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

01 June 2022

TMF Group BV

To print this article, all you need is to be registered or login on Mondaq.com.

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.

Contact us today to find out how we can help
your business stay compliant.

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.

POPULAR ARTICLES ON: Tax from Costa Rica

Non Domicile “The Cyprus Special” Tax Category

CYAUSE Audit Services Ltd

A non-dom is someone who lives in a country but does not have the same domicile as that country. Once an individual is born in a particular country they automatically become domiciled in that country…