Uzbekistan, Republic of
The following notable changes were introduced to Uzbek legislation in 2020 by virtue of the new edition of the Tax Code:
- General corporate income tax (CIT) rate is increased to 15% (previously 12%).
- Effective 1 October 2019, the value-added tax (VAT) rate is 15% (previously 20%).
- Simplified VAT regime is abolished as of 1 January 2020.
- VAT refund is extended to any excess of input VAT over output VAT (previously, refund was only envisaged in relation to zero-rated turnover). Input VAT related to purchase of fixed and intangible assets is fully recoverable at acquisition (currently, offset is provided in equal instalments within 12 months for fixed and intangible assets, and 36 months for immovable property).
- Land tax rates for legal entities and individuals and water-use tax rates for individuals are raised by approximately 15%.
- Excess profits tax is abolished.
- Excise tax rates for goods produced and services rendered in Uzbekistan are generally increased (e.g. mobile services from 15% to 20%, natural gas from 15% to 20%, polyethylene granules from 25% to 30%). The carryforward period for tax losses was extended from five to ten years. The gross amount of losses to be accounted for in each following year cannot exceed 60% of taxable income (profits) of the current year (previously 50%).
- Transfer pricing, controlled foreign corporations (CFCs), and group taxation rules are introduced in the Tax Code (all effective 1 January 2022).
- Thin capitalisation and beneficiary ownership concepts are introduced in the Tax Code effective as of 1 January 2020.
- E-services provided by foreign legal entities are subject to VAT as of 1 January 2020.
- Tax and customs exemptions provided to participants of small industrial zones were abolished (except for already registered participants till 1 January 2020).
- New types of tax audits replaced scheduled and non-scheduled audits. Also, the concept of ‘Thematic Express Analysis’ is introduced.
- Property tax is imposed on fully depreciated buildings based on their revalued (market) value, determined at least once every three years.
- All entities with turnover exceeding 1 billion Uzbekistani som (UZS), as well as permanent establishments (PEs) are considered as VAT payers.
New Tax Code
Below we provide more detailed information on the most notable changes provided in the new Tax Code.
The new Tax Code introduces full-fledged transfer pricing provisions, including definition of related parties, controlled transactions, pricing methods, documentation and reporting requirements, pricing agreements, etc. Rules are effective as of 1 January 2022.
Controlled foreign corporations (CFCs)
Generally, CFC rules are applicable to individuals and legal entities, Uzbekistan tax residents, owning or controlling foreign legal entities and/or structures. The main purpose of the new CFC rules is to tax undistributed profits of foreign companies and structures like trusts, foundations, etc. Similar to transfer pricing rules, CFC rules are effective as of 1 January 2022.
The new Tax Code introduces regulations on deductibility of taxpayer's interest expense on controllable debt from a foreign participant. Controllable liability is defined in the new Tax Code as liability owed to a:
- foreign legal entity or individual that is not considered as an Uzbek tax resident with a direct/indirect ownership of 25% of shares in the charter capital of the taxpayer
- other related entity of this foreign participant, or
- other persons for which the above-mentioned persons act as guarantors or otherwise undertake responsibility to ensure the repayment of this taxpayer's debt.
The deductibility limitations apply if the amount of debt exceeds the amount of equity by 3 times (13 times for banks and leasing companies). There is a specific mechanism for determining the deductibility limits.
The new Tax Code introduces a beneficial owner concept.
Consequently, a beneficial owner of income paid by a legal entity shall be a person having the right to independently use and (or) control (dispose of) such income, or a person in whose interests another person is entitled to control (dispose of) such income. It is not important whether this right arose due to direct and (or) indirect participation in this legal entity, or control over it, or due to other circumstances.
A foreign person/entity is not recognised as a beneficial owner of income from sources in Uzbekistan if such person/entity has limited powers with respect to control (disposing) of such income, performs intermediary functions in respect of said income in the interests of another person/entity, without performing any other functions and taking no risks, directly or indirectly paying such income (fully or partially) to this other person.
Consolidated group of taxpayers
The new Tax Code provides an opportunity to form a consolidated group of taxpayers, which may comprise of two or more Uzbek legal entities. The taxpayers should meet the ‘ownership’ criteria, i.e. participation share of one legal entity in the charter capital of other legal entity(ies) should comprise at least 90%. Furthermore, legal entities should not be undergoing liquidation or bankruptcy processes, and their net assets should be higher than the charter capital.
Moreover, all legal entities forming consolidated group of taxpayers shall satisfy other criteria related to turnover, taxes paid, and assets value. The advantages of applying this regime may include, without limitation, the ability of filing one set of reports for the group and offsetting profits of one group company against losses of another group company.
This concept is effective as of 1 January 2022.
'E-services' provided by non-residents
Foreign legal entities that supply e-services to individuals whereby the place of supply is considered Uzbekistan are subject to VAT in Uzbekistan. In such a case, the foreign service provider is liable for registering for VAT purposes in Uzbekistan.
The taxable base shall comprise actual sales price of such services inclusive of VAT.
Changes to specific taxes
- Definition of justified expenses is introduced and definition of ‘documented expenses’ is clarified.
- Mechanism to tax interest income at the level of recipient (tax residents in Uzbekistan) is introduced, except for non-commercial and budget organisations (currently, withheld at the source of payment).
- Advance payments are abolished, except for large taxpayers with a taxable income threshold of UZS 5 billion per annum.
- Investment deduction on depreciable assets in the amount of 5% and 10% (depending of type of asset) is introduced in lieu of tax preferences provided previously for new technological equipment, i.e. reduction in taxable base by the expenses on its purchase (but not exceeding 30% of taxable profits).
- List of non-deductible expenses is expanded to include, without limitation, expenses related to income exempt from taxation, taxes and obligatory payments to state budget (except for corporate income tax) accrued in and paid in excess of amounts established by law, cost of goods and services transferred free of charge, and others.
- ‘7% rule’, implying that the taxable base for the purposes of calculation of CIT of a PE cannot be less than 7% of the total cost, was abolished.
- Period for carry-forward of tax losses was extended from five to ten years. The gross amount of losses to be accounted for in each following year cannot exceed 60% of taxable income (profits) of the current year (previously 50%).
- Establishments become VAT payers. Moreover, certain categories of taxpayers, including agricultural producers and law firms, may also be subject to VAT.
- VAT refund is extended to any excess of input VAT over output VAT (previously, refund is only envisaged in relation to zero-rated turnover).
- Input VAT related to purchase of fixed and intangible assets is fully recoverable at acquisition (currently, offset is provided in equal instalments within 12 months for fixed and intangible assets, and 36 months for immovable property).
- Simplified VAT regime introduced in 2019 is abolished.
- Reporting and payment deadlines have been changed.