Free Economic Zones

The regulation of free economic zones commenced in October 1992 with the law entitled “General Principles of Creation and Functioning of Special (Free) Economic Zones”. The main provisions of this law include the establishment of a privileged tax and customs regime, a special banking and credit system including preferential loans and insurance as well as government investments. The first free economic zone was created in June 1994 by Resolution No. 396 of the Cabinet of Ministers on the Economic and Technological Experiment in the Brody region of the Lviv Oblast. The Zone was initially established for a period of five years but with the possibility of prolongation in case of ‘success’. The only privilege granted to enterprises established in this Zone was the exemption of certain goods imported into the Zone from import duties for the period of time the zone keeps its special status. No tax concessions were granted.
Subsequently, three more special economic zones have been created. The second zone was established according to law No.65/96 entitled “Some Issues of Currency Regulation and Taxation of Subjects of the Experimental Zone “Sivash”” of 23 February 1996 in the Sivash region. In this Zone raw materials, equipment and appliances (except for excisable goods – automobiles, oil products, etc.) imported by companies duly registered are exempted from import duty and VAT and enjoy a profit tax reduction of 50 per cent if they reinvest their profit.

The third and fourth zones are both located in the Donetsk region. The Presidential Decree “On Special Economic Zones and Special Regime of Foreign Investment Activity in the Donetsk Oblast” No.650/98, of 18 June 1998 establishes these economic zones for 60 years; it also sets up separate territories of priority development within these zones (for terms of 30 years). Enterprises established in these zones enjoy the following special tax and customs privileges:

  • enterprises only pay two thirds of the generally established profit tax rate on earnings;
  • enterprises do not pay amounts due to the State Innovation Fund and Chernobyl Fund;
  • imports from abroad are exempt from import duty and VAT; this does not apply to goods subject to excise taxes;
  • goods produced or sufficiently reprocessed in the zone are exempt from any export duties and taxed at zero VAT rate (as is normal under a destination based indirect tax system);
  • imports and exports from and to these two free economic zones are not subject to licensing requirements or quotas, if the exported or imported products are to be used in the production process within the free economic zones.

The extent to which these free economic zones are successful in practice is ambiguous as reflected in the marginal interest foreign investors have shown in these areas to date.

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