The difference between free zones and internal investment companies

Free zones are one of the most distinguished investment systems that Egypt has given great attention because of their great positive impact on the country’s economic performance and the privileges they provide to attract Egyptian and foreign investments. During the course of this, Egypt has issued legislations that help develop these projects and investments.

Legislation regulating free zones

Free zones are subject to the provisions of the Investment Law No. 72 of 2017, its executive regulations and their amendments, and the free zone management system regulations issued by Minister of Investment decree No. 39 of 2019, and its implementation is supervised by the General Authority for Investment and Free Zones.

Internal investment is one of the investment systems through which an investment project is incorporated, established, or operated in accordance with the provisions of Investment Law No. 72 of 2017, in areas other than free zones.

All investment projects subject to the provisions of this law, whether established before or after the implementation of its provisions, regardless of the legal system to which they are subject, shall enjoy the general incentives mentioned in this chapter, with the exception of projects established under the free zone system.

The objectives, principles, guarantees, and Article (11) of this law apply to investment in the free zone system, as long as they do not conflict with the nature of the work of this system.

Projects operating according to this system may convert to work in the internal investment system, and the executive regulation of this law determine the conditions and controls for the conversion and the customs treatment of equipment, machineries, production devices and lines, and the spare parts required by the licensed activity.

What are free zones?

It is part of the country’s territory that falls within its territory and is subject to its administrative jurisdiction, and is dealt in accordance with special tax, customs and monetary provisions.

Types of free zones

There are two types of zones: (public free zones – private free zones), and the free zones sector is responsible for supervising both.

Authorized activities in free zones areas

All activities intended for investment are allowed to be carried out within the free zones in accordance with the policy set by the General Authority for Investment and Free Zones, mainly industries intended for export abroad, with the exception of the following industries:

• Alcoholic industries and materials.
• Arms, ammunition, explosives and other industries related to national security.

Law No. 160 of 2023 was issued amending some provisions of Investment Law No. 72 of 2017, including allowing the practice of some activities that were prohibited by the free zone system, as Article 34 was amended by stipulating the following:

(It is permissible, after the approval of the Supreme Council of Energy, to license the establishment of projects under the free zone system in the field of petroleum manufacturing – fertilizer manufacturing – iron and steel – manufacturing, liquefying and transporting natural gas – intensive energy industries).

Exemptions, guarantees and benefits granted to the project

The country, represented by the General Authority for Investment and Free Zones, has provided all the factors for success in free zones through an integrated system represented in providing the best benefits, incentives, exemptions and guarantees when compared to their counterparts at the regional level.

Projects within free zones and the profits they distribute are not subject to the provisions of the tax laws and fees applicable in Egypt. However, these projects are subject to the following treatment:

1. A fee of Two percent 2% of the value of goods upon entry (CIF) for warehousing projects and a fee of One percent 1% of the value of goods upon exit (FOB) for manufacturing and assembly projects. Specified trade in goods in transit (transit) is exempt from the fee.
2. A fee of One percent 1% of the total revenues generated by projects whose main activity does not require the entry or exit of goods, based on the financial statements approved by a certified public accountant.

Exemptions for public free zone companies

• Exempting all capital assets and production requirements necessary to carry out the project’s activity (except passenger cars) from any customs duties, value-added taxes, or other taxes throughout the period of conducting the activity, even if the nature of the activity requires their temporary presence outside the free zone.
• Exempting the project’s exports and imports to and from outside the country from any customs duties or taxes, whether value-added taxes or other taxes or fees applicable within the country.
• The project and its profits are not subject to the tax or customs legislations in force within the country throughout the period of practicing the activity.
• The project’s imports and exports to and from outside the country are not subject to any customs procedures or normal import rules in force inside the country.
• Exempting project imports from the local market from value-added taxes.
• Exempting transit goods with a specified destination from paying any fees imposed on incoming and outgoing goods in accordance with the following conditions:

1. The project must be within the customs department.
2. The final destination must be specified in the bill of lading and invoice.
3. Exempting all local components of goods produced in free zone projects from customs duties in the event of selling in the local market (inside the country).

