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Deloitte provides an overview of the local tax and accountancy landscape for investors looking to establish a business operation in Costa Rica.

The happiest country in the world is also a great place to invest

Costa Rica has stood out in the last decades as a bastion of democracy and stability, which has fostered significant growth and pushed the country into its position as a global leader in technology, services, and foreign investment. This peaceful country is committed to the preservation of its natural resources, with special attention to its biodiversity. These privileged conditions are connected to the country's geographic location, soil quality, climate, and, most importantly, its people.

Business climate: steady growth, great opportunities

According to the Ministry of International Commerce, in 2015 alone more than 39 new projects were started in Costa Rica as a result of FDI, one of the highest levels of FDI per capita in Latin America. Most of these projects were in the high-tech and service industry. The attractiveness of Costa Rica for projects like this comes largely from the country's great investment climate, its open-for-business government, and the track record of some of the biggest companies on the planet launching successful enterprises here.

Data from the Central Bank indicates that in October of 2015 the country's production, as measured by the cycle tendency of the Monthly Economic Activity Index (MEAI), registered a medium growth of 2.5% and a YoY growth of 3.2%, compared to 3.5% and 3.1% in the same period of 2014, respectively. At the same time, the MEAI without Free Trade Zones registered a year-on-year growth of 3.4%, compared to 3.6% in the previous year. The Central Bank estimates that 2015 closed with an inflation rate of around -0.7%, measured by a year-on-year variation of the Consumer Prices Index. According to statistics from the Central Bank, economic activity grew by 2.8% during 2015. The current account deficit of the balance of payments at end-2015 stood at 4.0% of GDP, compared to 4.7% at the same point in 2014, while the basic passive rate (PRIME/LIBOR equivalent in Costa Rica) was 5.95% at the end of the year, compared to 7.20% at end-2014.

During 2015, the Costa Rican commercial balance of payments reached negative USD6.189 billion (-11.8% of GDP), while the figure is projected to drop to negative USD6.719 billion (-12.1% of GDP) through 2016, and negative USD7.48 billion through 2017 (-12.7% of GDP). According to data from the Foreign Commerce Promoter, Costa Rica had exported USD9.666 billion by 2015. Additionally, by July, there had been USD8.944 billion in imports.

During 2015, Costa Rica's top export destination by region was North America, which accounted for 44% of Costa Rican exports, followed by Central America (24%), the EU (18%), the Caribbean (5%), Asia (4%), South America (3%), the non-EU Europe (1%), and other countries (1%).

Human resources: our main strength

A study prepared by Deloitte at the request of the Costa Rican Investment Promotion Agency surveyed transnational companies located in Costa Rica. These companies described the academic and attitude-related elements of Costa Rican employees as demonstrating high levels of schooling, talent, and creativity in problem solving. According to the survey, Costa Ricans enjoy challenges, are fast learners with relatively short learning curves, possess a high level of English proficiency, and are committed to their work.

Company incorporation: the first step toward a successful investment

The main difference among commercial organizations lies in their registration procedures and the financial liabilities of the parties involved. In principle, financial obligations are limited to the amount of capital contribution of the partners or stockholders, except when dealing with a corporation.

When forming a Costa Rican company, bylaws must be drafted before a Public Notary and thereafter incorporated with the Mercantile Section at the National Registry Office. Once the incorporation process has been completed, the Public Registry will issue a corporate identification number as evidence that the company is ready to lawfully start operations. According to the Civil and Commercial Code, there are two main types of companies used by foreign investors to operate in Costa Rica. A limited liability company, which is similar to a closed corporation, and a corporation, which may be formed by other business entities, individuals, or a mix thereof and may be eventually owned by a single individual or other business entity. For both types of entities the liability is limited to the amount of their capital contribution except in those cases where the law states the possibility or the requirement of piercing the corporate veil. There are no limitations for foreign nationals wishing to form either of these types of companies. In the event that the company does not have a representative residing in Costa Rica, the appointment of a resident agent is then required. Such an agent is necessarily an attorney-at-law, duly recorded, and in good standing within the Costa Rican Bar Association.

