Free Trade Zone Costa Rica

FREE TRADE ZONE REGULATION

The Free Trade Zone Regulation combines incentives and benefits granted by the Costa Rican Government to those companies complying with the requirements and obligations established under the Law 7210 of November 1990 and its amendments. The incentives and benefits are geared to economic operations based on importing raw materials and input, fabrication, assembly or marketing of products and services, and the subsequent exportation of these goods or services.

The administration of the Regulation, the companies that can operate under the Regulation, the incentives granted, obligations of the companies, procedure to obtain authorization, fees, and guarantees, are described below. The italicized paragraphs words or phrases include amendments recently made to the law.

I. ADMINISTRATION OF THE FREE TRADE ZONE REGULATION

The Free Trade Zone Regulation is administered by the Free Trade Zone Export Corporation, which is duly recorded in the Costa Rican Public Registry. This corporation also operates as the link between the companies under the Regulation and the Costa Rican Government.

There are also other corporations that administer the industrial parks, where usually the companies under the Regulation are located.

II. BENEFICIARIES

The companies that can receive the benefits of the Free Trade Zone Regulation are the following, provided they make an investment in new machinery, new buildings, and new equipment, of US$150,000.00

A. Export processing industries, which produce, process or assemble for export or re-export.

B. Non-producing commercial export companies which simply handle, manipulate, re-package or re-distribute non-traditional goods for export or re-export.

C. Industries and service companies that provide services to other companies or individuals outside of Costa Rica or to companies that operate under the Free Trade Zone Regulation; in the latter case, the services must be directly related to the production process of the companies operating under the Regulation. Banks, financial institutions, insurance companies, and others offering professional services operating in free trade zones, cannot receive the benefits of the Regulation.

D. Companies that will administrate the industrial parks where other companies under the Regulation will be operating only when those areas comply with the requirements that will be established. These administrating companies will receive the benefits established in article 20 of the law (Section III. BENEFITS AND INCENTIVES below), only if all the companies operating in the park are under the Regulation. If companies not under the regulation are operate in the area of the park, the administration companies will not receive the benefit established in paragraph "h" of Section III. BENEFITS AND INCENTIVES and all other benefits will be proportionally reduced as if sales were made to the Costa Rican Customs territory.

E. Companies that are engaged in scientific research for Costa Rican industrial, agro-industrial or international trade purposes.

F. Companies that operate shipyards and dry or floating docks for the construction, repair and maintenance of sea going ships.

III. BENEFITS AND INCENTIVES:

According to article 20, the companies that operate under the Regulation can receive the following benefits and incentives:

A. Exemption of payment of all taxes and consular fees corresponding to the importation of raw materials, processed or semi-processed products, components and parts, packing and packaging materials, and all other merchandise and goods required for operation.

Priority use must be made of domestic raw materials when the General Industry Office determines that they fulfill the same price, quality and delivery conditions of foreign materials as required by the companies. The companies are nevertheless able to import raw materials from foreign countries without any restriction until a complaint is filed in Costa Rica by the local industry; restrictions on imports of some products could apply without a complaint.

B. Exemption of all types of taxes and consular duties related to the importation of equipment, machinery, accessories and spare parts, as well as those taxes related to the importation of vehicles necessary for operation, production, administration, and transportation. The vehicles and vehicle parts eligible for exemption are the following:

1. Chassis with one or two ton cargo capacity single cabin. 2. Trucks or chassis for trucks. 3. One or two ton cargo capacity pick-up truck. 4. Vehicles with a minimum passenger capacity of 15.

Machinery or equipment that has been imported into the country for more than five years may be transferred re-destined or placed within the national customs territory without any restrictions, although a procedure must be followed. No additional charges are assessed.

C. Exemptions from all taxes and consular fees levied against the importation of fuels, oils and lubricants required for operation. This exemption will be granted only when the fuels, oils and lubricants are not produced domestically in the same quality, quantity and delivery conditions. To import the products, a previous authorization is required from the Economy Minister.

D. Exemption from all taxes related to the export or re-export of products, including machinery and other equipment used that is being re-exported.

E. A ten-year exemption, effective upon initiating operations, from taxes on capital and net assets, and real estate transfers.

