Apr. 6, 2019
In a bid to achieve these laudable goals, Jamaica recently established its own SEZ regime, with the enactment of the Special Economic Zone Act of Jamaica, 2016 (“the SEZ Act") and the passing of the Special Economic Zone Regulations, 2017 (“the SEZ Regulations").
It should be noted that the SEZ regime replaces the previous “free zone" regime under the Jamaica Export Free Zone Act (“the JEFZA"). Under the free zone regime, prescription of minimum export levels by free zone companies, combined with income tax exemptions, presented a risk of non-compliance with World Trade Organization rules prohibiting export subsidies. This provided Jamaica with further incentive to modernize its laws. The SEZ Act therefore repealed the JEFZA, and provided entities previously registered under the JEFZA with a transition process into the SEZ regime.
The SEZ Act states that its main objective is to “make provisions in respect of the development, regulation, construction, supervision, management, and control of SEZ's in Jamaica." To lead the execution of this mandate, the SEZ Act established a corporate body known as the Jamaica Special Economic Zone Authority (“the Authority"). The Authority is responsible for regulating and supervising the SEZs, considering the applications by prospective SEZ entities, and where applicable, issuing the relevant licences and authorizations and entering into the relevant agreements.
The Authority grants operating certificates and authorizations to the various entities that may engage in SEZ activities. These entities include developers, occupants, and zone users.
Under the SEZ Act, a developer is “a company limited by shares that is incorporated under the Companies Act of Jamaica and is established by a sponsor for the purposes of entering into a master-concession or a licence agreement" with the Authority. Developers are expected to design, finance, construct, and maintain infrastructure within the SEZs.
An occupant is a person who is not a developer or a zone user, but who conducts business in an SEZ under a sub-concession agreement with the developer, where the said developer holds a master-concession or licence agreement.
A zone user is a person or business entity not a developer or an occupant, who performs activities in an SEZ such as food or labour services.
A sponsor is an investor or a group of investors that will provide the developer with capital to finance the SEZ's business activity. A sponsor does not receive any special benefits under the SEZ Act, but plays a role in the developer's application process.
Requirements, Application Process and Benefits
Developer Requirements and Application Process
A developer must make investments in an SEZ sufficient to accommodate at least three occupants, unless the SEZ is designated as “single-entity" or “specialized." In order to evidence its ability to make such investments, a developer is required to have issued and paid-up share capital of a minimum of USD1,500,000.00.
The application process involves the completion and submission of a “written proposal" in the application form set out on the Authority's website, together with supporting documents, including the developer's corporate documents, a preliminary business plan, a description and map of the relevant land, and evidence of payment of the application fee of USD3,000.00.
The Authority will review the application, perform its due diligence exercises including background checks on the applicant, and inspect the land specified for the SEZ. If the application meets the Authority's requirements, it will then issue a pre-approval letter.
Within one hundred and fifty (150) days after the issuance of the pre-approval letter, the applicant is required to submit a supplementary written proposal on a form provided on the Authority website, which outlines details of all the proposed business activities to be carried out by the applicant and its prospective occupants and zone users, an SEZ development plan, environmental impact assessments, and various other details concerning the applicant and its planned operations. Once the supplementary information is provided by the applicant, the Authority shall within one hundred and twenty (120) days perform additional due diligence on the information provided and submit its recommendations to the Minister of Industry, Commerce, Agriculture and Fisheries for approval. Within sixty (60) days of receipt of the recommendations, the Minister is required to make a decision whether to approve or deny the application. If the Minister approves, an Order will be published in the Jamaica Gazette to reflect his decision to grant the applicant developer status. If the Minister denies the application, the applicant may appeal using the dispute resolution provision in the SEZ Regulations.
Once the Order is published, the applicant must begin discussions with the Authority to discuss and finalize the terms of the SEZ Developer Agreement, which can take the form of a “master concession" or a “licence agreement." If the Authority is the owner or head tenant of the land being utilized for the SEZ, the developer and JSEZA will enter into a master concession agreement. In contrast, if the developer is the owner or head tenant of the land, a licence agreement is executed. The developer's sponsor must also provide the Authority with a guarantee and indemnity as security for the exposure and obligations assumed by the developer.
