary and which are not part of the main business of the foreign legal person do not constitute permanent establishments. Such activities are:

  • the use of premises exclusively for the storage or display of goods or products belonging to it;
  • maintaining stocks of goods or products belonging to it exclusively for the purpose of storage or display;
  • maintaining a stock of goods or products belonging to him exclusively for the purpose of storage or display;
  • maintaining a fixed place of business exclusively for the purpose of purchasing goods, articles or collecting information for that foreign legal entity;
  • maintaining a fixed place of business exclusively for the purpose of carrying on any other activity of a preparatory or ancillary nature;
  • maintaining a fixed place of business solely for any combination of the above activities, provided that all such activities are of a preparatory or ancillary nature and relate to the non-resident himself and not to third parties.

PE may also arise if a foreign entity conducts insurance on the territory of Uzbekistan and collects insurance premiums or insurance risks through a dependent agent. The actions of any person acting in Uzbekistan on behalf of a foreign legal entity, concluding contracts, or playing a significant role in concluding contracts on transfers of the right of ownership (rendering service) or granting the right to use property on behalf of this foreign legal entity may be recognized as a PE.

This rule does not apply if the agent is independent and acts on the basis of a commission (assignment) agreement or other similar agreement, under the terms of which the agent signs contracts in his own name. At the same time, an agent may be recognized as dependent if he acts primarily on the basis of contracts concluded with one or more related foreign legal entities. Accordingly, in this case, this is the basis for the creation of PE.

In addition, if the activities of the foreign entity are mobile in nature (expensive construction, mineral exploration, and other activities of a mobile nature), in this case, the entire project is treated as PE, regardless of its mobile nature.

 1. Establishment of PE

Under Part 13, Art. 36 of the TC, the date on which a foreign legal entity commences its activities in the Republic of Uzbekistan is considered to be the date on which the PE is established, and the date on which the foreign legal entity commences its activities in the Republic of Uzbekistan is considered to be the date on which the contract is concluded.

The following contracts are the basis for the establishment of PE:

  • a contract on the provision of services in the Republic of Uzbekistan;
  • a contract on the provision of services in the Republic of Uzbekistan under an agreement on the establishment of joint activity;
  • a contract (transactions) on authorization to perform actions on its behalf in the Republic of Uzbekistan;
  • an agreement on the purchase of goods in the Republic of Uzbekistan for use or sale on the territory of the Republic of Uzbekistan;
  • a contract for the purchase of goods in the Republic of Uzbekistan;
  • an initial employment contract for the purpose of performing work in the Republic of Uzbekistan.

In addition, in accordance with Part 12, Art. 36 of the TC, the conclusion of a joint activity agreement and its implementation on the territory of Uzbekistan by a foreign legal entity gives rise to the creation of PE in respect of the activity for each party to the agreement, as well as the fulfillment of the tax obligation by each party separately and independently. 

The date of commencement of activity by a foreign legal entity is also the date of arrival of a non-resident individual to the Republic of Uzbekistan, employment of an employee or other personnel by a foreign legal entity to fulfill the terms of the agreements (contracts, agreements) specified in paragraphs 1-6 above.

A foreign legal entity may provide another legal entity with personnel for work on the territory of the Republic of Uzbekistan. Following Part 11, Art. 36 of the TC, this does not result in the establishment of PE if:

  • such personnel act on behalf of and in the interest of the legal entity to which they are provided;
  • the legal entity that provided the personnel is not liable for the result of the work of such personnel;
  • the income of the legal entity from the provision of personnel does not exceed 10% of the total amount of its costs for the provision of such personnel for the tax period.

Registration of PE

By Part 5, Art. 128 of the TC, a foreign legal entity carrying out activities in the Republic of Uzbekistan through PE is subject to registration at the place of activity.

A non-residential legal entity carrying out activities in the Republic of Uzbekistan through PE must submit an application for registration as a taxpayer to the tax authority based on Art. 130 of the TC no later than 183 calendar days from the date of commencement of such activities.

