Considerations on strategic sectors in the Free Zone Regime.

In order to apply to the Free Zone Regime (FZR) in Costa Rica, a processing company must be classified or immersed within a so-called strategic sector or must operate outside the Grand Metropolitan Area. In practice, the “Agreement defining strategic sectors under Article 21 bis, section a) of the Free Zone Regime Act and its reforms” has served for many years as the normative basis for clearing what those strategic sectors are. The above taking into consideration that in 2018 the Decree which created the Special Commission for the Definition of Strategic Sectors was repealed, which in turn created the Agreement in discussion.

Today, it has not been strange to see the discretion of the Executive Branch being exercised by the relative ambiguity at the moment of applying the content of this Agreement to specific cases. And it is not strange either to see how there has been misconception by investors and their advisers when trying to include their activity under some strategic sector.

Article 21 bis of the Free Zone Regime Act, in summary, mentions that beneficiary companies under the category of processing companies must meet various requirements, including that the project to be implemented must be within a strategic sector for the development of the country, or that it is established outside of the Grand Metropolitan Area.

Regarding these strategic sectors, we have the following:

1) Projects in which a company under a FZR employs annually at least 200 workers on average;

2) Projects in which a company under a FZR is located in one of the following industries:

I. Advanced electronics,

II. Advanced electrical components,

III. Devices, equipment, implants, medical supplies and highly specialized packaging,

IV. Automotive,

V. High precision machines,

VI. Aerospace and aeronautics,

VII. Pharmaceutics and biotechnology,

VIII. Energies,

IX. Automation and flexible manufacturing systems,

X. Advanced materials.

3) Projects in which a company under a FZR allocates at least 0.5% of its sales to research and development expenses in its local operation.

4) Projects in which a company part of a FZR counts for its local operation with at least one of the following certifications: I. ISO 14001 (14004) or its equivalent II. LEED or its equivalent.

In practice, the analysis of the above-mentioned areas may become ambiguous, and on many occasions, the suitability and adaptability of a project relies on the interpretation of the Executive Branch. It is important to mention that the compliance with only one single strategic sector is sufficient for a processing company to opt for a FZR; however, a company must also comply with other legal and regulatory requirements, such as the minimum level of investment and employment.

Also, in practice, it is common to find that most processing companies are under the FZR within one of the assumptions mentioned in paragraph 2, but with the imminent evolution of trade, science and technology, it will not be uncommon to see in the future a rise in processing companies under industries

and fields such as aerospace and aeronautics, energies, and research and development. The Executive Branch must be prepared to take on the challenge.

Written by:

Carlos Cartín

Associate

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