Amendments to the TC RUz enacted starting from 1 January 2022

In December 2021, a number of legislative acts updating and amending the Tax Code of the Republic of Uzbekistan (the “TC RUz”) were passed.[1] All changes are effective starting from 1 January 2022 unless stated otherwise.

In this review, we have summarized what are, in our opinion, the most significant changes. However, for a complete list of changes, we recommend also consulting the text of the relevant legislative acts, as well as the effective TC RUz.  

Value added tax (VAT)

• The list of VAT payers is extended to include tax consultant organizations, audit and non-profit organizations (as well as state-funded institutions) in case they carry out entrepreneurial activities, regardless of the revenue amount. VAT payers also include those agricultural producers whose threshold value of irrigated land is 25 hectares (50 hectares previously).

• The VAT exemption for banking transactions whose cost is set at a fixed amount is removed.

• Compliant taxpayers (who have ensured the timely receipt of foreign currency earnings for the preceding year and do not have overdue receivables under export contracts) can offset the VAT owed (paid) for actually received goods (services) used for exported goods, regardless of the receipt of foreign currency earnings.

• A taxpayer can apply for a refund of a negative VAT amount when submitting tax returns (no need to submit a separate application).

Excise tax

The following key changes are established regarding the amount of excise tax:

Corporate income tax (CIT)

Starting from 1 January a separate procedure for the recognition of depreciable assets is established, according to which these assets include only fixed assets and intangible assets meeting the criteria established by the TC RUz (previously, taxpayers applied accounting rules), while at the same time:

• Depreciation may be temporarily ceased (for example, during the reconstruction or modernization of a depreciable asset for more than 12 months), unless such asset continues to be used in the reconstruction or modernization process;

• The initial cost of a depreciable asset is determined without including the interest expenses associated with the acquisition of such asset, which are deductible in accordance with Article 306 of the TC RUz;

• The groups of depreciable assets were revised taking into account the statistical classifier of fixed assets and the annual depreciation rates for fixed assets are doubled on average (for example, for buildings and constructions, the rates were increased from 3% and 5% to 5% and 10%, respectively). At the same time, there are no special transitional provisions for fixed assets acquired before 1 January 2022, so starting from 2022, depreciation of all fixed assets may be carried out in accordance with the new rules.

Simultaneously with an increase in depreciation rates, the one-time investment deduction is also increased for the amount of funds allocated for (a) the purchase of new production equipment, modernization, upgrading and/or technical re-equipment of production - from 10% to 20%; (b) the expansion of production in the form of new construction, reconstruction of buildings and constructions used for production needs - from 5% to 10%.

Limitations on tax loss carryforwards are cancelled (before 2022 a tax loss could be carried forward within 10 years in an amount not exceeding 60% of the tax base of the current tax period).

When calculating the CIT, reserves created by commercial banks are expensed in the amount of 80% of the norms established by the Central Bank.

A procedure for accounting for positive and negative foreign exchange differences has been established, whereby the foreign exchange difference arising from a revaluation of prepayments made (received) is not taken into account for CIT purposes.

Similarly to VAT, the tax authorities have a right to adjust the CIT base if the transaction price is lower than the market value of goods (services); at that, the TC RUz establishes an exhaustive list of transactions, income and expenses for which are recognized as being on a market level (transactions between independent parties, transactions concluded as a result of exchange trading, etc.).

“Dividend tax” for permanent establishments of non-residents

Net profit remaining at the disposal of a non-resident operating through a permanent establishment in Uzbekistan after payment of tax is considered as a dividend and subject to a 10% tax (which is higher than the withholding tax applicable to dividend payments by legal entities under a number of double tax treaties concluded between Uzbekistan and other countries).

Social tax

Starting from 1 January 2022 to 1 January 2023, the social tax rate for individual entrepreneurs operating in the regions of RUz (with the exception of the city of Tashkent) is set at 50% of the base specified value (BSV) (from 1 September 2021, the BSV is established in the amount of 270,000 sums).

Property tax for legal entities

The tax base for buildings and constructions (with the exception of linear properties and construction in progress properties) cannot be lower than the minimum cost established as the absolute value per 1 sq.m.:

• in the city of Tashkent - 2.5 million sums;

• in the city of Nukus and regional centers - 1.5 million sums;

• in other cities and rural areas - 1 million sums.

The property tax rate for legal entities is reduced from 2% to 1.5%, and the tax rate for construction projects that have not been completed within the normative period is reduced from 4% to 3%.

New oil and gas wells are exempt from property tax in the first two years; after two years, a tax rate of 50% of the established rate can be applied for three subsequent years.

Land tax

The base rates of land tax for non-agricultural land are indexed by an average of 1.07 times, while land plots allocated for geological exploration and / or survey work are not taxed.

