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02 october 2017

Free economic zones in Belarus

As of October 2017

Free economic zones (hereinafter - FEZ) as an institute of market economy hold a special place in the legal system of the Republic of Belarus. Nowadays every regional centre of Belarus can offer to both foreign and domestic investors attractive conditions for investments on the territory of FEZ.

Legal and organizational basis for creation, conducting activity, and liquidation of FEZ on the territory of the Republic of Belarus is provided by the Law of the Republic of Belarus of December 7, 1998 № 213-3 «On Free Economic Zones» (hereinafter the Law № 213-3), by the Edict of the President of the Republic of Belarus No. 114 of March 20, 1996 «On Free Economic Zones on the Territory of the Republic of Belarus» (hereinafter – «Edict No. 114»), by the Edict of the President of The Republic of Belarus of 09.06.2005 No. 262 «On Certain Matters of Operation of FEZ on the Territory of the Republic of Belarus» (hereinafter – «Edict No. 262»), by the Edict of the President of the Republic of Belarus No. 508 of December 30, 2016 and by the Agreement on Free (Special, Exclusive) Economic Zones in the Customs Territory of the Customs Union and Customs Procedure of the Free Customs Zone, dated June 18, 2010.

As a FEZ resident, only legal entities and individual entrepreneurs of the Republic of Belarus with a location within the boundaries of this FEZ, who have concluded an agreement with the administration of the FEZ on the conditions on activity in the FEZ can be registered.

Today six FEZ function in the Republic of Belarus:

  • FEZ «Brest»
  • FEZ «Minsk»
  • FEZ «Gomel-Raton»
  • FEZ «Vitebsk»
  • FEZ «Mogiliov»
  • FEZ «Grodnoinvest»

Legal regime of FEZ

The Law № 213-3 defines a special legal regime as a set of legal norms establishing a special regime of taxation as well some other regulation and providing conditions for carrying out investment and entrepreneurial activity more favorable than usual.

It should be noted that the following types of activities were withdrawn from the special legal regime of the FEZ:

  • catering, gambling, commercial, sales and buying activity  operations with securities;
  • realization of goods (works, services), production (performance, provision) of which are carried out with the use of main resources and (or)  labor of employers of residents of FEZ beyond the territory of FEZ;
  • activity of banks, and non-banking credit and financial and insurance organizations.

The obligatory condition of application of the special legal regime is an obtaining of certificate of goods (works, services) of domestic manufacture by the resident of FEZ. The procedure and conditions of recognition of goods (works, services) as those of domestic manufacture are established by the Regulation of the Council of Ministers of the Republic of Belarus No. 1817 of 17.12.2001, by the Regulation of the Council of Ministers of the Republic of Belarus No. 1520 of 20.10.2010.

Taxation

For FEZ residents, the Tax Code of the Republic of Belarus establishes a special taxation regime that differs from that in the rest of the Republic of Belarus:

Thus, a special taxation regime applies to the sale by FEZ residents:

a) outside the Republic of Belarus to foreign legal entities and (or) individuals in accordance with the contracts concluded between them for goods (works, services) of their own production produced by these residents on the territory of the FEZ;

b) goods (works, services) of their own production, which they produced in the territory of FEZ, to other FEZ residents in accordance with the agreements concluded with them.

The special regime of taxation of FEZ residents includes the following tax privileges and mandatory payments payable by residents of FEZ:

Profit tax

The taxed profit is calculated on the basis of the sum of profit from realization of goods (works, services), other valuables (including main funds), proprietary rights and income from non-realization transactions, decreased by the sum of expenses resulting from these transactions.

The rate of tax is 18%.

Benefits for residents of FEZ:

The profit tax is paid by residents of the FEZ at a rate reduced by 50%, i.е. 9 %. (but no more than at a rate of 12 percent).

Profit of residents of FEZ, received from the sale of goods (works, services) of their own production, is exempt from income tax for 5 years from the date of their announcement of profit. This exemption applies to FEZ residents registered as such after December 31, 2011.

The profit received from the sale of goods (works and services) of its own production for export or other residents of the FEZ is exempted from the taxation of profits for 10 years from the date the company declared gross profit.

Residents registered before 2012 are additionally exempt from income tax for 5 years until December 31, 2021.

Value-Added tax

Object of taxation for this tax is turnovers on sales of goods (works, services), proprietary rights on the territory of the Republic of Belarus, as well as goods, imported to the customs territory of the Republic of Belarus.

