General legal newsletter for July 2020

In July 2020, aside from introducing a new set of measures for supporting businesses during the pandemic, the government announced a number of important initiatives aimed at improving the business environment in the country. Some of these initiatives are destatization of the economy through further improvement of the competition legislation and reform of the judicial system, including for the purposes of improving the quality of adjudication of investment disputes.

In general, the government continues to work on reforms in many areas, relying to a great extent on the assistance of international financial institutions. Active discussions are in place on Uzbekistan joining the World Trade Organisation and the Eurasian Economic Union.

 1.  PANDEMIC-RELATED MEASURES: TAX INCENTIVES AND OTHER BENEFITS FOR SMALL BUSINESSES

The President signed a decree to support businesses in the spheres of catering, retail trade and services. The following support measures were taken:

(a) from 1 July to 31 December 2020:

• the tax on turnover will not be levied on businesses in catering (cafes, restaurants, canteens, etc.) and businesses specializing in leasing premises;
• individuals are exempted from the income tax on profits from renting out premises;
• the minimum rates for renting out real estate set by the government will not apply to individuals renting out real estate;

(b) from 1 April to 31 December 2020, catering businesses are exempted from fees for the right to carry out retail trade in alcoholic beverages;

(c) catering businesses are allowed to offer delivery of alcoholic beverages;

(d) the maximum average number of employees for classifying a catering business as a “small business” (the status allowing to get particular tax incentives) was increased from 25 to 50 employees;

(e) mandatory contributions to the Fund for Supporting Winemakers paid by wholesale traders in alcoholic beverages will remain at the level of 3% of their net revenue until 2021;

(f) certain tax incentives and exemptions introduced by the Presidential Decree No. UP-5996 were extended untill 2021, namely:

• the exemption from the property and land tax for small businesses, marketplaces, malls, catering businesses, entities providing public transportation services, entities providing household services, entities leasing premises, some other entities;
• application of the social tax at the rate of 1% to private small businesses not being engaged in manufacturing excisable goods;
• deferral for payment of customs duties and the excise tax on imported non-consumer goods for small businesses operating for more than 1 year;
• the suspension of recovery of tax debts and fines for infringing the tax legislation (being in place as of 15 May 2020) from small businesses;

(g) till 1 July 2021, catering businesses are allowed to put light-weight constructions on land adjacent to their place of business for servicing customers without paying state fees by just notifying a local municipality and following relevant temporary rules for placing such constructions set by the Cabinet of Ministers (the temporary rules to be shortly introduced);

(h) till 1 July 2021, it is allowed to provide catering services through car shops and food trucks by notifying the tax authorities and without the need to conclude a relevant contract with a local municipality.

Presidential Decree No. UP-6029 of 20 July 2020

 2.  MANAGEMENT OF STATE ASSETS IN THE RECREATION INDUSTRY AND OTHER TAX INCENTIVES

It is clarified in the Decree that the previously introduced supportive measure (para. 4(в)) cancelling the application of increased land and property taxes rates to unused real estate facilities is available only to those entities that have actually suspended their activities because of the coronavirus-related governmental restrictions.

The President brought some changes to the taxation of land plots and real estate located in tourist areas and those used for recreational purposes. Hence, starting from 1 November 2020: 

• land tax incentives for land plots occupied by (i) vacation/rehabilitation venues, including holiday houses; (ii) places of mass recreation of the population and tourism; (iii) sanatorium facilities in tourist areas, as provided by the Tax Code, will be cancelled;
• increased land tax rates will be applied to the land plots above;
• property tax incentives for real estate facilities used for sanatorium facilities in tourist areas, as provided by the Tax Code, will be cancelled.

With the above said, the regional representative bodies (councils (Kengashes) of deputies) will be entitled to grant land/property tax incentives/exemptions for land plots, occupied by sanatorium facilities in tourist areas.
 
By 1 September 2020, the State Committee for the Development of Tourism and some other state bodies will prepare a list of the vacation/rehabilitation houses, sanatoriums, and other real estate facilities used for recreational and rehabilitation purposed owned by the state, state institutions and SOEs and located in the Bostanlik region of the Tashkent region for subsequent privatization. By 15 October 2020, similar lists for other regions will be prepared by the Ministry of Economy and the Agency for Managing State Property.

Presidential Decree No. UP-6027 of 15 July 2020

 3.  IMPROVEMENT OF THE COMPETITION LEGISLATION 

The President signed a Decree aimed at limiting the influence of the public sector on the competitive environment of Uzbekistan by, among other things, strengthening the Antimonopoly Committee. Starting from 1 October 2020, the following changes will come into effect:

• state-owned enterprises (SOEs) will be established (reorganised) only upon the Antimonopoly Committee’s pre-approval (except for the areas of national security and/or state defense).
• It will not be allowed to establish SOEs (including any affiliated ones) for operating in a market (a) if there are 5 or more private business entities successfully operating in that market, (b) by state agencies in markets they regulate by registering participants, issuing licensing or permits;
• SOEs being the only suppliers, having exclusive rights to supply, or being a dominant entity supplying particular goods or services are prohibited to establish affiliates that will depend on their goods, services, or network infrastructure and will compete with private entities (except for cases of unbundling SOEs);
• an entity having a conflict of interests with a public purchaser may not participate in relevant public procurement procedures, selection of the best procurement offers, and direct procurement negotiations (except for procurement procedures in the areas of security of public persons, state defense, state security, public order, and the areas where state secrets are involved);
• prior to conducting public procurement procedures, public purchasers will have to publish a list of their affiliates on a special online portal for public procurement.