Guarantees for public free zone companies

1. It is not permissible to file a lawsuit against projects operating in the free zone system except after referring to the Authority.
2. Projects and establishments may not be nationalized or confiscated.
3. It is not permissible, through administrative means, to impose sequestration on projects, seize their funds, seize, reserve, freeze, or confiscate them other than through judicial means.

Advantages of companies operating in the public free zone system

In addition to the advantages granted by the Investment Law to all projects operating under its umbrella, one of the most important advantages granted for free zone projects is dealing with one administrative body which is the Free Zones Administration, which handles dealing with the project throughout the life of the project according to an integrated system of procedures characterized by facilitation during the different stages of the projects through the following:

• Issuing all necessary approvals to establish the project.
• Issuing a license to practice the activity for the project, which is sufficient for dealing with all government agencies and without the need for registration in the industrial registry.
• Finalizing the procedures for reserving and handing over the land for the project by the zone administration immediately after submitting the application and completing the relevant procedures (for public free zone projects).
• Approval of building permits by the zone administration immediately after submitting and reviewing engineering drawings (for public free zone projects).
• Make all necessary modifications to the project.
• Completing all procedures for entry and exit of goods to and from the project headquarters by issuing import and export declarations and completing all customs procedures for them.
• Taking procedures to liquidate the project, if needed.

General guarantees and incentives for investment in Egypt

All investments established in the Arab Republic of Egypt enjoy fair and equitable treatment.

The country guarantees the foreign investor treatment similar to that granted to the national investor, and an exception may be made by a decree of the Council of Ministers to establish preferential treatment for foreign investors in application of the principle of reciprocity.

Invested funds are not subject to any arbitrary procedures or discriminatory decisions.

The country grants the non-Egyptian investors residency in the Arab Republic of Egypt throughout the duration of the project, without prejudice to the provisions of the laws regulating that.

The country is obligated to respect and enforce the contracts it concludes, and the investment project established based on fraud, deception, or corruption shall not enjoy the protection, guarantees, benefits, or exemptions stipulated under the provisions of this law. All of this must be proven by a final judicial ruling issued by the competent judiciary or by an arbitration ruling.

All decisions related to the affairs of the investment project shall be reasoned, and the concerned parties shall be notified thereof.
Investment projects may not be nationalized.

Investment project funds may not be expropriated except for the public benefit, in exchange for fair compensation paid in advance without delay, and its value shall be equivalent to the fair economic value of the expropriated money on the day prior to the issuance of the expropriation decision, and compensation shall be transferable without restriction.

It is not permissible to impose administrative sequestration on these projects, and sequestration may not be imposed on them except by virtue of a final judicial ruling, and it is not permissible to seize them except by virtue of a judicial order or ruling, and all of this can only be in the circumstances specified in the law.

Investment project funds may not be seized, confiscated, or frozen except based on a judicial order or final ruling, with the exception of tax debts and social insurance subscription due to the state, which may be collected through seizure of all kinds, without prejudice to what is agreed upon in the contracts concluded by the country or public legal persons with the investor.

No administrative body may issue general regulatory decrees that add financial or procedural burdens related to the establishment or operation of projects subject to the provisions of this law, or impose fees or fees for services on them, or amend them, except after taking the opinion of the Authority’s Board of Directors and the approval of both the Council of Ministers and the Supreme Council for Investment.

Administrative authorities may not provoke or suspend licenses issued for an investment project, or withdraw real estate allocated to the project, except after notifying the investor of the violations attributed to him, hearing his point of view, and giving him an appropriate period to remove the causes of the violation. In all cases, the authority’s opinion must be taken before issuing the decisions referred to in the first paragraph. The Authority expresses its opinion within seven days from the date the application is received, fulfilling all required legal procedures. The investor has the right to appeal this decision before the committee stipulated in Article (83) of this law.

