Costa Rica’s Free Zone Regime: An Enticing Market? – Gross sales Taxes: VAT, GST

01 June 2022

TMF Group BV

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The Latin American country is encouraging investment

with its free trade zone setup, offering tax and operational

advantages for companies looking to do business in the

jurisdiction, under the rules of the regime.

In Costa Rica, it is becoming increasingly attractive for

companies to operate under a ‘Free Zone Regime’ (FZR). The

FZR is a set of benefits and incentives granted by the Costa Rican

government to companies making new investments in the country, as

stated in the Free Zone Regime Act NN°7210 Act

NN°8794 and in its bylaws.

The FZR accounts for approximately 50% of Costa Rica’s

commercial shipments abroad, but firms that are under the free zone

status and jurisdiction – and stand to benefit from the

incentives – must comply with legally stipulated requirements.

Benefits

Major benefits of the scheme include a number of tax incentives,

among which is exemption from:

Value Added Tax (VAT)
Income tax
Remittances abroad

An entity that operates under the FZR in Costa Rica benefits

directly from general and administrative expenses of the income

statement, due to the exemption of 13% of VAT granted by the regime

on these areas. In some cases, this applies to the income tax rate,

with the applicable corporate rate at 0% for operations within the

regime.

Obligations

Entities must comply with set obligations in order to operate

within the regime. These include designing, implementing and

maintaining the relevant internal controls relating to property,

plant and equipment; internal controls at an administrative level;

and closely following what the different local laws and regulations

stipulate.

With this approach, entities can not only ensure their

permanence within the regime, but also mitigate reputational risks

to which they are exposed, that could derive from administrative

processes with government authorities.

Complying with the FZR: general recommendations

Here are some general recommendations that can guide you in

compliance tasks, helping you ensure your entity maintains the

current benefits offered by the Free Zone Regime:

The local regulation comes first: it is quite

usual for regimen companies to have their headquarters outside of

Costa Rica, with financial reporting frameworks based on accounting

regulations of other jurisdictions. However, tax and statutory

rules of the special regime require entities to have and present

financial statements in Costa Rican colóns, based on

International Financial Reporting Standards (IFRS).
A hurdle to overcome is the conversion processes of financial

information to a framework of accounting policies under IFRS. This

means working with the ‘conversion adjustments’ on items

where there are differences in recognition or measurement of

economic events. Examples of these differences may be functional

and presentation currency, share-based payments, capitalisation of

right-of-use assets, or differences in useful lives.

Being exempt from taxes does not mean being exempt from

controls: in the instance of property, plant and

equipment, although your company may have expressly authorised a

different capitalisation policy than the one referred to in the

Income Tax Law (LISR), this does not mean that low-value assets

have been exempted from absolute control. When Promotora del

Comercio Exterior de Costa Rica (PROCOMER) audit visits take place,

it’s important to have an auxiliary register of such assets,

which can become critical when samples are reviewed by that

authority. Therefore, the control of assets and inventories within

the regime merits particular attention, as they can be high

risk.

Not everything is for free: the regime offers

a range of attractive exemptions (around 43% across VAT and

income), but not everything that is purchased is exempt from taxes.

It is important that, in the face of an audit, your company has

sufficient internal controls that allow it to guarantee that only

those expenses that meet the deductibility criteria of the LISR

have been purchased VAT-free. Namely, those that are useful,

necessary and relevant for the operation of your business. In a

practical example, the VAT that private insurance companies usually

pay as an incentive for their employees does not meet this

criterion, so the corresponding VAT should be paid.

Control of property, plant and equipment (PPE) is the

entry ticket: it is vital to maintain control of assets

based on local legislation, in accordance with the LISR regulations

and its annexes. This should cover differential adjustments,

sufficient details of identification (label, description, serial

number) and its effects on deferred taxes. It is often incorrectly

assumed that, because it is exempt from income tax, temporary

differences should not be calculated for useful lives. If the

fiscal effects prevail beyond the executive agreement it does have

to be accounted for.
The completeness of the PPE must be periodically ensured through

physical counts, using sampling techniques from accounting books.

This is a fairly common audit procedure in inspections carried out

by the regime authority. In our experience, if a PPE auxiliary

register is not complete and accurate, management can be expected

to receive subsequent visits, follow-up audits, and administrative

proceedings for non-compliance.

Bear in mind that the value of PPE is the calculation base for the

investment level, and this is the authority’s incentive to

renew the benefits in whole or in part, once the executive

agreement has reached its limit.

Other rules to consider: Within the regulatory

framework of the FZR, there is the obligation of the beneficiary to

comply with all the legal obligations that the country demands to

maintain tax exemptions. Therefore, it is important for your

company to periodically carry out a preventative review of

compliance with the obligations related to the FZR. This includes,

among others, the General Health Law, the Occupational Health

Standard, the Smoking Regulation Law, administration of warehouses,

security service, labelling of the authorised area, entry/exit

registration, telework law and the correct calculation of labour

benefits, maternity wards and discrimination rules.

Talk to us

At TMF Group we work with several companies that operate under

the Free Zone Regime. Our team of experts has the knowledge and

experience that can help you avoid or minimise compliance risks,

which, if they materialise, can lead to sanctions that could impact

the operation of your entity at regime level.

The content of this article is intended to provide a general

guide to the subject matter. Specialist advice should be sought

about your specific circumstances.

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