General legal newsletter for May 2020

In May 2020, the Uzbek government remained pre-occupied with COVID-19, having taken a number of further measures to support individuals and legal entities. For providing support, the government continued to seek financial assistance of foreign governments and international institutions. It is of interest that economic forecasts of international observers, assessing the impact of COVID-19 on countries of the Asian region, for Uzbekistan remains to be relatively positive (in contrast to that for many other countries of the region).

The fight against the pandemic did not prevent the government from introducing significant legal changes in some industries. The most notable developments were in the banking industry, for which a reforming strategy was approved, the construction industry, and in the sphere of foreign trade.

 1.  COVID-19-RELATED MEASURES

The President signed another decree aimed at supporting businesses during the pandemic. The relevant measures include:

• From 1 June 2020 to 1 September 2020, certain entities, including small businesses, shopping malls, entities providing catering services, entities renting out premises, will be exempted from the land tax and the property tax;
• From 1 May 2020 to 1 July 2020, the rate of the social tax will be reduced from 12% to 1% for private micro-firms and small enterprises (except for the entities engaged in the production of excisable products);
• fines related to the land tax and the property tax accrued by small businesses from 1 January 2020 to 15 May 2020 will be written off; land and property tax debts of such entities accrued in April – May 2020 will also be written off;
• Until 1 July 2020, micro-firms and small businesses engaged in export and import operations are eligible to apply for a 120-day deferral with regard to customs duties and the excise tax on imported goods (except for consumer goods).

The State Fund for Supporting Entrepreneurial Activities will start to cover interest expenses on the following types of loans:

• on investment loans provided to business entities in the national currency with an interest rate not exceeding 1.75 times the Central Bank's basic rate (currently 15%) during the first year of the loan agreement;
• on loans for up to UZS 500 mln given to business entities in the national currency for replenishing working capital before 1 October 2020 (the support will cover the interest rate of up 10% for the duration of the loan agreement).

Presidential Decree No. UP – 5996 of 18 May 2020

 2.  REFORMS IN THE BANKING SECTOR

A Presidential Decree approving a strategy for reforming the banking sector was adopted. Among other things, in 2020, a privatization program for 2020-2025 will be initiated – 8 major banks will be privatized. A responsible body authorized to attract international consultants, to negotiate and conclude agreements on related matters with international financial institutions and interested foreign investors is the Project Office for the Transformation and Privatization of State-Owned Commercial Banks under the Ministry of Finance. Privatization is going to be implemented in 2 stages – the transformation (by 2021) and privatization. The relevant banks include:

• Joint-Stock Commercial Mortgage Bank “Ipoteka-Bank”– with the assistance of the International Finance Corporation (“IFC”);
• JSCB "Uzpromstroybank" (Sanoat Qurilish Bank) – IFC;
•  “Aloqabank”– the European Bank for Reconstruction and Development (“EBRD”) and the Asian Development Bank (“ADB”);
• JSCB “Asaka”– EBRD;
• JSCB “Qishloq Qurilish Bank”– undefined;
• JSCB “Turon”– undefined;
• JSCB “The People’s Bank of Uzbekistan” (Xalq Bank) – undefined;
• JSCB "Asia Alliance Bank" – undefined.

It is provided in the Decree that JSCB “Turon” and JSCB “Qishloq Qurilish Bank” may merge.

Further, a mechanism known as the “Project Finance Factory” will be introduced. The mechanism allows borrowers to obtain funding under syndicated loan agreements for raising more funds to deliver state-backed projects by approaching one bank. It is currently envisaged that the instrument will be available in the state-owned National Bank for Foreign Economic Activity, JSC “Agrobank”, and JSC “Microcreditbank”.

