Dentons Global Mining Guide: Uzbekistan

Dentons Global Mining Guide: Uzbekistan

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January 17, 2022

In this chapter

General framework
Environmental And Social Considerations
Taxes
Listings

General framework

Major Features

Uzbekistan has the world’s fourth-largest gold reserves and is ranked 12th in the world and second among Commonwealth of Independent States (CIS) countries (after Russia) in terms of mining. Uzbekistan is among the top 15 countries with the largest uranium and copper reserves. As reported by the State Geology Committee (GeoCom) in 2018, only 20 pe cent of Uzbek territory has been explored, with potential mineral resources being evaluated at US$5.7 billion. The country’s explored reserves comprise more than US$1 billion.

Metallurgy is one of the largest domestic industries, and the most mined minerals are copper, gold, silver and uranium. There are two dominant state mining enterprises: the Almalyk Mining and Metallurgy Complex (AGMK) and the Navoi Mining and Metallurgy Complex (NGMK); the latter was recently transformed into a joint-stock company, with uranium and rare earth metals production hived off into a separate state enterprise, Navoiuran. Both AGMK and NGMK are working to enhance their management structures, the methods for assessing and accounting for mineral reserves and their financial reporting, which, as acknowledged by a presidential resolution in January 2019, impeded production growth and deterred investment.

Legal System and Sources of Law

Uzbekistan mining regime is based on a civil law system and is regulated in the following statutes:

Constitution of Uzbekistan

Due to the importance of mineral resources, the Uzbek Constitution has an article dedicated to mineral resources. This article recognizes mineral resources as national wealth of Uzbekistan.

Law on Subsoil (Law No. 444-II, dated December 13, 2002);

As primary law on the field, the Law on Subsoil lays down the basic legal principles on mining and regulates the principal issues of possession, use and disposal of the subsoil. The general structure and directions of regulation over the mining sector are usually initiated by presidential decrees, and then incorporated into more detailed decrees of the Cabinet of Ministers (government). Relations in the mining industry, similar to other market relations, are also governed by the provisions of civil, tax, environmental, corporate, currency, land and other industry-related laws.

Law on Precious metals and stones (Law No. 710 dated 23.08.2021)

This newly adopted law regulates relations in turnover of precious metals and stones. It covers all phases of the exploitation of precious metals and precious stones — from exploration and extraction to processing (refining), sales and export.

A number of presidential and governmental resolutions.

Government with support of international development institutions is developing the legal framework to make this sector more attractive to foreign investors. For example “First come first serve” principle has been adopted by Presidential Resolution (PP-5083) earlier this year and it is expected that new law on subsoil will be enacted in 2022.

Ownership of mineral resources

Subsoil title generally vests with the state. Under Uzbek law, the award of the subsoil rights is possible as a result of online auctions or through direct negotiations. The president, in July 2019, ordered the adoption of international standards (ISO, OHSAS) in management and implementation of investment projects in mining, envisaging a license agreement framework. On 23 June 2020, the Cabinet of Ministers of Uzbekistan approved a new Regulation “On the procedure of issuance licenses for the right to use subsoil plots”.

All subsoil operations in Uzbekistan are subject to licensing. There are several regulations on licensing depending on the underground activity (exploration, development, artisanal mining, use of technogenic mineral formations, etc.) or the mineral that is sought after (ore minerals, non-metallic minerals, oil and gas). These regulate the conditions, requirements, and procedure of licensing.

Foreign Investment

In accordance with Law “Оn Investments and Investment Activity”, there is no restrictions on foreign investments for being engaged in activities such as exploration, development, production or use of natural resources, as well as participation in the production sharing agreement. Licensing procedures also provide same rules for both local and foreign investors.

The long-term programs adopted by the government in recent years are aimed at accelerated development, modernization and the expansion of production of the large enterprises of the mining and metallurgical industry. In accordance with Presidential Resolution No. PP-4124 dated 17 January 2019, it is planned to increase production by 30 pe cent at NGMK by 2026, attract investments in the amount of $2.9 billion to AGMK and increase copper production by 28 percent and zinc by 75 percent by 2023.

