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Special Economic Zones: Are Investors sitting on a Goldmine?

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Naivasha Special Economic Zone located next to Naivasha dry port in this photo taken on September 27, 2022. PHOTO | JEFF ANGOTE | NMG

In 2015, Kenya enacted the Special Economic Zone (SEZs) Act, with the aim of establishing preferential tax zones as major pillars of economic growth and development. An SEZ is a designated area, gazetted for the purpose of undertaking SEZ activities while enjoying special economic regulations that differ from general trade, tax, and investment rules.

SEZs are governed by the Special Economic Zone Authority, an entity responsible for attracting and licensing domestic and foreign direct investments (FDIs) in SEZs.

The Authority serves as the regulator of both public and private SEZs in Kenya and exists to create an enabling environment for investors through the development of integrated infrastructure facilities, as well as the creation of incentives that eliminate the barriers to doing business in Kenya.

SEZs were set up to not only boost local and foreign direct investments but to also expand investment opportunities available under SEZs, which include free trade zones, industrial parks, free ports, information communication technology parks, science and technology parks, agricultural zones, tourist and recreational zones and business service parks.

The major selling points for SEZs in Kenya are the tax shields offered within the confines of a SEZ. Licenced SEZ enterprises, developers and operators benefit from various tax rebates such as exemption from excise duty, customs duty, value-added tax and stamp duty.

Additionally, lower corporate income tax (CIT) rates of 10 percent apply for the first 10 years and 15 percent for the next 10 years. Furthermore, SEZ investors are allowed 100 percent investment deduction on their capital expenditure. Gains on transfer of property within an SEZ are exempt from capital gains tax.

The Finance Act, of 2023 has also encouraged investments in SEZs by amending the provisions on market accessibility for SEZ goods to include both customs and non-customs-controlled areas. The inclusion of both will transform the SEZs from restrictive demarcated zones to more robust integrated investment parks where industries correlate.

Other non-tax incentives afforded to SEZs, include enhanced environmental, social and governance (ESG) standards, which render SEZs more competitive and attractive to foreign capital. There is also exemption from rent and tenancy controls, as well as entitlement to work, permits for up to 20 percent of the full-time employees of SEZ-licenced entities. On the recommendation of the Authority, additional work permits may be obtained for specialised sectors.

Some of the factors that have stifled the full harnessing of SEZ opportunities is a lack of clarity on the SEZ legislative framework and delays in gazetting and operationalizing SEZs.

To many investors, there are no clear guidelines on how to set up businesses within the preferential zones. In addition, the government-sponsored SEZs have faced funding challenges resulting in delays in the development of infrastructures needed to attract investors.

Lastly, delays in gazetting and operationalizing SEZs in the country have been a great hindrance in attracting investors. Currently, only 15 SEZs have been gazetted and out of these, only two are fully operational.

The government should provide the needed investment to fully realise the SEZs' potential. With vibrant SEZs, Kenya’s objectives of industrial transformation will be met, and Vision 2030 will not remain a dream but potentially a concrete reality.

Eunice Maina is a Tax Advisor with KPMG Advisory Services Limited and can be reached on [email protected]. The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG.