October 25, 2012 - 10:28 AMT
Features of Armenian Free Economic Zone
How the idea of establishing Free Economic Zone in Armenia emerged
Currently there are approximately 1200 free economic zones (FEZ) operating worldwide, the most successful ones being the Special economic zones in China, about ten in number. These are quite efficient since the Chinese market is huge, and the labour force is cheap there; this attracts big brands to these zones.

Successful operation of FEZ, namely, the attraction of foreign investments and introduction of new technologies by global leading companies may give a huge impetus to development of any economy, including the Armenian one.

After studying the international practice of FEZ operation in post-Soviet countries including Russia, Georgia, Estonia, as well as UAE and Iran, Sitronics Armenia CJSC proposed an initiative of creating a similar regime of enterprise activity in Armenia as well.

With participation of the company, a bill was drafted and submitted to the government for consideration. On May 25, 2011, the parliament of Armenia passed the Law “On Free Economic Zones”, and President of the Republic of Armenia Serzh Sargsyan signed the Law on June 28, 2011.

According to the Article 1 of the Law, the latter regulates the legal relationships arising during the establishment, organisation and liquidation of free economic zones.

What is FEZ

Establishment of the legal framework enabled Sitronics Armenia to apply to the government to become organizer of the first FEZ in the country. The government adopted a relevant decision on February 2, 2012.

The company had to hurry with this, since the Law says if the free economic zone fails to start operating within one year after adopting the decision of the Government on the establishment of а free economic zone, the decision of the Government on the establishment of a free economic zone shall be revoked.

The first FEZ will start operating by the end of 2012 on the territory of RAO Mars factory (56000 sq.m.) and Yerevan Computer R&D Institute (YCRDI) (27000 sq.m.). Since 2008, these are managed by Sitronics. Russia represented by the Federal Agency for State Property Management is the owner of these companies.

Article 3 of the Law specifies that the Free Economic Zone is the special area, which is deemed to be beyond the customs area of the Republic of Armenia and wherein entrepreneurial activities are carried out in accordance with the specifics of this Law.

Also, different operational types of free economic zones may be established in the territory of the Republic of Armenia.

Armenian government puts special requirements to the managing company

The free economic zone should qualify for the following requirements: be equipped with facilities for bringing in cargo transportation means, including railway transport; be demarcated with a border in compliance with the technical requirements to the borderline approved by the government; be provided with the conditions necessary for carrying out customs control and customs formalities by customs officers.

In addition, FEZ should have facilities for free movement of goods within the free economic zone; be equipped with safety, first-aid and anti-fire systems; have uninterrupted water supply and wastewater collection system, energy supply, gas supply, solid waste disposal and at least a telephone line and internet as means of communication; be equipped with appropriate means of complying with sanitary and hygienic norms; have a quarantine service area. Also, it must be provided with logistics equipment for preservation of goods as well as with communication and other means necessary for the loading, unloading, transportation and storage facilities.

Therefore, Organiser of a free economic zone is the legal person established (founded) by the government or selected upon the decision of the government, with the sole aim of organising a free economic zone that ensures the creation of infrastructures necessary for carrying out activities in the free economic zone and the rendering of services.

“The total investments make up $10 mln; so far, $2.5 mln were invested, another $5 mln will be added shortly,” Sitronics Armenia CEO Armen Khachatryan said. The company is going to manage the FEZ for 10 years; in case it succeeds in this, the period may be extended for another 10 years, Khachatryan mentioned.

Armenian government puts special requirements to the operating company

Operator of a free economic zone (the Operator) is the commercial legal person, individual entrepreneur or a branch registered in the Republic of Armenia that performs entrepreneurial activities solely in the free economic zone in accordance with the Law, as well as the representation of a foreign organisation holding a respective authorisation issued by the government and a respective contract signed with the Organiser.

According to the Article 10 of the Law, the obligations of Operators are as follows: to construct in the area of the free economic zone in accordance with the plan approved in advance, by agreeing it with the Organiser; to comply with the requirements of the legislation of the Republic of Armenia with regard to pursuing activities in the free economic zone and those of the procedure for operation of the free economic zone; to comply with the safety rules of the free economic zone, the requirements defined by the authorisation and to fulfil other obligations as defined by the contract.

The key requirement is export-oriented production. There is a wide range of activities varying from electronics production, biotechnology, and pharmaceutics to industrial design and telecommunications.

