Costa Rica’s free trade agreements are the most advanced in Central America. More tax breaks have just been granted to extend its commercial attractions – but companies need to keep up-to-date with a growing phalanx of regulations.
Changes to Costa Rica’s Free Zone Regime law, which allow domestic and foreign companies to expand the tax-free services they offer, have recently worked their way through the country’s legislature.
After public consultation, a new bill includes amendments to the services category (Category C in Free Zone Law), effectively eliminating the local sales ceiling previously set at 50%.
Costa Rica offers the region’s most secure political environment, with a robust legal and banking infrastructure underpinning the country’s considerable appeal to investors and multinational corporations.
The Free Trade Zone Regime (FTZR) is the mainstay of the country’s export and investment strategy. Essentially, it is a set of tax incentives and other benefits granted by the Costa Rican government to investing companies who comply with strict local regulation. The regime, governed by the Free Zone Regime Law No 7210 and associated regulations, aims to boost foreign direct investment and trade and employment opportunities for Costa Ricans.
Qualifying companies are exempt from sales and excise taxes on purchases of goods and services and from all municipal taxes and licences for ten years. This is complemented by significant exemptions from profits taxes.
However, these concessions are time limited: for companies located inside the Gran Area Metropolitana Ampliada (GAMA) – a prime area within the Central Valley – the exemption is 100% for up to eight years and 50% for the following four. Outside the GAMA, the exemption is 100% for up to 12 years and 50% for the following six.
Companies must be active in one of the following areas: handling, processing, manufacture, production, repair and maintenance of goods; repackaging and redistribution of goods; and providing services for export or re-export. They must comply with the requisites and obligations in Law No. 7210, its amendments and regulations.
They must provide a minimum initial investment of US$150,000 in fixed assets (US$100,000 for those outside the GAMA) and establish their operations in specific industrial parks.
Exceptionally, companies may set up all or part of their operations outside these parks, but higher investment and a more arduous approval process is involved.
The zones are supervised by the Promotora del Comercio Exterior (PROCOMER), part of the Ministry of Foreign Trade. PROCOMER requires qualifying organisations to comply with a raft of regulations and fiscal measures.
These cover headcount, investment level, transfer pricing studies, and VAT filing. Companies are exempt from the latter but, from July this year, are still required to file. There is a mandatory requirement to submit annual reports and audits to deadlines. Companies must comply with strict local and international policies, evidenced by documentation.
Juan Carlos Rubio, Managing Director of TMF Costa Rica comments: “The Free Trade Zone Regime is complex, with intricate fixed asset and inventory management requirements that take time and experience to get right. However, it is a price worth paying: Costa Rican people are a prime attraction. They are creative, proactive and productive and many have intermediate or advanced English language skills. The administrative obstacles can always be overcome, providing you create a firm foundation for regulatory compliance.”
How Microsoft is navigating the Regime
Microsoft is driving Costa Rica’s digital transformation through cloud and artificial intelligence. In October 2019, the software giant entered the Free Trade Zone Regime. TMF Group provided end-to-end regulatory and free trade zone compliance services for Microsoft’s regional Sociedad de Responsabilidad Limitade (SRL), a form of limited liability company favoured by foreign companies.
To fulfil Microsoft’s operational objectives, TMF Group’s comprehensive approach to regulatory compliance covered:
- Tax: indirect and direct, transfer pricing, accommodating changes to FTZR regulations
- Balance sheet and financial statements analysis
- Accounting support services
- Treasury and banking support
- Statutory (external) audit, internal audit and SOX compliance
- Statutory management and counselling
- Review of tax filings related to payroll
- Mailroom and documents management
- Purchase order desk support.
Silvia Cerdas, Statutory and Taxes Controller of Mid-Americas and Venezuela at Microsoft explained: “TMF Group’s highly trained team demonstrated great technical capability, starting in October 2018 when they managed, from end to end, all tax and accounting requirements relating to Microsoft’s newly established operations in Costa Rica’s Free Trade Zone. The result was business continuity and compliance certainty – critical foundational work for growth in the region. TMF Group remains our trusted advisor.”
TMF Group piloting Fisher Scientific through the Zone
TMF Group provides regulatory and free trade zone compliance services for Fisher Scientific de Costa Rica SRL. The goal is to minimize the risk of compliance obstacles undermining the smooth running of operations. The global biotech and laboratory company enjoys the initial income tax-free period but recognizes the regulatory hurdles.
Fernando Rodriguez Ortiz, Accounting Supervisor at Fisher Scientific de Costa Rica SRL, commented: “There are many obligations such as detailing auxiliary fixed assets and providing documentation for accounting – including balance sheet reconciliations. However, with TMF Group’s support, we have met all PROCOMER’s strict audit requirements with no significant concerns or findings.”
TMF Group continues to work with Microsoft and Fischer Scientific and others in Costa Rica to help them understand and apply upcoming changes to the Free Zone Regime Law, which meet OECD (Organization for Economic Cooperation and Development) requirements.
This content was previously posted on the TMF Group’s website.