What is a Free Zone?
A free zone, also known as a free trade zone, is a defined geographical area that lies outside the customs territory of the country (or countries) in which it is located. A free zone may also exist as the result of a mutual agreement by several countries to create a customs-free zone in a designated area. The fact no duties or taxes are levied in the free zone helps to promote trade, especially the import and export of all kinds of goods.
If multiple countries conclude an agreement to create a joint free zone, all barriers to trade are abolished. No duties or taxes are levied within the free zone. This freedom from barriers attracts companies from all sectors and encourages them to relocate there and/or to form new companies. A free zone optimises the movement of goods between the individual countries in the zone and offers the opportunity to either secure or disallow imports from third party countries.
The most important types of free trade zones are free zones, free port zones and export processing zones. The United Arab Emirates offers a number of highly popular free trade zones, particularly the emirates of Ras Al Khaimah.
A free trade zone is a geographical area within a country and can be designated or located anywhere within a country. Large manufacturing and trading companies are afforded the opportunity to relocate their entire production line to these free zones, thereby guaranteeing considerable savings on the transport and export of goods to other countries. Equally, a company could move their production facilities to another country and import the resulting goods to the free zone without paying customs duties or tax. This means, for example, that a company can have their goods produced in China, import them tax-free into the free zone and then export them tax-free out again. Within this scenario, the company’s profits remain in the free zone country and are tax exempt. Typical business activities in free zones include the handling and storage of goods in warehouses (often rented out by the free zone), the packaging and sorting of individual products into smaller quantities or individual packages and the inspection of distribution and freight centres.
An export processing zone (EPZ) is defined as an area in which special incentives and privileges are offered to foreign firms for producing goods for export. EPZs are typically industrial areas in developing countries that offer favourable customs regulations (e.g. on the import of manufacturing equipment) as a financial incentive for export-oriented manufacturing companies.