Water use tax

Tax rates are indexed by an average of 1.1 times, and for certain sectors of the economy (with the exception of industrial enterprises, power plants and utilities) - by 1.3 times.

Subsoil use tax

The object of taxation (volume of extracted minerals) is determined taking into account losses that occur during the entire production and supply cycle, including extraction, primary processing, processing and transportation, and within the limits approved by the authorized body (the relevant regulatory document is under development), and in case of their absence - by the taxpayer.

A separate procedure for determining the tax base for hydrocarbons and metals is introduced.

Tax rates are reduced: for oil and natural gas - from 20% and 30%, respectively, to 10%; for gold and copper - from 10% to 7%; for tungsten - from 10.4% to 2.7%; for uranium - from 10% to 8%.

Special rental tax on the extraction of minerals (a new tax)

Taxpayers of the special rental tax are legal entities mining metals (precious, non-ferrous and/or radioactive metals, rare earth elements and/or those extracted from technogenic mineral formations) and hydrocarbon raw materials in licensed areas where mining will begin after 1 January 2022. Companies operating under production sharing agreements are exempt from the special rental tax.

The minimum tax rate is set at 25% of the tax base (income derived in as difference between sales revenues of extracted resources [excluding VAT and excise taxes] and the cost of their extraction). However, if the right to use a subsoil plot for geological exploration or production at a previously explored subsoil plot in respect of certain assets containing metals or hydrocarbon raw materials with significant commercial potential is put up for a competitive bid, the organizer of the competitive bid or their participants may offer higher tax rates.

Companies with foreign investment, which are taxpayers of the special rental tax, are entitled to keep tax records for tax purposes in US dollars on an accrual basis.

Revenue tax

The procedure for transiting to VAT and CIT payment is clarified for a number of taxpayers, in particular, for importers of goods, producers of excisable goods (services) and / or entities engaged in the extraction of minerals, the sale of gasoline, diesel fuel and gas, and agricultural producers if they have irrigated agricultural land plots of 25 hectares or more.

Similarly to VAT, the tax authorities have a right to adjust the tax base for revenue tax if the transaction price is lower than the market value of goods (services), at that, the TC RUz establishes an exhaustive list of transactions whose income and expenses are recognized on a market level (transactions between independent parties, transactions concluded as a result of exchange trading, etc.).

The reporting period is a month (previously it was a quarter).

Other changes

Other changes are mainly related to the area of tax administration, in particular:

• The financial sanction for late submission of tax reports to the tax authorities is cancelled.

• Catering businesses are entitled to a deferral (installment plan) for the repayment of debt for a number of taxes (including revenue tax, CIT, etc.) arisen as of 15 August 2021, as well as for fines and penalties for all taxes and fees, during the period from 1 January to 1 July 2022, in equal installments, without paying late payment interest.

• All business entities (except for enterprises with state ownership of more than 50%, subsoil users and manufacturers of excisable products) are entitled to a deferral of payment of property tax and land tax for a period of 6 months upon provision of a notice and without collateral, when registering the right to land plots and/or buildings and constructions with a total area of more than 1,000 sq.m.

• Private medical organizations for which, starting from 1 January 2022, the period of tax benefits established by the Presidential Decree of RUz dated 1 April 2017 No. PP-2863 “On measures to further development of the private healthcare sector” has expired, have the right to apply tax benefits envisaged by the TC RUz.

How can EY help?

We will be glad to provide our assistance in the following areas:

• Consulting services regarding the applicability of new regulatory requirements to your company.

• An assessment of the impact of these legislative changes on existing business structures, including taxation of both current and planned transactions.

• Revision and update of the company’s tax accounting policy, taking into account legislative changes, in particular, with regard to determining depreciable assets and their initial cost, depreciation for assets acquired both before and after 1 January 2022, recognition of foreign exchange rate differences, etc.

• Preparation of relevant queries to the regulatory authorities on the application of new legislative rules that may require clarifications.

We hope that you found this overview helpful. We will be glad to advise you on these changes in more detail and discuss them should you have any questions.

[1] Law of the Republic of Uzbekistan 741 "On amendments and additions to the Tax Code of the Republic of Uzbekistan" dated 29 December 2021; Law of the Republic of Uzbekistan 742 "On the state budget of the Republic of Uzbekistan for 2022" dated 30 December 2021; Presidential Decree of the Republic of Uzbekistan No. PP-73 dated 30 December 2021 “On measures to ensure the implementation of the Law of the Republic of Uzbekistan ‘On the State Budget of the Republic of Uzbekistan for 2022’”.

Authors:

• Doniyorbek Zulunov

• Dilovar Mavlonov