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Zone Overview

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Kaunas Free Economic Zone (FEZ) or Kaunas FEZ is a free economic zone near Kaunas, Lithuania. It has an industrial development area of 534 hectares^[1] that offers tax and customs incentives to production or logistics companies investing at least €1 million or service companies investing more than €100,000 and employing more than 20 people^[2]. 

This is managed by a private management company that aims to bring together a strong and diverse business community by attracting the most dynamic Lithuanian companies and the most advanced foreign companies. Most of its investors are foreign companies, as more than 70% of the total investments in the Kaunas FEZ are foreign direct investments^[2].

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Background

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Lithuania is a small but ambitious country, aiming for economic growth. With a young, dynamic and innovative society, it portrays itself as being open to innovation and inclined towards integration and cooperation. The Lithuannian state adopted democracy and a free market economy when it gained independence in 1991^[1], laying a solid foundation for the future.

The Kaunas Free Economic zone was established on 22 October 1996 in the Kaunas district. The first investor was established in 2005. Currently, more than 45 foreign and Lithuanian companies operate in the industrial zone. They have already created more than 6,000 jobs^[1] and generated 0.31% of Lithuania's gross domestic product. Since the installation of the first investor, the Kaunas FEZ has attracted €680 million in direct investment^[2].

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Layout

The Kaunas region is the second largest administrative unit in Lithuania, with highway connections to other major Lithuanian centers and foreign countries and easy access by air and rail transport; therefore, it is valued for its strategic geographical location. 

The territory of Kaunas Free Economic Zone is located near the city of Kaunas and close to Kaunas international airport. Surrounding the FEZ there are two main roads of national and international importance: the A1 and the A6^[1].  

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One of Lithuania's geographical advantages is the non-freezing Baltic Sea port at Klaipėda^[1], as well as the strategic location at the crossroads of European regions. Most European capitals are within a three-hour flight of Lithuania.

Lithuania's road, sea and railroad systems are also well developed and connected with neighboring countries. Lithuania, located in the north-eastern region of the EU, is a convenient logistic connection for conducting international trade.

According to the 2019 throughput of Klaipėda port, the closest port to the Kaunas FEZ, the annual cargo volume of Klaipėda is 46.26 million tons. Kaunas FEZ is located close to 3 international airports: Vilnius, Kaunas and Palanga, all of which are, as mentioned previously, at most 2-3 hours away from some of the most important EU capitals^[1].

There is a direct land connection to the seaport of Klaipėda, the most important in the country. The 1,435 mm and 1,520 mm wide tracks intersect at the Palemonas intermodal terminal, which facilitates the transport of goods for import and export^[1].

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Kaunas FEZ offers fully developed plots with complete infrastructure, meaning  construction works can start immediately. The Kaunas FEZ area has three parts: Production and Logistics Area, Business Street and Air Park.

The Production and Logistics Area occupies the largest territory of the Kaunas FEZ. Investments for the green field occupy the largest part of this territory. This area is used by logistics terminals, pharmaceutical companies, foam production companies of Finnish origin and automation companies of high-tech industry.

The business street is a part dedicated to upcoming business centers within the Kaunas FEZ and it is located on the A6 road. It is planned to build 13 different plots for hotels and offices. 

Most of these plots have detailed plans based on modern infrastructure. This territory will have easy access, a well-located parking system and well-developed office premises to make it more attractive to investors.

The final part of the Kaunas FEZ is the Airpark. This territory shares a border of almost 3 kilometers with Kaunas Airport, allowing direct access to airplanes and elimination of customs formalities.

The Airpark territory contains three different types of roads: air, automobile and railway. Airline depots, various aeronautical industries, such as aircraft testing, sales and assembly, or aeronautical service companies can easily establish themselves inside the FEZ and use the runway, tax incentives or other privileges offered. This is one of the greatest advantages of Kaunas FEZ.

Economics

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 Currently, 44 investors have leased some 155 hectares of Kaunas FEZ territory, employing more than 6 thousand people^[1] in manufacturing and service enterprises since 2007. Since the first employees started working in Kaunas FEZ, more than €131 million in labor taxes have been paid.

Sustainable companies, both local and foreign, set up shop in Kaunas FEZ. The latter generates 67% of FDI, which leads to the arrival of modern technologies several times faster than the Lithuanian average. The Republic of Lithuania, the European Union and the municipalities of the district and the city of Kaunas have invested approximately €23 million in the Kaunas FEZ, and the profitability of this project for the state is already 5.6 times higher than at its inception.

In 2021, a strategic goal was set to encourage the establishment of smart specialization companies on its territory and contribute to their R&D activities, the Kaunas Free Economic Zone (FEZ), carrying out the Smartpark project, the result of which is expected to be a cluster of companies. that create, develop and produce new products^[1].

The Smartpark project^[4] is planned as a community of smart specialization companies, a group focused on the development and production of new products. It seeks to foster business and scientific integration, with the priority activities of the Smartpark community being transportation, logistics, ICT, health technology, energy, biotechnology.

