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Spotlight on Uzbekistan: Kinstellar’s regular look at the Uzbek market - November 2021

November 2021 – This issue covers the following topics: 

Uzbekistan sets to improve contracting processes

On September 14, 2021, the President of Uzbekistan signed the Decree No. УП-6313 “[o]n fundamental improvements in contractual relations” (the “Decree”). According to the Decree:

1. Starting from 1 December 2021, certain matters will be released from regulatory control allowing parties freedom of contract, as the Decree abolished:

  • the previous ban imposed on commercial banks restricting processing of payments for delivered goods, works, and services rendered to third parties (i.e. parties that are not suppliers of goods, works and/or services);
  • mandatory advance payments in contracts for the supply of goods, works, and services entered into by companies with a state ownership of more than 50%; and
  • mandatory advance payment in contracts entered into with producers of agricultural and livestock products and stockpile organizations.

2. Private individuals are allowed to provide each other loans and repay such loans in foreign currency, provided the relevant loan agreements have been notarized.

3. Furthermore, starting from 1 January 2022:

  • The concept of duty of good faith will be further expanded: a party to a contract that has accepted full or partial performance of contractual obligations from the other contracting party or otherwise affirmed the contract, will lose its right to demand invalidation of the contract in the future, if such demand conflicts with the principle of good faith;
  • Contracts for public procurement would be required to include an anti-corruption clause, the breach of which by a contracting party (or parties controlled by such contracting party) would entitle the other party to unilaterally terminate the contract and demand recovery of damages;
  • In case legal entities and/or individual entrepreneurs (the “Debtors”) do not pay off their indebtedness on tax or customs duties, the State Customs Committee and State Tax Committee may send an instruction to a servicing bank on freezing of proceeds belonging to such Debtors in the amount equal to the outstanding indebtedness, and such amount may be recovered within thirty days, with a notification to be sent to such Debtors. If the Debtor timely challenges in court such instruction to its servicing bank on recovery of proceeds, then such recovery may only be undertaken based on a court’s decision;
  • Public contracts in the fields of utilities, energy supplies, communication services, passenger and freight transportation, and similar fields, having substantial social implications and developed by natural monopoly entities, will be subject to approval by the antimonopoly authority of Uzbekistan before they can be entered into with consumers.

4. The Decree provides for the plan setting forth different tasks to the ministries on future steps to improve the legal regime on contracting processes, including:

  • Introduction of an “escrow” system in the process of sale and purchase of goods via online trading platforms and transactions in other areas;
  • Development of a draft law on abolishing administrative liability for overdue accounts payable and receivable;
  • Development of suggestions on the repeal of the law “[o]n contracting and legal basis of activity of business entities” and, if required, reflection of its provisions in the Civil Code; 
  • Introduction of changes to the laws of Uzbekistan “[o]n joint stock companies and protection of shareholders’ rights” and “[o]n limited and additional liability companies” providing that if the company’s executive body breaches the procedures for entering into a significant transaction or a transaction with affiliated parties (i) as a result of which the company sustains a loss and (ii) the fault of a director, board member, or a custodian, is proven, then the director, board member, or custodian may, along with the company, bear subsidiary (secondary) liability in respect of the losses incurred by creditors.    

Uzbekistan takes further steps to accelerate geological exploration

On October 6, 2021, the President of Uzbekistan signed Decree No. УП-6319 “[o]n measures for further stimulation of geological exploration and improvement of taxation in respect of subsoil users” (the “Decree”).

The declared purpose of the Decree is to provide for additional steps to (i) accelerate industrial development of mineral deposits attracting foreign investments, (ii) stimulate geological exploration using modern methods and technologies, and (iii) further develop taxation in respect of subsoil users.

Starting from 1 January 2022:

A special bidding procedure will be introduced in respect of subsoil use rights for geological exploration or extraction on previously explored subsoil plots of hydrocarbons, precious, nonferrous, rare and radioactive metals, as well as other types of mineral resources with commercial potential, encompassing the following:

  • Sales amount will be considered as a bonus sum for the right to use a subsoil plot, while the commercial discovery bonus and subscription bonus currently provided for by legislation will be cancelled; and
  • Bidders or organizers of bidding will have the right to propose an increased tax rates in respect of certain types of taxes for extraction of mineral resources.

2. Land plots allocated for exploration and/or survey works will not be subjected to land tax; and

3. An annual license fee will be introduced for use of subsoil for geological exploration, to be calculated based on the allocated area and types of mineral resources.

Starting from 1 October 2021:

Export of natural gas will be subject to the excise tax rate set at zero percent; and

2. Import of natural gas to the territory of Uzbekistan by legal entities will be exempt from customs duties.

The Decree exempts legal entities involved in geological exploration, as well as their contractors and subcontracts, from the payment of:

  • Periodic customs duties for temporary import of special equipment required to conduct geological exploration, for a period of search, geological exploration, and development of deposits; and
  • Customs duties for importing of equipment, materials and special equipment not produced in the Republic of Uzbekistan and required to conduct search, geological exploration, and development of deposits.

The Decree further provides that the incentives (on customs duties) set forth by paragraph 3 of clause 4 of the Presidential Decree No.УП-2598 dated 28 April 2000 originally designed to cover foreign companies shall start to apply to domestic enterprises engaged in search and exploration of hydrocarbon deposits in Uzbekistan by exempting them from the customs payments (except for value-added tax and customs clearance fees) when importing equipment, materials and technical resources, and services required for conducting prospecting, exploration, and other related works.

The Decree instructs the Ministry of Finance, State Tax Committee, State Committee on Geology and Mineral Resources to submit to the Cabinet of Ministers by 1 December 2021 a draft law "[o]n introducing amendments and additions to the Tax Code of the Republic of Uzbekistan" providing for the following changes from 1 January 2022:

  • Reductions in subsoil tax rates for (i) oil and natural gas – to 10%, (ii) gold and copper - to 7%, (iii) tungsten - to 2.7%, and (iv) uranium - to 8%;
  • Introduction of rental income tax in respect of subsoil users engaged in extraction of oil, natural gas, gas condensate, precious metals, nonferrous metals, and radioactive metals on new deposits;
  • Exemption from corporate property tax in respect of new oil and gas wells in the first two years from their commissioning, and for the following three years – application of a reduced (by 50%) corporate property tax;
  • Companies with foreign investments paying rental income tax will be entitled to perform their tax accounting in USD; and
  • The tax rates for subsoil use in respect of non-metallic minerals to be unified.

For more information please contact Sherzod Yunusov, Partner, at , and Makhmudjon Khakimjonov, Associate, at .

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