Uzbekistan uses a combination of tax and non-tax incentives to channel investment to certain sectors and locations or to support national development objectives, such as green growth. This chapter explores Uzbekistan’s investment incentive framework, focusing foremost on the design, targeting and granting of corporate income tax incentives. Broader factors with the tax system are examined, such as the transparency of the tax system and the effectiveness of tax administration. The chapter provides policy recommendations to enhance the effectiveness of tax incentives, promote sustainable investment, and create fiscal space to support Uzbekistan’s long-term economic goals, including aspirations to achieve upper-middle-income status by 2030.
Roadmap for Sustainable Investment Policy Reforms in Uzbekistan
Abstract
Similar to many economies, Uzbekistan uses investment incentives to achieve certain objectives, such as increasing the overall level of investment or encouraging greater flows to certain sectors, locations, or desired investor outcomes. The main tax incentives in Uzbekistan involve concessions on corporate income tax (CIT) introduced by presidential decrees and consolidated into the main tax law (Tax Code of 2020). CIT benefits are most commonly provided in the form of temporary exemptions and reduced CIT rates. Aside from CIT benefits, Uzbekistan offers a range of additional tax incentives that include concessions on customs and import duties, land and property taxes, as well as a water use tax.
Tax reform has been a priority of the government in recent years, as part of broader efforts to enhance the investment climate. Significant changes include the revision of the Tax Code in 2020 with the foremost objectives of simplifying the tax system and reducing the tax burden on businesses. Recent initiatives have also aimed at promoting an efficient and stable tax system by improving tax administration procedures. These efforts have been accelerated in the context of Uzbekistan’s progress towards accession to the World Trade Organisation (WTO). Uzbekistan has also joined the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) in 2023, which provides further opportunity and impetus for tax reform moving forward.
As a result of ambitious tax reforms, Uzbekistan’s tax revenue – as measured by the tax-to-GDP ratio – has increased since 2019 and peaked at 18.8% in 2021. Despite these gains, overall tax revenues remain lower than several benchmarked economies selected for this analysis. In addition, tax reforms aimed at reducing the tax burden on businesses have contributed to declining tax revenues as a percentage of GDP following 2021. Additional tax incentives set to take effect from February 2025 may further reduce revenues that could otherwise support critical government spending on infrastructure and social services, which are important for improving the business environment in the long-term. Moving forward, Uzbekistan would benefit from broadening the tax base and reducing the amounts of forgone revenue tied to tax incentives. Uzbekistan is encouraged to revisit its stock of tax incentives to assess whether benefits lead to their stated objectives to maximise their efficiency and effectiveness.
Uzbekistan has traditionally relied on income-based incentives (e.g. CIT exemptions and reduced CIT rates) over expenditure-based incentives to attract investment. However, expenditure-based incentives are more likely to stimulate additional investment, as the instruments directly target investment expenses and encourage spending that might not occur in the absence of those incentives (IMF et al., 2015[1]). Expenditure-based incentives are also less likely to be affected by the GMT for large MNEs, which would reduce Uzbekistan's risk of forgoing revenue to other jurisdictions that may impose a top-up tax on in-scope MNEs. For these reasons, Uzbekistan could consider gradually shifting from income- to expenditure-based incentives, including in SEZs where CIT benefits are a prominent instrument for investment promotion.
Uzbekistan’s current investment incentives target a broad range of investor characteristics. Sector-specific tax incentives indicate a preference for agriculture and energy activities, but it remains difficult to assess the effectiveness of tax incentives in the absence of an overarching strategy for investment promotion. Adopting such a strategy would not only enable Uzbekistan to better structure and monitor its investment promotion activities, but it would also help guide the design of investment incentives and orient the instruments towards supporting broader economic and sustainable development goals. A key area that Uzbekistan may reconsider is energy-related tax incentives. Tax incentives aimed at stimulating renewable energy activities reflect the increasing priority attributed to green growth in Uzbekistan, but investment incentives extended to gas and oil exploration risk solidifying fossil fuels in the country’s energy mix in the longer term, which may hinder the transition to clean energy.
While a country's tax burden is a factor in investment decisions, it is often not the primary concern. Investors typically weigh other key considerations, including macroeconomic stability, business climate risks, compliance costs related to legal and regulatory frameworks, and administrative practices (OECD, 2015[2]). A survey of a subset of investors in Uzbekistan showed that recent reforms aimed at simplifying business licensing and registration as well as digitalisation of public services were viewed more favourably than changes to tax incentives (OECD, 2023[3]). As such, Uzbekistan may explore further improving the investment climate by measures outside of the provision of investment incentives.
Among the options that Uzbekistan may consider enhancing the investment climate is improving the transparency of tax incentives. Generally, investment incentives are consolidated in the Tax Code of 2020, which is published online and updated regularly, but investors may receive tax incentives through several channels, including investment contracts negotiated with the government on a case-by-case basis. Reducing discretionary granting of investment incentives would enhance investor confidence, reduce opportunities for aggressive privilege-seeking behaviour and contribute to the creation of a level playing field among investors. Recognising these benefits, Uzbekistan is taking initial steps towards reducing the discretionary granting of incentives by specifying the nature of those benefits in the new draft Law on Investment and Investment Activities and its implementing regulation. Uzbekistan is encouraged to continue these efforts that contribute to a more transparent climate for investment.
Design investment incentives within the parameters of a comprehensive strategy for investment promotion. Establishing an investment promotion strategy would enable Uzbekistan to better structure and monitor its investment promotion activities, including with respect to the design and assessment of investment incentives. Uzbekistan’s current stock of tax incentives is offered to a wide range of investor characteristics and sectors, rendering it challenging to assess the effectiveness of investment incentives based on broader national development priorities. A more targeted approach to the design of investment incentives would also reduce the amounts of forgone revenue linked to tax incentives.
Shift from income- to expenditure-based incentives. Uzbekistan has traditionally relied on income-based incentives (CIT exemptions and reduced CIT rates) to attract investment. These incentives are not always effective at stimulating new investment and could lead to forgone revenue and increased tax competition. Alternatively, Uzbekistan may consider shifting towards expenditure-based incentives (tax allowances and tax credits), which are more cost-effective and less likely to be affected by the GMT for large MNEs.