Presidential Decree No. UP-6019 of 6 July 2020

 4.  STATE REAL PROPERTY MANAGEMENT 

A Presidential Decree was passed to improve the legal and institutional framework for using vacant state real property.

Under the Decree, the Center for Effective Use of Vacant Facilities (along with its territorial departments) was established under the Agency for State Assets Management. Some of the main tasks of the Centre include:

• identifying and accounting unused (vacant) state-owned non-residential buildings, structures, and production areas;

• organising their maintenance and effective use;
• conducting monitoring over leased state real property and accounting lease payments;
• conducting inspections for checking effective use of real estate facilities transferred to state institutions and state-owned enterprises;
• seizing excessive unused or improperly used real estate facilities owned by the state or transferred to state institutions or state-owned enterprises;
• taking decision on the demolition of state real estate facilities recognised as unsuitable for use.

Vacant state real property (except for those included in the State Investment Programme) will be transferred to the Centre for maintenance und further effective use (privatization, lease, etc.) A detailed regulation on the Center’s mandate, functions, and rights will be enacted soon. It is also planned to create an official website for the Center with specific information on unused state real property.  

Further, starting from 1 September 2020, to streamline the conduct of e-auctions (through the “E-IJRO AUKSION” system), it was ordered to introduce the following changes:

• potential bidders will be able to participate in e-auctions via mobile applications;
• it will become possible to conclude lease agreements in electronic form;
• an online catalogue of traded lots will be created on the website of the Agency for State Assets Management.

Presidential Decree No. PP-4771 of 1 July 2020
Resolution of the Cabinet of Ministers No. 425 of 6 July 2020

 5.  REFORM OF THE JUDICIAL SYSTEM

A new Presidential Decree declared some significant changes in the Uzbek judicial system.

(a) By 24 September 2020, a draft of a new law on courts will be submitted by the Supreme Court and the judicial community to the Uzbek parliament that will envisage the following changes:

• courts of general jurisdiction (instead of separate civil, criminal, and economic courts) will be created in all the regions and Tashkent with the relevant specialization being still maintained within their structure;
• some powers to consider cases of administrative offenses will be transferred to criminal courts;
• inter-district administrative courts will be established in the regional centers and in Tashkent for considering disputes arising out of administrative and public law relations (district administrative courts will in turn be liquidated). 

(b) Starting from 1 January 2021,

• c) A specialized judicial panel within the structure of the Supreme Court was established for considering disputes between large investors (who have invested more than USD 20 mln) and state bodies as well as competition cases. Large investors and parties to a competition case may choose the panel as a court of first instance for hearing a relevant case.

Presidential Decree No. UP-6034 of 24 July 2020

 6.  PUBLIC OFFERING: BONDS OF LLCs

Amendments were introduced to the Law on the Security Market and the Law on Limited and Additional Liability Companies. Limited and additional liability companies have received the right to raise funds by issuing bonds. Some of the relevant requirements for an issuer of corporate bonds (that have been streamlined) include:

• the amount of issued corporate bonds may exceed the amount of the charter capital of the issuer, given that security (collateral) on the exceeding amount is provided;
• the issuer has positive indicators of profitability, solvency, financial stability, and liquidity for the last year (an audit report on relevant financial statements has to be in place);
• commercial banks must act as issuer's payment agents to make payments due to investors.

Law No. ZRU-629 of 21 July 2020

 7.  DEVELOPMENTS IN THE SECTOR OF RENEWABLES

The Regulation on the State Recording of Renewable Energy Installations and Energy Produced by Them was adopted. By 1 March 2021, the Ministry of Energy and LLC "The Single Integrator for the Creation and Support of State Information Systems UZINFOCOM" will develop an automated information system, which will ensure the operation of a unified database with information on produced and (or) supplied energy generated from renewable energy sources.

Starting from 1 March 2021, all producers of renewable energy (“PRE”) will have to obtain identification numbers through the system from the Ministry of Energy, providing, among other things, information on used renewable energy installations. Such registration is free of charge. As soon as an identification number is obtained, a PRE will be required to quarterly submit electronic reports on the volume of produced and (or) supplied energy. 

The information provided by PREs will be available to relevant state bodies for monitoring the sector and introducing relevant incentives.

The Energy Control Inspection under the Ministry of Energy is mandated to monitor compliance with the Regulation. If there are no infringements identified, the Inspection may conduct a relevant audit in respect of a PRE once in 3 years.