The investor has the right to create, establish and expand the investment project, and to finance it from abroad without restrictions and in foreign currency. He also has the right to own, manage, use and dispose of it, reap its profits and transfer them abroad, liquidate the project and transfer all or part of the results of this liquidation abroad without prejudice to the rights of others.

The country allows all cash transfer operations related to the foreign investment to be made freely and without delay to its territory and outside it, in a freely convertible currency. The country also allows the local currency to be converted into a freely usable currency without delay.

In the event of liquidation, the competent administrative authorities are obligated to notify the Authority and the company under liquidation with a statement of their obligations within a maximum period of One Hundred and Twenty days starting from the date on which the liquidator submits a request to that effect along with the necessary documents. The expiration of this period without a statement of these obligations is considered a discharge of the companies under liquidation, without prejudice to the criminal and disciplinary liability of the person responsible for issuing a statement that is contrary to reality or who caused the aforementioned deadline to pass without responding to the request.

Investment projects subject to the provisions of this law have the right to export their products personally or through third parties without a license and without the need to be registered in the Exporters’ Registry.

The investment project has the right to employ foreign workers within a percentage of (10%) of the total number of workers in the project, and this percentage may be increased to no more than (20%) of the total number of workers in the project, in the event that it is not possible to use national workers who possess the necessary qualifications. In some strategic projects of special importance that are determined by a decree of the Supreme Council for Investment, exceptions may be made from the percentages referred to, provided that the training of national workers is taken into account.

Taking into account the provisions of the Capital Market Law promulgated by Law No. 95 of 1992, the Central Bank, Banking System and Monetary Law promulgated by Law No. 194 of 2020, and Law No. 10 of 2009 regulating supervision of markets and non-banking financial instruments, the Board of Directors of the Public Free Zone has the authority to finally approve establishing projects within the zone, or in the private free zone located within its geographical scope, and the Chairman of the Board of Directors of the zone is responsible for licensing it to practice its activity.

The license must include a statement of the purposes for which it was granted, its validity period, and the amount and type of financial guarantee provided by the licensee, not exceeding Two percent (2%) of the investment costs in accordance with the percentages indicated in the executive regulations of this law. The license may not be waived in whole or in part. Except with the approval of the region’s board of directors.

The licensed project does not enjoy the exemptions or benefits stipulated in this law except within the limits of the purposes stated in the license, and this license is sufficient when dealing with various bodies in the country, to obtain services, facilities and benefits for the project, without the need for registration in the industrial registry, unless the project requires that. Notifying the competent authority with a copy of this license for inventory and statistical purposes.

Importation from free zones into the country shall be in accordance with the general rules for importing from abroad.

As an exception to this, materials, waste and residues resulting from the activities of projects operating in free zones are allowed to enter the country if their entry into the country is for the purpose of disposal or recycling at the expense of the concerned party, by safe methods and means established in accordance with the two environmental laws promulgated by Law No. 4 of 1994, and the regulation of waste management issued by Law No. 202 of 2020. The provisions of the aforementioned law regulating waste management are applied regarding the ban on the import of hazardous waste from abroad. The entry of materials, waste, and hazardous waste resulting from the activities of projects operating in free zones into the country is not considered an import from abroad in the application of this paragraph.

Customs taxes are imposed on goods imported from the free zone into the local market as if they were imported from outside the country.

As for products imported from free zone projects that include local and foreign components, the customs tax base for them will be the value of the foreign components at the prevailing price at the time of their exit from the free zone into the country, provided that the customs tax due on the foreign components does not exceed the tax due on the final product imported from abroad.

Foreign components are represented by foreign parts and materials imported according to their condition upon entry into the free zone, without taking into account the operating costs in that zone. With regard to calculating the freight, the free zone is considered the country of origin for the products manufactured in it.