The rate of the tax is 20%, in some cases – 0%; 0,5%; 10%; 9,09%, 16,67% or 25%.

Benefits for residents of FEZ:

The goods manufactured by FEZ residents using foreign goods imported within the framework of the customs procedure of the free customs zone are exempted from VAT.

Thus, in the production of goods using imported raw materials imported without payment of import customs duties and VAT, and further sale of goods to the domestic market, such goods will not be subject to VAT, but will be subject to import customs duties as foreign goods.

Also, owners of free customs warehouses are released until December 31, 2019 from VAT levied on the release of goods for domestic consumption after the customs procedure of customs.

Land payments

The payment for land is levied annually in the form of land tax or rent.

Benefits for residents of FEZ:

Residents of FEZ are exempted from payment for the right to conclude a lease contract for a land plot provided for the construction and maintenance of real estate facilities within the boundaries of the FEZ.

Rent is not charged for land plots of FEZ residents located within the boundaries of FEZ:

  • granted to them after registration as residents of FEZ for the construction of facilities, but not more than five years from the date of registration as a FEZ resident;
  • regardless of their intended purpose. The privilege is granted in the quarter if in the immediately preceding quarter the resident of the FEZ sold goods (works, services) of its own production for export or other residents of the FEZ.

Also, they are exempt from land tax:

  • land plots of FEZ residents located within the boundaries of FEZ and granted to them after registration as residents of FEZ for the construction of facilities (excluding land plots granted for temporary use and not returned in due time in accordance with legislation used not for their intended purpose), with the moment of registration of a FEZ resident prior to the acceptance in operation of facilities for the construction of which a land plot has been granted but no more than five years from the date of registration as a resident EZ.
  • from January 1, 2017 to December 31, 2021, land plots of FEZ residents, regardless of their intended purpose, located within the boundaries of the FEZ (except for land plots granted for temporary use and not returned in due time in accordance with the law, arbitrarily employed, used not for the intended purpose).).

Real Estate tax

The objects of taxation are buildings and constructions, including non-complete constructions that are in the property or in the possession, in the economic keeping or effective management of organizations-payers.

The tax rate is 1% per year, some projects of non-completed construction that are in excess of planned rate have 2 % tax rate per year.

Benefits for residents of FEZ:

Residents of FEZ are exempted from real estate taxation:

  • within three years, calculated starting from the quarter, which is the date of registration of the organization as a resident of the FEZ, for objects of taxation with this tax located on the territory of the respective FEZ acquired (occurred) in the specified three-year period, regardless of the direction of their use. In this case, the day of the loss of the right to benefit is the last day of the said three-year period.

Exception: The exemption provided above does not apply to the taxable objects of the property tax taken and (or) handed over (transferred) by the FEZ resident to the lease (financial lease (leasing)), other paid or uncompensated use, as well as to buildings, structures and transfer devices of excess construction in progress.

  • on objects of taxation with this tax located on the territory of the relevant FEZ, regardless of the direction of their use. The privilege provided for in this sub-clause is granted in the quarter if in the immediately preceding quarter the resident of the FEZ sold goods (works, services) to which the taxation features apply in the FEZ.

Customs Regulation

The territory of the FEZ is the customs territory of the Customs Union. On the territory of the FEZ, free customs zones (FCZ) are created for its residents.

Customs FCZ procedure is a customs procedure in which goods are placed and used within the territory of the FEZ or its part without payment of customs duties and taxes, and also without the application of measures of non-tariff regulation in relation to foreign goods and without the application of prohibitions and restrictions on goods of the customs union.

The territory of the FEZ, where the customs procedure of the FCZ is applied, is a customs control zone.

The customs procedure of the FCZ can be applied both on the territory of the FEZ and on its specific part. Goods imported into the territory of the FEZ, where the customs procedure of the FCZ is applied, and placed under the customs procedure of the FCZ, are considered as being outside the customs territory of the customs union for the purposes of application of customs duties, taxes, as well as measures of non-tariff regulation.

Foreign goods placed under the customs procedure of the FCZ retain the status of foreign goods, and goods of the Customs Union  - the status of goods of the Customs Union. Goods made from foreign goods placed under the customs procedure of the FCZ or with their use acquire the status of foreign goods. However, if the customs procedure of the FCZ is completed by the export of such goods outside the Customs Union, their status as being (not) goods of the customs union is determined on the basis of the criterion for sufficient processing of goods and is confirmed by the corresponding conclusion.

The declarant of goods placed under the customs procedure of the FCZ may be a resident of the FEZ (with respect to those goods that are located in the territory of the FEZ of which he is a resident).