Other steps envisaged by the strategy include:

• the development of the Law on the Rehabilitation of Banks and the Law on Non-Banking Credit Organizations with the assistance of the World Bank and international financial institutions;
• change of the rules for licensing banks, regulations on the requirements for the banks’ capital adequacy (based on the Basel Standards);
• simplification of regulations for the securities market;
• the transfer of the state pension system from JSCB “The People’s Bank of Uzbekistan” to the Ministry of Finance;
• the sale of non-core assets owned by state-owned banks;
• the cancellation of regulations making banks perform non-core (uncharacteristic) functions;
• tightening the requirement for the minimum share capital of banks from UZS 100 bln to UZS 500 bln (approx. USD 49,3 mln) by 2025;
• change of the requirements for corporate governance in banks, including the attraction of independent members to their supervisory boards, the application of the OECD principles of corporate governance for banks to state-owned banks;
• further support of the State Fund for Supporting Entrepreneurial Activities;
• measures to reduce dollarization in the economy (e.g. the introduction of restrictions on the types of loans that may be given in foreign currency);
• support of wider application of IT technologies in banking and the introduction of new mechanisms of the state IT audit.

Some targets of the reforms, aimed to be achieved by 2025, include:

• increasing the share of private banks from current 15% to 60%;
• increasing the provision of banking services to the private sector;
• attracting at least 3 qualified strategic investors to at least 3 banks remaining to be state-controlled;
• increasing the share of non-bank credit organizations in the loan market – from current 0,35% to 4%.

Presidential Decree No. UP-5992 of 12 May 2020

 3.  DEVELOPMENTS IN THE CONSTRUCTION INDUSTRY 

The Presidential Decree of 19 May 2020 introduced the following measures to support the construction industry:

• Until 1 January 2021 – to temporally cancel customs duties (except for VAT and customs clearance fees) on the import of new construction and special equipment as well as vehicles for the carriage of construction materials, as included in the relevant list;
• From 1 July 2020 to 1 July 2023 – to temporally cancel customs duties (except for VAT and customs clearance fees) on the import of forms for pouring concrete, machines and mechanisms for preparing concrete for the construction of multi-store monolithic residential buildings (the corresponding list of equipment is to be approved);
• Importers of machinery and equipment used in the construction sector, but not included in the above lists are eligible for 120 days postponement or payment plans for the payment of customs duties.

Further, the Resolution for Maintaining the State Register of Hazardous Production Facilities and the Resolution on the Industrial Control over Compliance with the Industrial Safety Requirements at Hazardous Production Facilities were approved that would enter into force on 19 August 2020. With the adoption of these Resolutions, a more streamlined procedure will be introduced for the inclusion of hazardous production facilities into the relevant state register. Clearer and stricter rules will regulate the state industrial safety control. 

Presidential Decree No. 4718 of 19 May 2020

Resolution of the Cabinet of Ministers No. 291 of 19 May 2020

 4.  DEVELOPMENTS IN THE AGRICULTURE SECTOR

It is concluded in a new Presidential Decree that currently, there is a need to restore agricultural lands taken out of the land circulation (usage) to increase the production of agricultural products. It is, therefore, ordered to introduce a mechanism for allocating abandoned land plots having groundwater supplies. Prior to the allocation, irrigation systems and other infrastructure will be created or restored on such abandoned land plots. For that purpose, territorial municipalities will initiate competitive bidding procedures to engage business entities and individuals.

After the restoration, the above land plots will be rented to low-income families and interested businesses. Business entities will be able to lease the land plots of up to 5 ha in size for a term not exceeding 10 years, based on the results of electronic auctions (held on the platform “Е-Ijro Auksion”). Lessees will be forbidden to carry out any non-agricultural activities (e.g. to construct facilities other than field facilities and lightweight structures). However, they (i) will not be subject to regular monitoring by the state (i.e. monitoring of compliance with the relevant lease agreement and other requirements), and (ii) will be more protected from land seizure without their explicit consent and non-payment of a relevant compensation. Corresponding by-laws regulating the relevant mechanisms will soon be introduced.

Further, during the period from 1 January 2021 to 1 January 2023, certain agricultural supplies (seeds, seedlings, root stock, etc.) as per the approved list, will be exempted from custom duties (except for customs clearance fees).

A Road Map for promoting rational use of available resources and state support of agriculture during the corona virus pandemic was also annexed to the adopted Decree.

It was also provided that some agricultural land plots would be categorized for specialization in the production of certain types of agricultural products. A pilot specialization project will be implemented in the Jizakh region, envisaging, among other things, the creation of modern “in vitro” laboratories, greenhouses, nurseries for root stocks and seedlings of fruit trees, based on PPP mechanisms. 