F. Exemption from sales and consumption tax on the purchase of goods and services.

G. Exemption of all fees on remittances abroad.

H. Exemptions from all taxes on profits or other items considered to be taxable income in relation to gross or net profits, dividends paid to shareholders, or income or sales, in accordance with the following:

1. For companies located in greater relative growth zones, the exemption will be 100% for the first 8 years and 50% for the following 4 years.

2. For companies located in lesser relative growth zones the exemption will be 100% for the first 12 years and 50% for the following 6 years.

The terms begin the day the company begins its actual operation, only if the companies begin operating within two years after the authorization to operate under the Regulation is granted.

None of the exemptions listed are applicable when the beneficiaries can deduct, in their countries of origin, the taxes exempted in Costa Rica.

I. Exemption from all municipal taxes and licenses for a ten year period. If the company receives any of the services granted by the local governments, then the company must pay for such services, even twice as much if the municipality so requires. The company is free to contract such services provided by the municipality with an independent third party.

J. Exemption from all taxes on imports and exports of commercial or industrial samples previous authorization by the corporation. K. Freely execute all types of transactions and contracts in foreign currency, in which case the corresponding payments must be made in that type of currency in both international transactions and those carried out with other companies established under the Regulation.

The companies established under the Regulation are not bound by the general foreign currency exchange regulations. But, when Costa Rican currency is required, the transactions must be carried out with commercial banks that have been duly authorized to operate; the foreign currency will be exchanged for Costa Rican currency only by those banks.

L. The companies established in zones of lesser relative growth will be eligible to receive a bonus equivalent to 10% of the total amount of the wages in the preceding year less the amounts paid as social security to the Costa Rican Social Security Agency. The companies that wish to receive such benefit must request it within 5 years from the publication of the amendments of the law (November 1998). The benefit will be valid for 5 years and will decrease 2% per year.

M. The processing companies that operate under the regulation can receive additional income tax benefits if they make a reinvestment after four years of operation under the regulation, according to the following:

1. If the reinvestment is 25% higher than the original investment, the benefit will be for 1 additional year.

2. If the reinvestment is 50% higher than the original investment, the benefit will be for 2 additional years.

3. If the reinvestment is 75% higher than the original investment, the benefit will be for 3 additional years.

4. IF the reinvestment is 100% or higher than the original investment, the benefit will be for 4 additional years.

The additional benefits or exemptions on income tax will be of 75% of the income tax to be paid. The benefits will apply after the eight-year of operation. When the companies are operating in lesser relative growth areas, the additional benefit will apply after the twelfth year of operation. The reinvestment must be made after the fourth year of operation and before the eighth year.

This additional income tax benefit will be granted to companies whose original investment was not less than US$2,000,000.00.

*** The Non-producing commercial export companies which simply handle, manipulate, re-package or re-distribute non-traditional goods for export or re-export, will not receive the benefits indicated in paragraphs G. and H. above. When other types of companies operating under the regulation wish to engage in trader activities, a special authorization is required and their income tax benefits could be reduced (this reduction is not yet regulated).

IV. ADDITIONAL BENEFITS

Besides said fiscal incentives, the law 7210 establishes the following additional benefits:

A. Employee training.

B. Guidance for contracting employees.

C. Assistance and guidance before government agencies.

D. Assistance on housing and education for employees and their families.

All the firms that are established under the Regulation must make at least 75% of their sales abroad. The firms are authorized to import into the Costa Rican customs territory up to 25% of their gross sales (50% for service companies), previous governmental authorization.

V. OBLIGATIONS OF THE COMPANIES UNDER THE FREE TRADE ZONE REGULATION

The beneficiaries of the Free Trade Zone Regulation will have the following obligations:

A. Keep and record on books and registries, duly authorized by the corporation and subject to inspection by the corporation and the fiscal authorities, the company's transaction and operations relative to goods enjoying tax exemptions authorized by the Ministry of Finance.

B. Furnish to the competent authorities the reports requested in relation to the use and destination of goods imported under the law, and provide the documents necessary to verify such reports when authorities determine it necessary.

C. Provide or lend free of charge sample products for exhibition to official organizations or agencies that participate in international trade fairs.

D. Sign an operating contract with the corporation.

E. Provide reports on employment, investment, national added value and other issues mentioned in the agreement where the authorization to operate under the Regulation is granted.

