Attitude toward Foreign Direct Investment
The government of Uzbekistan ("the government" or “the GOU”) has declared attracting foreign direct investment a core policy priority. According to official statistics, there are over 4,800 companies with participation of foreign capital operating in the country. At the same time, Uzbekistan has one of the lowest cumulative inflows of FDI in the former Soviet Bloc due to a range of factors. These include limited access to foreign currency, an underdeveloped and overregulated banking sector, trade restrictions, government involvement in trade and commerce, and widespread corruption.
Without support of the government or state-affiliated entities, foreign investors have limited business opportunities in Uzbekistan. The government generally welcomes investors and investment projects that are in line with its import-substitution and export-oriented industrialization policy, and discourages investments in import-consuming sectors by controlling access to currency exchange.
In 2012, when FDI levels fell well below government targets, President Karimov created the Working Committee on Improvement of Uzbekistan’s Ranking on the World Bank’s Doing Business report, and issued a number of decrees aimed at improving the business environment. These decrees emphasized one-window practices and electronic reporting systems aimed at reducing direct contacts between entrepreneurs and government entities. Although Uzbekistan's ranking has improved from 166th in 2012 to 103rd in 2015 and 87th in 2016, the GOU's measures have not addressed a number of fundamental problems plaguing businesses and investors.
Formally, foreign investors are welcome in all sectors of the Uzbek economy. According to law, the government cannot discriminate against foreign investors based on nationality, place of residence, or country of origin. However, government control of key industries can have discriminatory effects on foreign investors. For example, the GOU retains strong control over all economic processes and maintains controlling shares of key industries, including energy, telecommunications, airlines, and mining. The government regulates investment and capital flows in the raw cotton market and controls all silk sold in the country, dampening foreign investment in the textile and rug-weaving industries. Partial state ownership and influence are common in almost all key sectors of the economy.
Other Investment Policy Reviews
There were no investment policy reviews of Uzbekistan completed by the Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), or the United Nations Conference on Trade and Development (UNCTAD) in recent years.
Laws/Regulations on Foreign Direct Investment
Legislation protecting foreign investors includes the Law on Foreign Investments, the Law on Guarantees and Measures on Protection of Foreign Investments, the Law on Guarantees of the Freedoms of Entrepreneurial Activity, the Production Sharing Agreements Law, the Law on Investment Activities, and a number of other decrees and resolutions.
Uzbek law provides the following rights to foreign investors:
To decide the amount, kinds, and channels of investments;
To conclude agreements to carry out investment activity;
To own, use and dispose of investments and the results of investment activity;
To patent inventions, models and industrial samples belonging to the foreign investor;
To repatriate profits from Uzbekistan or to reinvest them into Uzbek entities;
To obtain financial resources in the form of credits and loans;
To convert local currency into foreign currency;
To possess and use land on terms provided by the legislation;
To receive compensation for investments/assets in case of expropriation by the state; and
To receive compensation for losses incurred due to illegal activity/decisions of the state.
Uzbekistan’s investment legislation provides a range of guarantees for foreign investors, including:
Protection against discrimination based on nationality, place of residence, or country of origin;
Fair and equitable treatment;
Protection from harm caused by retroactive implementation of legislation;
In the case of changes to legislation, the right to apply at their own discretion those provisions of the new legislation which provide for better conditions for their investments;
Protection from interference by the state in the economic activity of foreign investors which are carried out in accordance with the law; and
Any change in legislation that worsens foreign investment conditions shall not be applied to those investments until ten years following the date of the investments.
Though the government nominally guarantees these rights, the legislation and regulatory acts are ambiguous and contradictory. Several of the rights, such as converting and repatriating profits and conducting business without government interference, are routinely violated, with currency conversion difficulties most frequently cited by foreign firms as the greatest impediment to doing business in Uzbekistan.
In principle, the judicial system upholds investor rights and the sanctity of contracts. The judiciary is not independent, however, and regularly favors state-owned or government-affiliated entities. Foreign investors have reported numerous procedural infractions in both the Economic and Criminal courts of Uzbekistan and the Embassy is aware of a number of cases in which foreign companies did not receive timely payments from local partners.
Local legislation contains a number of exceptions allowing for state interference and impunity. Corruption is a constituent factor in legal proceedings, primarily in disputes between private businesses.
