Megaprojects, new beneficiaries under the law 10.234, and income tax in the Free Zones Regime

As is already known, Law number 7210, Law on the Regime of Free Zones (the “Law”), establishes in its numeral 17, the various categories of companies that can benefit from the Regime. Special mention for the purposes of this article for two of them: processing companies that produce, process or assemble goods, regardless of whether they export or not; and human health companies service centers that are installed outside the Greater Metropolitan Area (GAM).

Regarding to the processing companies mentioned above, it is of the utmost importance to bear in mind that their profits relating to the exemption from income tax are “staggered”; in other words, the Act provides for differentiated fees in relation to the passage of time. Paragraph 21 ter, subparagraph d) reads as follows: “Companies located in the Greater Metropolitan Area (GAM) will pay a fee of six percent (6%) of their profits for income tax purposes for the first eight years and fifteen percent (15%) for the next four years. For companies located outside the Greater Metropolitan Area (GAM), they will pay the rate of zero percent (0%) of their profits for purposes of the Income Tax Law for the first six years, five percent (5%) during the second six years and fifteen percent (15%) during the next six years.”

However, the above raises the following question: Is there any other mechanism for processing companies to obtain more robust tax benefits then those mentioned? The Law creates the so-called “mega-project”. Why is it valuable? What is the “megaproject”? I say “valuable”, since the processing company that qualifies as a “mega project” will get even more robust initial tax benefits (100% initial exoneration during the first few years) in terms of income tax exemption. In shorter words, a “megaproject” in Free Zones is a figure created for processing companies, so that they can access to higher initial tax benefits, if they meet various legal requirements, among them, a very large new investment in the country.

To qualify as a “megaproject”, a processing company must meet the following requirements:

1) Make a total new investment in Costa Rica of at least ten million US dollars (US$10,000,000) or its equivalent in national currency;

2) be a subject to an investment plan to be fulfilled over a period of eight years, calculated on the basis of the hundred amount of the assets subject to depreciation; and,

3) maintain at least one hundred permanent employees, during the entire operation of the company, duly reported on payroll.

The same paragraph expressly mentions that, if these requirements are complied, the processing companies or “megaprojects” will be fully applied the benefits indicated in the subparagraphs g) and l), article 20 of the Law, which are, in essence, initial benefits of 100% exemption in terms of income tax.

The foregoing shows very clearly that the returns for an investment of a processing company of at least US $10,000,000 also complying with the other law requirements, are and can be significant, and can make a remarkable difference in the operation of a company of this caliber, constituting the megaproject for many years as an attractive figure for attracting foreign direct investment.

With regard to the category of human health service center companies to be established outside GAM (new category added thanks to the Law on strengthening territorial competitiveness to promote the attraction of investments outside the Greater Metropolitan Area (GAM), number 10.234 of May 4, 2022), the interesting thing to note and mention in these brief lines is the very considerable amount of new investment (even equal to or more than the “mega-project” of processing companies) that they must comply with in order to obtain the Regime, and therefore, the benefits that this Regime entails, Among them, of course, the exemption from income tax established by law for beneficiaries outside the GAM.

Article 21 of the Law establishes that these companies are glued to the following rules: When a human health service center company specialized in ophthalmology, orthodontics, dentistry, cosmetic or reconstructive surgery wishing to benefit from the Regime and settling in an area outside the GAM must make a total new investment of at least five million US dollars (US$5,000,000) or its equivalent in domestic currency. This if it operates within an industrial park. On the other hand, such companies that are installed in an area outside the GAM may operate outside the industrial park, as long as the total new investment is at least ten million US dollars (US$10,000,000), or its equivalent in national currency.

As it can be seen, the investment amounts required are high. The regulation even creates an additional investment parameter when human health service centers provide ” hospital entity services with resolutive capacity “. This concept and other topics will be defined in the regulations still under drafting and issuance. But, for this scenario, the legislation requires a total new investment of at least one hundred and forty million US dollars (US $140 million) or its equivalent in domestic currency, when installed in an area outside the GAM.

For the above cases, the Law requires -in the same way as for the “mega projects” of the processors- the fulfillment of an investment plan in a period of eight years, calculation based on the book value of the assets subject to depreciation and, also, at least one hundred permanent employees, during the entire company operation, duly reported to the Costa Rican Social Security Fund. All the above shows how the rules of the game of megaprojects for processing companies, are also applicable to this new category of companies benefiting from the Regime.

Written by: Lic. Carlos Cartín

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