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New Law on investments and investment activities

Monday, 27 January 2020

On December 25, 2019, the President signed the Law on Investments and Investment Activities No. ZRU-598 (the “Law”), which will come into effect on January 27, 2020. Our translation of the Law is available in English at the following link.

Based on statements made by some public figures, the primary aim of developing and adopting the Law was to combine legal acts regulating investment activities in Uzbekistan into a single document. Thus, in particular, the Law will replace the Law on Investment Activities, the Law on Foreign Investments, and the Law on Guarantees and Measures for the Protection of Foreign Investors’ Rights (the “Revised Legislation”). It also incorporates provisions of some by-laws on investment, including by-laws on the procedure for the conclusion of investment agreements and on the assignment of the status of “a foreign capital enterprise”. Considering the above, the Law does not radically reform the investment regime; yet, it introduces certain changes that may significantly affect foreign investors in Uzbekistan. These are described in section “Key changes” below and are based on our interpretation of the Law.

Scope of the Law

The scope of the Law has generally remained the same. The Law explicitly provides that legal relations in the following areas are regulated by special laws and, therefore, fall outside the scope of the Law:

  • concession agreements;
  • production sharing agreements;
  • capital markets;
  • public-private partnership;
  • free economic zones;
  • investment, mutual, or venture funds;
  • centralized (public) investments.

Key changes

The key changes of the foreign investment regime may be summarized as follows: (i) amending the procedure for the conclusion of investment agreements with the Government and introducing mechanisms for the termination of investment agreements with the Government; (ii) introducing new state support mechanisms; (iii) changing dispute resolution mechanisms.

Investment agreements with the Government of Uzbekistan

First of all, the very definition of the term “investment agreement” has changed. In the Revised Legislation, an investment agreement was defined as an agreement between a foreign investor and the Government of Uzbekistan. With the Law coming in force, an investment agreement will mean an agreement between any subjects of the investment activities, as enlisted in Article 9 of the Law, including individuals, legal entities, local municipalities, foreign governments, etc. Therefore, the term “investment agreement” will start to apply to, for example, relevant agreements between private parties as well. Investment agreements between foreign investors and the Uzbek government will be regarded as a separate type of investment agreement that is concluded when additional incentives are sought.

Further, the Law has brought some changes to the requirements and the procedure for the conclusion of investment agreements between foreign investors and the Uzbek Government, particularly:

  • opinions of relevant state bodies on a proposed investment project required for the conclusion of the investment agreement are no longer submitted by the foreign investor along with an application on conclusion of the investment agreement, but are collected by the Ministry for Investments and Foreign Trade (the “Ministry”) independently upon receiving the application from the foreign investor;
  • the Law does not provide for the list of state agencies whose positive opinion has to be obtained when it comes to state expertise of investment projects– it will probably be determined on a case-by-case basis and with an eye on the currently set practice (opinions of the Ministry of Justice, the Ministry of Economy and Industry, the Ministry of Finance, the State Tax Committee (in so far as additional tax benefits are sought) are currently obtained);
  • it will be prohibited to grant investors exclusive rights and benefits that will allow them to take a dominant position in a particular market. It will have to be ensured that investment agreements do not contain corresponding provisions;
  • anticorruption and antimonopoly clauses will have to be included into investment agreements;

Yet another significant change is the inclusion of rules for the termination of investment agreements by the initiative of the Government. If the Government considers unilateral termination of the investment agreement due to the foreign investor’s default, the Ministry must notify the investor about such an intent, who will then have 3 months to submit documents justifying the default and the possibility for further implementation of the project. If no such documents have been received within 3 months, the Ministry makes the relevant application to the Government, which considers the application and may take a decision on the termination of the agreement. If such a decision is taken, the Ministry then notifies the investor about the termination. It is notable here that no criteria or procedures have been set for assessing investor’s default or assessing justifying documents that are received from an investor in default.

NOTE:

Except for cases of mutually agreed termination, if an investment agreement is terminated prematurely, a foreign investor is obliged to repay all the taxes and other payments to the state budget that it was exempted from under the investment agreement.

