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Free Economic Zones as an Important Factor for Attracting Investments and Development of the County’s Regions

Free Economic Zones as an Important Factor for Attracting Investments and Development of the County’s Regions

There are 14 free economic zones (FEZ) set up and operating in 10 regions of Uzbekistan today.

If initially the tax and legal regime of the first three economic zones had differed and they were “free industrial economic zones”[1], then, following the provisions of the Decree № УП-4853 of the President of the Republic of Uzbekistan dated October 26, 2016 “On additional measures on activating and expanding the activities of free economic zones” these zones were renamed into “Navoi”, “Angren” and Jizzakh: free economic zones respectively, and a single legal regime was established for them, while their tax and customs breaks and privileges were unified. Same privileges with the same terms and conditions have been awarded also to subsequently established free economic zones. 

Thus, the legal regulation of free economic zones’ activities went along the road of their unification with certain specific features for each FEZ. 


 1. “NAVOI” FEZ

Navoi province.

Decree №УП-4059 of the President dated December 2, 2008.

 

Line of Business activity Privileges and preferences

A wide range of high tech globally competitive production on account of introduction of modern foreign highly-efficient equipment and technology, technological lines and modules, as well as innovative technologies.

 

FEZ participants shall be exempt from paying[2]:

  1. Legal entities’ land tax, income tax, property tax, landscaping tax and tax for development of social infrastructure, a single tax payment for microfirms and small businesses, as well as mandatory deductions into the Republican Road Fund and extrabudgetary Fund for development of material-technical basis of educational and medical establishments under the Ministry of Finance of the Republic of Uzbekistan;
  2. Customs payments (apart from duties for customs clearances), payments for equipment, raw materials, materials and component parts imported for one’s own production needs, as well as customs payments (apart from duties for customs clearances) for construction materials not manufactured in the Republic and imported within the framework of implementation of projects in compliance with the lists approved by the Cabinet of Ministers of the Republic of Uzbekistan.

   

Moreove, in case of sale or donation of equipment, raw materials, and component parts imported with the applicatioin of customs privileges specified in this clause, within 3 years from the time of their importation, customs payments shall be levied in full in compliance with the provisions established by law.

 

The established privileges and benefits shall be provided for the period from 3 up to 10 years depending on the volume of investments, including within the equivalent of:

  • From US$ 300 thousand up to US$ 3 mln. – for the period of up to 3 years;
  • From US$ 3 mln. up to US$ 5 mln. – for the period of 5 years;
  • From US$ 5 mln. up to US$ 10 mln. – to the period of 7 years;
  • From US$ 10 mln. and more – to the period of 10 years,  with the application of income tax rate and unified income tax at the rate of 50% less than the current rate within the next 5 years.

 

There is also a special currency regime, a simplified procedure for entry, sojourn and departure, as well as obtaining work permits for citizens and non-residents of the Republic of Uzbekistan functioning on the territory of the FEZ during the period of a company operation.

       The business entities registered in the “Navoi” FEZ shall be allowed to:

  • carry out calculations and payments in foreign currency within the limits of the FEZ in complaince with the agreements and contracts concluded between them;
  • pay foreign currency for delivery of goods and commodities, works and services performed by other business entities – residents of the Republic of Uzbekistan;
  • use convenient for them conditions, forms of payment and calculations for exported and imported goods and commodities.

 

No tax Regulations of the Republic of Uzbekistan that worsen the position of taxpayers shall be applied in regard to business entities registered in the FEZ with the exception of acts regulating the taxation of excizable goods and commodites.  


 2. 
“Angren” FEZ 

Tashkent province.

Decree of the President №УП-4436 dated April 13, 2012.

Line of Business activity Privileges and preferences

Creation of modern high-tech production facilities, which would secure the output of competitive produce with high level of value added.

The “Angren” FEZ participants shall on general conditions be entitled to privileges established by clauses 3, 4 of the УП-4853.

 

The FEZ participants shall also be[3]:

  • Exempt from paying customs duties (apart from customs clearances) for imported raw materials, materials and component parts as parts of exported output for the entire period of FEZ operation;  
  • Entitled to carry out foreign currency calculations and payments within the territory of FEZ in accordance with the agreements and contracts signed between them;
  • Entitled to pay foreign currency for deliveries of goods, commodities, and works (services) by other economic resident-entities, as well as use conditions and payment and calculation forms for exportable and importable goods in the most convenient form for them.