Presidential Decree No. PP-4700 of 1 May 2020

Presidential Decree No. PP-4709 of 11 May 2020

 5.  EXPORT-IMPORTS OPERATIONS

(a) A new Presidential Decree provides for a number of measures to support local exporters.

• The mechanism for subsidizing up to 50% of transportation costs of exporters introduced in May 2019 was readjusted: (i) now, the subsidy is available not only for railway transportations, but also for road and air transportations; (ii) the list of goods, the transportation of which makes a company eligible for the subsidy, was revised; (iii) transportations to Afghanistan may now be subject to the subsidy (transportations to all the bordering states had previously been excluded). A detailed by-law governing the provision of subsidies is yet to be introduced and will be applied to all export starting from 1 April 2020.
• Checks on debts on mandatory payments and under enforcement documents during customs clearance of exported goods will be suspended till 1 January 2021.
• The Export Promotion Agency under the Ministry for Investment and Foreign Trade will introduce a mechanism for compensating insurance premium costs under insurance contracts to exporters that provide insurance as a collateral

(b) A list of temporarily imported goods subject to conditional exemptions from customs duties and taxes was supplemented. Until 1 July 2021, special machinery and technological equipment that is not manufactured in Uzbekistan and is imported for the implementation of projects involving international financial institutions and foreign government financial organizations will be exempted from custom duties at the request of executive agencies and bodies (except for the fees for customs clearance).

(c) A ban on the import of cement was abolished.

(d) On 14 August 2020, a revised version of the Regulation for Monitoring and Control over Export-Import Operations will enter into force. The following changes will, among other things, be introduced in respect of the monitoring and control procedures:

• it will be allowed to conduct import and export operations based on invoices, without the need to conclude a foreign trade contract (except when certain goods are exported). However, for conducting foreign trade operations based on invoices, it will be required: for export operations – to get full prepayment before exporting goods, for import operations – to have imported goods/services before making a relevant payment;
• it will be allowed to sell goods costing less than USD 5,000 through e-commerce without the need to register the relevant transaction with the Single Information System for Foreign Trade Operations and to prepare a cargo declaration (currently, the threshold is USD 3 thds).

Presidential Decree No. PP-4707 of 7 May 2020

Resolution of the Cabinet of Ministers No. 283 of 14 May 2020

Resolution of the Cabinet of Ministers No. 322 of 23 May 2020

Resolution of the Cabinet of Ministers No. 309 of 22 May 2020

 6.  WHOLESALE TRADE IN ALCOHOL PRODUCTS

As the government continues to implement privatization reforms in the alcohol industry, the Resolution on the Licensing of the Wholesale Trade in Alcohol Products and on the Measures and Sanctions for Violating the Licensing Terms and/or Requirements was adopted. The Inspectorate for the Regulation of Alcohol and Tobacco Markets under the Ministry of Finance established in February 2019 the (“Inspectorate”) is the relevant licensing and monitoring authority.

Eligible applicants are legal entities with the charter fund of at least 1,000 times the baseline calculation value (the “BCV”) (approx. USD 22,000) owning/using an appropriate warehouse. A state fee for the application is 5 times the BCV (approx. USD 110). Documents required for applying for the license are a completed standard application form, a copy of the documents confirming property rights to the relevant warehouse building, a copy of the document indicating the size of the charter fund. Some of the licensing requirements are also (i) that the owned/used warehouse building satisfies the sanitary and fire safety requirements, (ii) an applicant is connected to the electronic system for monitoring the production and sale of ethyl alcohol and alcohol and tobacco products of the Inspectorate, (iii) an applicant uses electronic invoices integrated into the information system of the State Tax Committee

After the provision of the license is approved, a licensing agreement must be conclude and the annual fee in the amount of 200 times the BCV (approx. USD 4,400) has to be regularly paid. The term of validity of the licence is unlimited. There is no need to obtain the licence if an entity engages in the whole sale trade in locally produced beer and locally produced foaming and natural wines.

Resolution of the Cabinet of Ministers No. 301 of 20 May 2020

 7.  STATE ASSETS MANAGEMENT 

Open state registers of state-owned assets (property.davaktiv.uz) will be created. Relevant resolutions on the state register for local state assets and the state register for state assets abroad were adopted. The following assets with their full description will be included in the registers: real estate objects, vehicles, state participation interests (shares) in legal entities, intellectual property. The resolutions do not cover military, hydraulic and some other facilities, the operation of which constitutes a state secret. To ensure effective use of the state assets, state authorities will periodically check the possibility of privatization of registered assets. State assets abroad will be sold/transferred based on relevant international standards.  

