Like the Economic Processing Zones (EPZ) scheme that I discussed last week, the Special Economic Zones (SEZ) scheme is administered under the Special Economic Zones Act, 2012 (the “SEZ Act”) read together with the Special Economic Zones Regulations, 2012 (the “SEZ Regulations”). Applications for registering investments under the SEZ scheme are submitted to the Economic Processing Zones Authority (“the Authority”) established under the Export Processing Zones Act, 2012 (“the EPZ Act”). Conceptually, the SEZ scheme is broader than the EPZ scheme.
Besides the Developer’s License and the Operator’s License that are replicated under the EPZ Act, the SEZ Act provides for an additional license known as the User License that is applicable to investors who are conducting SEZ-authorised activities other than export-oriented manufacturing or processing; in other words, producing for the local market. In reality, both the Developer’s License and the Operator’s License are issued under the EPZ Act. While the Developer’s License is granted to investors who undertake investments in infrastructure development, the Operator’s License is granted to investors who produce for the export market – this was the main thrust of my last week’s blog post. Therefore, the present discussion is focused on the license under the SEZ Act that is available to investors who produce for the local market (the SEZ User License).
SEZ-designated areas. As it is the case with the EPZ scheme, investors who are licensed to carry on business under the SEZ scheme must establish their business within areas that the Authority has designated as special economic zones. Instructively, areas designated as economic processing zones also qualify as special economic zones – one of which is the Benjamin Mkapa SEZ. Although many businesses licensed under the SEZ Act are situated in these areas, investors who have pre-built industrial premises in locations where no special economic zones exist can apply to the Authority to declare such premises to be a SEZ. An area can be declared as a SEZ regardless of whether it consists of developed, partly or underdeveloped land or whether it comprises of a single factory unit or a cluster of factory units. The Authority normally takes approximately one month to complete the process of declaring an area to be a SEZ.
Incentives. In my analysis of the EPZ Act and the SEZ Act, incentives offered to investors who are holding the SEZ User License under the SEZ Act to produce for the local market are not as generous as those offered to investors who are licensed under the EPZ Act to produce for export markets. Below is a list of the tax and non-tax incentives under the SEZ scheme for investors producing for the local market:
- Remission of customs duty and any other tax charged on raw materials, capital goods, one administrative vehicle, ambulances, fire-fighting equipment, fire-fighting vehicles, and up to two staff buses.
- Exemption from payment of withholding tax on interest on foreign sourced loan.
- On-site customs inspection of goods
- Entitlement to an immigrant quota of up to five persons at the time of set up and additional employees as may be determined by the Authority on subsequent applications.
- Unconditional transferability of profits, dividends, royalties, and payments in respect of loan servicing where a foreign loan has been obtained.
- One-stop service centre by the Authority for set-up, facilitation, and aftercare relating to work permits, labour relations, and customs.
Eligibility. Investors are not permitted to undertake business activities in special economic zones unless they are licensed by the Authority under the provisions of the SEZ Act. Although there is no requirement to demonstrate to the Authority that the business sought to be set up in a SEZ to produce for the local market entails ‘manufacturing operations’, the following conditions must be fulfilled:
- the investment is new,
- the investment is environmentally friendly, and
- the investment will use modern production processes and new machinery.
The Authority prefers a new entity other than an existing entity to undertake the new investment licensed under the SEZ Act. This preference seems to be in support of the need to ring-fence the incentives offered to SEZ or EPZ investments, so that the incentives are not available to entities doing business outside the free zones. The minimum share capital requirements are US$500,000 for foreign companies, and US$100,000 for local companies. A locally-incorporated company is not necessarily a foreign company. A company is regarded as a foreign company if the majority of its shareholding is held by non-Tanzanian individuals or companies. A company is considered local if the majority of its shareholding is held by Tanzanian nationals.
Documentation requirements. A prospective investor is required to provide the following documents to the Authority as part of the SEZ investment application form for the license to produce for the local market: (a) duly completed application form; (b) certificate of incorporation of the corporate entity to undertake the investment; (c) memorandum and articles of association; (d) export business plan; and (e) environmental impact assessment report; and (f) brief application letter forwarding the above documents. This is in addition to paying the application fees prescribed by the Authority. For an investor who fails to satisfy the requirements of an Operator’s License granted under the EPZ scheme to a business producing for the export markets, the SEZ User License under the SEZ scheme would be the second-best regime under which to license the business to produce for the local market. In the next blog post, I will discuss the Tanzania Investment Centre (TIC) scheme and its eligibility criteria.
Entity structure. It is important to consider incorporating a new entity to manage the new investment in a special economic zone for reasons that I have already stated above. This entity can be a wholly-owned subsidiary of an existing entity in Tanzania or of an offshore holding entity – particularly for investments under the EPZ Act if the tax perspective really matters. On this point, Tanzania currently has double taxation agreements with Canada, Denmark, Finland, India, Italy, Norway, South Africa, Sweden, and Zambia.
• • •
If you would like further information on any issue raised in this blog post, send me a message via this online contact form.
• • •
This blog post is intended as a general overview and discussion of the topics and issues dealt with. The information is not intended to be, and should not be used, as a substitute for seeking legal advice in relation to any particular situation.
• • •
Subscribe to Tanzania Law Blog – Paul Kibuuka‘s insights into Tanzanian law and the legal issues relating to doing business or investing in Tanzania.
Tanzania Law Blog - Paul Kibuuka's insights into Tanzanian law and the legal issues relating to doing business in Tanzania. 