More information on the laws, rules, procedures and registration requirements for foreign investors is available through www.lex.uz - Uzbekistan's legislation digest, or in the specialized website of the Uzbek Ministry for Foreign Economic Relations, Investment and Trade: http://www.uzinfoinvest.uz/eng/.
Foreign and domestic private investors and entities may establish and participate in a variety of legal forms of business, ranging from partnerships to joint-stock companies to wholly owned enterprises. Depending on the extent of foreign participation, a business can be defined as an “enterprise with foreign capital,” or EFC (less than 30 percent foreign-owned), or as an “enterprise with foreign investment,” or EFI (more than 30 percent foreign-owned and with a minimum charter capital of $150,000).
Legislation, including the Law on Joint-Stock Companies and Protection of Shareholder’s Rights, issued in 1996 and last updated in 2014, sets a range of standards to protect the interests of minority shareholders.
EFI businesses must register with the Ministry of Justice while EFCs can be registered by the regional governor’s office (Khokimyat). In theory, EFCs can register their business online through the Electronic Government website - https://my.gov.uz/en – if the size of the equity capital is smaller than $150,000. According to the law, the registration process should take no more than seven business days after submission of a complete application package. The World Bank has raised Uzbekistan’s Starting a Business indicator to 42 in 2016 from 64 last year, reflecting the introduction of an online one-stop shop and streamlined registration procedures. More information about business registration procedures in Uzbekistan can be obtained here: http://www.uzinfoinvest.uz/eng/investment_guide/fdi_notification_and_registration/, and here: http://www.doingbusiness.org/data/exploreeconomies/uzbekistan/starting-a-business
Foreign companies may also maintain a physical presence in Uzbekistan as permanent establishments without registering as a separate legal entity (other than with tax authorities). A permanent establishment may have a bank account.
Foreign investors can get consultations, business registration and other legal assistance from Uzinfoinvest agency, which operates as a branch of the Ministry of Foreign Economic Relations, Investments and Trade (http://www.uzinfoinvest.uz/eng/), or from the Chamber of Commerce and Industry of Uzbekistan on a contractual basis (http://www.chamber.uz/en/index). Formally, there are no criteria set for investors to be eligible for applying.
Businesses with a foreign share of ownership may choose to be qualified as small enterprises or micro firms. Small businesses in Uzbekistan are eligible for a range of incentives, including registration and taxation. These include easing registration – no mandatory requirement to have a company seal – and simplified or unified taxation, which replaces profit tax, VAT, property tax, land tax, social infrastructure development tax, as well as contributions to the road fund, school development fund and pension fund. The current average rate of the unified tax is 5 percent on gross revenue (established for FY2016). By the law, newly registered micro-firms and small enterprises can get a one-year grace period for unified tax payments, with subsequent repayment of the tax within 12 months after the grace period is over. Small businesses also can get a two-year grace period for any additional taxes that can be imposed by the legislation. Uzbek legislation provides additional tax incentives to small businesses that produce goods subject to excise tax, IT software, and agricultural products, as well as for those who generate exports.
According to the current legislation, the category of small business can be applied to micro-firms and small enterprises. To be qualified, businesses should meet the following criteria:
Micro-firms are businesses with:
20 or fewer employees in manufacturing;
10 or fewer employees in services or other non-manufacturing areas; and
5 or fewer employees in retail and catering.
Small enterprises are businesses with:
100 or fewer employees in light and the food-processing industries, metal works and instrument manufacturing, wood processing, furniture and building-materials industries;
50 or fewer employees in mechanical engineering, metallurgy, fuel, energy and chemical industries, agriculture, construction and some other manufacturing industries; and
25 or fewer employees in science, transport, communication, services (except for insurance companies), trade, public catering and other non-production areas.
Note: All numbers above indicate the average annual number of employees.
According to official statistics, in 2015 small businesses contributed 56.7 percent to the GDP and provided 77.9 percent of all active jobs in Uzbekistan.
The GOU encourages FDI through various tax incentives offered to companies investing in the following industries:
Agricultural, Construction, Building & Heavy Equipment
Chemicals, Petrochemicals, Plastics & Composites
Consumer Goods & Home Furnishings
Energy & Mining
Food Processing & Packaging
Industrial Equipment & Supplies
Information & Communication
Metal Manufacturing & Products
Textiles, Apparel & Sporting Goods
Please see Performance Requirements and Investment Incentives in this document for more details.