Resolution of the Cabinet of Ministers No. 452 of 23 July 2020

 8.  OTHER DEVELOPMENTS IN THE ENERGY SECTOR

A Presidential Decree envisaging the following legal developments in the energy sector was adopted:

• the selection of investors for the implementation of renewable energy projects (other than in respect of hydroelectric power plants) on an industrial scale (involving a capacity of 1 MW or more) is to be carried out through an auction (a competitive bidding);
• it is envisaged to adopt rules for energy audits of particular categories of energy consumers, entailing the imposition of higher energy tariffs if recommendations made following such audits are not observed;
• the legal framework for renewable energy will be improved with several new regulations being enacted by 1 September 2020.

 A Road Map for improving energy efficiency, fuel and energy saving at large energy-intensive enterprises was adopted and, among other things, envisages the following measures:

• postponing the implementation of some investment projects in the energy/oil and gas sectors to 2021;
• elaborating a national strategy for the development of hydrogen energy;
• commissioning a plant for the production of 3 propane-butane mixtures and synthetic fuels (JSC “Uzbekneftegaz”)
• attracting USD 115 mln for an infrastructure project for the modernization of heat supply facilities in the cities of Angren and Shirin.

The Law on Rational Use of Energy was amended and supplemented. The following important changes were made:

• the list of items subject to the mandatory certification (for compliance with energy efficiency indicators) was supplemented with “goods, works, and services for the implementation of energy-efficient and energy-saving technologies”;
• powers of the Cabinet of Ministers, the Ministry of Energy, the State Agency “UzStandard”, and the local municipalities in the area of energy efficiency were clearly defined;
• it is ascertained that the Intersectoral Energy Saving Fund is to be created by the President, not the Cabinet of Ministers.

Presidential Decree No. PP-4779 of 10 July 2020
Law No. ZRU-628 of 14 July 2020

 9.  DEVELOPMENTS IN THE OIL AND GAS SECTOR: RISK SERVICE CONTRACTS

The Cabinet of Ministers adopted a Resolution on introducing a new for Uzbekistan mechanism of the extraction of hydrocarbons based on risk service contracts. The mechanism will generally be used in respect of hydrocarbon deposits with hard-to-recover or small reserves, on which extraction works are expansive. A risk service contract is a contract for works, under which a contractor selected by a subsoil user based on a tender performs works for increasing the production of hydrocarbons on a deposit at his own risk and expense and, if the works are successful, gets the right to receive a part of the incremental volume of hydrocarbons as compensation for his costs and as remuneration. The contractor bears all relevant (including financial) risks associated with such works. The subsoil user and the state are not obliged to reimburse any costs incurred by the contractor. The minimum requirements for risk service contracts are set forth in the Resolution.

It is set that the mechanism (contracts) may only be used by subsoil users being (1) state unitary enterprises; (2) legal entities, 50% or more shares of which are owned by the state; (3) legal entities, 50% or more shares of which are owned by entities of the category (2). A list of the deposits that may be developed based on risk service contracts will be prepared by the Ministry of Energy based on proposals of allowed subsoil users and will be approved by the Cabinet of Ministers.

The Resolution also provides for the following important rules:

• a contractor carries out the activities based on licenses and permits (in respect of a relevant deposit) of a subsoil user;
• foreign contractors winning a tender must establish a local subsidiary for performing works under a relevant risk service contract;
• the incremental volume of hydrocarbons is calculated as the difference between the actual production volume and the estimated base production volume provided in the bidding documentation;
• the share of oil and gas condensate due to the contractor may be sold on a contractual basis as raw materials in the domestic market or processed on the territory of Uzbekistan on a tolling basis for further sale in the domestic market or for export;
• the share of natural gas due to the contractor may be sold on a contractual basis in the domestic market or be partially used for the contractor's own needs.

Resolution of the Cabinet of Ministers No. 448 of 21 July 2020

 10.  INVESTMENT PROJECTS IN THE ENERGY SECTOR 

In 2020-2023, Uzbekistan will implement an energy project for the construction of a new 500 kW substation and 220 kV & 500kV overhead power lines in the Tashkent region. The project is financed by the World Bank

The President approved a Road Map for the implementation of the project, in accordance with which it is scheduled to prepare project site by October 2020, to execute a credit agreement with the World Bank in December 2020, to engage consultants for managing the project in September 2021 and to hold an international tender for selecting a contractor by March 2022. A provisional table of goods and services that will be procured under the project is annexed to the Decree.

Presidential Decree No. PP-4791 of 29 July 2020

 11.  PROJECTS IN THE WATER SUPPLY AND SANITATION SECTOR

The Cabinet of Ministers ordered on measures for developing project and finance documentation for implementing a number of projects in the water supply and sanitation sector. The documentation will be developed with the assistance of the Asian Development Bank, having lent the state USD 15 mln for this purpose. The projects being prepared are:

• the reconstruction/construction of water supply and sanitation systems in cities and districts of the Tashkent region;
• preparation of a program for comprehensive development of the country’s water supply and sanitation systems by the Ministry of Housing and Communal Services;
• preparation of a program for integrated urban development by the Ministry of Investments and Foreign Trade.

Resolution of the Cabinet of Ministers No. 426 of 7 July 2020

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Kosta Legal Law Firm