January 21st, 2010
“Costa Rica ammends Free Zone Law"
This past January 12th Costa Rican President Arias signed a Law that reforms the Free Zone Regime. The reform was essential for the sustainability of Costa Rica´s successful Free Zone Regime as applied to manufacturing companies.
The bill had its origins in WTO´s regulations which consider incentives conditioned to exports to be a subsidy and therefore, discordant with principles of free trade. Costa Rica requires that manufacturing companies under the Free Zone Regime export at least 75%. Consequently, the country was compelled to modify the Regime applicable to manufacturing companies before 2015. With the bill, the Costa Rican government took a proactive approach in providing investors a clear view of how the country would deal with WTO´s regulations, and allowing decision makers to factor-in such scenario into their long term business plans.
The solution achieved by the recent Law is the creation of a new type of Free Zone Company were incentives are no longer linked to exporting, but rather to being part of a strategic sector. The Law sets forth that a strategic sector should generate high-quality employment, contribute to the modernization of the country’s productive system, promote innovation and transfer of technology, among others. A public-private commission will define what those strategic sectors are.
The reform does not affect Free Zone Service Companies since subsidies to services have not yet been regulated by the WTO. Neither does it affect Free Zone Manufacturing Companies which are currently under the Free Zone Regime, since their incentives will continue until the expiration date of their operations agreement. Moreover, such manufacturing companies may also convert their regime to the new category and enjoy a new term of incentives.
Free Zone Companies under the category will enjoy juicy benefits, especially those established outside the greater metropolitan area (GAMA). Outside the GAMA, companies will profit, to name a few, from an extended incentive period of 18 years; an initial income tax exemption for the first 6 to 12 years plus a discounted tax rate for the years thereafter; and the possibility of differing income tax payment until a distribution of dividends is made. Local sales will be permitted in any proportion for all companies under the new category.
The law was supported by all political parties, with the sponsorship of the Executive Branch, therefore demonstrating Costa Rica´s commitment to Free Zones which have been a fundamental tool for the country’s development.
