New free zones: The ins and outs of offshoring to encourage foreign investment

Part of Morocco’s strategy to attract foreign investors is the creation of free zones. To date, six integrated industrial zones have been established, all within the region of Tangier, and with each one dedicated to a different sector of the economy, including car manufacturing, aeronautics and sports, among others. Prime Ministerial Circular No 9/2007 created nearshoring zones, dedicated to service industries, such as call centre outsourcing. Two nearshore zones now exist, with a further four planned for the future.

A FAVOURABLE MODEL: In wake of the creation of the Tangier Free Zone (TFZ), which continues to attract investors, Morocco has created two new free zones, namely (i) the Atlantic Free Zone in the region of Kenitra, and (ii) the Oujda Free Zone. In general, the creation of free zones is a relatively new phenomenon. Affecting both Western and developing countries seeking to attract foreign investors as part of economic diversification, and creating more employment opportunities locally, free zones now exist in Europe, the US and India, among others. Free zones can be defined as geographic areas (ports or industrial zones) where companies benefit from a wide range of incentives such as (i) tax incentives, (ii) subsidies and (iii) reduced Customs duties and formalities. In Morocco, free zones have proven successful, with the French car manufacturer Renault opening a new facility in the TFZ in 2012. While this operation was criticised in France on the basis that Renault deprived French workers of employment opportunities, the project moved forward and Renault eventually built its factory in TFZ to reduce its employment taxes and costs associated with social security tax. Moroccan free zones are indeed very attractive for European companies looking to reduce their costs. The geographical factor is a key element in this current trend towards attracting European investors into Morocco. For instance, the TFZ prides itself on being only 15 km away from the European border. The proximity to Europe and the Moroccan policy objective to enhance its economy through incentives offered to foreign companies indicates that free zones look set to continue to develop in the country.

CURRENT TRENDS: From a general point of view, offshoring worldwide is a trend set to continue. Most companies across the globe are in one way or another seeking to reduce their costs by outsourcing and establishing their businesses and factories in countries where the costs are lower than in their jurisdiction. This trend can be qualified as offshore shopping. In such an environment, the biggest corporations are offshoring their activities in countries that will offer them more incentives, such as low taxes, low manufacturing costs or low Customs duties. Morocco has understood the necessity to position itself favourably in this global development and, as such, is continuing to create offshore zones that offer the best incentives.

BENEFITS: The recent finalisation of the facility for French-Korean Renault-Nissan car manufacturer in the TFZ indicates that Moroccan offshoring policy is indeed attracting major global investors. And the reasons for this are simple. Companies establishing their activities in the TFZ will benefit from (i) exemption of taxes on dividends and partnership shares, (ii) 0% corporate tax during the first five years and then a reduced rate of 8.75% for the next 20 years; (iii) exemption of all registration taxes and stamp duties; (iv) exemption of value-added tax; and (v) tax-free repatriation of foreign earnings. Also, foreign companies may benefit from subsidies from the Moroccan government, which grants financial assistance for the acquisition of land and / or construction of production units.

The incentives applicable to free zones look set to continue to attract new foreign investors and enhance international transactions in North Africa. This is especially the case given that the incentives offered are concomitant with the creation of Casablanca Finance City (CFC), which will allow foreign finance companies to set up a presence in Morocco through the CFC status and benefit from other related business incentives.