Uzbekistan: Customs and Tax Incentives For Foreign Investors

December, 2007

Author: Jahangir Kakharov, Bisnis Representative in Uzbekistan

INTERNATIONAL COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE, 2007. ALL RIGHTS RESERVED FOR USE OUTSIDE OF THE UNITED STATES.

Foreign Investors

This report briefly outlines the main tax and customs incentives available for foreign investors and companies in Uzbekistan. From the view point of Uzbek legislation enterprises with foreign investments (EFI) are those enterprises where at least 30% of statutory capital is composed of foreign investments. They could be created and may function in any organizational –legal form which doesn’t contradict to Uzbekistan’s legislation.

Foreign investors could be:

• Foreign states, administrative and territorial bodies of foreign states;
• International organizations, founded in accordance with treaties or other agreements among states or which are subjects of international public law;
• Legal entities, or any other companies, organizations, or associations founded and operating in accordance with legislative acts of foreign states;
• Physical persons, which are citizens of foreign states, persons without citizenship and Uzbek citizens permanently residing abroad.

EFI to be registered at the Ministry of Justice of the Republic of Uzbekistan and its territorial bodies are those newly created enterprises meeting the following criteria:

• The size of the statutory capital of the enterprise may not be less than equivalent of $150,000;
• One of the participants of the enterprise must be foreign legal entity;
• The share of foreign investments must be not less than 30% of the statutory capital of the enterprise.

For the enterprises newly being set up in the territory of Karakalpak Republic and Khoresm region, the criteria are different from the stated above. For these regions the minimum size of statutory capital is the equivalent of $75,000.

Enterprises that do not meet the above stated criteria are not considered as EFI and subject to state registration in municipalities of cities and districts.

Below is the list of preferences specifically set up for EFI and/or foreign investors. This list does not include preferences on separate types of taxes, duties, and other obligatory payments to the budget, foreseen for all enterprises, including EFI.

Tax Privileges for Foreign Investments Made in Some Regions of Uzbekistan

A President’s Resolution as of April 11, 2005 stipulates that direct foreign investments (existing or new) into certain areas of economy (production of computer components, textiles, construction materials, dairy products etc.) without the guarantee assurances of the Government of Uzbekistan are entitled to tax holidays on profits, property, and certain other taxes provided that a number of other conditions are met, such as a requirement to reinvest income generated from such privileges into the development of this entity.

Starting from July 1, 2005, EFI created in the certain regions of Uzbekistan (Republic of Karakalpakistan and Djizak, Kashkadarya, Syrdarya, Surhandadya, Khorezm, Navoi, Andijan, Namangan and Fergana provinces) are exempt from profit tax, property tax, tax for development of social infrastructure, single tax payment, and obligatory payment to the Republican Road Fund. The duration of these tax privileges depends of the size of direct foreign investments:

• from $300 thousand to US$ 3 million - 3 years;
• over $3 million to US$ 10 million - 5 years;
• over $10 million -7 years.

The main conditions for the use of the above mentioned tax privileges are the following:

• The share of the foreign participants/investor in the statutory capital of the enterprise must be no less then 50%;
• Foreign capital must be invested after the state registration of the enterprise;
• Foreign investment must be made in the form of convertible currency or in the form of modern technological equipment;
• Profits gained as a result of these privileges in the period of its use must be reinvested for the further development of the enterprise.

State Investment Program

Every year the Government enacts an “Investment Program” listing those projects deemed to be of most significance to the Uzbek economy. These are usually multi-million dollar investment projects involving production enterprises with foreign investments (PEFIs) – EFI that receives over 60% of its revenues from the sale of products which it has produced or the sale of its services.

Inclusion in the Investment Program does not automatically entitle a particular project to tax or other incentives (except in so far as a PEFI which is included in the Investment Program is automatically entitled to a seven-year profits tax holiday). Rather, projects included in the Investment Program are simply eligible for incentives at the discretion of the Government.

The Government may grant the following incentives to investors participating in the Investment Program: temporary tax holidays, a favorable tax regime, accelerated amortization of assets, customs preferences, and others. To obtain these benefits a participant in the Investment Program is required to obtain a special Government resolution.

