Changes in special economic zone law spark investor interest
A new law that will significantly lower the level of tax benefits special economic zone investors can count on is expected to be ratified this fall.
Last week, a Sejm subcommittee completed its work on the draft bill, which if passed would come into effect at the start of 2001.
For the last two years, Poland has come under increasing pressure from the European Union (EU) to close the special economic zones, which offer investors an initial 10-year tax holiday and a 50% tax exemption for the following decade.
According to the EU, the zones create unfair advantages for companies located within them and are against laws that Poland will have to adhere to when it joins the trading bloc around 2004.
"The EU considers the tax privileges too high and not in accordance with the way public assistance is given in EU countries," said Krzysztof Krzysztofiak, president of Krakow's special economic zone.
For the EU, at issue is not just the amount of tax exemption permitted by Polish law, but the rules associated with the investment. While in the EU an investor can receive up to 50-75% in return on the original investment in the form of a subsidy or tax exemption, Poland's zones permit returns over an extended period of 10-20 years without regard for original investment levels.
The zones are especially important to the government since they bring in greenfield production companies that spur infrastructure development in hard-hit areas. To date, upward of $6 billion in declared investments have come into the zones. If realized, the investments will create 35,000 jobs in some of the most economically depressed parts of the country, said Teresa Koryczynska, vice director of the Economy Ministry's regional development office.
Instead of closing the zones, the law would limit incentives to up to 50% of the value in a given investment. The law is not retroactive and will not affect the acquired rights of firms already present in the zones.
The progress on the new law follows recent government reshuffling of its special economic zone program. Two weeks ago the government announced changes in five zones aimed at improving the investment attractiveness of some and pulling investors into new areas suffering from a restructuring of heavy industry.
In the Lodz economic zone, for example, the government shifted special economic zone status from 14 hectares of virgin land in Pabianice to 14 hectares of real estate fully equipped with technical infrastructure in Tomaszow Mazowiecki.
"Large investors, the ones that employ 200-300 people, require infrastructure," Koryczynska said.
In the Tarnobrzeg zone, the government substituted 15 hectares in Tarnobrzeg for 17 hectares in Stalowa Wola at the behest of Japan's Komatsu, which wants to employ 200 workers in the welded construction plant it plans to build in the zone.
"The latest changes have been just a replacement of certain areas in the zones," said Marek Indyk, director of the Tarnobrzeg zone. "Some land turned out to be unattractive for investors."
With the days numbered for Poland's special economic zones in their present form, zone management say that investors are now scrambling to obtain licenses before the end of the year to benefit from favorable tax exemptions.
"We have seen that the (impending) changes have brought a revival in interest from customers," Indyk said.
Indyk said the Tarnobrzeg zone could have eight new investors by the end of the year, which would bring total declared investment in the zone to zl. 250 million ($56.8 million). At present, 22 companies have licenses to set up shop in Tarnobrzeg, with a total investment value of zl. 150 million ($34 million).
Management in the Walbrzych zone also anticipates a rush on licenses before the end of the year. To date, Walbrzych's zone has attracted 30 corporations, which have declared that they will pump zl. 550 million ($125 million) in the zone. According to Miroslaw Gerber, president of the zone, up to eight more companies could get licenses by December, thus bringing another zl. 200 million ($45.4 million) into the region.
Krakow's zone could double its investors by the end of the year. Its president expects five new licenses to be issued, which would raise by zl. 60 million ($13.6 million) the current zl. 300 million ($68.1 million) in investments. "Everybody is in a hurry now," Krzysztofiak said. "This is the last moment."
The six months left will be enough for some zones to meet the majority of their investment targets. In Walbrzych, the advent of the anticipated eight new investors will raise the occupancy rate to 80%, minimizing the impact of the more restrictive new law.
"We will have achieved most of the goals we set out to achieve," Gerber said. "If changes happen they will only touch about 20% of the zone that is still not occupied."
