At the same time, the establishment of a FIZ intends to further the development of foreign economic ties, increase the delivery of high quality goods and services, and create a modern industrial and market infrastructure in Georgia.

In order to achieve the aforementioned goals, the FIZ legislation provides for a set of various preferences and concessions to investors contemplating economic activities in the zone. For such investors, the package of incentives offered includes the combination of import duty exemptions and corporate income tax and other exemptions, mostly from indirect and local taxes. Other incentives include the absence of performance requirements and control exchange regulations.

The legislation also stipulates that the FIZ must be privately managed by an “Organizer,” establishes the FIZ and ensures developing, administering, planning and promoting the zone.

The rationale of the state to provide a preferable regime for additional investment in Georgia bears another implication for an investor. In addition to certain privileges and concessions granted under a FIZ, an investor will seek a stable investment environment. As part of such an environment, an investor shall rely on the fact that the preferential legal and fiscal regime of FIZ will last for a certain period of time and will not be removed by the state unexpectedly. Surprisingly, the FIZ legislation is not designed for a specific period. In other words, the legislation does not specify the period under which the FIZ incentives will last. It is worthwhile to note that the two relatively recent resolutions of the Government of Georgia on the establishment of FIZ regimes in Poti and Kutaisi do clearly provide for the term of FIZ: 99 years in each case. However, respective wordings do not imply the state is unconditionally ensuring irrevocability of the said term and the latter aspect requires additional considerations and thoughts to be given by investors.

In the absence of clear wording, one may think that the Georgian legislation intends to provide the incentives on ad infinitum basis. This assumption, however, is not supported by reality. Apart from the economic policy standpoint, which is not the subject of this article, it can be argued that such a policy may potentially go against the sovereignty of the state and, consequently, trigger legal challenges to uninterrupted operation of FIZ for a specific term. In other words, the risk is that pursuant to the state sovereignty considerations, the state may withdraw the incentives at any time on various grounds, such as shortfalls in state revenues, or in case it considers that FIZ advantages were poorly perceived and/or administered by the investor.

Georgian practice has produced the two solutions for ensuring the stability of a certain legal framework on the legislative level. One solution envisages having clear wording under the respective normative act (law) that certain preferences shall be maintained for a definite period. An example of such a case can be found in the Law on Oil and Gas, dated April 16, 1999, which expressly states that within 25 years from the effectiveness of the law, changes to the legislation which worsen investment conditions may not be applicable to oil and gas contracts. Another approach for protecting investors is to attribute the force of the law or international treaty to a definite investment contract made by the state and a respective investor. Although the stability clause under such contracts seems quite controversial from the legal viewpoint, existing practices show that such an approach has been widely applied in cases where the substantive value of an investment made, or vital strategic interests of the state, have been at stake. It seems that investment value or/and national strategic intentions were the main criterion which were apparently reconciled by Georgia authorities through the aforesaid approaches. On the other hand, however, contractual preferences and concessions have been extended on an exceptional and exclusive basis, such as the BTC oil pipeline and the South Caucasus natural gas pipeline projects.

Neither of the two aforementioned solutions, however, is reflected in the FIZ legislation. The Law on Free Industrial Zone and the Georgian Tax Code do not spell out a specific term which respective tax and other concessions, as granted to an investor, shall be preserved. While the resolutions of the Government of Georgia expressly state that the term of operation in the case of the FIZ is 99 years, a resolution, per se, when ranking within the hierarchy of normative acts is concerned, is not an appropriate instrument to irrevocably ensure the stability of advantages granted under the FIZ regime. Likewise, the agreement to be made between Government of Georgia and Organizer concerning the establishment of FIZ can not be deemed as an effective tool providing the stability of the current FIZ legal framework.

FIZ investors may seek alternative remedies in order to offset potential damages which may occur should Georgia withdraw the incentives attributed to the FIZ. Some strategic options may be available to foreign companies that made investments in the country’s FIZ, although for some investors those options may be limited.

Hypothetically, the elimination of a FIZ’s fiscal advantages would mean that investors would face unexpected financial burdens. This would entail significant increase of business costs, substantial fall in profits and ceasing or reducing manufacturing operations in Georgia. For the Organizer of the FIZ, such a development means the loss of investors from the FIZ and, consequently, a loss in profits when leasing FIZ space and/or premises. In the absence of a statutory stability clause, one possible strategic option available to the Organizer is to arrange for “hedging” against unexpected legislative changes in terms of providing for a re-negotiation/adaptation clause in FIZ agreement with the Government of Georgia. The proposed approach may serve as an alternative treatment to preserve the sanctity and stability of relevant contract. The re-negotiation/adaptation clause, however, is more focused on economic equilibrium rather than the legal stability required for successful investment. Moreover, the duty to renegotiate relies on the good will of both parties should an initial economic equilibrium be eventually changed due to legislative changes. Thus, in practice the clause may be proved to be less helpful should the Organizer attempt to enforce it in case of a dispute. At the same time, unlike the Organizer, no direct contractual relationship exists between the Government and FIZ investor and, therefore, in the absence of such agreement, any reliance on the re-negotiation/adaptation clause may also be of very limited help.

An alternative strategic option, which may also serve as a viable recourse to an investor, may be found in any applicable bilateral investment treaty (the “BIT”) to be effective and binding for Georgia. To date Georgia has concluded BITs with sixteen countries. As a rule, BIT provides investor with a certain legal protection of his investments, including the right to seek direct redress through international arbitration (often, under auspices of the International Centre for the Settlement of Investment Disputes – ICSID) and obtain compensation for violated rights.

Based on these grounds, an investor may take legal actions against the host state provided that the measures of the state are in violation of the obligations as set out above and envisaged under a respective BIT. Such an adverse attitude by the state may be particularly evident in the case of abolishing fiscal and regulatory incentives under a FIZ when such actions undermine the legitimate expectations of the FIZ investor and, eventually, result in conflict with the principle of “fair and equitable treatment”.

The stability of FIZ legal framework remains the main concern for investors interested in operating under the current FIZ legislation. As mentioned above, risk prevention can be sought by an investor through various forms, or alternatively, an investor may apply his rights of recourse to recover losses suffered in case his legitimate expectations are frustrated by the state.

The volatility of the stability still remains on agenda especially in the light of Georgia’s aspiration towards extensive free trade agreement (the “FTA”) with EU. Although the latter prima facie does not favor the idea of special economic zones, the FIZ may theoretically pose an obstacle to a FTA: special economic zones under EU law are traditionally perceived as a form of state aid (preferential income and property tax breaks), which distorts the fair competition in the integrated EU market.