Free Zone Administration Regulation

On 20 January 2019, the Ministry of Investment and International Cooperation issued the regulations for the administration of free zones (the “FZ Regulations”).[1] The FZ Regulations replace older ones that were issued in 2004,[2] and are issued in implementation of free zone provisions under the 2017 Investment Law (the “Law”).[3] In addition to containing administrative rules for the free zone board of directors and its administration, the FZ Regulations set out the rules for the licensing of projects within a free zone, the treatment of exports and imports of free zone projects, financial reporting rules, penalties for violation of laws and regulations, detailed liquidation processes, and the different fees that the General Authority for Investment and Free Zones (“GAFI”) and the free zone administration collect – mostly in foreign currency – as well as the manner of calculating interest in the event of delayed payment. Furthermore, the FZ Regulations contain a provision exempting free zone projects from stamp duty and notarization fees for certain contracts and facility agreements which we delve into later in this Egypt Legal Update coverage, along with the most important of the procedural rules contained in the FZ Regulations.

Background

In May 2017, the Investment Law came out identifying a new list of eligible activities, described as “Investment Fields,” that were granted certain legal guarantees, benefits, and incentives with a view of facilitating and attracting investment. The Law also contained provisions governing special zones such as investment zones, technological zones, and public and private free zones, as well as some provisions on special economic zones, albeit the latter being separately regulated under Law No. 83 of 2002 for Special Economic Zones. A free zone is an area inside Egypt that could be a complete city established by virtue of a law (the single case being the city of Port Said); a fenced area for various investments established as a public free zone by a decision from the Cabinet of Ministers; or a private free zone that is a stand-alone project established under specific conditions. Free zone projects are subject to special tax and custom rules, and they are mainly geared toward export. Each free zone has a board of directors and an administration that manages operations within it in a manner that is relatively distinct from the general applicable rules and administration outside of the free zone. A company wishing to operate in a free zone must submit a financial guarantee of 2% of its investment costs.[4] A project enjoys the special incentives provided in the Law – but not the general incentives – and only within the extent of the purposes listed in the project license that is granted by the free zone board. In addition, projects are exempt from tax on profits, export/import regulations, and custom duties on production input, except in the case of entry of their products to local markets. Warehousing projects in public free zones are subject to a fee equal to 2% of goods at their entry, while manufacturing and assembly projects are subject to a fee equal to 1% of goods at their exit. Projects that do not export or import commodities are subject to a fee equal to 1% of annual turnover. The aforementioned payments are made to GAFI. Certain industries are not allowed to operate in free zones. These include petroleum, fertilizers, iron and steel, natural gas, transport, high energy consuming industries, as well as the production of alcohol, arms, and ammunition. It is worth nothing that free zones are not a creation of the new Investment Law. In fact, they have existed for decades under previous legislation. Although there had been talks of abolishing private (single project) free zones, the Law was nevertheless issued maintaining the concept, albeit with more detailed regulation and conditions.

The New Free Zone Regulations

• Permanent Free Zones Technical Committee at GAFI

Issued in October 2017, the Executive Regulations (the “ER”) of the Investment Law provided for the creation of a Permanent Free Zones Technical Committee (the “Committee”) that is to be tasked with recommending free zone policies to GAFI’s board of directors. It also looks into requests to establish public free zone projects, and reviews requests to amend company statutes, legal form, or licensing prior to submission to the free zone’s board of directors. The FZ Regulations issued last week provide that GAFI will determine the activities to be undertaken in free zones according to the need for those activities and in light of the Committee’s recommendations in that respect, in addition to the opinion of the free zone’s board of directors. The Committee convenes every week and must inform the investor of its decision within three days from ratification, following which the investor has one week to challenge the decision before the same Committee.