 

       No tax Regulations of the Republic of Uzbekistan that worsen the position of taxpayers shall be applied in regard to business entities registered in the FEZ with the exception of acts regulating the taxation of excizable goods and commodites.  

 
3.             “Jizzakh” FEZ

Jizzakh province.

Decree №УП-4516 of the President dated March 18, 2013.

Line of Business activity Privileges and preferences

Creation of modern high-tech production facilities, which would secure the output of competitive produce with high level of value added.

FEZ participants shall on general conditions be entitled to privileges established by clauses 3, 4 of the УП-4853, as well as the benefits established by clause 5 of УП-4853.

 

No tax Regulations of the Republic of Uzbekistan that worsen the position of taxpayers shall be applied in regard to business entities registered in the FEZ with the exception of acts regulating the taxation of excizable goods and commodites.  


4.      
UrgutFEZ                                 6. “Qoqon” FEZ

5.       Ghizhduvon”FEZ                       7. “Khazarasp”FEZ

Samarkand province, Bukhoro province, Farghona province, Khorezm province.

Decree №УП-4931 of the President dated January 12, 2017. 

Line of Business activity Privileges and preferences

-   Ensuring a comprehensive and efficient utilization of production and resource potential of Samarkand, Bukhoro, Farghona and Khorezm provinces;

-   Creation of new modern production facilities in the sphere of deep processing, storage and packaging of fruit and vegetables, farm products, textile, carpet, foot-wear and leather goods, ecologically safe chemical, pharmaceutical, food, electro-technical industries, machine and automobile building, production of building materials and such other sectors of economy.

FEZ participants shall on general conditions be entitled to privileges established by clauses 3, 4 of the УП-4853, as well as the benefits established by clause 5 of УП-4853.

 

The National Bank for external economic activities of the Republic of Uzbekistan and other commercial banks shall be recommended to allocate credits on account of the own and foreign credit lines attracted without issuing guarantees of the Republic of Uzbekistan for co-financing investment projects offered for sale in the territories of free economic zones.

 

 
8.       “Nukus-Farm” FEZ                  12. “Boisun-Farm” FEZ
9.       “Zomin-Farm” FEZ                  13. “Bustonlik-Farm” FEZ
10.    “Kosonsoi-Farm” FEZ              14. “Parkent-Farm” FEZ
11.    “Syrdaryo-Farm” FEZ 

Republic of Karakalpakstan, Jizzakh province, Namangan province, Syrdaryo province, Surkhondaryo province, Tashkent province.

Decree №УП-5032 of the President dated May 3, 2017.

Line of Business activity Privileges and preferences

-      Ensuring a comprehensive and efficient utilization of production and resource potential of the Republic of Karakalpakstan, Jizzakh province, Namangan province, Syrdaryo province, Surkhondaryo province, Tashkent province for cultivation of medicinal vegetable raw materials under special natural conditions for their subsequent processing;

-      Attracting direct foreign investments and national investors for setting up modern production facilities for the production of pharmaceuticals and medicines with high level of value added, in the first place, on the basis of medicinal substances and vegetable medicinal raw materials produced at plantations set up in accordance with the established procedures;  

-      Setting up new modern production facilities and capacities for processing medicinal vegetable raw materials and production of medicines, medical products, auxiliary and packaging materials;

-      Deepening the processes of localization of production of pharmaceuticals on the basis of local medicinal vegetable raw materials and materials based on the establishment of close consumer cooperative relations and development of industrial cooperation among free economic zone organizations and those of the Republic in general;

-      Creation of scientific-research centers on the study of introduction and cultivation of medicinal vegetable raw materials jointly with the test and experimental laboratories.

FEZ participants shall, on general conditions, fall under the privileges established by clauses 3, 4 of the УП-4853, as well as privileges established in clause 5 of the УП-4853.

