By TBY | Costa Rica | Feb 28, 2018
Thanks to a decades-old policy of actively courting foreign investment, Costa Rica has tax and legal frameworks that encourage free trade and the movement of capital.
Costa Rica’s position as one of Latin America’s greatest success stories over the past few decades comes thanks to two things: heavy social investment that has raised access to healthcare and education to create a well-educated populace, and trade policies that have leveraged this social stability and workforce expertise to form new ties with major markets. Foreign investment has powered the nation’s industrial and tourism sector; Costa Rica has 11 industrial free trade zones (FTZs), where firms receive tax breaks and economic incentives to manufacture export goods. As of 2016, the country’s free trade zone regime employed more than 80,000 people directly and accounted form more than USD3.1 billion in net benefits. The Costa Rican government has formed a well-regarded set of regulations around these zones and other areas of foreign investment that has prioritized the rights of investors and created new hotbeds of development.
Costa Rica’s free trade regime is governed by Law 7210, passed in November 1990. This legislation laid the groundwork for free trade zones by setting the export and investment requirements needed to establish operations to the zone. PROCOMER, Costa Rica’s Foreign Trade Promotion agency, is the regulatory body in charge of the FTZ regime, and all applications for access run through this body. The basic structure of the FTZ law has remained largely unchanged since its inception, but Costa Rica made some modifications in an Executive Decree that went into effect in early 2017.
Currently, FTZ applicants must export at least 75% of their goods and invest at least USD150,000 of assets within an FTZ or USD2 million outside an FTZ. FTZ companies receive 100% customs duty and tax exemptions on imported raw materials, machinery, and other supplies needed for manufacturing, and a 100% exemption on local taxes on local capital taxes. Firms also receive a property tax waiver that applies for 10 years past the date of commencing operations in Costa Rica. Depending on the specific FTZ a company is located in, it receives an income tax exemption for either 8 or 12 years, followed by a 50% exemption for another four years. The benefits of the FTZ are restricted to manufacturing firms; services sector firms can set up operations in a FTZ to take advantage of the cluster of industry in the area but do not receive tax exemptions. The regulatory changes made in 2017 primarily concerned the scale of FTZs; by lowering the minimum size of a FTZ park from 10,000sqm to 1,000sqm, the Costa Rican government hopes to incentivize the creation of new, more focused clusters better suited to the needs of the high-tech manufacturing industry.
Costa Rica has built up a deep stable of free trade agreements over the past few decades. It became a member of the US-backed Caribbean Basin Initiative in the mid-1980s; in 2000, this became the Caribbean Basin Trade Partnership, which granted Costa Rica and 24 other countries duty-free trade regimes for textiles and other manufacturing goods. Today, the countries with which Costa Rica has trade agreements represent two-thirds of the world’s GDP. It has also been a member of the World Trade Organization since 1995 and has drawn praise for liberal regulations in line with global standards.
Outside of the FTZ regime, Costa Rica has few restrictions on FDI. The standard corporate tax rate is 30%, though lower rates apply to companies that are below a certain size. Capital gains are usually not taxable, but the Costa Rica has a number of withholding taxes on non-FTZ corporations, including dividend and interest taxes. Corporations are also required to contribute 26.33% of its gross wages to social security to help fund Costa Rica’s renowned public health system. Costa Rica uses a civil law system to govern commercial transactions, but several of its bilateral trade agreements call for disputes involving foreign firms to be resolved through international arbitration. The nation’s legal system is widely respected, though slow in some cases and there have been complaints that enforcement of international laws concerning intellectual property and local property rights codes have been spotty.