Klaipeda FEZ: almost ready to roll

  • 1999-07-22
  • By Paul Beckman
Like many of Europe's coastal cities, Lithuania's Klaipeda is known for having a rich tradition in various kinds of trade and commerce. But the Lithuanian government is hoping that, by allowing the establishment of a free economic zone in the city, Klaipeda will also become a powerful magnet for drawing in foreign investors.

Klaipeda is hardly a stranger to foreign investors. Big-name companies have been trickling in since Lithuania re-established its independence. Tobacco giant Philip Morris has already thrown $60 million into a cigarette producing plant while Master Foods has been in town for five years. But there is still plenty of room left for more investors.

In order to boost investment throughout Lithuania, zones featuring corporate tax breaks and a simplified customs regime were slated to begin in three of Lithu-ania's largest cities: Kaunas, Klaipeda and Siauliai. International tenders were held by the Lithuanian government to select companies to managed the zones. In Klaipeda, the zone is being managed by the American Baltic Fund and a group of local big-shot companies.

"The selection depended upon local initiative," said Eimantas Kiudulas, marketing director for the Klaipeda FEZ.

So far, though, not one of the three zones has begun activities. But according to Kiudulas, the zone in Klaipeda is the closest one to the starting line.

"We are going to start our activities in the autumn of this year," said Kiudulas. "The exact date will depend upon the entrance time of our first client. Today we are negotiating the final conditions with four companies. Three of them are representatives of multinational companies with EU headquarters."

Kiudulas claimed the process that companies need to go through to establish themselves in the Klaipeda FEZ is relatively painless. Companies need only to register and then receive permission from the FEZ management company to begin operations.

"It's an easy process without bureaucratic [complications]," said Kiudulas.

He added that the only companies which would face problems getting an operation licence are those which deal in products like guns or drugs.

The Klaipeda FEZ management has compiled an extensive list of advantages it says investors would have by jumping into its free economic zone. The first one FEZ management points to is that the zone sits a mere 2.5 kilometers from the Port of Klaipeda, which has been undergoing extensive upgrades over the past few years. Klaipeda's 120,000 people of working age, combined with low labor costs, was mentioned as another advantage.

In 1995, the Lithuanian Parliament enacted the Law on the Fundamentals of Free Economic Zones, which outlined basic conditions for company activities operating in the zones. A number of tax breaks and a special customs regime was also defined by the law.

Klaipeda FEZ information lists several of such incentives which await companies willing to set up shop in the zone. The first is the exemption from corporate income tax for five years following the company's registration and a 14.5 percent tax for the following 10 years for companies with a minimum investment of $1 million. Those companies which do not have $1 million to throw around, will pay a 5.8 percent corporate income tax for the first five years.

Companies will also find they will not be faced with import taxes, VAT, or excise duties. Real estate taxes, road taxes or withholding taxes on dividends and interest have also been wiped off the board.

As good as the free economic zone idea sounds, it is not without its critics. Ruta Vainiene, a tax expert at the Free Market Institute, said she is not against the benefits offered by the zones. But she added that the same principles should be applied on a larger scale, rather than boxed up in three small areas.

"I'm not against the minimizing as such," said Vainiene. "But I would rather see a decrease in the general tax burden throughout the whole of Lithuania."