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Time of change for Special Economic Zones

     
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Time of change for Special Economic Zones

For 20 years of their existence special economic zones have evolved. The latest amendment to the Special Economic Zone Act poses new challenges to their management. However those are not the only changes that affect the zones.

For the two decades of their operation Poland has undergone a series of transformations, including those related to joining the European Economic Community. When in 1994 the special economic zones were created, their main purpose was to support the areas of collective redundancies being a result of the liquidation of state-owned industrial companies. Hence it is no surprise that most zones are in the highly industrialized Western Poland.

“One of the most important tasks of the special economic zones is developing unused land and extending the area covered by the SEZs, which enables new investments in the region.  This allows the incorporation of post-industrial areas into the zones, the areas where business operations are decreasing,” says the Vice Premier, Minister of Economy Janusz Piechociński.

In recent years the role of the zones was focused on innovativeness and modern technologies, which is proved by e.g. the Technology Incubator and the Malopolski Information Technology Park within the Cracow SEZ, or the Baltic Port of New Technologies and Gdansk Science and Technology Park within the Pomeranian SEZ. The investors’ needs are changing as well due to the changes in the system of education and the increasing role of small and medium-sized businesses. It is also necessary to support investors who start their operations in Eastern Poland.

Changes in the state aid approved. Zones may start granting permits.

Since 1 July new rules for granting state aid apply in Poland; they had been ordered by the European Union and will remain applicable till 2020. The government needed almost 5 months to adapt them also to the special economic zones, which meant that their management could not grant new permits for business operations in the zones. Finally, on 26 November the new government order on the state aid became effective.

50 percent of state aid will go to the companies investing in Warmian-Masurian, Podlaskie, Podkarpackie and Lubelskie Voivodships, and in Greater Poland, Lower Silesian and Silesian Voivodships state aid will reach no more than 25% of the investment value. In the remaining voivodships it will be 35%. In the Masovian Voivodship, Western Warsaw poviat will receive 25% support for the investors there, and the remaining poviats – 35%. Until 2017 Warsaw will get 15%, and then 10%. Additionally, a large investor that has already been operating in Warsaw will receive state aid only for the primary investment leading to new business activity. The new business activity should be specified in a different PKD class (Polish Classification of Activities), than the activity pursued so far.

In addition to the volume of state aid the changes also apply to the definition of a large investment project, additional conditions for providing the support for investments that alter the production process or the current operations of the existing business. Apart from the remaining criterion of EUR 50 million, most investments will be analyzed at the level of a group in the same subregion NTS 3. Special attention will be paid to the investments with the value exceeding EUR 100 million and the cases where within 2 years preceding the day of the submission of the application for aid, the investor has stopped business activity that belongs to the same class of activity and that he pursued on the territory of the European Economic Area, or on the day of the submission of the application for aid he intends to stop such activity within two years after the end of the investment covered by the permit.

Companies will also face difficulties if they seek support for changes in the production process or diversification of an existing production facility. On the other hand it will be impossible to apply for support for an investment in the transport sector.

Easier access to the zone

Investors have been waiting for the decision changing the value of state aid for several months, but at the end of October the government issued another important order which made the conditions for the incorporation of private land into the zone less strict.

In accordance with the new regulations, from 1 November 2014 r. to 31 December 2016 the application of less strict conditions will depend on the unemployment rate. If the private land incorporated into a special economic zone is located in poviats where the unemployment rate is equal or lower than the national average the thresholds are lowered by 20%, and in the other poviats by 30%. So, for example in a poviat where unemployment is equal or lower than 60% of the national average (but not higher than the national average), the businessman should undertake to create at least 400 new jobs or promise to pay at least PLN 280 million of qualified investment costs.

In poviats with the unemployment rate exceeding 160% of the national average, but not more than 200% it will be respectively at least 105 new jobs or PLN 70 million of investment costs. In poviats with the unemployment rate higher than 200% of the national average, but not exceeding 250% the investor will have to provide at least 70 new jobs or pay qualified investment costs of at least PLN 50 million. In the Lubelskie, Podkarpackie, Podlaskie, Świętokrzyskie and Warmian-Masurian Voivodships the requirements will be reduced by 30%. It is supposed to encourage investments in Eastern Poland. Another purpose of the government order is to support the investments made by small and medium-sized businesses.

The previously applicable criteria for the unemployment rate were a barrier preventing investors from receiving the support for smaller investments, which are usually made by small and medium-sized businesses.

Amendment will change a lot

There are more changes in the special economic zones. On 5 November in Sejm, the lower chamber of the Polish parliament, there was the first reading of the amendment to the Special Economic Zone Act, which was approved by the government on 7 October.

“Most importantly, the document specifies the conditions for submitting an application for permit termination. It also introduces the possibility to withdraw the permission on the investor’s request and defines the rules for auditing companies,” says minister Piechociński.

The amendment to the act specifies that the new solutions will become effective on 1 January 2015. One of the important conditions in the amendment is the replacement of a provincial governor’s representative in the supervisory boards of the companies with a representative of the Minister of Finance. The reason for this is the form of state aid provided in the zones (tax release), the location of the zones in several voivodships and the fact that the provincial governor is not responsible for the regional development.

