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Considerations for The Law to Create Incentives for Expats

As you may know, on July 5th, Costa Rica's President Alvarado signed the law to attract foreign investors, rentistas and retired people to the country. Currently, everyone is wondering how this is going to be implemented

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As you may know, on July 5th, Costa Rica’s President Alvarado signed the law to attract foreign investors, rentistas and retired people to the country.

Currently, everyone is wondering how this is going to be implemented and what should be done to take advantage of the benefits.

Here we share what we know, what we do not know and what you should do about it.

What we know

Tax Benefits

The law creates tax benefits for specific groups of people with residency status in Costa Rica. To wit:

∙ Investors

∙ Rentistas

∙ Retirees

The tax benefits in question create three main tax exemptions:

∙ Exemption for importation tax for two vehicles. It must determined to whom the exemption applies. It states that “a person” will be subjected to the benefit, but it does not clarify if it is two vehicle per family or two vehicles per individual person.

∙ Exemption for importation tax for household goods.

∙ Exemption for importation tax for professional equipment. This is created with the intention to allow people to bring equipment required for them to work while living in Costa Rica, such as computer equipment, photographic equipment, so on and so forth. This does not mean that foreign nationals under the residency categories in question are allowed to work in Costa Rica. However, clarification is required regarding this particular matter.

∙ 20% exemption for the transfer tax for real estate. The law clearly states the exemption applies to the foreign national who is title holder of the property. It seems the benefit will not apply for people who hold property on corporations. There is no indication on whether the property should be dedicated for residential or commercial use.

Reduction of Minimum Investment Amount

Under the current regulations, people who desire to obtain residency as an investor must invest at least $200,000 USD in a property or a business. With the new law, the minimum investment amount is reduced to $150,000 USD.

While the current law allows investment in either a business (a new business, an existing business, or stock ownership) or real estate, the new law introduces the option to invest in securities such as mutual funds.

New Immigration Process

The law creates a special window (let’s call it a special office) to process the residencies included in this law. With this, it seems there is intention to separate the processes for these categories and the rest of residency categories such as parents of Costa Ricans, spouses, employees (not included for registered companies with the DMGE) so on and so forth.

Validity of the Law

This law is valid for a period of five years. This means that people who would like to take advantage of this benefit will have a window of five years to obtain the residency and to apply for the exemptions. In addition, the law states that people who obtain the benefits will be able to enjoy those exemptions for a period of ten years. We do not know if after 10 years people must pay the taxes that were exempted.

Timeline to Implement’Codify the New Law.

As a side note, for those folks who are not familiar with legislative processes please note that all laws coming from Congress (for the most part it is the same process in each democratic government, there may be a few differences here and there) must be regulated by the Executive Branch (the president and ministers).

Under this law, the Executive Branch (Alvarado’s Administration) has two months to enact the regulations that will tell us how to process these residencies and how to process the tax exemptions (this is to codify the law). The two months start running from the date of the publication of the law which happened on July 14th, 2021. That means the CR Government has until September 13th to enact the regulations.

What We Do Not Know

Retroactivity of the Law

People are wondering if the law is retroactive. Well, the law does not say whether it is retroactive or not. By principle, it must be. What I mean is that under Costa Rican regulations and case law, all benefits are retroactive, but it is extremely important to understand what that means. So, let’s see below a couple of cases.

  1. I am already a resident. Can I import a vehicle and household goods and enjoy these benefits? Under this scenario, people who are residents should be able to enjoy the benefits in the future. In this sense, the retroactivity is applicable to people who have obtained residency prior to the existence of the law. Not withstading that they are residents, they will be able to enjoy the benefits in the future.

  2. I am a resident and have already imported a vehicle and my household goods prior to the law. Can I request the exemption for those items I already imported and get a refund or credit? Under this scenario, the law is not retroactive and will not be effective for transactions that happened already.

Imagine if a new law creates a new holiday for May 4th (may the force be with you). An employee in a company will be able to get the day off for all future holidays on May 4th, but will not be able to claim to the employer to have accumulated time off for all the previous years in which May 4th was not granted as holiday.

Ten Year Validity of the Benefits

It is not clear what it means for the benefits to be valid for ten years. We must wait for the regulations to clarify what that means.

In other parts of the law, it is stated that if you import a vehicle and get the tax exemption and then sell the vehicle, the importation taxes must be paid in the process of transferring the title. Thus, it is clear that there is an intention for the benefits to be limited at some point.

It seems the intention of the legislation is to impose those restrictions for a period of ten years. It could be the case that the law is not drafted very clearly. The way it is currently drafted generates the impression that taxes must be paid at the end of the ten years, which defeats the purpose of the law. Perhaps the intention is to have the restrictions expire after ten years and therefore if the vehicle is transferred after ten years the taxes are not required to be paid. We must wait and see how they regulate this.

