The Costa Rican Free Trade Zone Regime offers a wide array of business opportunities to foreign investors who want to take advantage of the country's unique characteristics, including doing business in the oldest democracy of Latin America; the availability of a highly educated and skilled workforce; and the tax benefits granted by the Free Trade Zone Regime.
Furthermore, Costa Rica has enacted legislation to strengthen the Free Trade Zone Regime pursuant to the regulations set forth by the World Trade Organization. This explains why almost 260 companies, mostly foreign, are operating under the Regime through local subsidiaries.
The Free Trade Zone Regime in force comprises a set of incentives and benefits granted to companies that manufacture, handle, process, produce, trade or provide goods or services for exportation or re-exportation, as well as to those scientific or technological development companies that make new investments in the country.
This Regime, originally created to stimulate exporting companies, is governed by the Free Zone Regime Law, Number 7210, and its regulations. Companies that benefit from the Regime must meet certain requirements and establish their operations in designated free trade zones, which are specific areas designed for this purpose.
Companies located within the Extended Metropolitan Area (the more densely populated area, which includes San Jose, the capital city, and nearby Provinces), as defined by the Law, can benefit from an exemption of 100% on income tax during the first eight years of operation and 50% during the next four years. Companies located outside the Extended Metropolitan Area are granted an exemption of 100% on income tax that applies during the first 12 years of operation and 50% during the next six years.
Additionally, manufacturing companies that make a new investment, when and if they meet certain requirements – such as being part of a strategic sector of the economy, as defined by the regulations of the Law – are partially or totally exempt from income taxes, and can benefit from a special income tax rate of 6% during the first eight years and 15% during the next four years, if operations are located within the Extended Metropolitan Area. If located outside the Extended 2 Metropolitan Area, the income tax rate is 0% during the first six years, 5% during the next six years, and 15% during the following six years of operation. In general, some of the additional tax incentives established in article 20 of the Law are exemptions:
- from payment of all taxes and duties on imports of raw materials required for the operation of the business;
- from all taxes and duties affecting imports of machinery and equipment corresponding to the beneficiary's operation;
- from all taxes and duties on imports of fuels, oils and lubricants required for the operation of the business;
- for a term of 10 years from taxes on capital and net assets and the payment of the real estate transfer tax, as of the date of approval of operations of the company;
- from sales and consumer taxes;
- from all taxes on remittances abroad; and
- from all taxes on profits, including dividends paid to shareholders in accordance with the following differences:
(i) 100% for companies located in zones of higher relative development, for a term of up to eight years and 50% for the following four years;
(ii) 100% for companies located in zones of lower relative development, for a term of up to 12 years and 50% for the following six years; and
(iii) exemption from all municipal taxes and licences for a term of 10 years.
Also, export processing enterprises that re-invest in the country may receive an additional exemption on the payment of income tax. Furthermore, processing companies – independent of whether they export or meet special requirements – may enjoy other benefits such as the importation of merchandise with tax suspension when the merchandise is submitted to transformation, repair, reconstruction, or assembly within Costa Rican territory.
The Law also provides, pursuant to article 20 (bis), another advantageous alternative to extend the term of the exemptions. The beneficiaries may obtain from the government an extension of the incentives if they make a considerable additional investment (such as works in progress, non-depreciable real estate, machinery and equipment and software used in the business).
If the extension is granted, the incentives will consequently be granted as if the beneficiary were applying for the first time. Therefore, under article 20 bis of the Law, these incentives would be available as of the date of notification of the approval of the extension, or the date of commencement of operations for income tax purposes.
The above benefits have attracted a very significant number of companies that have focused on specialised manufacturing and services operations; all of which acknowledge the success of the Free Trade Zone Regime.
It is important to underline that the request to obtain the corresponding authorisations to operate under the Regime is handled by Procomer (the Office for the Promotion of Foreign Trade), which is part of the Ministry of Foreign Trade (Comex).
The procedure for obtaining such authorisations is relatively expeditious and straightforward, as is the setting up of the local subsidiary or selected legal vehicle to operate in Costa Rica.
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About the author
Fernando Vargas-Winiker specialises in commercial, corporate, telecommunications and energy law. In the commercial and corporate areas, he has advised national and international clients in the negotiation, structuring and closing of mergers and acquisitions and financing operations, drafted general contracts and structured trust agreements. He has developed an active practice in channelling foreign investment and rendering advice to investors, especially in relation to the Costa Rican Free Trade Zone Regime. In the telecommunications and energy law sectors, Vargas-Winiker has advised companies in several projects, providing guidance on corporate and regulatory issues and heading the firm’s teams of specialised lawyers who participate in such projects.
Vargas-Winiker graduated from the Universidad Autonóma de Centroamérica as a licentiate in law (cum laude mention) and has an LLM in Common Law Studies from Georgetown University Law Center. |
Contact information
Vargas-Winiker
Pacheco Coto
PACHECO COTO Building
Forum 2 Lindora
San José, Santa Ana, Pozos
10903, Costa Rica
T: +506 2505 0900
F: +506 2505 0907
E: info@pachecocoto.com
W: www.pachecocoto.com |