Conduct regular assessments of the main investment incentives provided in Special Economic Zones. Generous CIT relief is a central feature of the investment incentive framework in Uzbekistan’s Special Economic Zones (SEZs). Looking forward, Uzbekistan would benefit from conducting periodic assessments of the tax incentives provided in SEZs. Such assessments should not only measure the impact of existing tax benefits but also explore whether alternative policy tools, such as non-tax incentives or broader business climate improvements, could offer more efficient means at achieving the desired policy objectives.
Strengthen transparency for investment facilitation purposes, including of investment incentives. Uzbekistan is recommended to reduce discretionary granting of investment incentives, such as those provided in investment contracts, as this would contribute to limiting investor uncertainty and supporting a level playing field between investors. Initial steps to clarify the nature of benefits available to investors in the new draft Law on Investment and Investment Activities are welcomed and encouraged. In addition, as many tax benefits are time-bound, Uzbekistan may consider developing an inventory of all available incentives to consolidate information on tax relief and reduce tax system complexity. Alternatively, Uzbekistan may develop incentive-specific guides that detail the level of benefit provided, eligibility criteria, and granting process to investors.
Implement monitoring and evaluation practices to assess the costs and benefits of investment incentives. Uzbekistan may consider undertaking and publishing tax expenditure reports in a regular and systemic way. Tax expenditure reports can support the evaluation of the costs of tax incentives (direct or revenue forgone) and create accountability and better control over the use of public funds.
Promote a level playing field among investors by reducing investment incentives that exclusively favour foreign firms. Such incentives disproportionately benefit foreign firms, while preventing domestic peers from benefitting equally from comparable support. Adopting a more equitable approach towards investment incentives would enable Uzbekistan to maximise benefits from investment from all sources, beyond foreign investment.
Uzbekistan declared aim is to achieve upper-middle income status by 2030 (Government of Uzbekistan, 2024[4]). Uzbekistan’s 2030 Strategy identifies several priorities towards attaining the income status, including the development of infrastructure and social services. Tax revenues can provide important resources to support plans of economic diversification and finance the needed public investments on the path toward upper-middle income status. Towards that end, Uzbekistan has undertaken comprehensive tax policy and administration reforms since 2018 to improve the overall business environment for investors while securing the necessary revenues for public spending.
Tax revenue mobilisation, as measured the by tax-to-GDP ratio, has increased in recent years as a result of tax reform initiatives. During the past decade, tax revenues reached a peak of 18.8% in 2021 (see Figure 6.1, Panel A). In 2022, Uzbekistan’s tax ratio of 18% was higher than two comparator economies selected for this analysis, Romania and Kazakhstan, but lower than Kyrgyzstan, Armenia, and Czechia. The average tax-to-GDP ratio for lower income economies is 10-20% while more than 40% for high-income economies (Besley and Persson, 2014[5]).
Uzbekistan’s tax revenues are mainly composed of taxes on goods and services (i.e. value added tax, excises, sales tax), which amounted to 58% of total tax revenues, or 9% of GDP in 2022 (see Figure 6.1, Panel B). Of these taxes, VAT was the main contributor to revenues, which came to 5.7% of GDP, almost three times more revenue than all other taxes on goods and services. The reliance on taxes on goods and services as the principal source of revenue is observed among all comparator countries except Kazakhstan. This trend is also reflected across low- to high-income countries, particularly ones with limited fiscal capacity, as consumption taxes provide a broad base and can be simpler to administer, despite the potential regressive effects.
The second largest contributor to revenue in Uzbekistan is taxes on income (i.e. personal income tax, corporate income tax), which accounted for 7% of GDP in 2022. Revenues from corporate income taxes made up of 3.8% of GDP, at a level higher than comparator countries such as Armenia, Czechia and Romania, but lower than Kazakhstan, where CIT revenues reached 5.1% of GDP (IMF, 2024[6]). Uzbekistan is in line with the average CIT revenue of 3.8% in the Asia-Pacific, and higher than 2.7% in Africa and the OECD average of 3.3% (OECD, 2024[7]).
(% of GDP)
Note: Panels A and B exclude social security contributions.
Source: IMF Government Finance Statistics (2024[6]).
Revenues from CIT have increased rapidly in recent years, owing to changes to the statutory CIT rate, which often serves as the first reference point for investors when evaluating the tax competitiveness of a jurisdiction and can have an important signalling role. Currently, Uzbekistan’s statutory CIT rate of 15% remains lower than the OECD average of 22.5%, and below all other comparator countries selected for this analysis except Paraguay (OECD, 2024[8]) (see Figure 6.2). In the last decade, the statutory CIT rate was lowest at 7.5% in 2014, at the time the lowest compared to all comparators as well as the regional average of 14%. Since then, Uzbekistan has progressively increased the statutory rate to 15%.
However, the tax-to-GDP ratio has declined since 2021 due to efforts to alleviate the tax burden on businesses, including by reducing the VAT rate from 15% to 12% (IMF, 2024[9]). Uzbekistan has also introduced temporary CIT exemptions to firms located in special economic zones (SEZs), which may have contributed to this outcome, as will be discussed in this chapter. Additional tax incentives taking effect in January 2025 could further reduce the tax-to-GDP ratio, which raises the case for broadening the tax base further moving forward (IMF, 2025[10]).
Statutory CIT rates in %
Note: Central Asia countries include Kyrgyz Republic, Tajikistan, Turkmenistan, Kazakhstan, and Uzbekistan.
Source: OECD Global revenue statistics (database) (2024[8]), https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL; (Tax Foundation, 2023[11]), https://taxfoundation.org/data/all/global/corporate-tax-rates-by-country-2023/.
When making investment decisions, potential investors consider a range of factors outside of a country’s tax burden, including the overall governance and administration of the tax system. Outside of the tax system, investors consider other, at times more important, factors related to the investment climate, such as macroeconomic and business conditions, complexity of compliance with laws and regulations, administrative practices, market size, labour force characteristics, and location-specific profit opportunities (OECD, 2015[2]). In a survey of a subset of foreign firms in Uzbekistan, investors viewed reforms towards improving business registration and licensing, digital infrastructure and investment facilitation as particularly useful to their operations, highlighting the importance of these elements in the broader investment climate (OECD, 2023[3]).