Goods may stay under the customs procedure of the FCZ within the term of the functioning of the relevant FEZ, except for cases when the person who placed the goods under this procedure, loses the status of the FEZ resident, or decided to cease the application of the customs procedure of the FCZ in the territory of the relevant FEZ.

Currency Regulation

The basic document of currency legislation is the Law of the Republic of Belarus "On Currency Regulation and Currency Control" of 22.07.2003. All commercial organizations registered on the territory of the Republic of Belarus are residents of the Republic of Belarus in terms of currency legislation. The term "resident" means any individual, regardless of nationality, permanently residing in the territory of the Republic of Belarus, as well as a legal entity registered in the Republic of Belarus.

General rule concerning residents: settlements between residents are made in Belarusian rubles. The use of foreign currency between residents is allowed in cases strictly limited by law.

According to the Regulations «On Conducting Currency Operations in the Republic of Belarus» adopted by the Resolution of the Board of the National Bank of the Republic of Belarus N 72 dated 30.04.2004 with further changes and amendments all wire transactions between residents and non-residents can be conducted both in foreign currency and in Belarusian rubles. Therefore, if the clients of the commercial organization are residents, settlements will be carried out in Belarusian rubles. If the clients are non-residents, settlements will be carried out mainly in foreign currency though use of Belarusian rubles is allowed as well.

Compulsory Sale of Currency

The Edict of the President of the Republic of Belarus «On Compulsory Sale of Foreign Currency» dated 19.07.2006 N452  and the Resolution of the Board of the National Bank of the Republic of Belarus № 129 dated 13.09.2006 «On the Order of Execution of Compulsory Sale of Foreign Currency on the Internal Foreign Exchange Market»  provides for compulsory sale of 10% of foreign currency, transferred within contracts, involving refundable transfer of goods, proprietary information, exclusive rights on results of intellectual activity, lease of property, performance of works, rendering of services. Compulsory sale is pursued not later than within 7 working days from the day of receipt of relevant monetary funds. Types of foreign currencies subject to compulsory sale are established by the National Bank of the Republic of Belarus.

Benefits for residents of FEZ:

FEZ residents are revealed from the compulsory sale of currency.

Types of Activities on the territory of FEZ

Realization of certain types of activity on the territory of FEZ are prohibited.

According to the Law № 213-3 and norms of Regulations on FEZ among them are the following one:

  • production, processing, stockpiling and sale of weapons, ammunition, explosives;
  • production, processing, stockpiling, sale of drugs, narcotic substances, psychotropic substances and their precursors;
  • sowing, growing, processing, stockpiling, sale of crops containing narcotic substances, psychotropic or poisonous  substances;
  • production of spirits, excluding champagne, sparkling wines and beer;
  • manufacturing of tobacco products;
  •  production of securities, banknotes and coins, stamps;
  • lottery activity;
  • preparation and broadcasting of radio and TV programs, excluding technical maintenance of radio and television;
  • treatment of people suffering  from illnesses that constitute danger for people’s health;
  • treatment of animals with highly dangerous illnesses;
  • activity connected with job placement of citizens of the Republic of Belarus, foreign citizens and persons without citizenship, permanently residing in Belarus, abroad.

The Procedure of Registration in FEZ

The implementation of the investment project on the territory of the FEZ, including the creation and registration of a legal entity as a business entity in the territory of the FEZ, as well as the registration of a legal entity as a resident of the FEZ, presupposes a sequence of actions of the investor, which can be conditionally divided into several stages:

1. Creation of a legal entity

A FEZ resident may already be an organization established and registered with the state.
On the territory of FEZ registration of legal entities is carried out by the administration of FEZ.

2. Preparation of the investment project

The investment project is a fundamental factor in the subsequent registration as a resident of the FEZ.

The investment project must meet the following basic criteria:

  • The volume of investments should be equal to at least 1 million euros. However, if the investor is ready to invest within 3 years, then for such a category of investors the minimum threshold of investment is reduced to 500 thousand euros;
  • The investment project should provide for the creation and (or) development of production oriented for export and (or) import substitution.

3. Registration as a resident of the FEZ

For registration as FEZ resident, the following documents are submitted to the administration of the relevant FEZ:

  • application on the form approved by the administration of FEZ;
  • copies of the constituent documents certified in accordance with the established
  • procedure  providing original documents;
  • a copy of the certificate of state registration with the original documents;
  • business plan of the investment project in the form approved by the administration of the relevant SEZ;
  • a payment document confirming the payment of the state fee, which is 50 base units.