Special Window at the Immigration Department

Currently, the Immigration Department (DGME) has three special windows. To wit, one for academic organizations, one for religious organizations and one for business registered with the DGME (there are special regulations for this last window, it is not for everybody, so do not get excited). Thus, it seems there is an intention to improve the processing of the residencies with this “new window”. Again, we must wait and see what results of the pending regulations.

Period of Time to Regulate the Law

As noted, this law must be regulated by the Executive Branch, and we are not sure they will be able to pull it off within two months. It seems the government is motivated to get this law implemented. The law itself was approved by the Costa Rican Congress in a very short period of time. While regularly a law may take years to be approve by Congress (you know, nothing gets done quickly in Costa Rica) this law was passed in a matter of months. Perhaps this is an indication the Executive Branch will regulate this law within the allotted two-month period. We must wait and see, fingers crossed.

Regulations from the Revenue Service

While the law seems to be immigration oriented as it grants benefits to foreign nationals, the benefits themselves are fiscal in nature as it refers to tax exemptions. While the Immigration Department must enact some regulations regarding some of these changes in the law, the bulk of the regulations must come from the Revenue Service (Ministerio de Hacienda) and specifically from the Customs Department (Direcciòn General de Aduanas). Some other regulations must take place regarding the transfer of real estate as there is the 20% exemption of transfer taxes.

On a recent communication with Pablo Arias from International Relocation Partner, he stated that customs brokers are not aware on whether the Customs Department is doing anything regarding the regulations required by this law.

With this, we hope that there would not be a delay with the enactment of the over all body of regulations that must be created for the appropriate implementation of the law. However, as you can see this process is not as simple as signing a form.

 

What should you do with all of this?

As many people are wondering when can they get the benefits and when will the law l be implemented, a very simple piece of advice is to plan ahead and get a head start.

In many other countries with similar tax benefits, it is possible to obtain the tax benefits either when a residency is pending or certainly when people have the residency in their pockets.

We do not know what the regulations are going to say or when they are going to be enacted. We do not know if the Immigration Department is going to be able to improve the processing times with this new window, we also do not know if this incentive will actually have the desired effect which is to “attract foreigners” to move to Costa Rica and whether the volume of people arriving to the country will increase.

What we know is that prior planning prevents poor performance. If we learned from recent history, many expats waited until the last minute to apply for residency, just in the nick of time when the tourist visa extensions were about to expire, and many people wanted everything done and filed in the last minute. Do not be that person, please plan ahead.

The best advice we can give you is to have your residency ready. It will be great if the government enacts the regulations within two months. When that time comes, it would be a good idea if you are already getting your ducks in a row. If the government enacts the regulations much later (in six or twelve months) then it will be great for you if you already have your residency approved or are just about to get it approved.

Do not wait for the regulations to be enacted to get your things together. Start putting things together now.

I hope this information  is helpful. Please share your comments and questions in our blog or Facebook page. We will try to address them as soon as possible.

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rvalverde@outlierlegal.com

Attorney and Entrepreneur with more than 15 years experience in: immigration law in the US and Latin American countries including Argentina, Chile, Colombia, Brazil, Costa Rica and Panama. In addition, Rafael has extensive experience in Business Law, Estate Planning, and Real Estate. Lastly, Rafael has developed experience in people management, talent development and business development.

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6 COMMENTS
  • Henry July 30, 2021

    Thank you. Question:
    If a person falling under one those categories doesn’t import a vehicle but buy it in Costa Rica, will he be eligible for a tax exemption or refund? Basically, it’ll be a similar tax burden to importing it. I am doing pensionado and will be purchasing a vehicle upon arrival.

    • Stacey Jennings August 2, 2021

      No because the dealer or seller would have paid the taxes upon the importation of that vehicle and it will have to be included in the pricing in Costa Rica

  • Michael August 2, 2021

    I am surprised that the car dealers are not making an effort to capture these sales by getting a tax refund for those new residents that would like a new car with warranty. If you import a new car, or one still under manufacturer’s warranty it is not covered here.

    • Sailuk Joe Breese November 25, 2021

      It would be nice to put those Dollars into the hands of local car dealerships instead of one state-side. Especially when we consider that some of the toughest and longest lasting vehicles found in Costa Rica are even not sold in the USA: The Toyota Hilux 4×4 diesel and the Kia Bongo III 4×4 as examples.

  • Victoria Fisher Rice October 24, 2021

    Any updates on this law? I am currently building a house and would love to ship my household items tax free. I know all about Tico time so just thought I would check to see if there has been any movement? Thanks!

    • Stacey Jennings October 25, 2021

      Nothing yet – as soon as we hear it’s implemented we will announce on all our social media platforms

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