During the last year, the number of free economic zones in Lithuania has expanded considerably. To help both Lithuanian and foreign investors, tax and other activities are implemented in these zones.

In addition to infrastructure and rapid settlement, the Kaunas FEZ offers corporate and real estate tax incentives.

Profits are taxed at 0% for the first 10 years and 7.5% for the next 6, in contrast to the rest of Lithuania where corporate taxes stand at 15%. In addition to that there is zero real estate, a policy which  applies for the whole period of Kaunas FEZ’s operation, i.e. until 2045^[1].

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In order to be eligible for the corporate tax incentive, a company must, as a general rule, meet a number of conditions^[1]: 

• It must be registered as a Zone company;
• Needs to reach the investment threshold:

• For manufacturing companies: €1 million;
• For service companies: €100 thousand;

• Needs to generate 75% of the revenues from the activities carried out in the FEZ territory
• They have to perform activities that are not prohibited by the Law on the fundamentals of FEZ, specifically its Article 8.1;
• Service companies have to meet the average annual number of, at least, 20 employees.

Legal

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The law on the fundamentals of FEZ was enacted in 1995, being amended in 1996. This law establishes in its article 2 that FEZ by definition ''means a territory designated for the purpose of economic-commercial and financial activities within which economic entities are provided with special economic and legal conditions of operation as established by this Law. The territory must not have permanent residents.

2. Goods within the zone shall be deemed to be outside the customs territory of the Republic of Lithuania as regards import and export duties and charges, as well as other prohibitions and restrictions of an economic nature"^[3].

In addition, the law establishes that the territory of the zone will be leased to the zone administration company in accordance with the procedure established by law and this company will be in charge of organizing the economic activities of the zone.

In its Article 9, the Law provides that the creation of a zone may be initiated by city and district municipalities of the Republic, as well as by counties submitting to the Government of the Republic of Lithuania a proposal for the creation of a zone^[3]. 

The proposal must specify the types of activities of the zone; the description of the territorial boundaries of the zone and the plan of its territory, the agreement of the county governor to lease the territory allocated to the zone agreed with the municipality; as well as all necessary information and a project of law on the zone^[3].

Zones can also be created at the initiative of the Republic of Lithuania. After the approval of the draft law, the Republic of Lithuania will invite international investors to join the project and invest in it.

One of the indispensable requirements for establishing a FEZ in Lithuania is that more than 50% of the members of the zone management company must be citizens of the Republic of Lithuania^[3]. 

Companies registered and operating in the zone and engaged in productive activities will pay rent for the land at a reduced rate of 50%. The private capital of the zone management company and zone companies invested in the infrastructure will not be included in the value of the land when determining the land rent.

Zone enterprises will pay a profit (income) tax reduced^[3] by 80% for 5 years from the day of their registration; for the following 5 years, the rate of profit (income) tax payable by the enterprise will be reduced by 50%.

When the goods are transported from the customs territory of the Republic of Lithuania to the zone, the laws and other legal acts of the Republic of Lithuania regulating the export of goods abroad, including export taxes applied to the goods, and other economic prohibitions and restrictions shall apply.

When the goods are brought into the customs territory of the Republic of Lithuania from the zone, the laws and other legal acts of the Republic of Lithuania regulating the import of goods from abroad, as well as import duties and taxes applied to the goods and other prohibitions and restrictions of an economic nature shall apply.

Foreign investors shall have the right to transfer their legally received income (profit) abroad without restrictions. Foreign investors may take out of the country their income (profit) or a part of it in goods purchased on the domestic market or reinvest it in the economy of the Republic of Lithuania.

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Conclusion

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The Kaunas FEZ has 47 companies invested in the Kaunas FEZ, beginning with the first customer which arrived in 2005. Some 80 companies operate in the territory, including tenants operating at the customers' facilities. According to their strategic plans, the companies will generate more than 6,200 jobs when operating at full capacity.

There are 534 hectares of land in the Kaunas FEZ. The area occupied by customers exceeds 184 ha, while the total value of project investments amounts to €1 billion. 70% of this value is foreign direct investment.  

The future of Kaunas FEZ looks promising, because it is particularly suitable for investment due to the advantages of its geographical location, tax incentives and the competence in a wide range of technical specialties. 

See more about the Kaunas Free Economic Zone in our Open Zone Map here.

References

1. Kaunas Free Economic Zone; Kaunas Free Economic Zone

https://ftz.lt/en/

2. Familiar/unfamiliar Kaunas FEZ: myths about the free economic zone; Kaunastic

https://kaunasin.lt/en/kaunas-fez-myths/

3. The fundamentals of Free Economic Zones; Lietuvos Respublikos Seimas

https://e-seimas.lrs.lt/portal/legalAct/lt/TAD/TAIS.38026?jfwid=i3h7we8bj

4. Kaunas FEZ Smartpark: hospitable space for innovation-creating business community; Kaunastic

https://kaunasin.lt/en/kaunas-fez-smartpark-hospitable-space-for-innovation-creating-business-community/