Out With The Old, In With The New: The Need to Transition From Free Zones to Special Economic Zones
The Special Economic Zones Act, 2016 (the "SEZ Act") repealed the Jamaica Export Free Zone Act (the "Free Zone Act") when it came in force on August 1, 2016.
SEZ's in essence are designated geographical areas with special economic regulations that differ from the general trade, tax and investment rules of a country. The Prime Minister may, on the recommendation of the Special Economic Zones Authority (the "Authority"), after consultation with the Minister of Finance, designate such a geographical area as a SEZ.
Even though the Free Zone Act has been repealed, all licenses, agreements, instruments or other documents granted, made or given under the Free Zone Act continue in force in so far as they are consistent with the SEZ Act and The Special Economic Zones Regulations, 2017 (the "SEZ Regulations") for a period of four years from August 1, 2016. The SEZ Regulations define the structure within which the Authority operates and gives the Authority the powers to facilitate businesses operating in existing Free Zones and those seeking to transition to operating under the SEZ regime.
From Old to New - How the Incentives have changed
Under the Free Zone Act, one of the main benefits was that any approved enterprise engaged in manufacturing and any approved enterprise not engaged in manufacturing but engaged in activities involving international trading in products (including products originating in countries belonging to the Caribbean Common Market) was entitled to be granted total relief from income tax in respect of profits or gains earned from such manufacture.
This benefit has changed by the introduction of the SEZ regime so as to ensure conformity with Jamaica's obligations under the World Trade Organization's (WTO) Agreement on Subsidies and Countervailing Measures.
Presently under the SEZ Act, where applicable, both developers and occupants enjoy benefits including: Corporate Income Tax Headline rate of 12.5% (with a possible effective rate of 7.5% with the approval of additional tax credits); relief from custom duties; relief from G.C.T. on all specified goods and services entering the SEZ; employment tax credit; promotional tax credit; capital allowance; and 50% of stamp duty payable. Additionally, developers will pay no taxes on rental income and they also enjoy relief from transfer tax.
The 'Developer' and The 'Occupier'
Any person who is licensed by the Jamaica Free Zone Council (the "Council") to promote, develop or operate as a Free Zone pursuant to the Free Zone Act is called a "Free Zone Promoter" under the Free Zone Act. Such a person under the SEZ Act would transition to become a 'developer' which must satisfy the requirement of being a company limited by shares that is incorporated under the Companies Act and is established by a sponsor (investor(s)) for the purpose of entering into a master-concession or a licence-agreement with the Authority.
Under the Free Zone Act "Free Zone Tenants" are businesses approved by the Free Zone Promoter to carry out authorized economic activities in the existing Free Zone as a tenant. When Free Zone Tenants transition to a SEZ, they will become 'occupiers' under the SEZ Act who will have to enter into sub-concession agreements with a developer.
A 'master-concession' is a concession agreement concluded between the Authority and the developer of a SEZ established or intended to be established on land that is vested in the Authority as the registered proprietor or head lessee of the land. On the other hand, a 'licence-agreement' is a concession agreement concluded between the Authority and the developer of a Zone established or intended to be established on land that is not vested in the Authority as the registered proprietor or head lessee of the land. A sub-concession agreement is the respective contractual arrangement between the developer and all occupants operating within the Zone which must be compliant with the terms and conditions of the master-concession or the licence-agreement.
Why the need for transition?
A Free Zone Promoter which desires to continue its activities as a developer under the SEZ Act must enter into a master-concession or a licence-agreement with the Authority within a period of four years from August 1, 2016. Free Zone Tenants must also enter a sub-concession agreement with a developer under the SEZ Act within the same four years period from August 1, 2016.
In other words, existing Free Zone companies have a transitional period in which to regularize and transition to full SEZ status, in compliance with the SEZ Act and SEZ Regulations as the benefits to current Free Zone holders will automatically continue till the end of the transition period. The need is therefore evident for all Free Zone Promoters and Free Zone Tenants to submit their applications to the Authority in order to facilitate the transition from operating under the Free Zone Act to becoming a 'developer' or an 'occupier' under the SEZ Act, if they desire to continue to benefit as such after the transition period.
What happens when you do not transition?
If a Free Zone Promoter fails to make its application to transition from a Free Zone to a Special Economic Zone within the allotted four year period, this will result in the Free Zone Promoters' status and its respective free zone fiscal benefits being revoked.
Any Free Zone Tenant affected by the revocation of the authorization of a Free Zone Promoter will have until January 1, 2020 to request that it becomes an occupant under the SEZ Act and the SEZ Regulations. If the Free Zone Tenant fails to so apply, such an omission will result in the automatic revocation of the governing free zone licence with effect on January 1, 2020.
A Free Zone Promoter or an approved enterprise which, immediately before the appointed day, was entitled to fiscal incentives under the Free Zone Act is considered as a "continuing beneficiary" for the purposes of the SEZ Act. A continuing beneficiary continues to be entitled to the fiscal incentives to which he was entitled under the Free Zone Act, however, this benefit expires on December 31, 2019 or an earlier date when the continuing beneficiary begins to benefit under the Act in light of a successful transition.
In light of the above, all existing Free Zone Promoters and Free Zone Tenants seeking to continue to operate within and as a zone and to continue to enjoy the special benefits afforded to such zones after the transition period must begin to consider the necessary steps that they must take to give effect to a successful transition from the Free Zone to a Special Economic Zone. Failure to act prudently may result in the unfortunate consequence of having their respective operating licences revoked and also being in a position where they are barred from making an application for transition due to lapse of time. The clock is ticking.
Jezeel Martin is an Associate at Myers, Fletcher and Gordon, Attorneys-at-Law, in the Commercial Department. He may be contacted at firstname.lastname@example.org or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.