Investors in the mining industry enjoy the general investment protection offered by Uzbek law. Investment law guarantees:

protection against discrimination;
change in law protection for certain limited cases;
protection against nationalization; and
protection of the rights to profit repatriation and access to information.

Additional guarantees, such as government guarantees, state project financing and special tax and payment regimes are provided on the basis of special presidential decrees. It is common practice that any major investment projects or investment agreements in Uzbekistan are generally implemented by issuing of special decrees.

Role of the state

State management of mining industry is carried out by the Cabinet of Ministers of the Republic of Uzbekistan, local state authorities, as well as specially authorized state bodies.
The government is a primary regulating body in the industry, which adopts policies for the development of the mining sector and licensing procedures, in addition to other matters.
Local government bodies carry out supervising functions over the use and conservation of resources, and the prevention of unauthorized use of the subsoil.

The specially authorized bodies are the following three committees:

the State Committee on Geology and Mineral Resources (GeoCom);
the State Committee for Ecology and Environmental Protection (EcoCom), and;
the State Committee for Industrial Safety of the Republic of Uzbekistan.

Among them, the GeoCom is the main executive body responsible for the development of mining policies and is also the licensing and compliance monitoring body.

EcoCom coordinates issues of environmental protection, standards for mining operations and waste management. Mining allotments for the development of mineral deposits are coordinated with the Committee for Industrial Safety in terms of ensuring industrial safety.

As previously mentioned, there are two dominant state mining enterprises: the Almalyk Mining and Metallurgy Complex (AGMK) and the Navoi Mining and Metallurgy Complex (NGMK); the latter was recently transformed into a joint-stock company, with uranium and rare earth metals production hived off into a separate state enterprise, Navoiuran.

Nature of mineral rights

Article 19 of the Subsoil Law provides that mining rights grant their holders the exclusive authority for exploration, extraction, artisanal mining of mineral resources, use of technogenic mineral formations, construction and operation of underground facilities (underground storage and disposal of waste). However, such rights do not grant ownership or possession rights over mining areas. Article 30 of the Subsoil Law establishes that mining rights can be transferred subject to GeoCom approval.

Granting of mineral rights

Subsoil title generally vests with the state. Under Uzbek law, the award of the subsoil rights is possible as a result of online auctions or through direct negotiations.
In PP-5083, it is envisaged to include in a new draft law "On Subsoil":

Online issuance of permits for the right to use little-explored subsoil areas for geological exploration on the basis of the "first come first served" principle, based on online applications from investors;
Issuance of permits for the right to use areas with a high degree of exploration and the potential for the discovery of deposits for geological exploration, as well as mining of minerals at discovered deposits based on the results of auctions held on the Single Electronic Trading Platform "E-AUKSION".

Security of tenure

Pursuant to the Uzbek Subsoil Law, mining rights may be restricted, suspended or terminated early in the following cases:

(i) Occurrence of a threat to life or health of population, to ecology in the zone affected by works related to subsoil use;
(ii) Failure to start using a subsoil area within one year;
(iii) Systematic failure to make payments for subsoil use;
(iv) Violation by the subsoil user of the main conditions of the license
(v) Failure to comply with regulatory requirements to exploration (art.36) and to development (art. 37), safety (art.40)
The procedure for restriction, suspension and termination of subsoil use rights is specified by the Cabinet of Ministers of the Republic of Uzbekistan.

Environmental And Social Considerations

Environmental, health and safety regulations

Currently, there is no special law on environmental requirements for mining activities. In general, irrespective of the type of activity, all companies must comply with the environmental regulations. The legal basis for environmental controls is laid down by the Law on Environmental Protection. Compliance with environmental regulations is supervised by the government and EcoCom.

