Location:


You are here: Home > Information in focus > Publications > NON-RESIDENT HAS ACQUIRED A GOVERNMENT ASSET: HOW TO PAY FOR IT

NON-RESIDENT HAS ACQUIRED A GOVERNMENT ASSET: HOW TO PAY FOR IT

05/01/2018

A foreign company has bought out part of the state share owned by a joint venture in Uzbekistan (under purchase and sale agreement concluded between the foreign company and the Tashkent Territorial Directorate of the State Committee of the Republic of Uzbekistan for Assistance to Privatized Enterprises and Development of Competition with the participation of the joint venture). The foreign company paid the redemption value of the state share of the joint venture in part in due time according to the schedule of payments under the purchase and sale agreement from the account in the Clearing House of Xalq Iste’mol Tovarlarining Ko’rgazma-Yarmarka Savdosi Respublika Markazi (Republican Center for Exhibition ad Fair Trade in Commodities) LLC.

On its account in the Clearing House of the LLC, the foreign company has funds in the national currency (the Uzbek soum), which are planned to be transferred to the account of the Territorial Directorate of the State Committee of the Republic of Uzbekistan for Assistance to Privatized Enterprises and Development of Competition to pay off the next payment under the agreement. However, the Clearing House of the LLC has refused to transfer the funds with reference to amendments introduced in some decisions of the Government by Resolution of the Cabinet of Ministers No.912 dated November 13, 2017. The foreign company has its representative office in Uzbekistan.

Can the foreign company (a non-resident of Uzbekistan) open a settlement account with a bank in Uzbekistan in the national currency to pay for the state’s redemption share of the joint venture? Is it possible to pay for the share from the settlement account of its representative office?

K.L.

 

Foreign legal entities do not have the right to directly open on-demand deposit accounts in the national currency (settlement accounts) with banks in the Republic of Uzbekistan and make any payments from them, including settlements for state-owned shares (stakes) acquired.

What are the grounds for the conclusion?

Measures to regulate mutual settlements at exchange and exhibition & fair trading in order to improve the efficiency of currency regulation in connection with liberalization, improving the business climate and liquidating the informal foreign exchange market are specified by Presidential Decree (No.РD-3295 dated September 29, 2017).

Thus, funds credited to the account of a non-resident seller in clearing houses (CH) of the Commodity Exchange or Trade Fair under import contracts can be used solely for payment of export contracts concluded at exchange and exhibition & fair trading, customs duties, judicial expenses, and related services (Clause 1 of PD-3295).

Similar amendments were introduced in a number of legislative acts that regulate this field of activity (RCM No. 912 dated November 13, 2017).

Moreover, provisions, providing for the possibility of making payment for state-owned stakes or shares in businesses from the accounts that were previously contained in Resolution of the Cabinet of Ministers ‘On Approving Regulations on the Procedure for Privatization of State-Owned Property’ (No. 279 dated October 6, 2014), have been omitted.

Relations between banks and their customers are on the basis of contracts. Customers have the right to open on-demand deposit accounts in national and foreign currencies with one or several banks selected by them in accordance with the procedure established by the legislation. Banks must comply with the procedure for opening accounts for customers established by the Central Bank of the Republic of Uzbekistan (Article 31 of the Law ‘On Banks and Banking Activities’).

The national currency accounts may be opened for non-resident legal entities that carry out activities through a representative office of a foreign organization that does not have the right to conduct economic or commercial activities.

Funds from these national currency accounts of non-resident legal entities may be used to pay current expenses for their maintenance in the territory of the Republic of Uzbekistan, as well as for other purposes in accordance with the current legislation (Clauses 2.1, 2.3 of Procedure registered with the Ministry of Justice, No. 510 dated October 22, 1998).

In addition to representative offices, non-residents, operating in Uzbekistan through a permanent establishment, keep funds in the national currency on accounts opened with authorized banks in the territory of Uzbekistan and use them in accordance with the legislation (Clauses 2.1, 5.1 of Procedure No.510).

Opening on-demand deposit accounts (settlement accounts) to non-resident legal entities, except for those carrying out activities through a representative office or a permanent establishment, was not provided for either (Clause 16 of Instruction registered with the Ministry of Justice, No.1944 dated April 27, 2009).

Thus, the possibility of opening accounts is provided for them only if they conduct any activity through a representative office or a permanent establishment.

Representative offices are not legal entities and do not have the right to conduct economic or other commercial activities (Clause 7 of the Regulation, Annex 1 to RCM No.410 dated October 23, 2000). The only exception is settlements related to covering costs for their own needs:

  •  hospitality expenses;
  •  costs for purchase of inventory items for the needs of the representative office;
  •  settlements related to the payroll of the representative office employees;
  •  business travel expenses;
  •  rental payments, utility charges, etc.

