According to Benjamin Franklin in 1789, “In this world nothing can be said to be certain, except death and taxes.” Taxation is a burden for profitable companies, and the option of basing a company in a location where the government has reduced the taxes can be a tempting for any company, but especially for a high-risk high-reward business like the pharmaceutical industry.
Free economic zones, also known as special economic zones, or SEZs, take the inevitability out of taxation. A free economic zone is an area designated by a government for business development where companies are taxed at low levels or not at all. Some free economic zones just provide tax incentives, but others also provide extra support for tenants, from visa services for employees to networking with regulatory bodies for product approval.
There are free economic zones throughout Europe, Asia, Latin America, and the Far and Middle East. Dubai Biotechnology and Research Park (DuBiotech), based in Dubai in the United Arab Emirates, is reported to be the world’s first free economic zone dedicated just to the life sciences. DuBiotech is based on an idea from His Highness Sheikh Mohammed bin Rashid Al Maktoum, United Arab Emirates VP, Prime Minister, and Ruler of Dubai, and is a member of TECOM Investments.
“DuBiotech offers opportunities that combine the benefits of being in Dubai as well as those of being in a free zone. These include 100% taxfree status with 100% foreign ownership, rather than needing a local sponsor. Companies have no restrictions on capital, there are no trade barriers or quotas, and profit repatriation is free,” says Ayesha Abdullah, Ph.D., managing director of the sciences cluster of TECOM Investments.
“The ownership issue was very important for us — outside the free zone we would only have had 49% ownership of the company,” says Salah Malek, managing director, MAQUET Middle East FZ-LLC, a DuBiotech company that provides medical products, therapies, and services for operating rooms and intensive care units.
While the tax advantages can be significant and are very attractive, companies should be aware of the financial limitations of free zones before they commit. “Free zones require companies to declare levels of investment and employment up front, which can make business models less flexible, especially in times of financial crisis,” says Tomasz Konik, head of special economic zones team, Deloitte Poland. Because tax exemption is only beneficial while a company is in profit, this means that free zones may not work out for biopharma start-up companies with a rapid cash burn or companies in R&D rather than marketing phases.
Free Economic Zones And Pharma Development
Free economic zones attract researchers and developers from all around the world, providing an international environment, but most have a mix of different types of industry. Free economic zones that specialize in any one field are rare, according to Konik, and any similarity is usually an accident of geography, rather than the result of a specific plan. The idea of business parks and bioincubators that specialize in the life sciences and so allow companies to access each other’s expertise and cross-fertilize ideas are not new, but free economic zones can have a “value-add” over and above that of a biopharmaceuticals research park, by providing tax and other economic benefits.
“There could be advantages in companies in a free zone being in a similar field such as life sciences — this facilitates networking and helps with cooperation, potentially even allowing companies to carry out R&D in common, so saving money and improving efficacy,” says Konik.
“The specialization of DuBiotech was very important for us. It made a lot of sense to be with other life sciences companies,” says Malek.
“Gathering companies from a variety of life sciences in one place helped us to leverage our strengths and work together,” says Louis Lecoeur, general manager, Firmenich Dubai, which creates flavors and fragrances and has been a tenant in DuBiotech since September 2009.
What Makes A Free Zone Work?
In order to work within a specialized field like life sciences and biopharma, the free economic zone has to provide the specific infrastructure required by this type of company. “DuBiotech has invested in specially tailored facilities that meet all life sciences industry requirements: world class laboratories compatible with the most demanding requirements, warehouses for manufacturing and distribution activities, and land available for new manufacturing plants and logistic platforms,” says Abdullah.
As well as being purpose-built, DuBiotech also provides technical knowledge to help companies negotiate regulatory and legal issues in a new market. This includes assistance to develop their business; privileged connections with important stakeholders such as governmental bodies, financial institutions, media, and specialized professionals; and dedicated assistance with regulatory matters.
The location of a free zone has to be planned carefully; not only does it require a sympathetic government, but also it must be easily accessible to facilitate visitors, both local and global.
“The market for the life sciences industry in the Middle East and North Africa (MENA) is one of the few characterized by a strong and steady growth. Dubai is proving to be the location of choice for national and global brands and an attractive place to relocate human resources because it is the commercial hub of the MENA region situated at the meeting point of three continents and offers a high quality of life in a cosmopolitan environment,” says Abdullah.
“Dubai was the best choice for us for a regional headquarters. It is well-connected, both globally and for the Gulf region, it is easily accessible from Europe, and it has good mobile and Internet coverage. Dubai is a fast-moving country, and decisions are made quickly,” says Dream Samir, managing director for Merck Serono Middle East, a regional division of a global pharmaceutical company. “One of the key advantages of the location for us is that we are close to local partners and distributors, including biopharma R&D and manufacturing companies. We also have health authorities and other healthcare providers nearby.”
Free economic zones can provide homes for both small- and medium-size enterprises (SMEs) and major international biopharma companies. These areas also have business centers for companies wanting to test the market before extending their commitment in the free zone. DuBiotech includes 70 biotechnology, pharmaceutical, and laboratory equipment/testing companies, including global leaders such as Pfizer, Amgen, Merck Serono, and Genzyme, as well as SMEs.
More Than Just A Place To Work
Because of their international nature, free zones such as DuBiotech provide access into a workforce that is diverse, motivated, and highly educated. Free zones also have to work for the families of staff members. Where companies are bringing in staff from outside, the free zone must be positioned to help with visa requirements and residency for employees, as well as supporting families with relocation, including jobs for partners and education for children.
Being so far from home can be a problem for some people, especially the families of ex-pat workers. Free zones, especially within regions that have a non-Western culture, need to provide safety and a feeling of liberty for workers and their families and create an environment that will encourage them to settle somewhere that may be a long way from friends and family.
“The free zone provides social freedom for our staff and their families,” says Samir. “As many of our members of staff come from Europe, which is a different culture from Dubai’s, if we could not promise this freedom for their wives and children, it would be much harder to attract people. My observation is that people stay longer in Dubai than in other countries.”
What’s Next For The Free Zones?
The next step for free zones could be to move toward the DuBiotech model of specialization within an area such as pharmaceuticals or life sciences, offering a range of support services that companies can use when required, as well as access to networks within the free zone and in the local and regional areas.
“The free zones in Asia and the Middle East are booming, and this seems to be because they offer more than just tax exemption, for example, other exemptions, centralized administration services, lower costs, and support services. This will provide strong competition to the established free zones,” says Konik.
The tax exemption within some free zones, for example those in Poland, may be time-limited, Konik adds. Revising this will help encourage companies to move into free zones.
This model seems to have been successful for DuBiotech. “In a short space of time, DuBiotech has grown into a strong community of companies involved in the life sciences. These companies have chosen DuBiotech because of its vision to be the home for life sciences in the Middle East, the investor benefits it delivers, and its strategic location. We want to continue to attract high-caliber organizations that will help achieve the vision of building the science economy of Dubai and becoming a location of excellence for life sciences in the region. This is a long-term vision, which we are building step-by-step, and with the support of our partners, we are confident we can realize this goal,” says Abdullah.