Free Trade Zones: a great incentive for foreign investors

The Free Trade Zone Regimen is a system that exempts goods from import taxes and gives companies that are part of the system an exemption from income taxes according to the category under which the goods enter the country. The company may receive income tax exemption benefits for periods of time vary in length between eight and 12 years (extendible), or pay a 6% of the value

Currently there are more than 375 companies in Costa Rica operating within Free Trade Zones, which jointly export over USD4.191 billion annually.

In order to enter the free trade system a minimum investment is required, which is determined based on the geographical location and the activities that the company will take part in, and whether or not these activities will take place within an industrial park. An investment of at least USD150,000 in fixed assets should be considered a part of the requirements necessary to request entry into the free trade zone system. For cases in which the company is located in an industrial park, if the company wishes to operate outside of the industrial park, the minimum required investment is USD2 million.

Companies that request entry into the free trade zone system are classified into several categories that included industrial companies, services, and scientific researchers, among many others.

Taxation in Costa Rica

There are a number of tax systems applicable in Costa Rica that, in general terms, are managed by the General Tax Administration and the General Customs Administration, both of which fall under the authority of the Ministry of Revenue.

Corporate income tax: This income tax is applicable to commercial entities established in the country, as well as to branches of foreign entities. This tax applies to earnings received as a result of the development of profitable activities of any type, except for those activities assigned a specific tax treatment by means of other enlisted exemptions established by law. A 30% tax rate is imposed on profits obtained during a specific fiscal period.

Dividends: Tax on disposable income (distribution of dividends) is established based on the disposable balance, which results from deducting the tax on profits from the taxable income. In general terms, when the available income of capital companies is distributed in cash, in kind, or in shares of stock of the company itself, the company must:

i. Withhold 15% from such amounts as a sole and definitive tax payable by the shareholder.

ii. When dealing with dividends distributed by corporations and whose stock is recorded with an officially recognized stock exchange, and in addition said shares of stock have been acquired through said institutions, withhold 5% as a sole and definitive tax payable by the shareholder.

Neither the withholding nor the tax are applicable when the partner is another corporation domiciled in Costa Rica and subject to said tax, and when dividends are distributed in the form of nominative shares of stock or corporate quotas of the company paying them.

Remittance tax: The foreign remittances tax is levied on all income or benefits of Costa Rican source that are sent abroad. The tax is generated when an income or benefit of Costa Rican source is settled, credited, or in any other way made available to persons domiciled abroad, and ranges from 5.5% to 30% depending on the service.

Transfer pricing: On September 13, 2013, the Executive Decree N° 37898-H: Transfer Price Provisions was published in The Gazette (La Gaceta) No. 176. This new group of norms was created to resolve the legal vacuum that existed in this area for many years. With the issuing of this decree, local businesses must use OECD principles to determine the method used for transfer prices applicable to their operations, taking prices established between unrelated parties as a reference for prices agreed on by related companies. Such legislation is applicable for the purposes of supporting its operations and the income tax declaration. However, the administration has not yet issued a resolution on the delivery of the informative statement of this matter.

Sales tax: Levied at a rate of 13% and calculated based on the sales price of all products, as well as on a determined and definite list of services. Exceptions to the applicability of this law include a series of products established in the bylaws.

Treaties to avoid double Taxation and for exchange of information: At present, Costa Rica has already signed and ratified treaties with Spain (2010) and Germany (2016), while other agreements are currently under negotiation, including those with Mexico and Canada, among others. Other treaties, such as that signed with the US, have addressed the exchanging of information for taxation purposes, while others on this same issue have been signed with different countries that seek to improve the exchange of information between national taxation authorities.

In general, these instruments seek to ensure the correct taxation and collection of taxes while attempting to prevent fraud or tax evasion. They set forth the best information exchange sources in connection with tax issues.

In terms of Central America, the country has moved forward with a significant effort to draft and implement a mutual cooperation model accord aimed at preventing tax avoidance and evasion and improving cooperation among tax administrations for collection purposes.

A bright future, thanks to the past

Costa Rica has stood the test of time as a leader for attracting foreign investment. The country offers human capital at a level unrivalled in the region, a great location, tax benefits, and a list of hundreds of success stories that grows longer every day.

Published on The Bussiness Year Costa Rica
February 2017

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