In cases where harm is caused to the environment (e.g., unintended use, subsoil pollution by chemicals, fertility deterioration), the right to use the land may be revoked by the state. Moreover, any company involved in an activity that produces waste (in the course of extraction or processing) must comply with sanitary and environmental standards, monitor levels of waste that are hazardous for the environment and people, provide conditions for safe waste utilization and avoid waste disposal within unauthorized territories. More detailed rules are elaborated in the Uniform Rules of Subsoil Protection for Development of Mineral Deposits. According to these rules, a company involved in mining must, at its own expense, conduct recultivation of the land after termination of all works on all lands suitable for farming, forestry or any other agricultural activity, or for the fishing industry. It is the company’s responsibility to maintain necessary facilities and equipment for the prevention, control and remediation of waste products. Besides this, it is strictly forbidden to start mining works if a company does not operate the above-mentioned facilities.

Uzbek law does not differentiate health and safety regulations depending on the company’s type of activity. Therefore, all types of health and safety regulations and other correlated legislative instruments have to be observed by mining companies. Employers should insure their liability for any harm that may be caused to an employee’s health as a result of work-related injuries, professional illness or other damage caused during the employee’s employment.

Supervision by the regulatory bodies administering the observance of laws on safety precautions may be divided into external and internal control. External control is performed by the government and the Ministry of Employment and labor relations, while internal control is carried out by the company’s employees or trade union, or both.

Any company operating in Uzbekistan, irrespective of its type of activity, has to observe health and safety rules. In cases where the number of employees equals or exceeds 50 persons, the employer must establish a special department or position responsible for health and safety compliance. Moreover, if the company possesses 50 or more vehicles, an analogous department for traffic safety must be organized within the company. In cases where the number of employees or vehicles is less than 50, the employer may assign such duty to one of its senior managers. The specialists in the health and safety department and traffic safety department are responsible for internally controlling the observance of the health and safety rules by the employees.

All employees of the company must be properly informed by the employer on labor conditions and professional risks before conclusion of the employment agreement, or while they are on transfer to another position within the company. Moreover, the employer has an obligation to hold regular training sessions on accident prevention and occupational sanitary, fire protection and other health and safety rules. It is strictly forbidden to allow employees to start work without attending such training or without passing an internal health and safety exam held by the employer. In practice, the employee must sign the register journal before starting work. The employee’s signature shows his or her understanding of his or her personal duties, and of any risks in the event of failure to observe safety rules while performing his or her duties.

Environmentally protected areas

Law on Protected Environmental Areas prohibits conducting any other activities in environmentally protected areas.

Taxes

Duties, royalties and taxes

Tax issues in Uzbekistan are governed by the Tax Code effective from 30 December 2019.However, in accordance with Presidential Decree No. UP-6319, the following amendments will be introduced into the Tax Code staring on January 1, 2022:

A decreased subsoil use tax rates for oil and natural gas, gold, copper, tungsten, and uranium.
Introduction of a tax on rental income for subsoil users at new discoveries.
Incentives for new oil and gas wells.
Unified tax rates for subsoil use for non-metallic minerals
Right to carry out tax accounting in US dollars for enterprises with foreign investment (i.e. payers of tax on rental income).

The Uzbekistan taxation system mainly falls under two headings: taxes and fees. The Tax Code envisages the following definitions:

‘taxes’ are mandatory payments established by the Tax Code, paid to the state budget or to the state trust fund; and
‘fees’ are mandatory payments to the budget system established by Uzbek law, the payment of which is a condition for legal actions performed by authorized bodies and officials, including provision of certain rights, or the issuance of licenses and other permits.

The following taxes are applied in Uzbekistan:

value added tax;
excise tax;
profit tax;
personal income tax;
subsoil use tax;
water use tax;
property tax;
land tax; and
social tax.

The procedure for introducing, calculating and paying fees is determined by the Tax Code and other legal acts.

