Tax treatment of Islamic financial transactions

On 27 March 2026, the Republic of Uzbekistan (the “RUz”) enacted Law of the RUz No. ZRU-1126 On Amendments and Additions to Certain Legislative Acts of the RUz Aimed at the Introduction of Islamic Banking Activity (“Law No. ZRU-1126”) that establishes a legal framework for implementing financial instruments in accordance with the international Islamic finance standards.

The amendments related to the implementation of Islamic finance principles become effective from 29 June 2026.

For these purposes, a separate section was added to the Tax Code of the RUz (the “TC of the RUz”), which regulates the taxation specifics of Islamic financial transactions. Also, a number of targeted amendments were introduced in relation to value added tax, corporate income tax, personal income tax, property tax and land tax.

In this review, we summarised the amendments made to the TC of the RUz. However, we recommend that you study the text of the relevant legislative acts to become fully knowledgeable about the amendments being made in relation to Islamic finance.

Introduction of special tax concepts for Islamic finance

The TC of the RUz introduces the following concepts:

• “Islamic finance” is financing activity performed by banks and micro finance organisations (“MFOs”) in accordance with the legal procedures based on the Islamic finance standards;
• “Islamic financial transactions” are transactions effected by banks and MFOs based on the Islamic finance standards in accordance with the law.

According to updated Law of the RUz No. ZRU-580 On Banks and Banking Activities dated 5 November 2019, Islamic financial transactions carried out by banks include the following:

• (Mudaraba) client financing or taking funds on investment deposits based on profit distribution conditions;
• (Wakala) providing funds or taking funds on investment deposits based on an agency agreement;
• (Murabaha) client financing through the sale of goods with payment by instalments;
• (Salam) client financing with advance payments for goods;
• (Musharaka) client financing through joint venture (partnership) or participation in the share capital of legal entities;
• (Ijara) providing property into Islamic lease (with a purchase option).

Banks operating in the sphere of Islamic banking are allowed to carry out other Islamic financial transactions that do not contradict the law of the RUz and comply with the generally accepted international banking practice and Islamic finance standards.

General provisions of Islamic finance taxation

• General rules of the TC of the RUz are applicable to Islamic financial transactions, unless otherwise provided for by any special standards.
• The procedure for separate accounting for income from Islamic financing activities and income from Islamic securities is required to be set out in the accounting policies in accordance with the accounting law.
• For finance leases, it is provided that one of the criteria for designating the Islamic finance lease entered into with banks and MFOs is the lessee’s right to enter into a separate agreement for acquisition of the leased asset at the end of the lease term and accept the asset in accordance with the terms and conditions therein.

Value added tax (VAT)

The following transactions are exempt from VAT:

• Transactions with Islamic securities (certificates), including:
  • custody;
  • record of rights;
  • transfer of securities;
  • registry keeping;
  • trades management (except for services to produce such securities).
• Services provided on a fee basis by banks and MFOs to a trustor as part of Islamic financing under trust management (agency) contracts.
• Islamic finance lease transactions to the extent of the positive difference between the amount of all lease payments and the asset’s purchase price.
• Markup applied by banks and MFOs when selling goods to clients as part of Islamic financing.

Corporate income tax

• Income from Islamic financing activities includes the following:
  • Income in the form of interest from Islamic financing activities;
  • Income of insurers and reinsurers under insurance and reinsurance contracts.

• Cash received from Islamic financing activities as a result of overdue payments from clients as well as cash donated against fines is accounted for as deductible expenses.
• When interest-free loans or loans provide for payment of interest at the rates below the refinancing rate of the Central Bank of the RUz for Islamic financial transactions, no income arises for the borrower.

Personal income tax

Personal income tax is not imposed on income received by individuals from banks and MFOs involved in Islamic financing activities under the contracts of:

• agency;
• trust management;
• partnership.

Property tax and land tax

Banks and MFOs are recognised as payers of property tax and land tax for real estate assets transferred to Islamic finance lease and land plots under such assets.

Basically, Law No. ZRU-1126 introduces integral control of Islamic banking activities, it is aimed at tax neutrality* of Islamic instruments (Murabaha, Ijara, Mudaraba, Musharaka, Wakala, Sukuk, etc.) and grants substantial tax exemptions in a number of cases. However, the risks of double taxation and inconsistencies have not been fully eliminated so far; therefore, certain challenges are expected in the use of the new instruments in practice, which may be resolved through future clarifications from tax authorities, judicial practice, etc.

* Tax neutrality, in our opinion, is the situation when the taxable income of one party to the transaction corresponds to the deductible expense of the other party, when no double taxation arises for the same item, etc.

How can EY help?

We would be happy to assist you in such areas as:

• Advising on the applicability of new legal rules and benefits to your company;
• Assessing the impact of these developments on the existing business structures, including taxation of existing and planned transactions;
• Revising and updating the company’s accounting and tax accounting policies to reflect these developments;
• Drafting queries to the respective regulatory authorities on the issues of application of these legal standards that may require clarification.

We hope that you will find this information useful. We will be glad to advise you on these developments in more detail and discuss them with you if there are any questions.