Before analyzing the potential benefits derived from investing in Costa Rica, it is pertinent to understand the way the Costa Rican tax system works; since not every income received or every activity executed, shall be levied.
Costa Rica has a system based in the territorial principle; which implies that the only taxable income by the country’s Tax Administration is the one only obtained from services, capital, or assets which are located or used inside Costa Rica, regardless of the nature, residence or nationality of the taxpayer. Therefore, any revenues obtained from an activity executed by a Costa Rican National or any foreigner located abroad, will not be taxed in our country; as neither any activity developed by a Costa Rican company outside our borders with no relation to our economic structure.
Other notorious difference is that our income tax is divided into several additional taxes which are not mutually exclusive, and each one makes up a different category, according to the different sources of such income. For example, the monthly payments received from a labor relation will have different rates, as the applicable rates derived from capital gains, or the ones obtained from an independent activity.
Finally, Costa Rican tax system is based on a “rent-product” principle; which implies that the only taxable revenue will be the one obtained from capital put into operation in a sustainable and periodically exploited source. Therefore, gains obtained from an inheritance of from a lottery ticket will not be levied.
Costa Rican tax rates are much lower than the ones that currently apply in the Unites States for example, and its work force is amongst the most educated in Latin America (education is state-sponsored and compulsory until the 9th grade), with a very high rate of English speaking professionals.
Regarding specific advantages that any company may obtain from transferring its operations to Costa Rica, inevitably, the Free Trade Zone Law opposes as excellent opportunity to drive in foreign direct investment; since its main objective is to promote new investments in Costa Rica.
For example, companies with service activities enjoy several tax advantages, such as a full exemption from custom duties, import taxes, value added tax and consumption tax on purchases of any goods and services; a ten year exemption for most Municipal and property transfer tax; and a full exemption for the withholding tax on dividends for a period of eight or twelve years, with a 50% percent exemption on the following four or six. Regarding the income tax, and depending on the conditions of the company, a full exemption will apply for the first years of the investment, and a 50% or less for the following up coming years.
In addition, manufacturing companies enjoy a full exemption from Income Tax for a period of four years if joining this Tax Regime on 2011, as after the year 2015 the investor will be allowed to choose between the old or the new applicable rules. This new rules will include several options that range from eight years at a rate of 6%, followed by another four years at the rate of 15%, and finally the option of twelve years enjoying full exemption for the initial years and the final six years at a 50% rate exemption. These options depend on the physical location of the plant, the amount of the investment and level of employment.
Currently, there is a new possibility for companies that desire to invest in a no mandatory export condition regime, which allows 100% of the production to be either exported or sold in the local market. This option has a 100% exemption on the export portion (depending its characteristics), but regarding local sales, no tax benefits apply.
For example if the project is located inside the Great Metropolitan Area (center of the country) and is part of an strategic sector, implies an investment of $150,000 inside a Free Trade Zone Park, or a $2,000,000 outside a Free Trade Zone Park, 6% income tax rate will apply for the first 8 years and a 15% rate for the following 4 years.
On the other hand, if the investment is executed outside the Grand Metropolitan Area and in a sector (no considered strategic) having an investment of $10,000,000, with at least 100 employees, an exemption for the first twelve years at 0% rate applies and 50% exemption rate will further apply for the following 4 years.
Finally, Costa Rica is a country known worldwide as being, likely, the oldest recorded democracy in the Americas. It endures a long term and historical political stability, which serves as unique base for a solid business environment throughout Latin America. Clearly, the country is aiming to attract foreign investment in order to assure to the current growing population, further and more lucrative job possibilities; especially in strategic and advanced technological niches.
Costa Rica is the actual home for leading transnational companies which manufacture and develop sophisticated computer parts, electronic components, pharmaceutical and health care products, data processing, software development and remote customer service centers. It is indeed a profitable destination for foreign investment, resulting from the current and future tax incentives, low political and financial risk indicators.
Authored By: Enrique Rojas, Tax Manager Deloitte Costa Rica