Mutual Offset Between Companies in Uzbekistan: Documents, E-Invoices and Tax

Conditions for set-off under the Civil Code

• the claims are mutual: each party is both creditor and debtor of the other;
• the claims are of the same kind, usually monetary (money against money);
• the claim is due, or its due date is not specified or is determined by the moment of demand (Article 343 of the Civil Code);
• a statement by one party is sufficient (Article 343): the law does not require the other party’s consent, but the statement must be sent to it.

When set-off is not allowed

Article 344 of the Civil Code prohibits set-off of claims:

• for which the limitation period has expired (the general period is three years, Article 150 of the Civil Code);
• for compensation of harm to the health or life of a citizen;
• for recovery of alimony;
• for the transfer of a house subject to lifetime maintenance;
• in other cases provided by law or contract, so first check that the contract itself does not prohibit set-off.

Set-off on assignment of a claim

If the creditor has assigned the claim to a third party, the debtor may set off against the new creditor’s claim its own counterclaim against the original creditor. The condition is that the counterclaim arose on grounds that existed when the debtor received notice of the assignment and became due before that notice, or its due date is not specified or is determined by the moment of demand (Article 345 of the Civil Code).

How to document a mutual offset

• Reconcile balances: sign a reconciliation statement for each contract to fix the amounts of mutual debts.
• Prepare a set-off statement (unilateral option) or a bilateral offset act listing contracts, invoices and the amount set off.
• Fix the date: obligations end in the amount set off, and the remaining balance is paid in cash.
• Record the set-off in both parties’ books on the basis of a primary document, which may also be prepared electronically (Article 14 of the Law on Accounting).
• Mind the settlement currency: payments for goods and services within the country are made in sums (Article 9 of the Law on Currency Regulation), so a set-off between residents is made in sum amounts.

Example

Company A supplied goods worth 100 million sums to Company B, and B provided transport services worth 60 million sums to A. Both debts are monetary and due, so the conditions of Article 343 of the Civil Code are met.

A sends B a set-off statement for 60 million sums. A’s debt to B is then fully settled, and B’s debt to A falls to 40 million sums, which B pays in cash. Each party has already recorded VAT on the supply and on the services by the invoice dates (Article 242 of the Tax Code), so the set-off does not affect tax amounts; it only closes the balances.

VAT and invoices

A set-off is a method of payment, not a new sale. For VAT, a supply of goods takes place on the date the invoice is issued or on shipment if earlier, and a supply of services on the date the invoice or other document confirming the services is executed (Article 242 of the Tax Code of the Republic of Uzbekistan). The seller therefore charges VAT on shipment regardless of whether the debt is later settled in cash or by set-off.

The buyer deducts input VAT when the conditions of Article 266 are met at the same time: the goods are used in taxable activities and there is an invoice showing the tax separately from a registered VAT payer. Payment in cash is not among these conditions for domestic deductions, so a set-off does not block the deduction if the invoices are correct.

• the exception is zero-rated exports: deducting input VAT requires a bank statement confirming payment by the foreign buyer (Article 266), so settling export proceeds by set-off may cost the right to the deduction;
• both sides need properly issued e-invoices; without them there is neither a deduction nor proof of the sale.

Set-off with a non-resident: tax and currency control

• Withholding tax. A set-off of a counterclaim of the same kind in respect of a non-resident’s income counts as payment of income (Article 354 of the Tax Code). If income is paid by mutual offset, the tax agent must pay the calculated tax to the budget.
• Repatriation. Termination of a non-resident’s obligation by set-off of a counterclaim of the same kind is one of the recognized ways of repatriating assets under foreign trade transactions (Article 11 of the Law on Currency Regulation).
• Deadlines. If repatriation is delayed by more than 180 days from the date the non-resident’s obligation arose, the transaction is treated as a capital transaction (Article 11), and fines calculated as a percentage of the amount apply for failure to repatriate (Article 11¹).

Common mistakes

• setting off a claim for which the three-year limitation period has expired;
• no statement or act, leaving receivables and payables hanging in the books;
• setting off export proceeds without assessing the effect on the zero VAT rate and repatriation;
• forgetting withholding tax on a set-off with a foreign counterparty;
• setting off despite a direct prohibition in the contract.