Representative offices bear these expenses from the funds allocated by the foreign company – Head Office. Accordingly, a representative office’s sources of funds in the national currency are as follows:

  •  the exchange of freely convertible currency made in accordance with the procedure established by the legislation of the Republic of Uzbekistan;
  •  the funds of a foreign company in the national currency, remaining, by its decision, at the disposal of the representative office (Clauses 35-37 of Regulation No.410).

Therefore, national currency accounts, opened by a representative office of a foreign commercial organization to pay expenses for the maintenance of a representative office at the expense of funds allocated by the Head Office – foreign company, are not intended for payments for shares (stakes) purchased under a sale and purchase agreement.

If such payments are made from the representative office’s account, it may serve as the evidence of entrepreneurial activity of the foreign company in the territory of the Republic of Uzbekistan and, accordingly, there will be a need to register the permanent establishment with the tax authorities (Article 20 of the Tax Code of the RUz). Regulatory authorities may give reasons for their suspicions using the fact that investment activity, investment resources and forms of investment are mainly associated with investing in business ventures and aimed at income extraction.

 

RECOMMENDED ACTIONS

 

OPTION 1. To offer the Clearing House of Xalq Iste’mol Tovarlarining Ko’rgazma-Yarmarka Savdosi Respublika Markazi (Republican Center for Exhibition ad Fair Trade in Commodities) LLC to ensure making further payments on the following grounds:

The state guarantees and protects all rights of foreign investors when they are carrying out investment activities in Uzbekistan.

Foreign investors and foreign investments are granted fair and equitable mode of entrepreneurship, full and permanent protection and security (Article 9 of the Law ‘On Foreign Investments’).

All contracts on foreign investment, especially private ones, in terms of ensuring unconditional guarantees for their implementation are under the control of the relevant bodies authorized by the Government of the Republic of Uzbekistan.

The income of foreign investors earned in Uzbekistan can be reinvested in the territory of the Republic of Uzbekistan or used in any other way at the discretion of a foreign investor (Articles 3 and 6 of the Law ‘On Guarantees and Measures for the Protection of the Rights of Foreign Investors).

In this case, the use of funds from the accounts of the subject of investment activity may be limited only in the manner prescribed by law (Article 25 of the Law ‘On Investment Activities’). Regulatory and legal acts other than this Law cannot limit an investor’s settlements made from its account in the Clearing House. Accordingly, it is advisable to act in order to protect investments and the rights of foreign investors and implement guarantees provided by the state (Articles 23, 24 and 26 of the Law ‘On Investment Activities’ and other laws and statutory instruments).

In the situation with foreign investment, if there is any inconsistency between the provisions of the laws ‘On Foreign Investments’, ‘On Guarantees and Measures for the Protection the Rights of Foreign Investors’ and other legislative acts (including laws – author’s note) or international treaties of the Republic of Uzbekistan, provisions that are most favorable for foreign investors (Article 22 of the Law ‘On Foreign Investments’, Article 12 of the Law ‘On Guarantees and Measures for the Protection of the Rights of Foreign Investors) shall prevail.

Also, in your situation, issuance of a certificate confirming the right of ownership by the seller of the share – the State Committee of the Republic of Uzbekistan for Assistance to Privatized Enterprises and Development of Competition – will be of certain importance. When buying out state enterprises on the installment plan, the certificate for the right of ownership is issued after the first redemption installment has been paid. Until the full value of the enterprise is paid, the administrator of public property objects may impose restrictions on the right to dispose of property (Article 15 of the law ‘On Denationalization and Privatization’). Therefore, if your foreign company has already received a state certificate for the right of ownership of a share in the joint venture (without the right to its disposal), it is also possible to use a number of norms of the laws ‘On Property in the Republic of Uzbekistan’, ‘On Protection of Private Property and Guarantees of Owners’ Rights’, in order to protect the rights and interests of the owner – a foreign company. It is important for your organization to make sure that:

  •  a certificate for the right of ownership has been issued;
  •  the rights of the foreign investor – the buyer of the state-owned share in the joint venture – have not been violated.

In case if the Clearing House of Xalq Iste’mol Tovarlarining Ko’rgazma-Yarmarka Savdosi Respublika Markazi disagrees about the matter, you should appeal to:

  •  The State Committee of the Republic of Uzbekistan for Investments proceeding from the state tasks performed by it. An investment agreement concluded in accordance with the legislation, which provides additional guarantees to a foreign investor, will serve as an additional ground for the appeal;
  •  the State Commission for conducting tenders for the sale of state property to foreign investors – with a request or complaint requesting assistance in the enjoyment of rights, freedoms and legitimate interests (Articles 3.5 and 12 of the Law ‘On Applications of Individuals and Legal Entities’, Articles 22, 31 of the Law ‘On Guarantees of Freedom of Entrepreneurial Activity’);
  • The institution of the Commissioner for the President of the Republic of Uzbekistan for the protection of the rights and legal interests of business entities – for an appropriate order to this official.

