Exploring Tax Incentives Advanced To SMEs Operating In Special Economic Zones (SEZs)
The rate of taxation directly affects individuals’ propensity to start, run, invest and grow a business. Special Economic Zones stand to benefit from various tax incentives provided for in the Special Economic Zones Act, No. 15 of 2016(the ‘SEZs Act’), underlying tax laws and regulations. These incentives, in the form of exemptions, zero and/or lower rates, are aimed at incentivizing entry and promoting the growth of SEZs.
The rate of taxation directly affects individuals’ propensity to start, run, invest and grow a business. Special Economic Zones stand to benefit from various tax incentives provided for in the Special Economic Zones Act, No. 15 of 2016(the ‘SEZs Act’), underlying tax laws and regulations. These incentives, in the form of exemptions, zero and/or lower rates, are aimed at incentivizing entry and promoting the growth of SEZs.
This article seeks to illuminate tax incentives that Small and Medium Enterprises (SMEs) operating under Special Economic Zones stand to benefit from. They include:
a. Exemption from payment of stamp duty
This exemption is encapsulated in the Special Economic Zones Act by dint of Section 38. The SEZ Act provides that enterprises, operators and developers operating under the SEZs are exempt from payment of stamp duty arising from the execution of any instrument that related to their activities. SMEs are able to save cost when obtaining finance against property as well as when purchasing property.
b. Lower corporate tax rate
The Income Tax Act, Cap 470 makes provision for lower, favorable corporate tax rates for enterprises operating under SEZs. The enterprises are required to remit corporate taxes at a rate of ten percent (10%) for the first ten years of operation and fifteen percent (15%) for the subsequent ten years whereas the standard rate for corporate income tax for other resident companies is set at thirty percent(30%). In turn, the SMEs’ are thus able to reinvest their earnings thereby increasing their overall productive investments.
c. Preferential rates on withholding tax
Enterprises operating under SEZs are allowed to withhold tax on all payments to non-residents at the rate of five percent (5%). These payments include interests, management and professional fees as well as royalty. The dividends paid by SEZ enterprises, operators and developers licensed under the SEZs Act are exempt from withholding tax.
d. Zero rated VAT
The supply of goods and/or taxable services to enterprises operating under the SEZs are zero rated. This means that the goods and/or services are taxable but the rate is set at 0%. The Value Added Tax Act provides for this incentive. SMEs operating under SEZs are thus able to lower production cost and in turn increase the profit levels.
e. Investment Allowance
Enterprises under the SEZs who expend capital expenditure on the construction of a building or the installation or purchase of machinery are entitled to 100% investment deduction. This deduction in turn reduces the amount of tax to be paid by the enterprises. SMEs can therefore leverage on this incentive and make productive investments.
How we can help
At CM SME Club, we advise various stakeholders on setting up business vehicles that are most suitable to operate under Special Economic Zones. We shall also assist you in the preparation and review of agreements incidental to operations within the SEZs, ultimately helping your business mitigate potential risks.
Please feel free to contact us on law@cmsmeclub.com for any further clarification and assistance.
Published on Aug. 22, 2024, 1:10 p.m.