Localization (Import Substitution) Program

If foreign investments are made in projects included in the Localization Program, these legal entities are exempt from profit tax & single tax (for entities, using simplified system of taxation) for period of 5 years. In addition, legal entities with foreign investments are exempt from customs duties for imported technological equipment and its spare parts, as well as material and components, not produced in the country and used in technological process for producing of a localized product for period of 5 years, if foreign investments are directed to projects included in the list of Localization Program.

Some other preferences for EFI in Localization Program include:

• 2 years grace period from payment of taxes on property for newly created enterprises from the date of registration;
• Exemption from payment of property tax for the property used to produce localized/import substituting product for legal entities for period of 5 years.

EFI Investing in the Textile Sector

These EFIs are exempt from payment of any taxes and payments except for VAT until January 1, 2009. This is purposeful privilege – funds freed due to exemption must be directed at technical re-equipment and modernization of production, developing new types of finished products, expansion of working capital, and creating incentives for employees.

Exemptions from Payment of Customs Duties and VAT

Following imports by foreign investors are exempt from paying customs duties:

• Property of foreign investors imported to the Republic of Uzbekistan for their manufacturing needs and also for personal needs of foreign investors and citizens of foreign states in the Republic of Uzbekistan according to labor contract made with foreign investors;
• Goods, imported by foreign legal entities, which made direct investments into economy of Republic of Uzbekistan for the total amount of more than $50 mln, provided that imported goods are the products of their own production. This incentive is not applicable to legal entities importing consumer goods;
• Goods, works and services intended for implementation of works according to Production Sharing Agreements (PSAs) and imported into the Republic of Uzbekistan according to project plans and specifications by foreign investor or by other persons participating in implementing of works according to PSA and also investor's products exported according to PSA;
• Technological equipment imported as a contribution to the statutory capital of enterprises is exempt from payment of VAT and customs duties.
• Technological equipment imported to fulfill investment obligations of the foreign investor for firms being privatized is exempt from payment of VAT.

Foreign Investors Engaged in Exploration and Prospecting Works

Foreign companies engaged in exploration and prospecting of natural resources are provided the most favored nation treatment which ensures:

• Exclusive right for prospecting and exploration works with further development of any of the fields discovered in indicated territory through creation of joint venture, on conditions of concession or production sharing agreement;
• Priority right on granting of new territory for continuing of prospecting and exploratory works in a case if in territories stipulated in the contract for implementation of works resources having commercial value have not been detected;
• The property right and unrestricted export foreseen by the constituting documents of joint venture or concession agreement of a part of extracted hydrocarbon, and also products of their processing on the basis of tolling;
• Guarantee for reimbursement of actual costs on prospecting and exploratory works in discovering deposits of industrial value, in case of transfer them for further mining to the National Holding Company Uzbekneftgas.

Foreign companies attracted for prospecting and exploratory works in oil and gas are exempt from:

• All kinds of taxes, deductions and payments effective in the territory of the Republic of Uzbekistan during exploration and prospecting works. The total duration of exploration and prospecting works may not exceed 5 years. This period could be extended for another 3 years in case of potentially promising outcome of continuation of works;
• Customs duties in import of equipment, material-technical resources and services needed for exploratory and other relevant works;

Joint ventures on extraction of oil and gas formed with engagement of foreign companies, involved in prospecting and exploratory works on oil and gas, are exempt from:

• Payment of the profit tax for the period of seven years from beginning of production of oil or gas. On expiration of the indicated term, the rate of the profit tax of the indicated joint ventures will be set at the rate of 50% from the applicable rate;
• Payment of tax on property and on the incomes of the foreign participants that own shares in joint venture;
• Mandatory surrender of a part of the foreign earnings from sales of product obtained as a result of activity on extraction and refining oil and gas, for the period of return of the invested capital for prospecting and exploratory works.

By a special resolution of the Cabinet of Ministers, a company with foreign investment may be granted extra tax exemptions and other benefits, depending upon the importance of the company’s project to the Government, the volume of the investment to be made, and other factors. An investment program of US$ 20 million or more requires the consent of the Cabinet of Ministers.

For more information on Uzbekistan, visit BISNIS online at http://www.bisnis.doc.gov/bisnis/country/Uzbekistan.cfm

BISNIS (www.bisnis.doc.gov) is part of the U.S. Commercial Service (www.export.gov).