6.3.1. Efforts to strengthen tax administration are promising, but challenges remain
Tax policy and administration are important elements of the investment climate. The effectiveness of the tax system can be determined by how well the tax administration performs its core functions, which include the tax registration system, tax assessment functions, collaboration across government agencies, verification and compliance management, and adaptability to wider changes such as the digital transformation. For example, tax administrations are increasingly leveraging digital tools to streamline tax processes, using data analytics for better compliance and decision-making, and introducing online platforms for easier taxpayer engagement, among other measures (OECD, 2023[12]; 2020[13]). In the latest Doing Business rankings by the World Bank, Uzbekistan ranked 69th out of 190 jurisdictions for ease of paying taxes, with firms spending an average of 181 hours per year on tax compliance (World Bank, 2020[14]).
Uzbekistan has prioritised tax administration reform, as reflected in the 2030 Strategy, and in several reform measures implemented since 2018. These changes aimed to simplify taxes while reducing the tax burden on firms and workers (OECD, 2023[15]; World Bank, 2019[16]). In 2020, a new version of the Tax Code was adopted to modernise and simplify the tax system, namely by reducing the types of taxes levied on firms, introducing a simplified regime for small firms, and streamlining VAT refund procedures (OECD, 2023[15]). Significant steps have also been taken to automatise tax administration procedures by introducing digital platforms for tax reporting, e-invoicing, and real-time transaction monitoring (Republic of Uzbekistan, 2020[17]). These changes have contributed to reducing compliance costs for firms, broadening the tax base and in turn increasing tax revenues for Uzbekistan in recent years (World Bank, 2022[18]).
Despite these notable improvements, firms in Uzbekistan continue to cite issues related to tax administration, due to complexity of new registration procedures, VAT refund delays, and the introduction of digital instruments abruptly and prematurely (OECD, 2023[15]). Assessments by the IMF identify steps towards improving compliance, including by conducting audits of taxpayer registers for accuracy, creating a compliance plan to mitigate risks across all taxes and taxpayer categories, and ensuring 100% on-time tax payments from large taxpayers (2024[9]; 2025[10]). As part of the World Bank’s ongoing efforts to enhance the capabilities of Uzbekistan’s tax administration, reform options were put forth to strengthen the tax administration system, including the introduction of a simplified VAT administration mechanism, facilitation of cross-government data sharing, and expanded educational and support initiatives to improve taxpayer compliance (World Bank, 2024[19]). Drawing from international experience, several countries have implemented initiatives that provide Uzbekistan with illustrative examples of tax administration reforms, including a simplified VAT administration scheme in the Netherlands, or efforts to promote cross-government data integration in Brazil (Box 6.1). Uzbekistan may consider pursuing these improvements can in tandem with efforts to revise incentives and improve their design in order to maximise compliance and minimise rent-seeking opportunities, such as by transitioning from income- to expenditure-based incentives, which will be discussed more detail in this chapter.
Cross-government information sharing to identify non-compliance, Canada
The Canada Revenue Agency (CRA) uses the Common Reporting Standard and Foreign Account Tax Compliance Act data in its Foreign Source Matching (FSM) programme to detect unreported foreign income. In 2023, a pilot expanded FSM’s scope by reviewing data from 27 jurisdictions, identifying 2 000 cases where taxpayers may not have reported interest and dividend income. The pilot showed positive results and a strong return on investment. Moving forward, the FSM programme will continue utilising CRS and FATCA data, monitoring its effectiveness, and exploring potential expansion.
Engagement with new taxpayers to increase compliance, Türkiye
Türkiye has implemented several communication programmes to support newly registered taxpayers and increase voluntary compliance. Tax officials provide key documents during in-person visits, including letters outlining rights, obligations, and contact details; brochures summarising tax responsibilities; and communication cards with engagement channels. In addition, new taxpayers receive congratulatory text messages with a link to an informational video, ensuring accessible guidance for compliance prepared by the tax administration.
Source: OECD Tax Administration (2024[20]), Comparative Information on OECD and other Advanced and Emerging Economies, https://www.oecd.org/en/publications/tax-administration-2024_2d5fba9c-en.html.
6.3.2. Increased transparency of investment incentives can reduce investor uncertainty
Transparency for investment facilitation purposes involves making information about investment incentives publicly available, accessible and clear to all stakeholders. More specifically, information on incentives that supports transparency include details on the nature of the benefits (i.e. instrument type and parameters), the eligibility criteria that investors must fulfill to receive the benefits, and governance (i.e. legal basis, granting process) (OECD, 2023[21]). Potential investors unfamiliar with the local market may not be aware of the incentives available to support new investment. To date, there is no centralised portal providing information on all available incentives for investors in Uzbekistan (Jedlicka et al., 2022[22]). Maintaining an inventory of available incentives requires resources and close co-ordination between government agencies. In the shorter term, Uzbekistan may consider publishing incentive-specific guides that detail relevant information to investors. Sector-specific guides are already available through the Invest Uzbekistan website, but these guides do not provide information on incentives offered within those sectors.
Laws and regulations relevant to incentives are made generally accessible through an online platform (https://lex.uz/en/), which includes a consolidated version of the Tax Code. However, the regulatory framework remains fragmented, consisting of a variety of legal instruments that are frequently amended, and this fragmentation can act as a deterrent for investors (Embassy of Switzerland in Uzbekistan, 2024[23]). As many incentives are temporary in nature or include sunset clauses, as discussed below, this fragmentation can make it difficult for investors to assess new investment opportunities, particularly when eligibility criteria for an incentive is spread across multiple legal acts. Understanding the precise application of incentives and eligibility criteria can be easier to navigate and afford by larger investors and may deter smaller investors or newcomers to the jurisdiction, which contributes to an uneven playing field between investors (OECD, 2023[21]). In response to these challenges, several countries have introduced measures to consolidate and improve access to information on tax incentives. These include publicly accessible databases to help investors identify incentives based on their eligibility criteria, and comprehensive guides outlining key information on flagship incentive schemes, such as level of benefits, eligibility criteria, and the relevant legal framework (Box 6.2). Uzbekistan has also initiated steps toward such a register to enhance transparency and predictability in the allocation of privileges and benefits, assigning the MIIT responsibility for creating a Unified Register that defines the categories, conditions, procedures, and authorities involved in granting them (Cabinet Decision No. 77 of 13 February 2024).