• Free Zone Board Regulations

The FZ Regulations restate some of the free zone related provisions that came out in the Law and its ER, specifically that each free zone is to have a board of directors, the chairman of which is appointed by GAFI’s Chairman, and which includes at least two GAFI representatives, not more than three investors from the free zone, and one board secretary from the employees of the free zone. The FZ Board must convene at least once a month “or whenever necessary.” The Regulations contain the procedures for the convening of a board meeting, including that the meeting invitation must include an agenda and detailed memos on the subjects that the board will discuss. These documents must also be sent to the Free Zones Department at GAFI. FZ Board decisions are sent to the Free Zones Department at GAFI within three days from the board chairman’s signature of the decision, which must not be later than one week from the date of the meeting. The Free Zones Department reviews decisions to ascertain whether they are in line with the Investment Law, its ER, and the FZ Regulations, in addition to GAFI’s policies and priorities. The FZ Board’s decision is then ratified by GAFI’s Chairman.

• Project Licensing

The FZ Regulations contain rules for the issuance of licenses for undertaking the activity, for project establishment, for land allocation, and for construction, all of which are issued in the free zone, given that certain licenses and decisions must be presented to GAFI’s Permanent FZ Committee.

1. Operational Licenses

Operational licenses are issued through the FZ Board. The conditions for issuing a license of activity or operation differs between public free zones and private free zones, the latter having to satisfy additional conditions to be licensed. A check, letter of credit, or letter of guarantee for 1% of the investment costs of industrial and assembly projects (up to a maximum of USD 75K) or for 2% of the investment costs for warehousing projects or projects that do not import or export goods (up to a maximum of USD 125k) must be submitted with the licensing application. Projects undertaking two or more of the aforementioned activities pay the higher value. These values are also re-estimated every three years to take into account changes in investment costs. They may also be reduced or their increase waived by GAFI’s Chairman at the end of the three-year period.

2. Project Establishment Licenses

Projects already established under the general umbrella of the Investment Law may apply to operate under a free zone system and vice versa. The FZ Regulations provide that requests for establishment licenses are presented to the administration of the public free zone (the “FZ Administration”). The application must include a time schedule for the conclusion of construction works, prepping the site, and the commencement of operations. Said documents are then presented to the Permanent FZ Committee at GAFI prior to being submitted to the FZ Board for the issuance of the license.

3. Land Allocation Licenses

The Law provides that land allocation in public free zones will be in the form of a usufruct right. According to the FZ Regulations, one year must be paid in advance along with the application for land usufruct. Prices are set annually by the FZ Board. All free zone projects must pay a sum of USD 1,000 or its equivalent in foreign currency as a deposit to show intent to implement the project. This is then deducted from any dues owed to GAFI. Projects are also to pay fees in consideration for development, improving, cleaning, and security services within the free zone. Investors have 30 days (which can be extended to a similar period) from the date of being informed that their land allocation application was accepted to sign the related contract and documents, or the approval lapses. An investor then has 90 days to commence legal procedures for the establishment of the project and commencing construction in accordance to the submitted time schedule.

4. Construction Licenses

Building permits in public free zones are issued by the FZ Administration and permits for entering construction material into the zone are issued by the FZ’s Engineering Works Department. Private free zones obtain building permits from regular venues depending on where they are located and which public authority owns the land.

• Incentives

Interestingly, while Article (9) of the Investment Law clearly excludes free zone projects from the ‘general incentives’ contained in the Law, the FZ Regulations explicitly state that free zone projects will benefit from Article (10-1) of the Investment Law which is a general incentives provision. Some of the general incentives contained in the Law include an exemption from the fees of registration of land contracts, and unified customs duty of 2% for imported working capital goods. Importantly, Article (10-1) - which free zone projects are now to benefit from - exempts projects from stamp duty, notarization, and publication fees with respect to articles of association, construction contracts, and credit facilities and mortgage agreements for five years from the date of registration in the Commercial Registry. This provision is problematic as it represents a divergence from the Law which might have been better dealt with through an amendment to the text of the Investment Law itself.

