Shareholder Loans in Uzbekistan: Interest-Free Loans, Financial Aid, Tax and Accounting

How to document the loan agreement

Under a loan agreement the lender transfers money into the borrower’s ownership and the borrower undertakes to return the same amount; the agreement is concluded when the money is handed over (Article 732 of the Civil Code). If one of the parties is a legal entity, a loan agreement must be in simple written form regardless of the amount (Article 733 of the Civil Code).

• state the amount, repayment date, interest (or its absence) and how interest is paid; if no date is set, the loan is repaid within thirty days of the lender’s demand (Article 735 of the Civil Code);
• an interest-free loan may be repaid early, while an interest-bearing one only if the agreement allows it or the lender consents (Article 735);
• interest is paid in the amount and manner set by the agreement (Article 734); on late repayment the lender may claim additional interest under Article 736;
• the payment reference must match the agreement — “repayable loan under agreement No. …”, not “financial aid” — otherwise any dispute over whether the money is repayable will have to be settled by documents;
• keep a decision of the general meeting or sole participant on the loan on file, especially if the charter treats the deal as an interested-party transaction.

Interest-free loan: imputed income at the refinancing rate

Part four of Article 299 of the Tax Code: where a loan (repayable financial aid) is received with no obligation to pay interest, the borrower’s income is determined based on the Central Bank refinancing rate on the date the loan is received. The same applies if interest is charged but below the refinancing rate. This income is included in the borrowing company’s profit tax base.

• the rule does not apply to interbank transactions and loans issued by credit institutions;
• it does not apply to loans granted under decisions of the President or the Cabinet of Ministers, or to loans granted by non-residents of the Republic of Uzbekistan;
• it does not apply to loans between members of one consolidated group of taxpayers;
• so an interest-free loan from a resident founder (individual or legal entity) creates imputed income for the company, while the same loan from a foreign founder does not;
• use the refinancing rate on the date the loan is received and keep evidence of it in the tax register.

Interest-bearing loan: tax for the company and the founder

• the company deducts interest based on the actual rate (Article 310(1) of the Tax Code), subject to the transfer pricing rules of Section VI;
• if the founder is a foreign person holding directly or indirectly more than 20% of the shares, the debt owed to it is controlled debt; where such debt exceeds the company’s equity more than three times, interest deductions are limited through a capitalisation ratio (Article 310);
• a resident individual founder receives interest as property income (Article 375); PIT on interest is 5% (Article 381), withheld by the company as tax agent on payment;
• a non-resident individual founder: the rate on interest is 10% (Article 382);
• a foreign company founder: withholding tax on interest is 10% (Article 353), unless a double tax treaty gives a reduced rate;
• a resident legal entity founder includes the interest received in its total income (Article 297(3)(2)).

Charter capital contribution and free financial aid

If the founder does not need the money back, there are two routes with opposite tax consequences.

• a contribution to charter capital is not treated as income (Article 304(1)) — but requires a decision to increase charter capital and registration of the change;
• property and money received free of charge are income of the recipient (Article 299, part one) and are subject to profit tax at documented market value;
• Article 304 contains no specific exemption for free aid from a founder, so non-repayable “financial aid” usually costs more than a capital contribution or a loan;
• if the founder later forgives the loan, the company has income from the write-off of a liability (Article 297(3)(12)).

Accounting for a shareholder loan

A loan received is a liability of the company, not income. Under the NAS No. 21 Chart of Accounts it is recorded according to its maturity.

• short-term loan (up to one year) — account 6820 “Short-term loans”;
• long-term loan — account 7820 “Long-term loans”;
• accrued interest — interest expense in the period it accrues; PIT or withholding tax withheld — settlements with the budget;
• participants’ payments towards a charter capital increase before registration — account 6630 “Founders’ shares in charter capital increase”; after registration — account 8300 “Charter capital”;
• imputed income under Article 299 is determined for tax purposes: where accounting recognition differs from the Tax Code, the Tax Code applies for tax (Article 297) — such income is shown in the tax register and the profit tax return.

Checklist before accepting money from a founder

• decide whether the money is needed temporarily (loan) or permanently (charter capital contribution);
• sign a written loan agreement before the money is transferred;
• if the loan is interest-free and the founder is resident, calculate the income at the refinancing rate in advance;
• for a foreign founder, check the debt-to-equity ratio (threshold — three times) and the double tax treaty rate;
• do not use the words “financial aid” without “repayable” — otherwise the tax authority may treat it as a free receipt.