For the sake of ease, I am going to bundle Free Trade Zones (FTZ), Free Zones (FZ), Free Ports (FPs), Free Economic Zone (FEZ), Special Economic Zone (SEZ), and other variations thereof into the term Free Trade Zone (FTZ). There are differences between them but none that is universal.
This article will only serve as a cursory overview of what FTZs are. I will go into more detail about specific FTZs in the future.
But let’s start with the basics.
What is an FTZ?
These are zones (often geographical but sometimes purely regulatory) in which a different set of laws and regulations surrounding business activities, immigration, finance, technology, and other sectors and factors.
The probably most well-known FTZs are in China in UAE, but FTZs can be found across the whole world.
Things to consider:
- Does the FTZ have a special purpose? For example, the Cayman Islands has a SEZ which is focused on knowledge, whereas Djibouti’s FTZ is focused on the physical trade of goods.
- Is a local presence required?
- If a local presence is required, how are the immigration requirements compared to the rest of the jurisdiction?
- Is the FTZ included in DTAs?
- What are the regulations in the FTZ for your industry?
- Are there any capital control differences?
What is the purpose of an FTZ?
They are typically either designed to simply business in a confined space, so as to not affect the jurisdiction as a whole, or to experiment with different legislation.
This is particularly apparent in for new economic zones set up in China, where bureaucracy is much more streamlined than the rest of the country, almost to the point of competing with Hong Kong, and the Cayman Islands Special Economic Zone, which has significantly easier immigration policies.
Some FTZs are structured to cater largely to warehouses or re-shipping.
Should I incorporate in an FTZ?
The first step is to assess your requirements – what you are looking for, what you need, and how important each criterion is. Take that and compare it to interesting FTZs.
As mentioned, some have local presence requirements (beyond just a registered office) as they are intended for companies that actually engage in local import/export (see for example Djibouti) or simply as a means to filter out companies that are just looking to establish a shell corporation.
Whether this is a hinder or an advantage is up to you to decide.
In many cases, FTZ have easier immigration policies which makes it easier to relocate yourself and or staff to the jurisdiction. This doesn’t necessarily mean that you as a foreigner can just pack your bags and settle down in some jurisdiction that’s otherwise almost impossible to set up base in (e.g., the aforementioned Cayman Islands).
What are the taxes in an FTZ?
Companies incorporated and or operating from an FTZ (as circumstances and regulation may dictate) usually pay no tax, or at the very least a significantly lower tax rate than normal companies.
That isn’t always the case, though. A handful of FTZs are only set up to allow for a different, more lenient, regulation on certain sectors.
An FTZ company not controlled from within the FTZ runs a very high risk of being deemed tax resident wherever it is operated or owned, as as such enjoys no tax benefits.
Are FTZs secretive?
Not necessarily. Many are in transparent, high-tax jurisdictions and serve only as a convenient port for import/export. Secrecy is not something one can expect from all FTZs.
Banking and FTZ
It is worth noting that banks often do not operate in FTZs or at least not under any special regulations, unlike for example International Banking Acts.
That is, a bank operating in an FTZ does normally not have any increased banking secrecy advantages over other banks nor are they more lenient with account opening.
Inversely, however, an FTZ company can find it more challenging to open a local bank account than a regular company, especially if there is non-resident ownership and or directorship. This is because the FTZ company may appear to pose a higher risk than a regular company due to operating in an isolated legal space which isn’t always understood by the bank.
FTZ and PayPal, other payment processors
Contrary to popular belief, as an FTZ company, you aren’t necessarily in any different position than a regular company in the same jurisdiction.
Payment processors do not usually treat FTZ companies any differently from other companies in the same jurisdictions, although exceptions can and do occur.
One thing to consider is that there may be capital control and currency usage differences between the FTZ and the mainland, meaning that FTZs cannot trade in the local currency.
FTZ companies and residence varies greatly between jurisdiction. An FTZ in Kenya can be very different from an FTZ in China which can be different from an FTZ in UAE.