Uzbekistan would also benefit from reducing discretionary granting of incentives that compromise a level playing field for firms of all sizes. Consultations with government stakeholders suggest that investors can currently receive investment incentives through several channels. While the new Tax Code of 2020 stipulates that tax incentives may only be provided through the Tax Code, an exception is made for tax incentives provided by the President of Uzbekistan on a case-by-case basis, with a ceiling of 50% reduction and a maximum duration of three years. According to the Law on Investment of 2020, investors can also conclude investment agreements with the government, represented by the Ministry of Investment, Industry and Trade, which provide investment projects with various support measures, including tax incentives on a case-by-case basis. The extent to which investment incentives are provided through these channels is unclear, as the agreements are not always made public or published in the government gazette (World Bank, 2022[18]). Discretionary granting of incentives, such as through investment agreements where the benefits and eligibility criteria are not clearly defined, is a process that often favours investors with greater resources and bargaining power. This process can also encourage firms to engage in aggressive privilege-seeking behaviour and contribute to market distortions (OECD, 2023[21]). Positively, Uzbekistan is taking initial steps towards reducing the discretionary granting of incentives to large investors in the new draft of the Law on Investment and Investment Activities and its implementing regulation, restricting the granting of incentives to well-established criteria and according to predetermined list of priority sectors. The government is encouraged to continue such efforts that would contribute to minimising discretionary decision-making and fostering a more even playing field between investors.
Target Industries Dashboard, SelectUSA
The Target Industries Dashboard was implemented by SelectUSA to consolidate information on all incentives offered by US states, in addition to ones administered at the federal level. To support investors in navigating incentive schemes, SelectUSA has developed the state business incentives database, a comprehensive resource offering detailed information on incentive programmes across all 50 states. The database currently includes information on 2 438 programmes, covering programme objectives, eligibility criteria, and descriptions of available benefits.
To further assist international investors in identifying strategic locations for business operations, SelectUSA has introduced the Target Industries Dashboard, a tool that provides an interactive overview of US states and territories where specific industries are prioritised. It also offers direct access to state fact sheets and sector-specific incentives, ensuring that investors have the necessary information to make informed decisions.
Incentive-specific guides, Mauritius Economic Development Board
The Economic Development Board (EDB), Mauritus’ apex investment promotion agency, provides an up-to-date investor guide that outlines available investment incentives on the government homepage. In addition to this broader resource, EDB publishes incentive-specific guides that detail the level of benefits, eligibility criteria, and legal basis of individual incentive schemes. Investors seeking to familiarise themselves with Mauritius’ incentive framework can navigate the EDB homepage and explore the incentives available per economic sector, thereby simplifying their investment decisions and ensuring a more equitable playing field for investors of all sizes.
Source: C2ER (2024[24]), State Business Incentives Database, https://www.stateincentives.org/; SelectUSA (2024[25]), Target Industries Dashboard, https://www.trade.gov/selectusa-target-industries-dashboard; and EDB (2024[26]), Investment Guide, https://edbmauritius.org/investment-guide.
In line with many other economies, Uzbekistan uses tax incentives to promote private investment and direct it towards certain sectors and locations, or to encourage certain outcomes from investors. Tax incentives take on many different forms, including income-based incentives (CIT exemptions and reduced CIT rates) and expenditure-based incentives (tax allowances and tax credits) (Box 6.3).
Uzbekistan’s tax incentive schemes include primarily CIT exemptions and reduced CIT rates (see Figure 6.3). CIT exemptions apply temporarily for a period of three to 10 years depending on the eligibility requirements. For example, manufacturers of renewable energy generators receive a full CIT exemption for up 10 years. Similarly, firms located in special economic zones (SEZs) are eligible for a full CIT exemption for up to 10 years depending on investment size. Reduced CIT rates provide significant reductions of the statutory CIT rate, such as a 1% CIT rate (compared to the statutory CIT rate of 15%) for priority investment projects located in the Muynak and Fergana regions. Positively, many CIT incentives are temporary in nature or include a sunset clause, a provision that stipulates an end date to an incentive policy unless extended through legislative action, which limit excessive revenue loss. However, the CIT incentives remain generous in nature, and include full CIT exemptions, which are more likely to result in revenue loss by design.
Beyond CIT incentives, Uzbekistan offers several other tax and non-tax benefits to increase private investment, including exclusively for firms with foreign capital. These tax incentives include reductions or exemptions on customs and import duties, land and property taxes, and taxes on use of water resources. For example, firms located in SEZs are eligible for concessions on customs and import duties, as well as exemptions from property tax, land tax and water use tax on temporary basis, subject to investment size conditions (minimum USD 300 thousand). Outside of SEZs, firms that receive FDI can access similar tax benefits, provided the investment projects meet additional eligibility conditions. Uzbekistan also offers financial incentives, including direct state financing to cover infrastructure costs for foreign and domestic investment projects exceeding UZS 200 billion (approximately EUR 14 million) (Government of Uzbekistan, 2022[27]).
Investment tax incentives provide favourable deviations from the standard tax treatment for a specific group of corporate taxpayers, based on sector, activity, location or other investor- or project-related characteristics. The most commonly observed CIT incentives are often categorised as income-based tax incentives (CIT exemptions and reduced CIT rates), which relate to the income generated by a firm, and expenditure-based tax incentives (tax allowances and tax credits), which relate to the capital or current expenditure of firms.
Tax exemptions provide a full (100%) or partial (less than 100%) exemption of qualifying taxable income, which may refer to all of a business’ income or income from particular sources (e.g., export income).
Reduced rates are CIT rates set below the standard rate for qualifying taxable income and apply on a temporary or permanent basis.