State support mechanisms

According to the Law, state support may be provided to investors in the following forms:

  • provision of exemptions and incentives[1], including but not limited to (i) transferring state property objects or property rights at a reduced or zero cost, (ii) providing tax and payment benefits, (iii) subsidizing interest rates payments under loan arrangements made by an investor for the implementation of an investment project;
  • allocation of centralized investments for joint financing of an investment project;
  • provision of financial, advisory and informational support.

Some new particular mechanisms of state support are introduced by the Law that had not been envisaged by the Revised Legislation. In order to receive state support, an application has to be submitted to the relevant state authority.

  • Tax Credit – the amount of money that taxpayers may subtract from taxes owed to the Government for a given period of time. The taxpayers will have to repay both the amount of tax liability and the sum of interest subsequently.[2]
  • Investment Subsidy, which is provided by (i) the Government constructing necessary upstream utility and communication networks outside of production facilities, or (ii) by granting tax and/or customs incentives. In order to receive investment subsidy, the relevant application has to be submitted to the Ministry.

NOTE:  

Starting from January 9, 2020, the investment projects for more than USD 50 mln and with at least 50% of foreign shareholding, will have to satisfy the following criteria in order to be eligible to receive Investment Subsidy in the form of the construction of utility and communication networks: (i) must have a pre-feasibility study confirming profitability and return on investment, (ii) must have obtained a positive opinion of the Agency for the Urbanization under the Ministry of Economy and Industry confirming the appropriateness of the project location at a requested land plot, (iii) must have the project documentation passed through the state ecological expertise, if applicable.

Dispute resolution mechanisms

According to Article 63 of the Law, the following dispute resolution mechanisms are set for resolving investment disputes: (i) negotiations, (ii) mediation, (iii) Uzbek courts, (iv) international arbitration.

Article 63 is drafted such that a foreign investor may rely on each subsequent mechanism, provided it has failed to settle the dispute by means of the precedent mechanism. Thus, the foreign investor shall start from negotiations, mediation and only then go to Uzbek court. The Law sets exclusive jurisdiction of Uzbek courts over all investment disputes. Only when it is ‘impossible to resolve an investment dispute’ [through negotiations, mediation and local court proceedings], a dispute may be brought to an international arbitration, provided Uzbekistan is a party to an international treaty, which has a valid arbitration clause, or Uzbekistan has entered into an investment agreement with the foreign investors that provides for international arbitration.

Considering the established exclusive jurisdiction of Uzbek courts over investment disputes, our interpretation is that ‘impossibility’ to adjudicate can arise in situations when an international treaty, which Uzbekistan is a party to, establishes an exclusive jurisdiction of another court and/or international arbitration. By virtue of the supremacy of international law, the exclusive jurisdiction of Uzbek courts set by the Law will be refuted, hence leading to the ‘impossibility’ to adjudicate an investment dispute.

NOTE:

When considering dispute resolution procedures in an investment agreement, foreign investors shall examine relevant bilateral investment treaties (“BIT”) of Uzbekistan as to whether exclusively of international arbitration is established.

In the absence of a BIT with a country of a foreign investor setting exclusive jurisdiction of international arbitration, the mere inclusion of an arbitration clause into an investment agreement with the Government of Uzbekistan will not overrule the exclusivity of Uzbek courts, as an investment agreement is not an international agreement under Uzbek law. Moreover, given that dispute resolution mechanisms under BITs cover mainly disputes between a foreign investor and the host state, investment disputes between two private parties could not be adjudicated by international arbitration, but shall be resolved by Uzbek courts.  This matter is getting especially acute, considering that the Law defines an investment agreement broadly and covers any relations between subjects of investment activities, and, for example, M&A agreements may now be seen as a sub-category of investment agreements.

[1] As before, the exact scope of exemptions and incentives being provided depends on the volume of investment; conditions of an area in which an investment project is implemented; an expected socio-economic effect and particularly, in respect of the creation of new jobs; spheres and industries, in which an investment project is implemented.

[2] As per the Law, this mechanism shall be regulated by the Tax Code. The issues associated with the provision of tax credits are addressed in Chapter 11 of the Tax Code.