The International Labour Organization (ILO) traces the earliest beginning of Export Processing Zones to 1229 when King Alfonso X of Spain granted commercial incentives to the City of Cadiz thereby establishing the Free Zone Consortium of Cadiz. The basic definition of an “Export Processing Zone” is a designated industrial or manufacturing area offering free trade conditions, a liberal regulatory framework and incentives to potential investors.
In Kenya, Export Processing Zones provide employment to a significant number but most importantly they provide foreign exchange earnings and also boost foreign direct investment. Across the world, the concept of Export Processing Zones goes by different names in Mexico and China they are referred to as Free Trade Zones and Special Economic Zones respectively. The Export Processing Zones Authority (the “Authority”) under the Ministry of Investment, Trade and Industry is the state corporation mandated to promote and facilitate export-oriented investments and to develop an enabling environment for such investments. This write-up will discuss the process of designation of Exports Processing Zones, licensing and tax incentives available to investors.
Gazettement of Export Processing Zones
Currently, the Government has gazetted over (40) zones in various parts of the country including Nairobi, Voi, Athi River, Kerio Valley, Mombasa, Kilifi, Lamu and Kirinyaga as Export Processing Zones. The procedure for declaring an Export Processing Zone is set in Section 15 of the Export Processing Zones Act (the “Act”) which gives the Cabinet Secretary for the time being responsible for industry the power to declare an area to be an Export Processing Zone through a notice published in the Kenya Gazette.
Licensing
Section 19 of the Act, provides that no person shall carry on business as an export processing zone developer, export processing zone operator or export processing zone enterprise unless he has been licensed to do so. For purposes of this write-up, we shall focus on the licensing requirements for an Export Processing Zone Enterprise. An Export Processing Zone Enterprise is defined as a corporate body, incorporated in Kenya, whether for the sole purpose of producing goods or services for export within an Export Processing Zone.
An application for licensing as an Export Processing Zone Enterprise is submitted to the Authority through the prescribed Form EPZE (1) and payment of a non-refundable application fee of USD 250 and an annual license fee of USD 1,000. In addition to the information/documents required for registration, an applicant should also provide the Authority a business plan showing the amounts of money to be invested in the said business, the expected sales turnover; operating expenses; and cash flow projections of the proposed business service. It is important to note that there are no there is no minimum capital investment required to operate as an Export Processing Zone Enterprise.
Tax incentives
Section 29 of the Act provides a list of incentives and benefits that an enterprise licensed to operate in an Export Processing Zone can take advantage of, they include but are not limited to;
1. Ten-year corporate tax holiday and 25% tax thereafter: licensed companies enjoy a tax holiday for the first ten years of operation commencing in the year production or sale commences, and a corporate tax rate of 25% for the subsequent ten years. This exemption does not apply to enterprises engaged in commercial activities.
2. Ten-year withholding tax holiday on dividends and other remittances to non-resident parties (except for EPZ commercial license enterprises): For the first ten years of operation, the company shall be deemed to be a non-resident for the purposes of the Income Tax Act and subject to the non-resident rate of withholding tax on payments made to it by resident enterprises, which shall be final tax.
3. Exemption from stamp duties on the execution of any instruments relating to the business activities of an export processing zone enterprise.
4. Exemptions from rent or tenancy controls.
Conclusion
If leveraged, the incentives offered in Export Processing Zones coupled with the availability of cheap create an opportunity to curve a competitive advantage in various industries and could set the country up for upward economic growth. Export Processing Zones provide Kenya with the prospect of extending the reach of goods manufactured and services offered in Kenya far beyond our borders by taking advantage of arrangements such as the Free Trade Agreement (FTA) and the African Continental Free Trade Area (AfCFTA).
This alert is for informational purposes only and should not be construed as a legal opinion. If you have any queries or need clarifications, please do not hesitate to contact Gregory Makambo, Partner, (gmakambo@makambolaw.com), Diana M. Kimiti, (dkimiti@makambolaw.com) or your usual contact at our firm, for legal advice.