Companies looking for compromise on special economic zones
The story The story started in 1996 when the Polish government (the same coalition that is in charge today) introduced the law opening the way for SSEs in a number of regions. The idea was that the SSEs would attract the attention of foreign investors due to the full corporate income tax exemption provided for companies that decided to set up business there. The investor was entitled to benefit from such a tax exemption if certain conditions were met. The most important was the investment expenditure level set up individually for each investor. Additionally, the investors would be obliged to hire a specific number of employees (to create new jobs). A so-called "local content" condition had to be met in some cases. This means that a specific percentage of the costs originating from the SSEs had to be included in the final value of the products sold. The reason for such a condition was to create as strong an economic link between the investor and the region as possible. On the other hand, a real estate tax exemption was an additional and eye-catching incentive. The SSE boom was not as huge as enthusiasts had hoped. Still, some investments - particularly in the automotive industry - are currently of great importance for some regions. Certainly the number of new jobs created went up significantly.
Gathering storm Dark clouds started to loom over the zone scenery when the negotiations between Poland and the EU regarding Polish accession moved to anti-competition regulations. From the very beginning of these negotiations EU representatives have claimed that since the introduction of SSE law in 1996 was a violation of the union's treaty, there is no place for SSEs as originally conceived within the EU. As a result, Polish authorities agreed to introduce a new law on public aid in 2001. These regulations reduced the tax exemptions in SSEs by limiting them to a certain percentage (40-50%) of the investment expenditures. Still, the above rules were not binding for "old" investors - that is, the ones who had received permits for doing business in the SSEs before 2001. Their tax exemption was still unlimited. But the Polish government found itself between the devil and the deep-blue sea - or at least the EU and investors. EU representatives showed every intention of demanding liquidation of "old" privileges as a condition for accession. Investors brought the constitutional rule of "acquired right protection" to defend their position. Breach of this rule would mean further worsening of the foreign investment climate in Poland, already not the best. Additionally, ignoring the rights of "old" investors would potentially lead to litigation against the government with regard to lost benefits. However, accepting the current status would lead to, at best, a delay in negotiations with the EU, if not to their collapse.
New solutions In the last month the government launched negotiations with the investors with the intention to work out new solutions not only allowing them to meet the EU requirements but also to protect considerable benefits in SSEs. The proposals were presented to the group of big investors - in the case of small ones the EU is likely to allow for a "transition period" during which already negotiated tax exemptions will be maintained. The government proposed that the big investors would agree for a voluntary switch from old SSE permits to new ones issued in compliance with the new law on public aid that went into effect in 2001. This would mean the investors would renounce their right to unlimited tax exemptions. Certainly, such a proposal could not meet with any enthusiasm on the investors' side.
Unanswered questions In truth the devil resides in the details and these are not known yet. The issues that should be outlined are numerous. First, if we link the limit of tax exemptions to the amount of investment expenditures a question arises as to which expenditures should be taken into account. Under the old rules, only those costs related to the purchase of new fixed assets were included (under the old law the amount of investment expenditures as determined in individual SSE permits was a prerequisite for utilization of the tax exemption). New regulations also allow for classifying as investment expenditures the costs of acquisition of second-hand fixed assets. Will the "old" investors have a right to enjoy such a liberal approach? Another question concerns the potential "forgive and forget" rule - will the tax exemption amounts already used by "old investors" be included in the limit of public aid or will the limit be counted from the beginning of 2004 (potential EU accession)? The next area for discussion (at least for some investors) is the limit of public aid. As mentioned above, almost all SSEs are located in the regions benefiting from the tax exemption equal to 50% of the investment expenditures borne by the investors. Still, in Kraków's SSE case, such limit amounts to 40%. In my opinion such differentiation has no grounds from either a legal or an economic point of view.
Taking into account all the above comments it seems the Polish government has to try to build a consensus among the investors. However, for some of them it might be very difficult to accept any modifications to their current tax benefits. This is particularly the case of SSEs in which the underlying laws did not include a provision allowing for any changes in tax incentives in due course of the EU accession process (a problem affecting, among others, two of the biggest SSEs - in Katowice and Mielec). These investors have a strong position for potential litigation against the government. In the case of SSEs where the investors were aware of potential tax benefit limitations due to specific provisions in the relevant ordinances, the government may have a stronger negotiating position. There may be two keys to successful completion of negotiations: Working with companies on a case-by-case basis and the straightforward presentation of potential benefits of the new rules. Otherwise Poland might have a real problem attracting any foreign investors to set up their business here.
Anna Strzelecka is a tax senior manager in Andersen's Katowice office. Anna Szymańska is a tax senior manager in Andersen's Warsaw office.