Also, a potential resident must sign an agreement on the conditions of activity in the FEZ with the administration of the FEZ.

An official legal document confirming the registration of a business entity as a resident is a certificate of registration as a FEZ resident issued by the administration on behalf of the state.

Discontinuation of Activity of the Residents of FEZ

A legal entity may lose the status of a FEZ resident on the following grounds:

  • liquidation of the free economic zone;
  • exclusion from the borders of the free economic zone of the territory with the location of this legal entity or individual entrepreneur;
  • liquidation (termination of activities) of this legal entity (individual entrepreneur);
  • reorganization of a legal entity in the form of merger, division, joining it to another legal entity;
  • changing the location of the legal entity or individual entrepreneur in case the new location is located outside the territory corresponding to the free economic zone;
  • termination of the agreement on the conditions of activity in the free economic zone;
  • the adoption by the administration of the free economic zone of a decision on the loss of status:
  • at the request of the resident of the free economic zone;
  • in connection with the failure or improper performance by a resident of a free economic zone of the terms of the agreement on the conditions of activity in the free economic zone;
  • due to non-observance of the terms of formation of the statutory fund by a legal entity that is a resident of a free economic zone.

Loss of status as well as its deprivation results at termination of obligations under the agreement on the conditions of activity of FEZ and other agreements, the conclusion of which is conditioned by the presence at a juridical person, an individual entrepreneur of the status of the resident of FEZ.

In the case of the continuation of activities on a general basis by a legal entity or an individual entrepreneur who has lost the status of a FEZ resident due to the liquidation of the FEZ or the exclusion from the borders of the FEZ of the territory with the location of these persons, leases of the land plots, buildings, other immovable property owned by them, the obligations under which are terminated, at their request, should be renegotiated with them for a period not less than the remaining lease terms by state bodies other organizations authorized to dispose of the property. At the same time, such contracts, with the exception of lease agreements for land plots, are renewed on the same terms.

Law No. 213-3 provides the preservation of the status of a FEZ resident in case of the reorganization of a legal entity. The preservation or transfer of the status of a FEZ resident during the reorganization of a legal entity registered as a FEZ resident is allowed only when it is reorganized in the form of accession to it, or the separation of one or several legal entities or its transformation.

When reorganizing a FEZ resident in the form of accession or separation, the status of a resident shall be retained by the reorganized legal entity.

In case of reorganization in the form of transformation, the status of the resident passes to the newly emerged person from the moment of state registration of the latter.

State Guarantees to Rezidents of FEZ

The State guarantees to residents of FEZ:

  • property right and other property interests as well proprietary rights acquired in a legal way, and protects these rights;
  • equality of rights presented to the residents of FEZ regardless of their forms of property as well as equal, without any discrimination protection of their rights and legal interests.

Forced nationalization, requisition or analogical by their effect measures are not admitted in regard to the residents of FEZ.

The system of state guarantees of the protection of the investments covers foreign investors in FEZ. This system is provided by Belarusian legislation on foreign investments.

Law On Investments guarantees to foreign investors upon making all necessary tax and other obligatory payments set forth by the legislation of the Republic of Belarus has a right to freely forward the income received as a result of investment activity on the territory of the Republic of Belarus outside of the country including:

  • monetary funds, received by foreign investors after partial or full termination of the activities on the territory of the republic of Belarus, including monetary funds received by foreign investors in the results of the transfer of investments and the property constituting the investments, other objects of civil rights;
  • monetary fund which are due to be paid as salary to foreign citizens and individuals without citizenship working without labor contract conclusion;
  • monetary funds to be paid to foreign investors according to the judicial decision.

Foreign investments cannot be nationalized without compensation, requisitioned, or other measures equal to the indicated consequences can not be applied either.

Nationalization or requisition is possible only with the full and on-time compensation of the cost of nationalized or requisitioned investment property and other damages caused by nationalization or requisition.

Compensation of the cost of the nationalized or requisitioned investment property is paid to the national investor in monetary units of the Republic of Belarus, and to the foreign investor - in the currency of the initial investments.

Compensation of the cost of nationalized or requisitioned investment property may be appealed by the investor in a court.

 

We will be happy to provide any further information or assistance should you are interested in the above procedures.

Please contact VMP corporate practice team - partner Svetlana Dashuk (svetlana.dashuk@vmp.by) or senior associate Natalia Talai (natalia.talai@vmp.by).

 

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