The path the first FEZ operator has passed

The Canadian R&D Arts company will become the first operator of FEZ in Armenia, with its representation office to be located in YCRDI territory. The company which has been recently endorsed by the government and got the status of an operator is mostly aimed at mobile app software development, in particular, cartography and video streaming. Its clients include Macadamian, 9x9.TV, The Talk Market, Modular, Rearden Commerce and other companies. R&D Arts plans to invest about $2,2 mln in Armenia during the coming years and create approximately 25 new jobs.

Vahagn Lalayan, head of the Investment Policy Department of the Ministry of Economy of the Republic of Armenia told about the path this company has already passed. The interested company submits to the government or the Ministry of Economy an application, business plan and a certificate provided by the managing company, namely Sitronics Armenia saying it is aware of the FEZ operation conditions.

The business plan comprises 6 key points, including the company's export-oriented strategy, areas of activities and volumes of produced output. Relevance of the business plan to the goals and directions of FEZ, as well as creation of new jobs and total investment amount, as well as the feasibility of the proposed plan will be considered.

The business plan will be assessed by the interdepartmental commission set up by the decree of the Armenian Prime Minister in December 2011. It comprises the minister and first deputy minister of Economy, representative of the presidential administration, deputy Justice minister, deputy minister of Finance, CEO of the Armenian Development Agency, representative of the government of Armenia, etc.

After the company submits the application and the business plan, the commission considers the investment programme within 15 days and sends its conclusion to the government. In its turn, within 21 days the executive body makes the decision on whether or not the company is allowed to work in FEZ. In case the verdict is positive, the applicant company must sign a contract with the managing company within three months, and may start working in FEZ then.

Tax exemption

Speaking about the attractiveness and peculiarities of the first FEZ, the representative of the Ministry of Economy mentioned the benefits the companies get here.

The operators are exempted from the income tax, customs duties, VAT, as well as property tax. However, social payments are due to be paid in accordance with the Armenian regulations.

Government will keep an eye on FEZ operation

The Article 11 of the Law specifies the restrictions in the free economic zone. The following types of activities may not be carried out in the free economic zone: production and trade of radioactive substances; production and trade of arms, ammunition and explosives; import, storage, production and trade of narcotic drugs and psychotropic substances without an

authorisation issued as prescribed by the legislation of the Republic of Armenia.

Besides, the entry and exit of natural persons, goods and transportation means into and out of the free economic zone without customs control shall be prohibited. The entry and exit of natural persons and transportation means into and out of the free economic zone shall be carried out as prescribed by the legislation of the Republic of Armenia.

FEZ will have a customs office to record the transfer of goods, and Sitronics Armenia will watch to ensure that operators do not engage in other production in this territory and maintain environmental regulations, and commits to provide constant operation of all infrastructures for the operating companies.

Direct investments flow to FEZ!

There are no estimates on the expected investments in this FEZ yet; they depend on the type of production activity.

Large companies from the U.S., Belgium and Great Britain demonstrated interest in FEZ, but they have not applied to the Ministry of Economy for relevant procedures yet.

Is the world aware of the unique Armenian FEZ launching by late 2012?

When choosing the operating companies, the Armenian government will give preference to leading brands; however, the local producers may also appear there to export their output abroad.

Cubix Development is one of such companies, with its office located on YCRDI territory. According to company CEO Alexander Bakhshetyan, Cubix Development has been developing business applications, e-commerce and CRM solutions, as well as mobile applications for iOS и Android since 2008. The output is mostly exported to foreign markets, and the turnover made almost 300000 euros in 2011. Outsourcing companies are interested in working with the Armenian partner because of the price/quality ratio and professional qualities of Armenian human resources. Cubix Development currently seeks new foreign partners to expand its activities, to jointly invest and work in Armenia's FEZ towards increasing the export of their production to foreign markets. The authorities pursue active marketing policy to inform such companies, using all possible methods including investments partners, diplomatic missions, the Diaspora, social networks, information leaflets, etc.

Pioneering in organizing a FEZ is not easy, but Sitronics Armenia is optimistic about the future, particularly in case the potential investor feels state guarantees. “This is important for the state as well, since we talk about new technologies, direct investments, and increased recognizability of Armenia on the international market,” Khachatryan stressed.

However, it is too early to name specific results of FEZ operation, though officials have repeatedly stated that another two zones will be established in Armenia in the near future. They will focus on agriculture (near Zvartnots airport) and jewelry (Armenian Jewellers Association, AJA).

Victoria Araratyan / PanARMENIAN News