4. Industrial Policies
All investment incentives to foreign investors are regulated by national level legislation, which can be adopted only by the president. Regional and local governments have limited authorities to offer any additional preferences. Exceptions can be made for tax incentives granted by special government resolutions or presidential decrees. By the new Tax Code, the GOU may provide holidays for land taxes, property taxes and water use taxes to some companies with foreign direct investments on a case-by-case basis. In 2021, the GOU initiated various programs to support businesses owned by underrepresented investors as part of efforts to reduce and unemployment. The programs included government sponsored business and financial literacy trainings and co-financing of startups. About $95 million of budget funds were allocated to only women’s startups in 2021. This program, however, cannot be used to support foreign underrepresented investors.
The Law on Investments and Investment Activities (ZRU-598, December 25, 2019) provides a range of general guarantees to foreign investors, including protection against illegal interference of local authorities in their activities, protects from any discrimination or unjustified nationalization, and ensures the right to use, transfer and repatriate funds and capital. The law also provides guarantees the protection of investors from any business environment deterioration due to legislation changes. ( ).
In some cases, the GOU may issue investment guarantees to certain foreign or local investors if, it finds the project worthy of such support. The current legislation also allows the GOU to provide joint financing of FDI funded projects. Such joint financing can be provided under public-private-partnership (PPP) agreement framework, or through involvement of the Uzbekistan Direct Investments Fund and the Fund for Reconstruction and Development of Uzbekistan. In all cases, however, a special GOU resolution is required.
The GOU set an ambitious goal to raise the share of renewable energy generation to 25 percent by 2030. To stimulate private investors, the Parliament approved the Law on Renewable Energy (ZRU-539, May 21, 2019). It provides a range of tax and other incentives for renewable energy sector businesses. By the law, specialized equipment producers get five-year relief from paying all taxes beginning from the date of registering the entity. Renewable energy producers get ten-year relief from paying property and land tax (allied only for energy generation facilities with a nominal power of 0.1 MW and above). Individuals that invest in renewable energy also may enjoy three-year property and land tax relief for the facility equipped with energy generators. Private investors also have the preferential right to sell the energy to state-owned companies at a negotiated price.
The first law on free economic zones in Uzbekistan appeared in 1996. After dozens of modifications, in February 2020 it was finally replaced by the Law on Special Economic Zones (SEZ) (ZRU-604), which entered into force May 19, 2020 (the text is available in English: ). The law provides the following classification of special economic zones:
- Free Economic Zone (FEZ) – territory allocated for the construction of new high-tech, competitive, import-substituting, and export-oriented industrial production capacities, and for development of industrial, engineering, telecommunications, road, and social infrastructure, as well as appropriate logistics services.
- Special Scientific and Technological Zone – territory allocated for the development of innovation infrastructure by scientific and science-related organizations, including technology parks, technology distribution/transfer centers, innovation clusters, venture funds, and business incubators.
- Tourist-Recreational Zone – territory allocated for tourism infrastructure development investment projects, including construction of hotels, cultural and recreational facilities, and functional and seasonal recreation areas.
- Free Trade Zones – territories for consignment warehouses, areas of special customs and tax regimes, facilities at border crossing points for processing, packing, sorting, storing goods, airports, railway stations or other custom control sites.
- Special Industrial Zone – territory with special economic and financial regulations of production and logistical business activities.
According to the new Law of SEZ (Article 39) and the Tax Code (Article 473), investors to special economic zones of Uzbekistan may expect:
- Holidays for paying property taxes, land taxes and taxes for the use of water resources. The term of the holiday shall be determined by a separate presidential resolution depending on the size of investments. Such tax holidays can be applied only to business activities stipulated in the relevant investment agreement with administration of a special economic zone. Participants of special economic zones also may get some VAT exemptions and other tax benefits.
- Exemption from paying customs payments (except for value added tax and customs clearance fees) for construction materials that cannot be sourced locally; technological equipment that cannot be sourced locally, raw materials, materials and components used to produce export-oriented output.
The following activities are prohibited within the SEZs:
- Businesses that violate environmental and labor protection standards.
- Businesses related to weapons and ammunition.
- Businesses related to nuclear materials and radioactive substances.
- Production of alcohol and tobacco products.
- Rawhide processing, livestock corrals, or slaughter of animals.
- Production of cement, concrete, cement clinker, bricks, reinforced concrete slabs, coal, lime and gypsum products.
- Processing, decomposition, incineration, gasification, chemical treatment, final or temporary storage or burial underground of all types of waste.
- Placement of oil refineries, nuclear power plants, nuclear installations, or radiation sources, or points and installations designed for storage, disposal, and processing of nuclear fuel, radioactive substances, and waste, as well as other radioactive waste.
The first Free Industrial and Economic Zone (FIEZ) was created in 2008 in the Navoi region. By the end of 2021, the GOU had created 23 large and about 350 small industrial zones, which created nearly 40,000 jobs and attracted over $470 million of investments.
The government welcomes foreign investors mainly in the areas of localization, building local production capacities, and developing export potential. To support local producers, the GOU introduced a rule (GOU Resolution PKM-41, adopted January 29, 2021), which says import contracts of enterprises and joint ventures with at least a 50% state share exceeding 50,000 BCRs ($1,244,240 as of March 2022) are subject to mandatory review by the supervisory boards of these entities on a quarterly basis. The government also bans import of 529 categories of goods and certain services through public procurement processes. The basis for inclusion of items to the list was the presence of two or more domestic suppliers of similar goods and services. It currently includes food products, construction materials, fertilizers, industrial products, textile and clothing products, footwear and leather goods, furniture, household goods, household electrical appliances, vehicles, paper and cellulose products, and medical products. The GOU also has established a procedure for public procurement of these imported goods through the website of the Center for Electronic Cooperation Portal under the Ministry of Economic Development and Poverty Reduction.
Uzbekistan’s legislation stipulates that the government must apply requirements to use domestic inputs in manufacturing uniformly to enterprises with domestic and foreign investments, but in practice, this is not always the case. There are no requirements for using only local sources of financing.
To qualify as an enterprise or business with foreign investment and be eligible for tax and other incentives, the share of foreign investment must be at least 15% of the charter capital of a company. The investment must consist of hard currency or new equipment, delivered within one year of registering the enterprise. The minimum requirements for charter capital for incentives (except financial institutions) is 400 million s’om (about $37,000 as of March 2022).
Tax incentives for foreign investment are essentially the same as for local enterprises participating in an investment, localization, or modernization program. Enterprises with significant investment in priority sectors or registered in one of free economic or special industrial zones can expect additional benefits.
The GOU requires localization of personal data storage in line with the Law on Personal Data (ZRU-547), adopted July 2, 2019. Per the law, large internet companies like Facebook, Google, and Russian search engine Yandex are encouraged to move their server equipment with local users’ personal data to the territory of Uzbekistan. According to the law, the GOU may block services in the country in the event of non-compliance.
As of now, the legislation of Uzbekistan prevents or restrict companies from freely transmitting customer or other business-related data outside the country.
Transfers of technology or proprietary information are not required by the law and can be the subject of an agreement between the foreign investor and its local partner.