The application shall be submitted together with the following documents:

  • a document confirming the registration in the country where the legal entity is established;
  • special permits or licenses (if any);
  • power of attorney or another document (if any) confirming the right to act on behalf of the foreign legal entity in the Republic of Uzbekistan;
  • contract (if any), the performance of which will lead to the establishment of PE.

 If a foreign legal entity has concluded a contract for a period exceeding 183 calendar days or several contracts, the total period of activity under which exceeds 183 calendar days, the application for registration must be submitted no later than 30 days from the date of commencement of such activity or conclusion of a contract under which the total period of activity under several contracts exceeds 183 calendar days.

If a non-resident has entered into a joint activity agreement with a resident of the Republic of Uzbekistan, which results in the creation of PE, the non-resident must register within 30 calendar days from the date of commencement of the activity at the place (residence, stay) of the tax residents of the Republic of Uzbekistan, which is a party to the joint activity agreement. The following documents must be submitted to the tax authority with the application:

  • agreement on joint activity;
  • a document confirming the identity of a non-resident legal entity, indicating the state registration number or its equivalent.

The above–mentioned documents attached to the application for registration must be notarized (if they are copies) and translated into the state language.

Under Part 17, Art. 36 of the TC, if a foreign legal entity engages in business activities that result in the establishment of two or more PEs that are subject to registration with a tax authority, one PE is subject to registration for a group of such PEs. If two or more PEs are to be registered in different places, each of them must be registered separately with the relevant authority based on Part 18, Art. 36 of the TC.

2. Employment

As mentioned in the introduction, PE does not have a legal personality. According to Part 3, Art. 19 of the Labour Code (hereinafter. the LC), an employer is a branch, representative office, or other separate subdivision of an organization. The legislator does not clarify whether PE can be treated as a separate subdivision. However, Art. 32 of the TC defines this concept: “A separate subdivision of a legal entity of the Republic of Uzbekistan is any territorially separate subdivision of it, where stationary workplaces are located”.

According to Art. 47 of the Civil Code of the Republic of Uzbekistan (hereinafter. the CC), there is no doubt that representative offices and branches are separate subdivisions of a legal entity, but Art. 36 of the CC, which defines PE, does not specify it as a separate subdivision. In addition, PE may not always have a fixed workplace, as a verified foreign legal entity may be registered as PE, concluding contracts and acting on its behalf. Therefore, it is clear that PE may not always be a separate subdivision if it is considered as such.

Because PE is not a subject of law and Art. 19 of the LC does not directly mention the PE as an employer, nor has the legislator defined the PE as a separate subdivision, we do not consider the PE as an employer. When hiring, the employer is the foreign legal entity itself, which signs the contract through its verified representative. Another argument in this case is that the PE is established solely for tax purposes. The foreign legal entity is obliged to register the PE and has no benefit or interest in doing so.

3. Taxation

Non-residents who carry out their activities through PE have the status of a taxpayer, with all the rights and obligations of a taxpayer. The process of taxing PE is based on the general norms of the TC, taking into account special norms. Pursuant to Part 2 of Art. 347 of the TC, the tax obligations of a non-resident who carries out his activities through PE may be imposed on his PE.

According to the TC, the PE should pay the following taxes:

  • income tax (Art. 294 of the TC);
  • value added tax ( Art. 283 of the TC);
  • excise tax (Art. 283 of the TC);
  • personal income tax (Art. 386 of the TC);
  • social tax (Art. 402 of the TC);
  • property tax (Art. 410 of the TC);
  • land tax (Art. 410 of the TC).

Tax on the income of a non-resident operating through PE is calculated and paid by the non-resident independently following the procedure established by Chapters 43-44 of the TC, taking into account the provisions of Art. 347 of the TC.

In accordance with Part 3 of Art. 347 of the TC, the total income of PE consists of the following types of income:

  • income received by a non-resident as a result of carrying out activities on the territory of the Republic of Uzbekistan through his PE;
  • income of a non-resident from ownership, use, and (or) disposal of property of the PE of this non-resident in the Republic of Uzbekistan;
  • income of a non-resident, including income of its structural subdivisions in other states, received from carrying out in the Republic of Uzbekistan activities identical or homogeneous to those carried out through the PE of this legal entity, a non-resident in the Republic of Uzbekistan;
  • income from sources outside the Republic of Uzbekistan related to the activities of such PE.