Tax allowances are deductions from taxable income (i.e., income subject to taxes) and may target current or capital expenditures. Qualifying capital expenditures are generally asset specific (e.g., machinery, buildings, equipment). Qualifying current expenditures tend to be activity specific (e.g., spending on training, R&D, exporting). Tax allowances as defined for this work cover a variety of instruments that allow for a faster write-off of capital expenditure compared to the standard depreciation schedule. Tax allowances can accelerate the rate of deducting capital costs (up to 100% of incurred costs) or enhance deductions beyond 100% of the acquisition cost. The latter includes allowances that apply in addition to standard depreciation resulting in deductions that effectively exceed the initial capital cost, for example, allowing firms to deduct 150% of the value of a new machine. Tax allowances for current expenditure are typically enhancing.
Tax credits are deductions from the amount of taxes due (i.e., tax liability) that may relate to capital expenditures or current expenditures
Note: Additional information on how the key design features affect tax relief is discussed in Celani, Dressler and Hanappi (2022[28]).
The design of tax incentives has a central role in their effectiveness and success, alongside other important factors such as the country context, jurisdictional and macroeconomic framework conditions (IMF et al., 2015[1]; James, 2013[30]). Tax incentive design pertains to how the incentive lowers taxation, including the specific instrument used and the qualifying income or expenditures it targets, duration and generosity. Design also includes eligibility criteria (determining which investors and projects can receive the incentive) and governance (how the incentive is granted to investors) (Celani, Dressler and Wermelinger, 2022[29]). These design features shape investor behaviour, and influence incentive take-up, the degree to which these instruments achieve stated policy objectives, and the costs incurred. The OECD Investment Tax Incentives Database (ITID) offers insights into how Uzbekistan utilises tax incentives, the policy goals the instruments aim to accomplish, and how these practices compare to comparator economies and regional peers (Box 6.4).
To better understand how tax incentives are used across countries, the OECD Investment Tax Incentives Database (ITID) systematically compiles and classifies quantitative and qualitative information on the design and targeting of CIT incentives, using a consistent data collection methodology. For each tax incentive, it includes information along three dimensions:
instrument-specific design features;
eligibility conditions; and
legal basis.
This allows for cross-country comparisons on how countries design their tax incentives and on the types of business and project characteristics. As of September 2024, the database covers 70 developing and emerging economies in Eurasia, the Middle East and North Africa, Southeast Asia, Sub-Saharan Africa and Latin America. Celani, Dressler and Wermelinger (2022[29]) present the methodology and key classifications underlying the OECD ITID as well as its scope.
6.5.1. Income-based incentives are prevalent despite associated costs and risks
Income-based incentives (i.e. CIT exemptions and reduced rates) are commonly used across developing and emerging economies, but empirical evidence is limited on their effectiveness. Income-based incentives are not always effective in attracting new investment, and can come with considerable drawbacks, including forgone revenue, increased tax competition, and economic distortions (IMF et al., 2015[1]; James, 2013[30]; Zee, Stotsky and Ley, 2002[31]). These incentives also tend to favour projects that are already profitable early on, making projects that could proceed without them even more profitable. CIT exemptions, in particular, are costly and could lead to a race-to-the-bottom in tax competition for mobile foreign investment, often resulting in windfall gains to companies that would invest even without the preferential tax treatment (Klemm and Van Parys, 2012[32]; James, 2013[30]). In the longer term, income-based incentives are insufficient in motivating for firms to stay and contribute positive spillovers to the economy (Klemm and Van Parys, 2012[32]).
Uzbekistan’s tax incentive schemes consist largely of income-based incentives, including both CIT exemptions and reduced rates. More than half of all income-based incentives provided in Uzbekistan are CIT exemptions, at a level higher than Viet Nam, Egypt, Jordan and Colombia, and lower than all other four comparator countries selected for this analysis (see Figure 6.3). Low CIT rates are also offered to certain sectors and locations, including 1% CIT rate to certain industries in the Republic of Karakalpakstan and Fergana region. While Uzbekistan relies mainly on income-based benefits in its incentive mix, four other comparator countries provide a combination of income- and expenditure-based incentives. Given the prevalence of CIT exemptions and low CIT rates, and their numerous disadvantages, it is advisable that Uzbekistan revise these incentives and transition to expenditure-based incentives, with the view of minimising costs in terms of forgone revenue and windfall gains for investors.
Instruments used, as % of incentives per country registered in the ITID
Source: Author’s calculations based on the ITID database (accessed on 10 October 2024).
Income-based incentives are also likely to be affected by the global minimum tax for Large Multinational Enterprises (MNEs) (Box 6.5). The agreement introduces a minimum effective tax rate (ETR) of 15% for MNEs with annual revenues above EUR 750 million in every jurisdiction they operate. In the event that in-scope MNEs in Uzbekistan face an ETR that is below the minimum of 15%, it may lead to forgone revenue that would otherwise be collected by the home jurisdiction of the MNE or other signatories with a top-up tax. Income-based incentives, such as CIT exemptions and reduced rates, are most likely to reduce the ETR below the minimum. In light of this, countries offering generous tax incentives, such as Uzbekistan, are encouraged to assess their tax incentives with a view of reducing the chance that the GMT will apply in the jurisdiction. In the more immediate term, countries may consider introducing a Domestic Minimum Top up Tax (QDMTT), which would allow jurisdictions to tax low-taxed domestic income before it becomes subject to top-up taxes imposed by other jurisdictions (Christians et al., 2023[33]; OECD, 2022[34]). To date, Uzbekistan has not made any public announcements with respect to the implementation of the GMT (PwC, 2024[35]).
Conversely, expenditure-based incentives (i.e. tax allowances and credits) targeting tangible assets and employment are less affected by the GMT. Expenditure-based incentives are more likely than income-based ones to positively affect investment. By targeting specific investment expenses, these incentives reduce the cost of capital, which in turn renders the investment more profitable at the margin (IMF et al., 2015[1]). These incentives therefore lend themselves to be more efficient in supporting investment than income-based incentives (Klemm and Van Parys, 2012[32]; Chai and Goyal, 2008[36]). Depending on the design features, expenditure-based incentives can be tied to specific costs or activities such as R&D or skills development, leading them to have a positive impact of investment on sustainable development (Celani, Dressler and Wermelinger, 2022[29]; OECD, 2022[37]). However, as is the case with all incentives, an assessment of the costs and benefits of incentives requires comprehensive monitoring and evaluation, to take into consideration design- and context-specific factors affecting performance.