What is equally important, the catalogue of the main tasks of the zone managements was extended by adding the cooperation with higher secondary schools and universities to adapt their educational offer and programs to the employer’s needs, and actions aimed at increasing the potential of the zones to create clusters. These are key tasks, especially due to the growing difficulties in finding qualified laborers.

“It is absolutely true that the best advertisement is a satisfied customer – so if we provide the companies in our zone with additional services, they will speak well of us. That is why I think that giving the zones new tasks is a good strategy,” says Barbara Kaśnikowska, President of Wałbrzych Special Economic Zone.

“We always look at changes from the businessman’s point of view. The proposed changes make the regulations more precise, which seems to be a good move. I think that the government managed not to complicate the process of granting the permits and control of the businesses that operate in the zone. And that is what really matters,” adds the President of the Cracow SEZ Wiesława Kornaś-Kita.

It is notable that some zones undertook such activities before by cooperating with regional vocational schools and creating special classes adapted to the investor’s needs. Additionally, ever more SEZs try to build cluster structures, an example of which is the Lower Silesian Automotive Cluster established by the Legnica SEZ or the Educational Cluster in Kamienna Gora.

Another area affected by changes is the end of activity in a SEZ. A withdrawal of the permit for operations in the zone will result in the repayment of the received state aid by the investor (tax releases), and the investor will not be able to receive another permit until he repays the previously received aid. Moreover, the claims related to the repayment of the state aid (tax release) will fall under the statute of limitations after 10 years (counting from the end of a calendar year in which the businessman used the tax release).

It will also be possible to withdraw the permit for the operations in the zone at the investor’s request (at present the businessman can apply for declaring the termination of the permit for the operations in the zone). The introduction of this new solution is necessary due to the limitation of conditions for the termination of the permit. It may happen that for a businessman who started using tax releases, but expects that he will not be able to fulfill his obligations, it will be better to resign from the permit before the date by which he has to fulfill his obligations, because this will reduce the interest on the aid that he will have to repay.

“Summing up, after 1 January 2015, if a businessman decides that he will not be able to realize his investment and meet the requirements specified in the permit, and he has already used the tax release, he can file an application for withdrawal, and the faster he does it, the lower will be not only the amount to be repaid, but also the interest,” explains Marek Sienkiewicz, Manager in the Special Economic Team at Deloitte.

Before the crisis the applications for termination were filed by the businessmen who did not start the investment or did not use the aid. During the slowdown in the economy when a lot of companies had to reduce production and lay off staff, the imprecision of the regulations caused that the businessmen threatened with the withdrawal of the tax release filed for its termination, thinking that it would protect them against the repayment of the state aid they had used. To eliminate such actions, the termination of the permit has been limited in the act to a single situation. The businessman will be able to apply for the termination of the permit if before the day of filing the application he has not used the tax release allowed by the permit.

On the other hand an application to the Minister of Economy for state aid (tax releases) has to be submitted in a tender or negotiations. A large company can file the application to the Minister of Economy earlier if it plans a new investment in an area outside the zone at the time when the application is filed. Such a company will be able to start the investment after the Minister of Economy has confirmed the fulfillment of the so-called incentive effect – in such a case the businessman will have no rights resulting from the fact that the area has not been incorporated into the zone or that the permit has not been granted. This regulation is supposed to be advantageous for businessmen.

Since the establishment of the zones 20 years ago the conditions for the operations on their territory have changed several times, hence the need for uniform rules governing the change of the permit – regardless of when it was granted. Since 4 August 2008 the rules governing the change of the permit have been more advantageous than before, because they lower the required employment by no more than 20% of the base value. However it turned out that during recession the regulation became necessary for businessmen who had already had permits. Therefore its application to all businessmen in the zone should protect many companies against the results of the withdrawal of the permit and so let them survive this difficult period.

This solution can be used by a group of Korean companies that invested approx. PLN 3.5 billion in the production of TV sets and components and employed over 9 thousand people and now find it difficult to keep those people employed.

“The companies belonging to the zones should also pay attention to the new regulations specifying the period of keeping records related to the state aid received. Books and documents must be kept until the aid repayment claims fall under the statute of limitations, i.e. for 10 years since the end of the calendar year in which the businessman used the tax release,” adds Marek Sienkiewicz.

A record year in the SEZs. What next?

The year 2014 was very good for the Special Economic Zones. The reason behind the excellent result was that investors were afraid of the changes affecting state aid after 1 July. Till the end of June 2014 438 permits for projects in the Polish special economic zones were granted. This is 170% more than in the whole previous year. The businessmen declared that they would realize investments of almost PLN 22 billion in value and create over 20,000 new jobs. The businesses operating in the SEZs come mainly from Poland, Germany, USA, Netherlands, Italy, and Japan.

After such a good year, in 2015 we may expect an investment slowdown, yet representatives of the government believe that Poland, especially after the last changes in the regulations, will remain an attractive place to invest.

“In 2015 the investments which received the permit for operations in the SEZs before 1 July 2014 will start. Still, I think that we may also expect new investments attracted by the projects already carried out in Poland,” believes Ilona Antoniszyn-Klik, Vice Minister of Economy.

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