BLP Newsflash – Reform to the Services Category of the Free Trade Zone Regime

On May 29, 2019, approval of the Second Debate of Bill No. 21,200 modified the Law of the Free Trade Zone Regime, specifically the category of service companies. This very specific modification benefits service companies by not subjecting them to a minimum percentage of service exports which has as its genesis the process of Costa Rica’s accession to the OECD.

As part of the process of joining the OECD, the panel that reviewed our Free Zone Regime made the observation that this limitation did not comply with the plan of action to combat erosion of the tax base and transfer of benefits (BEPS “Action 5 “), since, in the case of service companies, the Law established that they could not make sales to Costa Rican customers (local sales) for more than 50% of the company’s total sales. That is to say, that the benefits of the Franca Trade Zone were conditioned upon the sale of at least 50% of the services abroad (export of services). This conditioning is known as “ring-fencing”, which is when a country grants benefits to companies that are not willing to have effects within their territory, which is a pernicious practice under BEPS.

The purpose of the modification to the Law is to eliminate this export requirement and allow Free Zone Services companies to provide their services in Costa Rican territory without any limit, thus eliminating the practice of “ring-fencing” and complying with BEPS.

This reform of the Law also benefits companies in this category, since it expands the market they can serve. Local sales of services will not affect the income tax exemption but will be subject to the payment of taxes corresponding to consumption, including VAT.

Instead of the requirement to sell a minimum percentage abroad, new companies seeking to enter this category must meet the criteria that will be established in a Strategic Eligibility Index for Service Companies (IEES) to be defined by regulation by a public-private commission that will take into account the type of companies that are already under the Free Trade Zone Regime.

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