Written by Zarifa Mamadaliyeva
May 14, 2021
Image source: www. taxaide.com.ng

Although Uzbekistan has adopted several normative-legal acts on tax privileges for investors, their implementation is not always smooth, which leads to investment disputes between investors and the state. In this blog post, the author will focus on investment dispute issues arising from tax privileges.

  1. Tax privileges and guarantees for stability

Why do states offer tax privileges for foreign investors? This is because countries are interested in providing investors with benefits and preferences for creating new competitive and innovative, export-oriented and import-substituting industries, expansion and modernization of production using modern technologies, and contemporary management practices. In many cases, foreign investors and legal entities have their requirements for entering the country as an investor. For instance, they require a 10-year guarantee for their investment, which means if an investor invests in 2021, no matter whether there are any changes in the tax system, the tax will be at the rate of 2021 until 2031. Many countries around the world offer various privileges and preferences to attract foreign investors actively. Uzbekistan is also not an exception.

2. Legal basis of investment activity and tax privileges

Chapter XXI of the Tax Code of Uzbekistan defines the specifics of taxation of certain categories of taxpayers, including land tax, property tax, depending on the volume of direct investment in foreign investment. There are also tax privileges for the use of water resources. Furthermore, additional support for foreign and domestic investors has emerged with the adoption of the new Law “On investments and investment activities.” According to Article 35 of the Law, foreign investors may establish enterprises with foreign investment in the territory of Uzbekistan and enjoy all the rights, guarantees, and privileges granted to them by the legislation of Uzbekistan and international agreements.

Now let’s turn to analyze the details of tax privileges made available to investors in Uzbekistan. According to the presidential decree on April 11, 2005, “On additional measures to encourage foreign direct investment.” the government will apply tax privileges depending on the volume of foreign direct investment. Based on this decree, the Regulation “On the procedure for applying tax privileges for enterprises that directly attract foreign investors.” was adopted, and Annex 1 to the Regulation lists the sectors of the economy to which privileges are applied. According to this list of industries, enterprises specializing in producing goods, attracting foreign direct foreign investment, joint-stock companies are exempted from paying corporate income tax, property tax, individual tax. Depending on the size of the foreign investment, these privileges are introduced: for instance, tax-free for three years for a foreign entrepreneur who has invested between $ 300,000 and $ 3 million, for five years for more than the US $ 3 million and seven years for more than the US $ 10 million.

Furthermore, section 7 of Article 211 of the Tax Code of Uzbekistan provide exemptions from value-added tax and import customs duties for technological equipment, as well as components and spare parts and also, these privileges are submitted following section 13 of the second part of Article 297 of the Customs Code of Uzbekistan. In the manner prescribed by the Regulation, “On approval of the Regulation on the procedure for applying privileges to legal entities investing funds,” several legal entities with investing funds are exempted from corporate income tax and individual tax. According to the Regulation, corporate income tax privileges are provided for taxpayers engaged in producing goods, works, and services. If the investor has loan obligations, the amount used to repay the principal amount is deducted from the taxable profit. Also, when calculating the tax base, the funds used for the purchase of equipment are deducted only once.               

Thus, the Tax Code and the tax system applicable to foreign investors have been revised and simplified under the relevant laws. First, the relevant areas of applying tax privileges for direct investment, depending on their size, have been identified. Second, the interests of investors have been taken into account in the calculation of corporate income tax, and the funds formed on loan are excluded from the income tax base.

3. The practice of applying tax privileges and international arbitration disputes

Of course, before adopting the new Tax Code in 2019 and the adaptation of tax relations to modern requirements, there were significant disputes with foreign investors over the application of tax privileges. Zarafshan-Newmont v. Uzbekistan is the most notorious case initiated under investment protection law and later agreed to pay a lot. The dispute arose when the Uzbek government terminated a set of tax privileges for Newmont company alongside other Western investors. As a result, the American investor filed a lawsuit against Uzbekistan in the International Center for Settlement of Investment Disputes (ICSID). Although no arbitration award has been made in the case, some unconfirmed reports suggest that Uzbekistan has reached an agreement with the investor and paid about $80 million compensations.

 Notwithstanding the negative effect of the Zarafshan-Newmont case on the investment climate in the country, however, the government again used similar tactics later on in Oxus Gold v. Uzbekistan, Spentex v. Uzbekistan, Bursel Tekstil v. Uzbekistan. In the Oxus Gold case, claims arose from the alleged misappropriation by the Uzbek Government of claimant Khandiza and Amantaytau Goldfields mining assets in Uzbekistan. Again, the cancellation of tax exemptions played a crucial role in finding the host country liable. As a result, $ 10.3 million compensation was paid to the British company Oxus Gold in 2013.

In the Spentex case,  investor’s claims arose out of the withdrawal by the Government of a VAT subsidy to cotton input purchases and other incentives, allegedly leading to the bankruptcy of the claimant’s investment in Uzbekistan. On December 16, 2016, the arbitration under ICSID rendered its award, which ultimately declined to support the plaintiff’s arguments based on corruption allegations. So, it was in favor of Uzbekistan.   Finally, claims arose out of the Government’s alleged failure to uphold promises made to the claimants in the Bursel Tekstil case. The plaintiff’s claim included the right to buy cotton at discounted prices and the exemption from value-added tax on export products, which allegedly led to the claimants’ companies’ bankruptcy. Currently, this case is pending, and one has to see how the arbitral panel handles legal issues surrounding tax privileges.

From the above-mentioned cases, we can conclude that the investor can file a lawsuit to the relevant international arbitration court in case of violation of investment agreements with foreign investors. Premature cancellation of state preferences to investors or accusations of taxation of investors will worsen the relationship between the state and the investor and lead to the payment of large amounts of compensation by the international arbitration decision. According to statistics, in 2016-2021, there were no major investment disputes with foreign investors in Uzbekistan.

However, the volume of foreign direct investment in the country in 2018 amounted to 1.6 billion US dollars, while in 2019, this figure increased to 4.2 billion US dollars. This confirms that the investment climate in Uzbekistan is radically improving in recent years, and investor confidence in the state is growing.


In this blog post, we explored the nature of tax policy designed to attract foreign investors and the consequences of conflicts between investors and the state. As a result, in the first part, we were able to clarify the conditions for foreign investors to invest in the country and the importance of studying the experience of foreign investors. Next, during the discussion of the legislation of Uzbekistan on tax privileges, we saw that the scope of preferences and the procedure for calculating taxes are defined by law. In the most crucial third part, we looked at the disputes between Uzbekistan and foreign investors through practical examples. Furthermore, the unilateral cancellation of taxes and other privileges by the state without revealing the deadline could show the state of the investment climate in the country. We can now conclude that the application of tax privileges has a significant impact on improving the investment climate from a legal point of view. However, the wrongdoing against the investor will ultimately work only to the detriment of the state in the future.

Cite as: Zarifa Mamadaliyeva, “Application of tax privileges for foreign investors: practice and analysis”, Uzbekistan Law Blog, 14.05.2021