A global minimum effective taxation level for large MNEs
Pillar Two of the new international tax agreement establishes a global minimum effective corporate tax rate of 15% for large multinational enterprises (MNEs). Where an MNE’s effective tax rate (ETR) in a jurisdiction falls below 15%, the MNE would potentially be subject to top-up taxes under the Global Anti-Base Erosion (GloBE) Rules, a core component of Pillar Two. The GloBE Rules establish the minimum corporate tax and are complemented by the subject-to-tax rule which will allow developing economies to tax certain base-eroding payments (such as interest and royalties) when they are not taxed up to the minimum rate of 9%. The GloBE Rules apply top-up taxes to profits above a substance-based income exclusion (SBIE), which allows some profits based on economic substance (tangible assets and payroll) to be deducted from the GloBE base.
A recent OECD report prepared at the request of the G20 Indonesian Presidency explores the impact of GloBE Rules on tax incentive use (OECD, 2022[34]). This report draws on the OECD Investment Tax Incentives Database (ITID) to provide evidence on tax incentives use in developing countries; outlines key provisions of the GloBE Rules; analyses the impact of GloBE on different common tax instruments and outlines some options for policymakers to explore.
Impact on the use of tax incentives
The GloBE Rules will not affect all jurisdictions, MNEs and tax incentives in the same manner. The impact of the GloBE Rules on tax incentives will depend on their design, on the jurisdiction’s tax system (its baseline tax system and its use of base narrowing provisions), and on the characteristics of MNEs and the activities they perform in the jurisdiction. For example, existing tax incentives may continue to be used by MNEs below the EUR 750 million revenue threshold, without them being affected by the GloBE Rules.
The impact of the GloBE Rules will strongly depend on the design of tax incentives. Certain types of tax incentives will be strongly affected, particularly certain income-based tax incentives such as full exemptions or significantly reduced CIT rates, which are widely used across the world. Others may not be affected at all, such as accelerated depreciation for tangible assets. Understanding the degree to which tax incentives may be affected by the rules requires careful consideration of the detailed design of tax incentives.
Targeted tax incentives, incentives with economic substance requirements and expenditure-based tax incentives targeted at tangible assets may be less affected. The targeting of tax incentives to certain categories of income or expenditure or limitations to tax benefits will impact which tax incentives might be affected. However, the value of providing strongly reduced CIT rates or CIT exemptions to in-scope firms might merit a reassessment of the use of these tax incentives.
The GloBE rules should prompt jurisdictions to review the use of tax incentives and consider tax incentive reform. This is particularly the case for tax incentives that may become inefficient due to the operation of the GloBE rules
Source: OECD (2022[34]), Tax Incentives and the Global Minimum Corporate Tax: Reconsidering Tax Incentives after the GloBE Rules, https://doi.org/10.1787/25d30b96-en
Positively, more than half of income-based incentives in Uzbekistan include a sunset clause, a provision that stipulates an end date to an incentive policy unless extended through legislative action. Sunset clauses are included in Uzbekistan more commonly than comparator countries, such as Jordan, Viet Nam and Azerbaijan. All other tax incentives included in this analysis provide temporary benefits for investors, in the exception of a reduced rate of 1% for service industries in the Muynak region. Temporary benefits can promote regular policy reviews by providing a natural break to assess and determine whether the incentive should be extended or left to expire based on intended policy objectives. Sunset clauses may also encourage take-up of certain incentives, particularly expenditure-based tax incentives, by prompting investors to act quickly to benefit from them (Jean-François Wen, 2020[38]; US Department of the Treasury, 2010[39]). However, temporary benefits can lead to increased uncertainty for investors and may add complexity to the tax system, requiring governments to explicitly inform investors when incentives are limited in duration.
6.5.2. Eligibility conditions include a wide range of investor characteristics
Eligibility conditions for incentives refer to the requirements that investors must fulfill to receive the tax benefits. Incentives may be linked to one or more conditions, and can include a variety of investor characteristics. For example, benefits may be tied to investments in a certain sector or location, meeting a minimum investment amount, or having a certain ownership structure (e.g. majority foreign-owned, co-operative). Incentives can also depend on specific investor activities (e.g. training and research and development), or to promote certain outcomes (e.g. job creation and energy efficiency) (Celani, Dressler and Wermelinger, 2022[29]). Assessing the eligibility conditions tied to incentive policies can provide insights into a country’s targeting strategy and economic development priorities. In Uzbekistan, tax incentives are tied to a wider set of eligibility conditions than all comparator countries except Viet Nam (see Figure 6.4).
Uzbekistan offers tax relief to new businesses, similar to Morocco and Viet Nam. For example, newly created businesses located in 45 mahallas and villages in the Republic of Karakalpakstan are entitled to exemptions from CIT as well as property tax, land tax, turnover tax, and fixed amounts of personal income tax for individual entrepreneurs. Businesses must be specialised in the provision of services and located in certain areas with difficult conditions based on a list determined by the Jokargy Kenes of the Republic of Karakalpakstan. Other incentives include a 50% reduction of the CIT rate for new businesses registered before 1 September 2025, whose main activity involves the construction of solar and wind power plants and small hydropower plants. Investment incentives to new businesses can offer crucial support during a pivotal stage, more so than well-established companies that may not require the same level of assistance.
Ownership-based conditions channel tax relief to foreign companies and co-operatives. For example, fish farming co-operatives are eligible for a full CIT exemption, provided that at least 90% of the total income is from fish farming. Of the comparator economies selected for this study, Viet Nam offers similar several incentives to agriculture co-operatives, with the level of support determined by whether the project is located in prioritised areas for development. Tax incentives in the form of CIT exemptions are also extended to foreign companies in Uzbekistan during geological exploration work for a period of up to eight years. The same companies are provided with a host of other benefits such as exemptions on property, land and water use taxes. While this chapter primarily focuses on the use of CIT incentives, Uzbekistan extends these non-CIT tax benefits to businesses that attract FDI, and these involve concessions on property tax, land tax and tax on use of water resources.