 

Legal entities and individuals shall pay a fee for harvesting (gathering) wild plants in the amount of 50% of the established payments for the removal of wild plants from their natural environment (except licorice naked) that are not included in the Red Book of wild plants and covered by the “List of Wild Plants” approved annually by the State Committee of the Republic of Uzbekistan for Ecology and environmental protection. This Regulation is applied provided that activities are carried out for the production of finished pharmaceutical products in the territories of the said FEZ with the use of wild-growing plants or on condition of availability of concluded agreements (contracts) with the FEZ participants which put out finished pharmaceutical products from wild plants.

Commercial banks are recommended to allocate loans for setting up plantations for cultivation of medicinal vegetable raw materials to business entities and farms;

Commercial banks are recommended to allocate loans to business entities and farms for growing medicinal plant raw materials, and ensure the supply of technological equipment for leasing on condition of insufficient or no collateral resources.

  


The operation period of all FEZ is 30 years with a possibility of its subsequent extension. 

Legal Regulation of FEZ Activities. 
The Law of the Republic of Uzbekistan “On Free Economic Zones” No.220-I dated April 25, 1996 make up the basis of legal regulation of activities of free economic zones.

The passage of the Decree УП-4853 of the President “On Additional Measures on Activation and Expansion of activities of free economic zones” dated October 26, 2016 had literally given an impetus to a new stage in the legal regulation of activities of free economic zones, in which connection a number of new by-legal legislation has been adopted and changes introduced into the previously acting by-laws.

                     Major Tasks and Business Activity Lines of FEZ. 
    The major tasks and business activity lines of free economic zones include:
-   Attraction of direct investments of foreign and national investors for setting up modern production facilties on the output of import-substitution products with high value added, which are in demand in external markets.  Moreover, the most significant among them are the production facilities in the sphere of deep processing, storage and packaging of fruit and vegetables and farm products, textile, carpet, shoe and leather goods, environmentally safe chemical and petrochemical, pharmaceutical, food, electrical engineering, machine building and automotive industries, production of building materials and such other directions;
 - Deepning the processes of localization of production of high-technological output on the basis of local raw and materials. 

Management Structure at FEZ. 

Functions on coordination and regulation of FEZ activities shall be carried out by the Administrative Council – a collegiate governing body formed by a Presidential Decree from among representatives of government bodies, local government authorities and such other organizations.
   Operational management activities of the FEZ shall be carried out by the Directorate.
   The structure of governing bodies, their powers and interactions among them shall be regulated by the aforesaid Law, as well as a Regulation “On Administrative Council of free economic zones” approved by a resolution of the Cabinet of Ministers №418 dated December 29, 2016 and a provisiion “On Free Economic Zones” approved by the resolution of the Cabinet of Ministers № 196 “On Measures on the organization of activities of free economic zones” dated April 10, 2017.   

FEZ Participants’ Status 

Procedure for prepration of documents, selection of investment projects, registration of FEZ participants and concluding investment agreements with them shall be specified by the Regulation “On the procedure for electing investment projects for their placement in the territories of free economic zones and registration of participants of free economic zones”, approved by the resolution of the Cabinet of Ministers № 196 dated April 10, 2017.
   The certificate of a FEZ participant, issued to a FEZ participant, is a confirmation of his/her rights to apply a special tax regime and customs privileges - in respect of his/her activities - in the territory of the FEZ. 
   After registration the participant of the FEZ, in accordance with the established procedure, shall be imposed obligations, stipulated for in the relevant investment agreement, insofar as it relates to activities on the territory of the FEZ. Under an investment agreement a FEZ participant shall have no right to transfer his/her rights and obligations to another person.
   Deprivation of the status of the FEZ participant shall be allowed by the decision of the FEZ Administrative Council (at the request of the organization or in the event of its liquidation) or in court (if there is a dispute regarding a violation of the national legislation or that of an investment agreement by a FEZ participant). 

Procedure for Applying Tax Benefits
and Customs Payments on the Territory of FEZ. 

