Tax-Benefit Regimes in Costa Rica

Anamari Echeverría

Anamari Echeverría

The current Law of the Free Trade Zone Regime in Costa Rica was established in 1990 with the primary goal of attracting foreign investment for job creation. There are approximately 500 beneficiary companies under this law, contributing a substantial 15.2% to the GDP, as per studies by the Foreign Trade Promotion Office (PROCOMER). This translates to an approximate contribution of $2.5 for every exempted dollar.

In terms of employment, it stands as one of the country’s most significant job generators. Additionally, the paid salaries are increasingly competitive, with the average salary considered 1.2 times higher than that of a private sector worker. The sustained growth of these companies has not only impacted job creation but has also elevated the sophistication levels in the processes for product and service development, permeating into the suppliers of this sector.

Beneficiary companies under the Free Trade Zone Regime enjoy attractive tax incentives, some of which have no time limit, although certain benefits are time-constrained.

Activities authorized in the Executive Agreement of each beneficiary company state that they can enjoy unlimited exemptions, such as 100% exemption on value-added tax and import duties on equipment, machinery, furniture, and raw materials, among others, as well as a 100% exemption on remittances abroad. Exemptions limited to 10 years include municipal patent tax, real estate tax, and property transfer tax. The most relevant exemption, income tax, depends on the location and classification of the company.

For instance, service companies, trading companies, park administration institutions, and Megaproject processing companies (with over 100 employees and an investment of $10 million) located within the Greater Metropolitan Area (GAM) enjoy a 100% income tax exemption for the first 8 years, followed by 15% for the next 4 years, and 30% starting in the 12th year of the Free Trade Zone Regime.

Similar companies located outside the GAM enjoy a 100% income tax exemption for the first 12 years and 6% for the next six years, completing a 30% tax starting in the 18th year. Processing companies under Megaproject category located in the GAM, producing, assembling, or processing goods, are subject to a 6% rate from the start of productive operations for the first 8 years and 15% for the next 4 years.

The legislator’s intention was to attract investment to create jobs and linkages. In return, a regime of tax incentives was established for the enjoyment of companies benefitting from the Free Trade Zone Regime in Costa Rica.

However, the Organization for Economic Cooperation and Development (OECD) and G20 countries have created a new global tax model. They introduced Pillar 2, establishing a minimum global tax rate of 15% on the effective income of multinational companies with over 750 million euros in consolidated sales.

This tax can be levied in the country where the income is generated, the country of the parent company, or in the country of any subsidiary of the company within the same group. To implement this, countries must create legislation in line with these effects. Costa Rica is not exempt from this, as tax matters are exclusive to the law. Our legislators will need to agree on whether we will join countries that already have this legislation, such as Japan, Qatar, and others currently in the process of implementation or creating regulations for the coming year (Germany, Italy, France, Ireland, Australia, New Zealand, among others).

Certainly, the state must always strive to strengthen and promote the development model of the Free Trade Zone Regime, the benefits of which are widely known and proven for the country.