Free zones: Where they are located and how they differ
by Paul Gosling
In business, reward is often closely related to effort. And while the rewards for investing and doing business in a free zone can be substantial, so, too, is the effort involved in assessing which free zone is the best for a particular operation.
There are at least 3,000 free zones, scattered around almost all parts of the globe. Each has its own rules and incentives, which vary substantially. The extent of variation is such that it is difficult to find advisors who have sufficient information on all the free zones to provide help in narrowing down the choice. More typically, advisors with specialist knowledge of particular free zones are located within those zones.
Graham Mather, chairman of the World Free Zone Convention, recognises the weakness. When he recently met a Scandinavian potential investor in a free zone he had to warn him there was no reliable single source of free zone comparison. “He will have to hire a consultant, do the leg work and so on,” says Mather.
Recognising the need for such a resource, WFZC is commissioning both an academic study that compares and contrasts free zones, and a global directory of the zones. “That is a gap that we are trying to fill,” explains Mather. WFZC hopes to publish both later this year. “The enormous growth of free zones of different types around the world has led to a real need to produce a study, which details them and their benefits, and provides an investor guide,” says Mather. “The projects are at an early stage of development. One is an academic research analysis. The second a directory for investors, governments and zones.”
The best published material, suggests Mather, is ‘Understanding the Free Zones Scheme: the Nigerian perspective’, by Chris Ndibe – but which, unfortunately, is now two years out of date and out of print. Academic studies by Professor Francesca Trampus, of Trieste University, are also recommended by Mather as useful background information.
Another helpful resource is the Foreign Investment Advisory Service, which is part of the International Finance Group – itself a division of the World Bank. FIAS provides a range of useful guides to tax and inward investment policies of countries, including some detailed studies on individual free zones. These are published on its website – www.ifc.org/ – and can be downloaded free of charge.
But, ultimately, the question ‘which is the best free zone for us’ can only be answered by hard work and costly research. Local advisers’ support may ultimately also be crucial.
Different types of free zones
Free trade zones
These are duty free areas, providing warehousing, storage and logistics facilities, aimed at the trade, trans-shipment and re-exporting markets. They are typically small and securely fenced.
Export processing zones
These are an extension of the traditional free trade zone, which accommodate manufacturing and related facilities for the export market. But they are larger, usually comprising several industrial estates. Companies based in a zone need a licence, entitling them to tax incentives. A variation of the export processing zone is the ‘hybrid EPZ’, which has a second area open to a variety of businesses, alongside the export designated area. There are also single factory export processing zones, where individual investors reach agreements with governments for an exclusive manufacturing arrangement, in return for tax and other concessions.
Special economic zones
SEZs (sometimes called freeports) are widely used in China and are more ambitious in scope and larger in size than traditional free zones. Many accommodate any type of industrial or service sector and allow senior staff in investing businesses to reside on-site, with related leisure services also located there. SEZs may cover areas that include free trade zones and export processing zones within them.
These provide tax incentives and investment grants to businesses locating in deprived areas. They are mostly located in developed nations.
Asia – Shenzhen Special Economic Zone, China
Shenzhen was China’s first Special Economic Zone and is situated near Hong Kong on the Pearl River Delta. It has become the world’s largest manufacturing region and one of the fastest growing cities. Shenzhen provides an important logistical location for access across South China and elsewhere, with a major freight port (Huanggang) and airport. The Futian, Shatoujiao and Yantian Port free trade zones are positioned within the Special Economic Zone. The free trade zones include bonded warehouse facilities and permit foreign investment trade companies to be located within them. In the past 20 years, Shenzhen has attracted foreign investment in excess of $30bn, including through the creation of joint ventures. Many of the world’s largest corporations have invested in Shenzhen, including Bristol Myers, Kodak and Mitsubishi. The zone’s management claims it has the most liberal working environment in China.
There are important differences between the regulation of the city’s free trade zones and its export processing zones. The free trade zones are restricted to manufacture, trade, warehousing, logistics and consulting. An export processing zone may only be used for export processing-related manufacture, goods forwarding and warehousing. Companies located in free trade zones are permitted to sell products domestically. Companies based in an export processing zone must export at least 70% of their products, with the rest permitted for sale domestically. VAT is refunded on raw materials carried into an export processing zone, but that is no VAT refund on cargos entering a free trade zone, unless they are subsequently exported. The export of products through an export processing zone is prohibited, but permitted in a free trade zone.
Trading companies in the free trade zone pay a maximum of 15% enterprise income tax rate. Companies committing themselves for more than 10 years have a tax holiday on the first year of profits and pay 10% flat income tax for the following two years. Foreign exchange income can be retained in full. Companies inter-trading within the free trade zone are exempted from VAT.
The Gulf region – Abu Dhabi Airport Free Zone
The new Abu Dhabi Airport Free Zone promotes itself on the advantage of its location at the gateway of East and West, providing an excellent hub for logistics and situated within the boundaries of the fast expanding Abu Dhabi International Airport. It is supported by a range of tax concessions – full exemption of corporation tax, import and export tax and personal income tax. Investors can fully repatriate capital and profits. There is no taxation on foreign company ownership.
When completed, the free zone will contain over seven million square metres. Eventually, cargo capacity at the airport will reach two million tonnes. The development of the free zone is central to the plans for the expansion of the Abu Dhabi economy and its efforts to compete with Dubai, which has gained a reputation of well managed and popular free zones. Sectors targeted by ADAFZ include aerospace, logistics, electronics, engineering, construction materials, consultancy, IT, telecoms, foods, jewellery, pharmaceuticals, energy, cosmetics, media and horticulture.
Central America – Costa Rica
Costa Rica’s free zones are promoted on the basis of their prime location for North and South America and for the quality and low cost of their labour force. Local wage rates are $1.40 an hour, which can be as low as $1 an hour after state subsidy is included in the most deprived locations. English is generally spoken by workers, who are highly literate and with good IT skills. There are good telecoms connections.
Profits are fully exempted from tax for eight years, with a 50% exemption for another four years. There is a 10 year exemption on taxes on capital and net assets and real estate transfers and a 10 year exemption on municipal taxes and licence fees. There is no taxation of repatriated profits or capital. All goods and services are purchased tax free. Companies can sell to exporters within Costa Rica and up to 40% of production can go to the local market.
Exemptions on profits vary according to precise location of a business – the weaker the local economic growth, the higher the exemption. For companies locating in areas of low growth, there is 100% exemption of tax on profits for 12 years, and 50% for the following six years. Companies located in areas of lowest growth may also be entitled to rebates based on partial savings of national social security costs and are subject to the size of investment and reinvestment. The Government will repay, every year for five years, the company an agreed percentage of its payroll. There is also a state-subsidised training programme and a targeted bonus
Costa Rica specialises in the manufacture of electronic components, computer parts, pharmaceuticals, jewelry, clothing and food products, and in data processing, software development and customer support services.
Africa – the Chambishi Multifacility Economic Zone, Zambia
Zambia’s Chambishi tax free zone is based on its copper mine. It has succeeded in obtaining a promised $800m investment from China over the next five years. However, use of the zone is perceived to be an opportunity that is almost exclusively reserved for Chinese companies. Similar arrangements have been and are being entered into by several African governments, anxious to attract Chinese investment, and is one of the factors that has attracted massive Chinese investment into the continent. China is negotiating to open five ‘economic co-operation zones’ in various parts of Africa. All the zones are likely to provide tax exemption and favourable rights of access to local minerals, in return for the creation of thousands of jobs.