• Export and Import

Exports and imports of free zone projects are not subject to general export, import, and custom/tax rules. However, import of production input from the local market is subject to the rules set by the Ministers of Trade and Finance. Meanwhile, exit of goods from the free zone to the local market is treated in the same manner as importing goods from abroad. In this respect, the FZ Regulations provide that projects must submit to the FZ Administration a detailed list of goods and quantities that are ratified by the company’s auditor. The Administration then assesses foreign component in these goods for custom treatment. The Investment Law also provides that tools, equipment, and transportation (except for passenger cars) necessary for the project’s activities are exempt from customs and taxes including VAT. In this respect, the FZ Regulations provide that the FZ Administration approves the entry of said working capital. It further states that the FZ Chairman could approve requests to sell project assets as long as they do not exceed 30% of total project assets, and that the sale does not affect the project as an ongoing concern. Sale exceeding the 30% threshold must obtain a special approval from the FZ Board. Assets divested into the local markets are subject to normal custom, tax, and VAT treatment. Article (90) of the ER provides that GAFI could, upon request, issue a letter of guarantee for the amount of tax and custom duties owed for goods during their transport between custom circuits to and from a free zone, or between free zones. GAFI issues said letter of guarantee against payment of 1/1000 of its value provided that the project has secured an insurance policy against theft, damage, and fire, which must cover the full value of the guarantee. The FZ Regulations set the conditions for that insurance policy. For instance, it must be for the benefit of GAFI and must cover all tax and duties as assessed by the Customs Authority. The FZ Regulations also contain procedural details for the temporary clearing of goods and raw material from the free zone to the local market for repair or alteration and return, as well as rules for withdrawing waste that results from the industrial process and entering products that are unfit for export into the local market.

• Financial Records

All of the project records, invoices, and documents must be placed at the disposal of the FZ Administration as instructed. Projects must also maintain said records for at least six years. Financial statements and related documents must be presented to the ministries of Finance and Investment, in addition to the FZ Administration, within 90 days from the end of the fiscal year. Industrial and assembly projects must pay an annual service fee 0.5/1000 of their issued capital in foreign currency to GAFI, while service and warehousing projects must pay 1/1000. The maximum for either amount is capped at EGP100,000.

• Miscellaneous

Article (79) of the ER states that GAFI undertakes the evaluation of assets, liabilities, in-kind contributions at capital increase, or in the cases of mergers, or change of company form. The ER further states that the FZ Regulations are to determine the procedures, documents, and fees for undertaking the above. Accordingly, the FZ Regulations were issued containing procedures for inspection of the initial estimate of company assets and liabilities prior to a merger, split, or change of form, or in-kind contributions prior to the issuing of a company board or general assembly resolution in this respect. This includes a list of fees that must be paid in consideration for these services. Professions and crafts do not enjoy the benefits accorded to projects operating in free zones. They pay a guarantee equal to 50% of annual usufruct value, and 5% of the value of a contractor’s agreement (or a minimum of EGP 20K). All payments made by these projects are in EGP. Finally, the FZ Regulations contain procedural provisions for (1) voluntary liquidation, (2) mandatory liquidation, (3) lapse of license or cancellation of project, (4) a company’s request for cancellation of license, and (5) a company’s request to transfer project buildings and constructions to existing or new projects.

Conclusion

The issuance of the FZ Regulations is in itself a significant and positive development as the old regulations applied since 2004 were in need of reform in light of the experiences of the past decade and the enactment of a new Investment Law. However, the exemption from stamp duty tax and notarization fees might need further clarification from GAFI and the Ministry of Finance to ascertain that there is no conflict with the Law.   [1] Ministry of Investment and International Cooperation Decision No. 39/2019 enacting the Regulations for the Administration of Free Zones, Egyptian Gazette, Issue No. 16 (cont.), 20 January 2019. [2] GAFI Decision No. 2365/2004 enacting the Regulation of Operations in Free Zones, Egyptian Gazette, Issue No. 197 (cont.), 31 August 2004. [3] Law No. 72/2017 on Investment, Official Gazette, Issue No. 21 (bis) (c), 31 May 2017. [4] The ER defines ‘investment costs’ as those necessary for the establishment of the investment project constituting property rights in addition to long-term obligations that are investment in constructing fixed material assets (in the form of tangible), or intangible assets, on the condition that the value of such is paid in cash; in addition to working capital.