The government maintains the following list of projects where it is seeking foreign investors and technical assistance:
For detailed information on GOU programs to attract foreign investments, visit the Ministry for Foreign Economic Relations, Investment and Trade’s dedicated website: http://www.uzinfoinvest.uz/eng/.
Limits on Foreign Control and Right to Private Ownership and Establishment
Formally, Uzbekistan guarantees the right of foreign and domestic private entities to establish and own business enterprises and to engage in most forms of remunerative activity. The state reserves the right to export gold, and the government maintains a monopoly on cotton exports. Natural gas, cotton and gold are Uzbekistan's largest sources of foreign exchange earnings. There are isolated cases of foreign companies that have entered the natural gas and cotton production sectors with some success. In theory, private enterprises may freely establish, acquire, and dispose of equity interests in private businesses, but in practice, this is difficult to do because Uzbekistan’s securities markets are underdeveloped.
Private capital is not allowed in some industries and enterprises. The Law on Denationalization and Privatization (1991) lists state assets that cannot be privatized, including: land with mineral and water resources, the air basin, flora and fauna, cultural heritage sites, state budget funds, foreign and gold reserves, state trust funds, the Central Bank, enterprises that facilitate monetary circulation, military and security-related assets and enterprises, firearms and ammunition producers, nuclear research and development enterprises, some specialized producers of drugs and toxic chemicals, emergency response, civil protection and mobilization facilities, public roads, and cemeteries.
There are several official limits to foreign investment. Foreign ownership and control are prohibited for airlines, railways, power generation, long distance telecommunication networks, and other sectors deemed to be related to national security. Foreign nationals cannot obtain a patent for individual entrepreneurship in Uzbekistan.
Restrictions also apply to media, finance, insurance, and travel. Foreign investment in media enterprises is limited to 30 percent. In finance, foreign investors may operate only as joint venture partners with Uzbek firms, and banks with foreign participation face fixed charter funding requirements – €10 million ($11.3 million) for commercial banks, €5 million ($5.7 million) for private banks, and €1.5-6 million ($1.7 million - $6.8 million) for insurance companies – while the required size of the charter funds for Uzbek firms is set on a case-by-case basis. In the tourism sector, foreign ownership cannot exceed 49 percent.
Although in 1998 the government declared a policy of institutional and economic reforms (such as restructuring and privatization) in order to attract more investment into the country, in general, it has made limited progress despite ongoing privatization attempts. The GOU has banned privatization of large state-owned enterprises, such as international telecommunications providers, power generation and distribution companies, railways and airlines, explaining that these have national strategic interest. Many investors note a lack of transparency at the final stage of the bidding process, when the government negotiates directly with bidders before announcing the results. In some cases, the bidders have been front companies associated with influential Uzbek families registered abroad.
At the end of December 2015, the GOU set a requirement for joint stock companies registered in Uzbekistan to have at least a 15 percent share owned by foreign investors by July 1, 2016. Exceptions will be made for companies that produce and process primary strategic raw materials, natural monopolies and suppliers of socially important goods and services at state-regulated prices. Joint stock companies with a 15 to 33 percent share owned by foreign investors are getting a range of privileges, including holidays for income, property, and social infrastructure taxes, unified tax payments and mandatory contributions to the Road Fund. Foreign shareholders of local joint stock companies are exempted from paying dividend taxes for the period before January 1, 2020. After July 1, 2016, joint stock companies that fail to comply with the new foreign ownership requirements will be liquidated or reorganized.
On February 10, 2016, the GOU issued a follow-up resolution with a list of 25 joint stock companies where at least 15 percent of state shares should be offered to foreign investors. The list includes some large state-owned companies such as Uzbekyengilsanoat (light industry), Uzbektelecom (fixed-line and long-distance telecommunications), Uzbekiston Pochtasi (postal services), Matbuot Tarqatuvchi (printed media distribution), Uzsanoatexport (machinery exports), Markaziy Ipodrom (Tashkent hippodrome), and the Uzbekistan Stock Exchange, as well as five commercial banks – Asaka Bank, Qishloq Qurilish Bank, Agrobank, Ipoteka Bank and Microkreditbank. The resolution also provides a larger list of 64 joint stock companies for 15 percent privatization through emission of additional shares. It includes wine and vodka producers, construction subsidiaries in the energy industry, and others.