The Law ‘On Guarantees and Measures for the Protection of the Rights of Foreign Investors’ (Article 3) provides certain protective measures in respect of guarantees to be granted to foreign investors. So, if the subsequent legislation of the Republic of Uzbekistan worsens the investment conditions, within 10 years from the moment of investing, the legislation in force on the date of investment shall be applied to foreign investors. A foreign investor has the right, at its own discretion, to apply those provisions of the new legislation that improve the conditions for its investment. A list of deteriorating investment conditions, including amendments to the legislation, as well as adoption of new legislative acts of the Republic of Uzbekistan, providing for inter alia introduction of other additional requirements for foreign investment, is presented.

Considering this situation as a simultaneous actual introduction of additional requirements to the procedure for settlements for state-owned assets acquired by a foreign investor during privatization and as a limitation of the foreign investor’s rights, it is possible to apply to the registration authority for joint ventures as to an authorized organization in accordance with the Regulation on the Procedure for Applying the Guarantee (Annex 1 to RCM No.180 dated August 02, 2005), with a relevant notification of the application of the state guarantee. The notification can be sent by the investor at any time after the adoption of a piece of legislation that worsens the investment environment. The notification specifies the circumstances the foreign investor considers to be deterioration in the investment environment and the piece of legislation in force in force the date of investment, which the foreign investor intends to apply during the guarantee period.

The notification of a foreign investor is the basis for the authorized body’s application of the legislation in effect on the date of investment in respect of the foreign investor. The notification, irrespective of the date of its sending to the authorized body, is effective from the moment at which the piece of legislation that worsens the investment environment comes into effect.

If the foreign investor does not agree with the notification, the authorized body may apply to the Ministry of Justice of the Republic of Uzbekistan for a legal opinion on the legality of the foreign investor’s application of Part 4 of Article 3 of the Law ‘On Guarantees and Measures for the Protection of the Rights of Foreign Investors’.

The Ministry of Justice shall, within two weeks from the receipt of the appeal, send a reasoned conclusion to the appropriate authorized body.

 

OPTION 2. To consider the possibility to use a LORO account as an alternative payment method.

 

Non-residents of the Republic of Uzbekistan are allowed to use funds in the national currency that are on LORO accounts of foreign banks opened in authorized banks of the country (para 1, Clause 3 of RCM No. 119 dated March 9, 2001).

Foreign banks can open correspondent (LORO) soum accounts with authorized banks in Uzbekistan. Funds in the national currency of the Republic of Uzbekistan, including those received under import contracts, if the terms and conditions of the contracts stipulate settlements in soums, as well as received from other current international transactions stipulated by the legislation, can be credited to the accounts. Funds from the accounts can be directed, among other things, to the formation of the authorized capital of an enterprise and to other purposes stipulated by the legislation (Clauses 4.3, 4.4 of Procedure No. 510).

Thus, your foreign company can make payments for state-owned assets in the territory of Uzbekistan in the national currency.

OPTION 3.If your company has a permanent establishment of a foreign legal entity (PE) that carries out activities (Article 20 of the Tax Code), it is possible to consider the issue of payment in the national currency from the PE’s accounts.

According to the law, the sources of funds for purchasing property shall be the own and attracted funds of legal entities (including foreign ones) acquired in ways that do not contradict the legislation (Article 16 of the Law ‘On Denationalization and Privatization’).

The redemption payment is funds in the national and (or) freely convertible currency, paid by the buyer for the acquired state-owned property, that is without any restrictions (Clause 2 of the Regulation, Annex 6 to RCM No.279).

The amounts that are on the PE’s accounts can be used by the order of the account holder for purposes in accordance with the legislation (Clauses 2.3, 5.3 of Procedure No. 510).

Consequently, privatization laws do not contain any restrictions, except for the need to confirm the legitimacy of the origin of the funds a foreign investor pays in the national currency for shares bought out (shares) from the state, including from the accounts of a permanent establishment.

In case of the last two options, an additional agreement to the sale and purchase agreement for the state-owned share in the joint venture shall be concluded.

 

Oleg  DAMINOV,

Managing Partner of the

Auditing and Consulting Group of Companies

Baker Tilly Uzbekistan

Tax and Customs News №52 dd. December 26,2017


RECOGNITION AND AWARDS

STRATEGIC PARTNERS



Company Name
LATEST PUBLICATIONS

FIND A MEMBER FIRM

An independent member of Baker Tilly International.