Upon the execution of the Developer Agreement, the Authority will issue an operating certificate to the developer authorizing it to commence SEZ activities in accordance with the agreement. A developer will be required to pay the Authority an annual license fee of USD0.20 per square foot of building space, and USD0.05 per square foot of non-building space.
A developer will benefit from numerous tax incentives, which include the following:
i. Reduced corporate income tax rate of 12.5% (reduced from 25%);
ii. Exemption from income tax on rental income earned within the SEZ;
iii. Promotional tax credit, equal to the developer's expenditure on research and development and training, subject to a maximum of 10% of the income tax chargeable;
iv. Customs duty exemption for goods imported into the SEZ;
v. No General Consumption Tax (GCT) on locally purchased goods and services entering the SEZ. (GCT is a value added tax which is usually 16.5% of the cost of goods or services purchased);
vi. Stamp duty relief on contracts for the purchase or lease of land for use as an SEZ; and
vii. Transfer tax exemption on sale of land for use in a SEZ.
Occupant Requirements and Application Process
An occupant will be required to enter a sub-concession agreement with a developer, have issued and paid-up share capital of at least US$25,000.00, and make investments in the SEZ of at least USD50,000 within the first year of operation.
However, the capital and investment requirements may be waived for micro, small and medium enterprises (MSMEs) with “sufficient development potential", if they have a sub-concession with a developer and will make an investment of at least USD25,000 in an SEZ. An MSME occupant is an occupant with no more than fifty (50) employees and an annual turnover of no more than USD150,000.00.
A prospective occupant is required to first submit a written application to the developer, which primarily includes the following:
i. An application fee of USD1,500;
ii. Proposed activities carried out by the applicant at the SEZ;
iii. Proof that the proposed activities constitutes a new investment and consistent with the overall plans for the development of the SEZ;
iv. Business plan including financials;
v. Proof of the minimum required issued and paid-up share capital; and
vi. Certificate of incorporation under the Companies Act and additional company documents.
Once the developer and occupant enter into a sub-concession agreement, the developer will apply to the Authority for authorization of said sub-concession.
The occupant will benefit from all the tax incentives afforded to the developer, excluding transfer tax relief. However, the occupant additionally benefits from the following incentives:
i. Relief from income tax on dividends; and
ii. Asset tax exemption.
Similarly to an occupant, a prospective zone user must initially apply to a developer. If satisfied with the application, the developer will request authorization from the Authority for the applicant's zone user status. An application fee of US$100 is payable.
A zone user is also expected to make investments in the zone of at least USD50,000 within the first year of operation. Zone users are not afforded any tax benefits.
A developer or occupant is prohibited from engaging in a list of excluded activities described in the SEZ Act. These excluded activities include:
i. Extractive industries such as mining and quarrying;
ii. Tourism services;
iii. Telecommunication services;
iv. Public utilities;
v. Financial services regulated by the Bank of Jamaica or the Financial Services Commission;
vi. Construction services;
vii. Real estate;
viii. Health services excluding research and development;
ix. Catering services; and
x. Retail services.
It therefore appears that, for the time being, all other legal commercial activities are permissible. This is in contrast to the previous free zone regime, which had a fixed list of permitted activities. This change may reflect an effort by the government to diversify the economic activities within the SEZs, and therefore multiply the potential linkages with businesses and individuals in the wider economy.
Existing free zone entities will keep their fiscal incentives under the Jamaica Export Free Zone Act until December 31, 2019, or any earlier date on which they become entitled to benefits under the SEZ Act. In order to benefit under the SEZ Act, within four years from August 1, 2016, free zone promoters must apply to the Authority to become developers, and approved free zone enterprises must enter into a sub-concession with a developer to become an occupant.
Other existing Jamaican companies that did not operate within a free zone will not be permitted to move into an SEZ until ten years after the coming into force of the SEZ Act.
The Jamaican government envisions that SEZs will attract investment and new economic activities to Jamaica, generate employment, link Jamaican domestic suppliers to global supply chains, and create other synergies with the rest of the Jamaican economy. It is for that reason that incentives have been offered that are potentially attractive to many businesses. The SEZ therefore presents an opportunity for potential investors to not only reap positive benefits for their private enterprises, but also have a positive impact on Jamaica's economy and labour force.