Legal System

Costa Rica is a civil law country meaning that the organization of the legal system is derived from the French Napoleonic Code rather than English common law.

Civil law, also called Continental law or Romano-Germanic law, is the most prevalent legal system in the world. The main difference between civil and common law is that that common law draws abstract rules from specific cases, whereas civil law starts with abstract rules, which judges must then apply to the various cases before them. In other words, historically speaking, common law is based upon traditions and laws are codified following court rulings. On the other hand, in the case of civil law, laws are first codified and then applied. There are a number of civil codes besides the Napoleonic code.

Offshore Legal and Tax Regimes

Please be aware that the following is simply a brief summary of some of the more important aspects of Costa Rican tax law and should be considered only general information. Please do not substitute this for professional tax advice.

Overview

Please note that the government of Costa Rica does not make any particularly distinctions between onshore and offshore business. Both residents and non-residents are only required to pay taxes on income earned in Costa Rica – all foreign-sourced is tax-free. Thus, taxation in Costa Rica is based on territory rather than nationality.

In recent years the government of Costa Rica has worked increasingly hard to turns its low tax regime into a well-known virtue and as such they offer a wide variety of special regimes with tax privileges to particular sectors as described in greater detail below.

Since 2003 the government has struggled to ratify a Permanent Fiscal Reform Package aimed at reducing the country\'s deficit. A switch from the sales tax to a Value Added Tax system is one of the key components the package; also, taxes payable by Free Zone companies could be increased over a period of time. Lastly, it\'s possible that the territorial basis of personal taxation would be discarded in favor of worldwide income taxation.

Costa Rica Forms of Offshore Operation

Costa Rica does not offer any special forms for offshore or low-tax operations. Please note, though, that stock corporations, the form most often used for business activities, have some advantages from a withholding tax point of view.

Costa Rica Tax Treatment of Offshore Operations

Please see Domestic and Corporate Taxes for the general principles of Costa Rican corporate taxation; as Costa Rica does not distinguish between onshore and offshore entities these rules also apply to entities taking advantage of special low-tax regimes.

Businesses in Export Processing Zones, also called Free Zones, have numerous tax privileges. Although these concessions were originally only to industrial or agricultural companies, they have now been extended to a number of processing and service activities. The most important incentives are as follows:

• full exemption from income tax on profits for a period of 8 to 12 years from the commencement of trading, and 50% exemption for a further period of 4 to 6 years;

• exemption for the same period from customs duties on raw materials, machinery and equipment;

• exemption for the same period from VAT and other sales taxes including selective consumption tax;

• exemption from withholding tax on payments to non-residents;

• new legislation passed at the end of 1999 offers a 4-year extension of the 12-year 100% tax exemption to companies that have operated in a free zone for more than 4 years and that have reinvested profits in Costa Rica.

Numerous related schemes offer similar tax privileges to exporters but stop short of giving the full range of benefits outlined above.

As a member of the WTO, World Trade Organization, Costa Rica should have begun to eliminate Free Zone fiscal privileges for manufacturing companies in 2003, but this deadline was extended to 2009. Costa Rica is not obligated to do away with incentives granted to companies that provide services. Moreover, the Costa Rican government has not made any commitments to reduce or eliminate incentives for service companies; the official stance on this matter is that the regime for services will continue with little to no changes.

Numerous sectors involved in the tourist business receive tax incentives based on the Incentives to Tourist Development Law 1985.

• All business entities engaged in the air transportation of tourists are exempt from import duties on goods imported for the purposes of their trade and purchase taxes on supplies required for the operation of airplanes. What’s more, they can purchase their fuel at favorable prices and are may take advantage of accelerated depreciation allowances.

• All business entities engaged in running or constructing hotels are exempt from import duties on goods imported for the purposes of their trade, purchase (sales) taxes on supplies (excluding those payable on the purchase of vehicles and fuels) and the .25% annual rates tax. They may also take advantage of accelerated depreciation allowances.

• Businesses engaged in maritime transportation of tourists are exempt from import duties and purchase taxes on goods imported for the purposes of the construction of marinas, bathing resorts and aquariums. Moreover, they may take advantage of accelerated depreciation allowances and are exempt from all taxes relating to the purchase of a boat except import duties.

• All business entities engaged in car rentals are entitled to a 50% reduction in all taxes relating to vehicles imported for rental.

Taxes for Foreign Employees of Offshore Operations

This section describes the taxation of foreign employees of tax-privileged operations.

For the purposes of taxes, non-resident and residents foreign employees working in Costa Rica are taxed at normal rates. The government does not offer any special arrangements for foreign workers; in fact, they and their employers pay full social security contributions although they are not likely to receive any significant benefit from doing so.