F. File an activity report with the corporation including according to a form provided by the corporation.

G. Provide adequate facilities for the operation of custom's controls.

H. Keep a permanent inventory of imported goods.

I. Provide all the information necessary for cases in which the Regulation is canceled or renounced to.

J. Comply with the remaining obligations and conditions imposed on beneficiaries in the Free Trade Zone Regulation Executive Agreement, the rulings contained in this law, and the operating contract signed with the corporation.

K. Use the customs forms, areas and other required instruments, necessary to record and control its operations.

VI. EXPORT TOTAL PRODUCTION

The companies that operate under the Regulation have to export all of its production to other markets, but they are allowed to export to the Costa Rican market up to 25% of its gross sales, previous authorization from the government and payment of duties. Non-producing commercial export companies which simply handle, manipulate, re-package or re-distribute non-traditional goods for export or re-export, may not export to the Costa Rican market. The companies indicated in paragraph C Section BENEFICIARIES above may export to the Costa Rican market up to 50% of their gross sales.

The income and import tax benefits (for machinery, equipment and raw materials) will be reduced if production is exported to the Costa Rican market.

VII. SALES TO OTHER COMPANIES OPERATING UNDER THE REGULATION

Article 24 allows companies operating under the Regulation to sell or transfer their production or part thereof to other companies also operating under the Regulation; a special authorization a procedure has to be followed to make these sales and transfers.

VIII. PROCEDURE TO APPLY FOR THE FREE TRADE ZONE REGULATION ***Due to amendments introduced to the law, the following procedure used today could also be modified.

A request must be filed before the Free Trade Zone Export Corporation. This request must be notarized and must include detailed information regarding environmental consequences of its activities. This request is then submitted to the Costa Rican Government, and if approved, the approval is published in the official newspaper.

The request has 7 different forms:

A. Form 01

Includes name of the petitioner, identification card number, activities, office to hear notices, place where the firm will have its facilities, constructed area, detailed explanation of the investment, whether investors are national or foreign, approximate date of first export, required personnel, and address of parent corporation.

B. Form 02

This form requires filing the following documents:

1. Certified legal representation.

2. Certified information related to the recording of the corporation in the Public Registry, identification card number, resident agent, amount and value of shares, and names of shareholders.

3. Health and operation permits granted by the Secretary of Health.

4. Report on the environmental hazards and consequences of the operation of the firm.

5. Certification that indicates that the income tax exempted in Costa Rica is not subject to exemption in the parent's country.

C. Form 03

List of all products that will be processed and exported, including SAC Code, description, market, and expected exports during the first 3 years of operation.

D. Form 04

List of machinery, equipment, and parts.

E. Form 05

Detailed description of production process.

F. Forms 06 and 07

All information necessary to determine the added value of the final product.

IX. FEES:

***These fees may change due to the recent amendments introduced to the law.

The following monthly fees shall be paid by the beneficiaries to the Corporation for the benefits granted under the Free Trade Zone Regulation:

A. For those companies listed in paragraphs A, D and F of section II. above:

1) US $0.25 for each square meter of industrial roof, up to 5,000 square meters.

2) Companies occupying from 5,000 square meters up to 7,500 square meters will be assessed on the excess of 5,000 square meters, 80% of US $0.25.

3) Companies occupying more than 7,500 square meters and up to 10,000 square meters will be assessed on an excess of 7,500 square meters 60% of US $0.25.

4) Firms occupying more than 10,000 square meters of industrial roof will be assessed 50% of US $0.25 on an excess of 10,000 square meters.

B. For those firms listed in paragraphs B, C and E of section II. above, the fee will be 0.3% of monthly the sales.

C. Beneficiaries located outside the industrial park will be double the listed fees.

D. The monthly amount to be paid for use of the Regulation by satellite plants will be double the listed fee.

X. GUARANTEE DEPOSIT

***This deposit may change due to the recent amendments introduced to the law.

Beneficiaries must also submit a guarantee deposit in the amount of US $5,000.00. The guarantee has to be submitted within the following 15 days after the agreement granting the Regulation is published in the official newspaper. The guarantee must be valid for a minimum of 1 year, and must be renewed as long as the firm receives the benefits of the Regulation. The guarantee can be a cash deposit, a certified check issued by one of the 3 public banks, a guarantee document issued by one of the 3 public banks or by the National Insurance Institute, or a certificate of deposit issued by one of the 3 public banks.