Order of the Cabinet of Ministers No. 273 of 8 May 2020

 8.  REGISTRATION OF FOREIGN OF FOREIGN ENTITIES WITH TAX AUTHORITIES

The State Tax Committee approved standard applications forms and lists of required documentation for the registration or the deregistration of entities providing electronic (online) services within the territory of Uzbekistan with the tax authorities (submission of a separate application for the registration is not required if a foreign entity has a duly accredited representative office in Uzbekistan).

Order of the State Tax Committee No. 3234 of 11 May 2020

 9.  CONDUCT OF DESK TAX AUDITS

The Resolution on Conducting the Desk Tax Audits  was adopted. The Resolution does not apply to desk audits in respect of VAT refunds. Based on the Resolution, a desk audit is also not conducted in respect of the period subject to tax monitoring. Desk audits can be conducted in so far as the relevant terms of limitations have not expired (generally, tax returns could not be checked if more than 5 years have passed after their submission).

According to the Resolution, if a desk audit is initiated, business entities must respond to inquiries of the tax authorities within 5 days. Inquires are sent electronically to the taxpayer’s personal online cabinet or by mail. Taxpayers are eligible to request extensions for responding to inquiries if there are objective reasons. If a taxpayer fails to timely respond to an inquiry and his extension request has not been approved, the tax authorities may freeze his bank accounts. If after a desk audit, some discrepancies or mistakes in tax returns have been identified by the tax authorities, a taxpayer has 10 days to provide additional documents and clarifications. Within 15 days after studying such additional documents and clarifications received from the taxpayer, the tax authorities send him their refined tax request. If the taxpayer fails to timely provide the additional documentation and clarifications requested by the tax authorities, an on-site audit may be initiated.

Resolution of the State Tax Committee No. 3236 of 29 May 2020

 10.  INVESTMENT PROJECTS IN THE MINING SECTOR

The President signed a decree on the implementation of some investment projects of state-owned JSC “Almalyk Mining and Metallurgical Combine” (“AMMC”). The decree envisages the following, among other things:

• the implementation of the investment project “The Development of the "Yoshlik-I“ Field” for the production of 23 mln tons of ore by 2027, having been initiated by “Rönesans Holding” (Turkey) (with the total capital expenditures of USD 1,7 bln);
• the implementation of a 5 year-project – the first stage of the expansion of the production of non-ferrous and precious metals on the basis of AMMC deposits. The project will be financed by using the company’s own funds – approx. USD 35 mln, resources of the Fund for the Reconstruction and Development – up to USD 1 bln, syndicated financing attracted after the preparation of a feasibility study and the determination of the final total cost of the project. The main EPC contractor under the project is Russian “Renaissance Heavy Industries” LLC . The feasibility study will be prepared by 1 December 2020.
• preparation and the submission to the Cabinet of Ministers of a pre-feasibility study for the implementation of the second stage of the expansion of the production of non-ferocious and precious metals by 1 August 2021. The second stage is supposed to commence in 2022 and be implemented within 6 years.

AMMC, state agencies, and FE LLC “SFI Management Group”, managing the state share in AMMC, are responsible for the implementation of the projects.

Presidential Decree No. PP-4731 of 26 May 2020

 11.  INVESTMENT PROJECTS IN RENEWABLES

The President approved project documentation for an investment project for the design, financing, construction, and operation of a photovoltaic plant with a total capacity of 100 MW in Tutly village of the Samarkand region. The project is implemented by “Total Eren SA” (France), which has established local the special project company LLC “Tutly Solar”.

The 100 MWac solar PV plant will start to be constructed by the end of 2020, while the commission is scheduled for the end of 2021. The Presidential decree approving the project also approves a power energy off-take agreement between LLC “Tutly Solar” and state-owned JSC “National Power Grids”. The cooperation on the project will last for 25 years.

Presidential Decree No. PP-4712 of 13 May 2020

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Kosta Legal Law Firm