If a non-resident has several registered PEs, the tax base is determined separately for each PE.

The net profit remaining to a non-resident operating in the territory of the Republic of Uzbekistan through PE after payment of taxes is equivalent to dividends and is subject to taxation at the rate specified in Art. 353 of the TC. If an international treaty is in force, a reduced rate may be applied under the procedure established in such a treaty.

4. Liquidation of PE.

Formally, there is no liquidation procedure for PE, but PE must terminate all legal relations before it can cease its activities.

List of relationships to be terminated in case of liquidation of PE:

  1. Termination of administrative obligations (taxes, custom payments, bank currency relations, accounting, environmental, licensing, and others).
  • According to paragraph 125 of the Resolution of the Cabinet of Ministers (hereinafter. RCM) No. 1, dd. 07.01.2021, tax inspections in the form of a tax audit shall be carried out within 3 days after the termination of the PE;
  • An application for deregistration from the tax register must be submitted to the tax authority no later than 15 days after termination. The application shall be accompanied by copies of the certificate of work performed under the Contract, and financial and tax statements based on RCM No. 150 dd. 02.04.2022.
  • Per paragraph 3 of 349 of the TC, upon the termination of the PE, the tax report and the report on activities in the Republic of Uzbekistan shall be submitted to the tax authority.
  • Pursuit to paragraph 28 of RCM No. 595, dd. 22.09.2021, the PE should submit an application to the tax authorities for the cancellation of the registration of VAT payers.
  • Obtain a decision from the customs authority on the non-existence of the debt or its recognition as irrecoverable with Art. 3521 of the Customs Code.

Non-mandatory procedures:

  • Notification of cessation of licensable, permissive, and notifiable activities may be submitted to the licensing authority based on Art. 34 and 45 of the Law “On Licensing”. There is no direct requirement that such notification be mandatory.
  • The seal and stamp of the PE shall be destroyed following the Act.

Termination of labor relations with employees who are citizens of Uzbekistan and foreign citizens who have obtained a work permit in Uzbekistan

  • For each labor contract in which the PE acts as an employer, it is necessary to notify the employee, terminate the labor contract, make payments to dismissed employees, provide information to social security bodies, notify labor authorities, and prepare a file on wage, social and pension payments for transfer to the archive in accordance with articles 161,166,170-173 of the Labor Code.
  • It is necessary to inform the labor authority about the mass dismissal of employees.

 Termination of commercial agreements concluded by the PE

  • In accordance with the procedure established by the Board of the Central Bank of Uzbekistan No. 08.02.2023, bank account contracts of PE with the Serving Bank of Uzbekistan shall be terminated, and bank accounts shall be closed.
  • For each commercial agreement that has not been concluded and closed as an act of acceptance, it is necessary to terminate the obligations by Articles 341, 349,352 of the Civil Code. After termination of obligations, contracts shall be terminated by concluding an additional agreement. It is necessary to provide for the collection of debts beforehand.
  • It is necessary to distribute the property: return, export of temporarily imported property or alienation (sale, donation), and write off.

CONCLUSION

Based on the above the following conclusion can be drawn:

Firstly, the PE is not a legal entity, it is registration is only for tax purposes;

Secondly, there are many reasons for the emergence of PE, for this a non-resident doesn’t need to have an office in the territory of the Republic of Uzbekistan. It is sufficient to conclude a contract for the provision of services with a resident of the Republic of Uzbekistan or an authorized person who concludes contracts on behalf of the authorized person;

Thirdly, we cannot consider the PE as an employer as it is not a subject of law and is not defined as an employer by the legislation.

Fourth, a non-resident who carries out activities through a PE has all the rights of a taxpayer. The  taxation of PE is carried out based on the general norms established in the TC, taking into account special norms, e.g. Articles 347, 348, 349, and 350 of the TC.

Fifthly, there is no special procedure for the liquidation of a PE, but before this, all administrative, commercial, and labor obligations must be discharged.