While less common, Uzbekistan ties tax support to investment projects of a certain size, similar to several comparator economies (Viet Nam, Lao PDR, and Colombia). Full CIT exemptions for firms located in SEZs require a minimum investment size of USD 3 million. The duration of the incentive increases depending on investment size, reaching a maximum of 10 years for projects exceeding USD 15 million.
Note: Outcome refers to eligibility conditions that require businesses to achieve certain performance results. Special Economic Zones eligibility condition refers generically to all types of economic zones, including Special Economic Zones, Industrial Zones, Free Ports, and others.
Square colour indicates the number of incentive instruments (Panel A, x-axis) or CIT incentives in a country (Panel B, x-axis) per corresponding eligibility condition (y-axis).Source: Author’s calculations based on the OECD ITID database (accessed on 10 October 2024).
Sector conditions suggest a focus on agriculture and energy
Sector-based conditions are the most frequently used targeting mechanism for tax incentives in Uzbekistan, a strategy that is common among all other comparator economies selected for this analysis (see Figure 6.4). The preference for sector-specific tax incentives is a more widely practiced approach that is observed in 96% of economies in 2024 (OECD, 2022[40]; OECD, forthcoming[41]). While tax incentives in Uzbekistan may require investors to operate in certain sub-sectors (e.g. manufacturing of leather and related products, energy generation from renewable sources, waste management), other tax incentives support a wide range of investors within a sector. Although empirical evidence is limited on the advantages of narrow versus broader sector targeting, focusing tax benefits to certain industries can allow governments to contain certain costs of incentives and support the development or upgrading of key activities of priority to their economic strategy (Celani, Dressler and Wermelinger, 2022[29]).
CIT incentives offered to investors suggest a particular focus on agriculture and electricity generation activities. Under Uzbekistan’s incentive framework, investors in the agricultural sector are eligible for several reductions or exemptions of CIT depending on their specific activity. For example, firms may receive a full CIT exemption for leather and fur production, provided these activities comprise at least 60% of their annual revenue. Fish co-operatives and livestock farms are eligible for concessions on CIT once certain conditions are satisfied. Firms operating in the Munyak region and engaged in local industries or agriculture activities are eligible for a reduced CIT rate of 1%. Tax incentives extended to agricultural activities reflect the sector’s vital role in Uzbekistan’s economy, which has historically centred around cotton production and exports. Since the 1990s, Uzbekistan sought to decrease dependence on cotton and diversify to other forms of crop production and agricultural activities, with the view of enhancing food security and supporting the country’s long-term economic development (Bae and Mah, 2018[42]).
CIT incentives are also offered to support power generation from renewable sources, an area of increasing national priority in Uzbekistan since 2018 (see Chapter 6). Objectives relevant to green growth are reflected in national strategies, including the Green Economy Transition Strategy 2019-2030, which includes a target to achieve 40% of renewable energy in installed capacity for electricity generation by 2030. Tax incentives play a key role in Uzbekistan’s policy mix to channel FDI to renewable energy activities. Investors in renewable energy can benefit from reductions and exemptions of CIT, including a 50% reduction on CIT for three years for the construction of renewable power plants, and a CIT exemption for up to 10 years applied to electricity sales from renewable energy generators.
While certain tax incentives support priorities reflected in national strategies, Uzbekistan does not have an overarching investment promotion strategy that identifies priority sectors for investment promotion, making it difficult to assess whether tax incentives support national development priorities. In addition, Uzbekistan’s investment bodies promote differing sectors for investment promotion. Of these, renewable energy, mining, agriculture and tourism seem to be the common denominators (see Chapter 3), Adopting an investment promotion strategy would enable Uzbekistan to better structure and monitor its activities, including by assessing its stock of tax incentives and determine whether these instruments support priority sectors for FDI promotion and national development objectives more broadly. In the absence of an investment promotion strategy, tax incentives may be misaligned with the country’s strategic goals and lead to increased fiscal costs. For example, while Uzbekistan extends several tax incentives to support renewable power generation in line with national priorities (as discussed above), tax benefits targeting oil and gas exploration risk stimulating additional fossil fuel production, which may lead to solidifying fossil fuels in the country’s energy mix in the longer term (see Chapter 6). Establishing an investment promotion strategy would help Uzbekistan ensure that its incentives framework supports both immediate and long-term economic objectives.
Location-based investment incentives raise several concerns
Uzbekistan has several tax incentives supporting regional development, a priority that is reflected under the Uzbekistan 2030 Strategy, likely to address regional disparities such as unequal employment opportunities, supply of infrastructure and access to finance (ADB, 2024[43]). To that end, new investment projects located in underdeveloped mahallas in the Republic of Karakalpakstan receive a full CIT exemption, with a sunset clause of 2026. Investments projects located in the Muynak and Fergana regions receive a reduced rate of 1% CIT. While there is evidence that tax and non-tax incentives can provide an impetus for investors to locate in underdeveloped areas, these benefits tend to be overly generous by covering more than the extra costs incurred by investors to locate to these areas (Amin et al., 1994[44]). In addition, overly generous incentives tied to certain locations can trigger harmful tax planning by firms (for example, by shifting profits to areas with lower taxation while keeping operations elsewhere), and generate a race to the bottom among regions (IMF et al., 2015[1]; OECD, 2021[45]). For these reasons, it is important for Uzbekistan to evaluate the costs of these incentives in relation to their impact on regional development.
Other location-based incentives include tax benefits offered to investors located in SEZs. The development of SEZs is an important hallmark of Uzbek economic development policy to attract FDI and enhance industry competitiveness. There are five types of SEZs in Uzbekistan: free economic zones (FEZ); special scientific and technological zones, tourist and recreational areas, free trade zones, and special industrial zones (see Table 6.1). To date, Uzbekistan has a total of 22 SEZs, 507 small industrial zones, 201 youth industrial and entrepreneurial zones, 3 technology parks, and 4 specialised industrial zones. To operate within SEZs, investors must meet certain criteria, such as ensuring that at least 90% of their employees are Uzbek nationals. Zone-based firms are offered a range of tax and non-tax incentives. Concessions on custom duties and, in some cases, VAT exemptions are offered to firms in SEZs. In 2022, the Tax Code was amended to add CIT exemptions to the package of incentives available to SEZ companies (President of the Republic of Uzbekistan, 2022[46]). Investors became eligible for full CIT exemptions of up to 10 years depending on investment size (minimum 3 USD million). The tax relief is applied from the date commercial operations are launched within the zone. The package of incentives may also vary depending on the specific zone. For example, IT Park residents are eligible for a range of tax benefits, including full CIT exemption as well as a reduced rate of 7.5% on personal income tax for employees. In 2025, tax benefits offered to IT Park residents were extended to 2040 and now include additional concessions on CIT for certain firms providing IT services to park residents.