This issue is governed by the Regulation “On the Procedure for applying tax and customs fee benefits on the territory of free economic zones” approved by the Resolution of the Cabinet of Ministers No.196 “On Measures on the organization of activities of free economic zones” dated April 10, 2017.
  This Regulation specifies, in particular, that the benefits on the payment of tax and customs fees established by relevant Presidential Decrees on setting up FEZ, are applied exclusively to all types of FEZ participant’s activities provided for in the Agreement on investment on the territory of a free economic zone concluded between an investor (investors) and the FEZ Directorate.
   The validity period of customs and tax benefits shall be calculated from the date of receipt of the Certificate of a FEZ participant.
  If a FEZ participant increases the volume of investments to the volume that grants the right to a longer period of benefits than had been previously granted, the benefits shall be extended until the end of a longer period.
   At the same time, if an increase in investment shall be made after the expiration of the previous period of the benefits, customs privileges shall be applied from the date of making an investment in the amounts granting the right to a longer period of validity of benefits, while the tax benefits shall be introduced from the 1st day of the month following the month in which has arisen the right to a longer duration of benefits. Calculation of the effective period for applying the benefits shall be counted from the date of beginning the application of the benefits.
   A FEZ participant shall present the following documents to the state customs service when applying for provision of customs privileges for equipment, raw materials, materials and component parts that are imported for their own production needs:
  - List of equipment, raw materials, materials and component parts imported for their own production needs approved by a leader of the FEZ participant in compliance with the established form;
  - Norms of consumption of raw materials, materials and component parts per unit of manufactured output approved  by the FEZ participant’s leader and agreed with the chief accountant and technologist. 
In case of sale or donation of equipment, raw materials, materials and component parts imported with the applicatioin of customs privileges within 3 years from the time of their importation, customs payments shall be levied in full in compliance with the legally established procedure.

Monitoring Procedure. 

Prior to the 25th of December the FEZ participants shall present to the bodies of government tax and customs services annual declrations on the use of raw materials, materials and component parts imported for their own production needs.
  The state tax authorities shall maintain the FEZ participants’ separate records and, when submitting the organizations’ periodic reports, take into account the amount of tax benefits they receive and on a quarterly basis submit consolidated information to the working body of the Administrative Council. 
  Bodies of the state customs service also maintain separate records of FEZ participants and up to the 10th day of the month following the reporting period, submit quarterly information on the amounts of imported equipment, raw materials, materials and component parts to the bodies of the state tax service, as well as information on customs benefits granted to the FEZ participants. 
  In respect of FEZ participants who apply customs privileges for raw materials, materials and component parts, in the part of manufactured products sent for export, the state customs authorities similarly perform a quarterly reconciliation of imported raw materials, materials and component parts with the export of manufactured products actually made by a FEZ participant, and on the basis of its results, monitor the correctness of the application of the customs payments’ privileges.
   At the request of relevant state tax and customs authorities, the Directorate shall present information on the amounts of investments made by the FEZ participants, as stipulated for in the Investment Agreement.
  If a FEZ participant fails to invest the amount falling under the term of the benefit, then the amount released as a result of granting of privileges shall be recovered to the State Budget of the Republic of Uzbekistan with the application of financial sanctions in the manner prescribed by law. 

                                                                                          Prospects for Development. 
      The main guidelines of development of free economic zones have been specified by the Presidential Resolution № ПП–3175 “On Measures on strengthening coordination and raising the accountability of the Ministries, agencies, and the bodies of local government authorities for efficient functioning of free economic zones’ activities” dated August 27, 2017 in accordance with the “Strategy of activities along the five priority directions of development of the Republic of Uzbekistan for 2017-2021”.
    Speaking also about the prospects, it is worthwhile mentioning the earlier adopted Resolution of the Cabinet of Ministers № 110, dated February 27, 2017 "On measures on further expansion of production of import-substitution and export-oriented products in the free economic zones of the Republic of Uzbekistan", which approved a list of projects providing for the organization of manufacturing of finished products, materials and component parts in free economic zones during the period of 2017-2019. 


[1] In compliance with Article 7 of the Law “On Free Economic Zones” as of 24th of April 2006 No.220-I, an industrial-economic zone is one of the types of free production zone, which, in its turn, is a sub-type of free economic zones and is a free territory on which shall be introduced a special regime of economic and financial activity for the purpose of stimulation of entrepreneurship and attraction of foreign investments into priority sectors of economy and introduction of advanced technologies.

[2] Thereinafter referred to as “Privileges established in accordance with pp.3,4 of the УП-4853”.

[3] Thereinafter referred to as “Benefits established in compliance with p.5 of the УП-4853”.

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