Uzbekistan’s most recent denationalization and privatization program was finalized by the GOU on April 28, 2015. It provides for sale of state-owned shares in 68 enterprises to foreign investors, sale of state-owned shares and assets in 1,179 enterprises to the private sector under condition of a specific investment commitment or through public transparent auctions, and liquidation of 609 non-performing enterprises (such as underutilized public facilities and warehouses and maintenance shops of irrigation-construction and maintenance divisions in rural areas).
In 22 out of the 68 so-called “strategic enterprises” where part of the state-owned shares are being offered to strategic foreign investors, the state or state-owned organizations will hold the majority of shares (51 percent). The list includes four chemical plants: two large fertilizer producers – Navoiazot and Ferganaazot, in which the state is offering a 49 percent share to potential foreign investors and will continue to hold the remaining 51 percent, and two polymer plants, where almost 100 percent of shares are being offered for sale. Others of the so-called “strategic enterprises” are smaller or have been in a non-operational condition for nearly 15 years. There are also two commercial banks, one of which is a former private bank that was nationalized, two insurance companies, and a 60 percent share in a bankrupt company registered in Russia.
The main mechanisms for selling state assets are usually open tender or auction, but often the process is transparent only at the initial stage. In some cases the government uses local or international financial consultants for privatization of large enterprises, and foreign investors are invited to participate only after an enterprise has been evaluated. In June 2012, the government allowed foreign investors to buy state-owned, low-liquidity facilities at zero redemption cost under condition of a specific investment commitment.
Screening of FDI
The government closely scrutinizes all foreign investment, with special emphasis on sectors of the economy that it considers strategic, including mining, cotton processing, oil and gas refining, and transportation. There is no standard and transparent screening mechanism, and the legal framework is designed to protect domestic industries and limit competition from abroad. Outcomes of such screening reviews are frequently predetermined. Screening can be used to limit investment in certain industries and by certain countries, depending on Uzbekistan’s current policy priorities, and can also contribute to a lack of transparency and benefit local elites.
The government also uses licensing as a tool to control enterprises in several important sectors such as energy, telecommunications, wholesale trade businesses, and tourism. Often licenses for business operations in these sectors are issued by agencies that themselves have commercial interests in the sector.
A charter fund of an enterprise with foreign investment of $20 million or more needs special government approval, usually in the form of a Cabinet of Ministers resolution, to register the enterprise. Smaller investments in certain sectors of the economy also require permission from government authorities, although there is no official list of what these sectors are and enforcement is perceived to be random. In any case, filing for a standard business license is mandatory.
Large privatization deals with involvement of foreign investment require approval of the State Tender Commission (STC), an interagency body created in 2006. The STC is authorized to select investors for offered packages of shares without going through tenders or other transparent procedures. It will also decide on the privatization of enterprises that have foreign loans taken under GOU guarantee, and the sale of state assets and shares in enterprises to foreign investors. The IFC is providing technical and advisory assistance to the government in regard to this program.
The government reserves the right to cancel the registration of any business or withdraw licenses at will. Lengthy government inspections may lead to punitive sanctions or subsequent closures. The main GOU agency that makes the decision on the outcome of business screening reviews is the Ministry of Justice. This ministry registers a business and may also initiate termination of its registration. According to legislation issued in January 2016, it is also responsible for the protection of private businesses and foreign investors from meritless claims, unjustified inspections and other abusive practices of state bodies: on February 1, 2016, the ministry created a new specialized department to handle these responsibilities.
Uzbekistan’s Economic Court can also decide to close an enterprise, and its decisions can be appealed in the Superior Economic Court in accordance with the Economic Procedural Code or other applicable local law. Reviews usually are quite slow. Some foreign investors, including U.S. firms, have characterized the process as unpredictable and non-transparent, making it a potential tool for forcible takeovers of businesses.
The main entity that reviews transactions for competition-related concerns is the State Committee for Privatization, De-monopolization and Development of Competition. This agency is responsible for developing a competitive environment, limiting monopolistic activities and regulating natural monopolies, reorganizing economically insufficient ventures, supporting the development of entrepreneurship, protecting consumer rights, and controlling advertising activities. The Committee operates both directly and through its regional units, as well as through its non-profit consulting unit, the Antimonopoly Policy Improvement Center.