Generous CIT relief is a central feature of SEZs in Uzbekistan and elsewhere, but their use raises several concerns. Evidence suggests that the effectiveness of CIT incentives is limited (see Section 6.5.1). While tax incentives can increase the attractiveness of zones, the instruments may not compensate for other disadvantages related to insufficient infrastructure or poor site locations (Akinci and Crittle, 2008[48]; Farole, 2011[49]). Providing preferential tax treatment to investors in zones also risks creating distortions in relation to non-zone businesses, and triggering tax planning activities by local and international companies, particularly when income-based incentives are applied (Celani, Dressler and Hanappi, 2022[28]). The distortion lies in the ability of SEZ firms to sell into the domestic markets, while having a competitive advantage over peers located outside of zones, given the provided tax benefits. For these reasons, Uzbekistan would benefit from assessing the tax incentives offered in zones to determine whether these instruments are the most effective and efficient means for achieving the desired policy objectives. This is particularly pertinent as the implementation of the GMT will further curtail the effectiveness of income-based incentives (OECD, 2022[34]; Ndubai-Ngigi and Readhead, 2024[50]). Alternative efforts to improve the business climate in SEZs may have an equal, if not more, of an impact to success than tax incentives. These include improvements to the regulatory framework (i.e. investment approval procedures, work permits, import and export licenses), and the governance framework (i.e. autonomy and effectiveness of the governing agency) (Akinci and Crittle, 2008[48]).
Incentives selectively for foreign investors may lead to market distortions
First introduced in 2005, Uzbekistan offers tax incentives specifically to firms that attract FDI and meet certain eligibility criteria. To qualify, enterprises must have a minimum of 33% foreign ownership (or 15% for joint-stock companies). Firms must operate in one of 22 subsectors of manufacturing and services to receive the tax benefits,1 and have a minimum investment size of USD 300 thousand. While firms in certain subsectors may face additional location requirements, tourism businesses can locate themselves freely in any region of Uzbekistan. The tax incentives involve temporary exemptions from land, property, and water taxes, with the duration of these benefits linked to the size of the investment, extending up to seven years for investment projects above USD 10 million. Once the tax incentives are granted, firms must reinvest half of the received benefits towards expanding production. These incentives were first introduced by presidential decree and later consolidated in the Tax Code.
While many economies seek to encourage FDI for various aims, preferential tax treatment targeting foreign firms exclusively may present risks to the overall investment climate. Unbalanced preferential treatment to foreign firms may also increase investor uncertainty, particularly when the tax benefits provided to FDI entities seem to contradict legislation that underlines an equal playing field between foreign and domestic investors (OECD, 2023[15]). Such incentives also lead to market distortions by disadvantaging domestic companies, which do not receive comparable benefits but may face similar challenges in accessing land, property and water. Indeed, one of the biggest obstacles reported by domestic firms is access to land, at a rate higher than foreign firms (7% compared to 0.6% of foreign firms), according to the 2019 World Bank Enterprise Survey for Uzbekistan (2019[51]). Uzbekistan is therefore encouraged to take steps towards creating a more equitable investment environment, one that supports both foreign and domestic firms, by eliminating the preferential treatment or extending them to all investors. Such steps would unleash the potential benefits of investment from all sources, beyond foreign investment.
Tax incentives require regular monitoring and evaluation to determine whether the instruments achieve their stated objectives and at what expense. Closely monitoring and evaluating tax incentives is particularly pertinent as Uzbekistan provides several tax benefits to attract investment, which are often generous and likely associated with higher forgone revenue. Effective monitoring and evaluation can help identify inefficient and costly tax incentives and contribute towards determining whether these instruments are the most cost-effective measures in achieving the stated objectives. Monitoring can include tracking investor compliance with qualifying conditions and audits to identify any instances of fraud or abuse, as well as assessing and reporting on tax expenditures (i.e. revenue forgone generated from tax exemptions and reductions), which can offer essential data to assess the effectiveness and efficiency of tax incentives.
The Tax Committee publishes quarterly information on tax revenue collection and the costs of business-related tax incentives (2025[52]). However, the OECD was unable to access this data to assess the extent to which it measures the effects of tax incentives. Other publicly available estimates by the World Bank place Uzbekistan’s overall tax expenditures at 6.4% of GDP in 2018, and this excludes expenditures related to VAT, customs duties, and excises (2019[16]). Expenditures related to customs duties alone amounted to 10% of GDP in 2018, highlighting the importance of considering all forms of tax benefits available to investors when assessing the costs and benefits of incentives. Although tax expenditure reporting can present challenges to governments, due to limited resources and the need for close inter-agency co-ordination, estimating the costs of tax incentives is a crucial step towards evaluating the effectiveness of those instruments and ultimately creating additional fiscal space. Consultations with government stakeholders indicate that the Ministry of Economy and Finance is currently in the process of developing a framework for identifying, measuring, and evaluating tax expenditures, including the publication of an annual tax expenditure report, in line with international best practices.
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← 1. Concessions on land, property and water tax are available to the following subsectors: electronics; light industry (textiles, leather, footwear); silk industry; building materials; poultry production; food industry (processed food products); meat and dairy industry; fish industry (processing and canning); chemical industry; petrochemical industry; pharmaceuticals (human and veterinary); packaging materials; alternative energy (power plants); coal industry (beneficiation and briquettes); electroferrosplav and metal products; mechanical engineering and metalworking; machine tool and equipment manufacturing; glass and porcelain industry; microbiology; toy production; tourism (hotel and tourism services, thematic boulevards); waste management.