by Juliette Passer, Esq.
The Republic of Uzbekistan amended its "Law on Taxation of Enterprises, Associations, and Organizations" on December 22, 1995. The latest amendments are consistent with Uzbekistan's steady movement toward greater unification and standardization of its tax code, and have significant, positive implications for U.S. companies doing business there. As it has since the fall of the Soviet Union, the Government of Uzbekistan continues to utilize taxation not as the only means of supporting itself, but as a tool for encouraging a more stable and prosperous business climate in Uzbekistan.
In line with this policy, newly created enterprises now pay lower taxes for their first two years in business; joint ventures and foreign enterprises, as well as banks and insurance companies, continue to be taxed at lower rates; and companies are allowed to reinvest pre-tax profits into specifically targeted investments. Tourism ventures in Tashkent, Bukhara, Samarkand, and Khiva are encouraged by a three-year tax holiday. The formation of financial markets is facilitated by exempting from taxation for three years most operations with income derived from stocks, bonds, depositary receipts, and promissory notes, effective July 1, 1995.
All types of entities engaged in various agricultural activities are either exempt or taxed at lower rates. To encourage companies to reveal their incomes abroad, foreign tax credit is available up to the full amount of taxes due in Uzbekistan (carry forward of foreign taxes, however, is not available). With a view towards greater unification and international standardization, the government of Uzbekistan, together with a team of Western experts, is revising a draft of the tax code due at the end of 1996. The rates and exemptions effective in 1996 are discussed in some detail below.
Profits Tax
As of January 1, 1996, most companies will be taxed at a flat 37 percent rate (down from 38
percent last year, and 45 percent in 1991), calculated on the basis of net profits, with standard
deductions in Western terms, rather than on total income. The permitted deductions include
wages, interest for short-term bank credit, mandatory social welfare payments, local taxes and
excise and value-added taxes, certain advertising costs, depreciation and other costs of doing
business. In addition, three types of limited deductions are available from local authorities: (i)
profits contributed to investment projects and the repayment of credits obtained for such projects;
(ii) up to 30 percent of costs of expenses for the environmental protection measures; (iii) up to
one percent of profits contributed to social welfare organizations, environmental, and ecological
protection funds.
The Law limits the availability of deductions and tax privileges to not more than 50 percent
reduction of the tax base in comparison to the full taxable amount. The difference between
income tax and profit tax is the availability of deductions for wages and long-term interest,
allowed for calculation of taxable base for profit tax, but not for income tax. Joint ventures and
foreign companies could have elected to continue to pay taxes on income with all previously
granted privileges by notifying local tax authorities by April 1, 1996. Banks, insurance
companies, and entertainment-related industries continue to pay taxes on total income at
applicable rates (for more detail on income and profits tax rates, see the box on Page 5).
Passive incomes from sources in Uzbekistan, such as dividends and royalties, derived by foreign companies not conducting commercial activities in Uzbekistan, are taxed at 20 percent, unless international agreements provide otherwise. Both individuals and legal entities conducting commercial activities in Uzbekistan and deriving profits from dividends, sales and purchases of stocks, bonds, and other securities are exempt from taxation for three years from July 1, 1995.
Repatriated dividends of foreign partners are taxed at 10 percent, again, unless international agreements provide differently. Currently, Uzbekistan has a very limited network of tax treaties. Tax treaties have been signed with the UK, India, and Poland; the treaty with the United States is under discussion. A foreign participant in a joint venture must request confirmation of the tax privileges from the Ministry of Finance before repatriation, or within one year from the date of transfer.
Flexibility
It is also noteworthy that having mandated tax audits for certain types of enterprises, the
government was quick to recognize that there is an insufficient number of auditing firms to
accommodate the number of annual returns for 1995. As a result, the Ministry of Finance
issued an extension to July 1, 1996 for mandatory audits and authorized local tax agencies to
accept tax returns, pending the completion of audits. Generally, companies must pay estimated
taxes quarterly, with the annual return for the preceding year due by March 15. For more
information on taxation in Uzbekistan, U.S. companies should consult an attorney or tax
professional. This article is the first of two on taxation in Uzbekistan. Next: Value Added Tax
(VAT), Excise, and other Uzbekistan taxes.
Juliette Passer is President of International Project Development Group, a legal and financial consulting firm based in New York.
**Provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)