The Tax Code

The Tax Code provides the following tax regimes: the standard tax regime and the simplified tax regime.

The following special tax regimes are established for certain categories of taxpayers in Uzbekistan:

sales tax;
for companies under PSAs; and
for participants in special economic zones and certain categories of taxpayers.

Special tax regimes may include exemption from certain taxes, the application of reduced tax rates and other tax benefits.

A foreign investor, with the exception of cases provided for by legislation on production sharing agreements, pays taxes provided for the Tax Code at tax rates established for residents of Uzbekistan, unless otherwise provided by the PSA during the term of the PSA.

Standard tax regime

The standard tax regime envisages the payment by companies of all the aforementioned taxes and compulsory payments. Operation under the standard tax regime does not require companies to meet certain specific requirements under the Tax Code (i.e., investments).

I. Taxes and fees for subsoil users

In accordance with the Tax Code, subsoil users pay the following taxes and fees: subsoil use tax. Besides, in accordance with newly proposed amendments to the Tax Code there will be new “Special rent tax on extraction of minerals” for subsoil users.

Subsoil use tax

Subsoil use taxpayers are subsoil users that extract mineral resources from the subsoil, useful components from minerals or man-made mineral formations, and carry out the processing of mineral resources with the extraction of mineral components. Tax rates are established by Article 452 of the Tax Code. For example, the tax rate for mining of gold, silver, copper uranium and zinc is 10 percent.

However, new amendments to the Tax Code provide that the subsoil use tax rates staring from 1 Jan 2022 for oil and natural gas will be reduced to 10 percent, for gold and copper to 7 percent, for tungsten to 2.7 percent, and for uranium to 8 percent.

The tax base for subsoil use tax is determined based on the cost of the volume of extracted (mined) finished product, calculated on the weighted average realization price for a reporting period.

Special rent tax on extraction of minerals

Special rent taxpayers are legal entities extracting precious, non-ferrous and radioactive metals, rare and rare-earth elements and extracting them from technogenic mineral formations, as well as extracting hydrocarbon raw materials. Tax rate is expected to be 25%. The tax base for special rental tax on extraction of minerals is the amount of rental income, and if there is a rental loss, the tax base is equal to zero.

Rental income means any difference between the income from the sale of produced (extracted) metals or hydrocarbons calculated on the basis of the price applied by the parties to the transaction, without the inclusion of VAT and excise tax, and the costs directly related to their production (extraction).

This tax is expected to be introduced from January 1, 2022.

II. Legislative trends and amendments

As of January 1, 2022, the following amendments will be introduced:

The subsoil use tax rates for oil and natural gas will be reduced to 10 percent, for gold and copper to 7 percent, for tungsten to 2.7 percent, and for uranium to 8 percent.
New oil and gas wells will be exempt from corporate property tax for the first two years, starting from the month of their exploitation, and for the following three years they will see a 50 percent reduction from the established corporate property tax rate.
From January 1 to December 31, 2021 the taxable base for the subsoil use tax for the production of oil, natural gas and certain kinds of minerals will be reduced by expenses associated with transportation and refining.
The tax rates for subsoil use for non-metallic minerals are to be unified.
Enterprises with foreign investment (i.e., payers of tax on rental income) will be granted the right to carry out tax accounting in US dollars.

Exploration companies and their contractors and subcontractors are exempt from:

Periodic customs fees for temporary importation of special equipment
Customs duties on imports of equipment, special facilities and material and technical resources not produced in Uzbekistan, in accordance with a separate list.

III. Other taxes payable by subsoil users

Subsoil users also pay corporate tax and VAT (presently 15 percent).

Tax rates on corporate income tax are set in the following amounts:

Payers	Tax rates in % of taxable base
Legal entities	15
Legal entities carrying out the production of cement (clinker)	20

Incomes paid in the form of dividends and interest to residents of Uzbekistan are taxed at a rate of 5 percent. Excess profits tax was abolished as per the new Tax Code from 1 January 2020.