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Lithuania Is 3rd in the World According to Number of Free Economic Zones — After the USA and Poland
According to the number of Special Economic Zones (SEZs) operating in the country, Lithuania is the third in the Western world, after the United States of America and Poland. While SEZs can be found in about 70 percent of developed countries and are mostly customs-free zones to encourage foreign trade, Lithuania, Poland, and other countries like Bulgaria are different, with other fiscal incentives offered as well in an effort to boost the growth of industry, especially in the less developed regions of these countries.
This is stated in the World Investment Report 2019: Special Economic Zones, prepared by the economists participating in the United Nations Conference on Trade and Development (UNCTAD), the Verslo žinios business daily reports.
Currently, there are 16 SEZs (7 Free Economic Zones (FEZs) and 9 industrial parks) in Lithuania, 21 in Poland, 262 in the United States. Following Lithuania, Croatia is in fourth place with 11, while Bulgaria is fifth with 9 SEZs.
The Report notes that SEZs are among the most important tools, aiding countries to attract investment. Foreign direct investment (FDI) flow for 2018 in Lithuania increased by 39%, to 905 million EUR, compared to 2017 figures of 654 million EUR. The situation is different globally, with FDI flows continuing to slide, falling by 13 percent to $1.3 trillion from $1.5 trillion recorded in 2017.
The UNCTAD Report also emphasizes that the number of SEZs worldwide is growing rapidly, with more than 5,000 such zones with fiscal incentives attached already existing and more planned.
The authors of the Report note that SEZs are active in 70% of all developed countries, with most only featuring customs-free trading and relatively limited influence on the overall economy in these countries, with the possible exception of the United States.
In Western Europe, SEZs are rare, even where they exist, they are just customs-free zones most of the time.
“Bulgaria, Lithuania, and Poland, however, have both customs-free zones and zones in which other fiscal incentives are offered,” the Report states.
Differences between the West and the East
Special Economic Zones in Lithuania, Poland, Bulgaria, and other Central or Eastern European countries are established to encourage the growth of industry and less-developed regions of the country. It is emphasized that these economic zones were established even before the countries mentioned above joined the European Union in 2004.
In Lithuania, manufacturing and logistics companies established in FEZ territories, having invested more than a million EUR, and business service companies that have invested more than 100 thousand EUR do not pay corporate income tax for 10 years with a reduced (7.5%) tariff for further six years after that. These companies are also often relieved from paying the real estate tax.
In the United States and Western Europe, “freeports” are the most common customs-free zones.
“These are essentially warehouse facilities that are designated as tax-free and used for storage of valuable items such as artwork, jewelry, precious metals, and other luxury goods. In Europe, such freeports exist in Luxembourg, Monaco, and Switzerland,” according to the UNCTAD Report.
The Report points out that economies in Western Europe are more concerned with creating a level playing field, rather than setting up privileged areas.
“The main rationale for establishing SEZs in developed economies is to reduce the distortionary effects of tariffs and regulatory “costs” associated with importing,” the UNCTAD economists state.
Extended incentives in Lithuania, Poland
In 2018, a law was passed in Poland, which essentially established the whole country as a Special Economic Zone, meaning that a company only needs to invest a certain sum of money and create a certain number of jobs to receive the incentives applied to SEZs. In this way, SEZ-related incentives are no longer tied to the company residing in a Special Economic Zone.
Something similar is planned in Lithuania as well. An amendment to the corporate income tax and related laws has been proposed, which would relieve manufacturing and data service companies from the corporate income tax if they invest 30 million EUR and create 200 jobs, meaning that these companies would no longer have to operate out of Free Economic Zones.
Invest Lithuania analyzed the impact FEZs had on the economy and its future prospect this spring. The analysis found that the money FEZs generate has been outstripping the money lost due to various incentives since 2017. Relieved taxes, infrastructure investments, and other incentives amounted to 132 million EUR, while the companies and employees affected paid taxes worth 356 million EUR.
Invest Lithuania calculates that the positive impact FEZs will have had on the Lithuanian economy in the 2002 – 2043 period will be 6.6 times greater than the public investment and unpaid taxes due to incentives. These numbers are provided in the Free Economic Zones in Lithuania 2019 report.
“We wish plug & play solutions to be the main advantage of the FEZs in the future. Entire plots with all the necessary communications, from plumbing to electric infrastructure. The ability to offer unmatched fast launch capabilities would be one of our unassailable advantages in the fight for foreign investments,” Mantas Katinas, the General Manager of Invest Lithuania, once said.
At present, sevent Free Economic Zones are active in Lithuania, operating in Akmenė, Kaunas, Kėdainiai, Klaipėda, Marijampolė, Panevėžys, and Šiauliai.
In 2017, 52 companies were active at Lithuania FEZs, employing over 5,000 people. They recorded income of 1.24 billion EUR, with 75%, or 936 million EUR, coming from exports, which accounts for 6% of all Lithuanian exports income. On the other hand, FEZ companies’ import numbers reached 676 million EUR, having a positive impact on the balance of Lithuanian trade.
Throughout 2017, FEZ companies created 172 million EUR of added value, which accounts for 2.4% of the entire added value created by the Lithuanian manufacturing industry. In 2017, a single FEZ employee on average created 82,000 EUR of income for direct FEZ suppliers in Lithuania. In comparison for the same period, income divided for each employee in Lithuania overall was only 52,000 EUR.
Eimantas Kiudulas, the CEO of the Klaipeda FEZ, says that the number of Free Economic Zones in a given country by itself does not automatically determine the number of investment projects nor their quality. According to him, Lithuania was 16th in Europe with more than 80 foreign direct investment project and can be counted among the leaders by the number of projects per capita. With that said, it is obvious that investors first choose already functioning communities and ecosystems.
“A successfully FEZ is, in a way, “a city within a city”, with a developed infrastructure, communicating and cooperating companies, good transportation infrastructure and a culture of care for its employees’ well-being, as well as a wide network of academic and social partners. Territories like this attract both employees and investors,” says the CEO of the Klaipeda FEZ.
(Source: “Verslo žinios”)