New SSE rules raise more questions
By : Jeffrey Sparshott
Scaled-back regulations on special economic zones (SSE) should bring Poland in line with European Union (EU) requirements, but the government will still have to negotiate a place for agreements signed with 700 companies prior to 2001, Polish and EU officials said last week.
According to the EU, the old rules offer benefits that are overgenerous and skew competition.
"We have tried to explain to representatives of the EU that it will be very hard for us to undo tax relief already given," said Pawel Badzio, a spokesman for the Economy Ministry. "Companies shouldn't lose benefits."
Poland's official negotiating position seeks a transition through 2017 and states that, "the duration of the transition period is conditioned by the obligation to respect the rights acquired by entrepreneurs who commenced business activities in the zones." Nonetheless, the EU remains skeptical of the SSEs.
"In Poland, we simply don't know what kind of conditions were granted by the Poles to the investors and this is our worry," said Jean-Christophe Filori, an EU spokesman for enlargement issues. "It certainly belongs to the negotiation process. Theoretically nothing prohibits the negotiators from agreeing on transition periods, but 18 or 20 years is definitely too much."
The new incentives, designed to comply with EU rules, will cover up to half of initial capital investment or half of employment costs until 2017 and be returned to companies as tax breaks or, possibly, grants, Badzio said. Companies that negotiated their place in the SSEs prior to the end of 2000 could receive a 100% tax break for 10 years followed by a 50% discount for an additional decade. Through Dec. 31, Poland had negotiated deals with 700 companies investing zl. 11 billion ($2.75 billion) and creating 60,000 jobs, Badzio said.
"Special economic zones are definitely not as attractive as before," said Tadeusz Donocik, deputy secretary at the Economy Ministry, in announcing the changes Tuesday.
SSEs do not yet have the specific regulations, but officials there say they do not expect companies to lose benefits already negotiated. They do expect investor interest to decline.
"The new regulation will affect us in that the number of potential investors will be limited because the old regulations were more profitable," said Agnieszka Sodieszek, deputy marketing manager of the SSE in Lodz. "Nevertheless, conditions are still better than outside the zones." No investors are expected to lose rights guaranteed prior to Dec. 31, 2000, she said.
Generally, the new regulations limit the total amount of tax incentives that investors can reap, said Krzysztof Krzysztofiak, president of Krakow's SSE management board. "There were no exact figures how much it could reach previously, since the aggregate amount of the entirely exempted corporate income tax ... depended on the company's performance. Now it shall be definitely less. The total amount of so-called public help cannot exceed 40% of investment expenditure," he said, noting that the 40% limit is unique to Krakow, while the other zones can give back 50%.
There is also the obligation to pay local tax on real property, he said. According to a government statement, local and federal breaks will be treated cumulatively toward the maximum allowance.
While narrowing tax benefits, the new regulations broaden the range of companies that can invest in the zones. Services such as information technology, scientific research, environmental technology, communications, transportation and warehousing concerns will be allowed in, according to a government statement. Only manufacturing operations had been allowed before.
Importantly, Donocik said the EU should be satisfied with the new regulations. For more than two years, the EU has pressured Poland to close the zones claiming they create unfair advantages for companies and are against EU laws. The EU had a problem with Poland's scheme because it included exemptions that lasted for 10-20 years without regard to original investment levels. The new breaks are in accordance with investment.
"The zones are probably less attractive right now," said a staff member from Legnica's SSE. "But companies are looking for a good location and good infrastructure. They still depend on these types of conditions."
SSE managers agree that the special designation has attracted investment. In Krakow, for example, 19 companies will invest zl. 700 million ($175 million) and create about 3,000 new jobs in the zone. "Most of the companies admitted to Krakow's SSE would never have come to Krakow if there were not a special zone with its benefits," Krzysztofiak said.
