Tax reforms conducted by the Government typically take the form of decrees or regulations and often respond to the fiscal policies of the current government.

However, legal reforms are infrequent and occur approximately every four years, as they require a legislative approval process.

When a reform project is prepared, the deputy or group of deputies responsible for it presents the proposed text to the Legislative Directory. The directory then assigns it to a special commission for further evaluation and review.

The commission may propose both formal and substantive amendments to improve and correct any deficiencies in the draft. The bill is also sent to the Constitutional Chamber for a constitutionality review.

If the Constitutional Chamber’s opinion is favorable, the bill is placed on the legislative plenary’s agenda for a first debate. If it passes the first debate, it is sent to a drafting commission where the final text is reviewed before proceeding to a second debate.

If it’s approved in the second reading, it is forwarded to the Executive Branch. The President of the Republic then has the authority to either enact the bill or veto it. If the President vetoes the bill, the Legislative Assembly may override the veto, thereby enacting the bill into law.

Section 128 of the General Tax Code outlines the obligations of taxpayers operating in Costa Rica. It specifies the requirement for taxpayers to properly register and keep their information updated with the tax authorities. Key obligations include maintaining accurate accounting and financial records in strict compliance with the principles set forth in the International Financial Reporting Standards (IFRS), as well as correctly reporting income and expenses.

The Ministry of Finance is subdivided into various departments based on specific areas of expertise and competence. For example, there is a department responsible for customs-related matters (“DGA”), another focused on tax exemptions (“DGH”), and another dedicated to tax regulations and audit processes (“DGT”). This last department is divided into various administrations that are distributed by geographical areas within Costa Rica.

These departments engage with taxpayers through a combination of regulatory oversight, compliance audits, and taxpayer assistance services. Tax issues are resolved through administrative procedures, including assessments, audits, and appeals processes, which may ultimately involve independent bodies like the Administrative Tax Court or judicial venues such as the Contentious Administrative Court.

If irregularities are detected in a taxpayer’s returns, the Tax Administration itself initiates a Determination procedure to make the necessary adjustments.

This procedure includes two stages of appeal, the final one being heard by the Administrative Tax Court. This court is an independent body with full jurisdiction, separate in its organization, operation, and competence from the Executive Branch. Its rulings exhaust the administrative process. The entire procedure can take up to two years to complete.

After this final act, the taxpayer has the option to escalate the dispute to the judicial venue before the Contentious Administrative Court.

The payment deadlines depend on the type of tax in question. For example, income tax follows an annual tax period, while sales tax is settled monthly. Another relevant case is the capital gains tax, which must be declared at the time of accrual.

Generally, the declared amount must be paid at the end of the tax period. However, if the Tax Administration issues an ex officio determination that increases the declared amount, the taxpayer must pay the additional amount once the dispute is resolved.

Yes, the administrative tax procedure and its files are confidential to third parties, including during hearings. This is established in Article 117 of the General Tax Code.

Yes, through Resolution No. DGT-R-16-2020, the obligation to provide the Tax Administration with information regarding accounts and payments, as outlined in this resolution, was established in accordance with the OECD Common Reporting Standard (CRS).

Additionally, financial institutions are required to adhere to the procedures and definitions, as well as all related aspects contained in the CRS commentaries.

Costa Rica maintains a transparency and beneficial ownership registry managed by a computer system developed by the Central Bank of Costa Rica. This system allows legal entities and other legal structures to provide information to register their participants and their ultimate beneficiaries, as well as other relevant information on natural persons. This facilitates effective control in the fight against tax fraud, money laundering, and the financing of terrorism.

Every entity that carries out economic activities has the legal duty to register with the Tax Administration. If this is not done, the competent authorities may carry out cross-checks with other state entities in order to corroborate the situation.

Yes, the Costa Rican tax authorities do target cross-border transactions within international groups. If any irregularities are detected in intercompany transactions, the authorities can initiate an audit to analyze the legality of the agreements and the accuracy of declared income and expenses.

The Tax Administration is empowered to request any type of documentary support to substantiate the transactions under review. Therefore, it is crucial for companies to document and maintain records of all transactions.
It is important to note that Costa Rica operates under a principle of territoriality.

This means that while the tax authorities can challenge payments, expenses, royalties…, that impact the local taxpayer, they do not have jurisdiction over entities outside of Costa Rica.

Currently, there is no individualized control regime for foreign entities that are related to companies located in the national territory.

No.

Yes, Costa Rica has general anti-avoidance rules (GAAR) designed to prevent practices that, although legal, primarily aim to reduce or avoid paying taxes. These rules ensure that taxpayers meet their tax obligations in a fair and equitable manner. The Tax Administration enforces these rules through audits, negotiations, and, if necessary, litigation to address any detected tax avoidance practices.

Yes, Costa Rica has a tax on digital services. Since October 1, 2020, a 13% value-added tax (VAT) on cross-border digital services has been implemented. This tax applies to various digital services, including streaming platforms, subscription services, apps, and other similar services provided by foreign companies to consumers in Costa Rica.

Companies offering these services must register with the General Directorate of Taxation (DGT) of Costa Rica and comply with the corresponding tax obligations. The purpose of this tax is to ensure that foreign companies providing digital services to Costa Rican consumers contribute fairly to the country’s tax system.

There is currently no specific intention to withdraw or amend this tax once a multilateral solution is in place.

Yes, the Tax Administration updates its audit plans annually based on OECD guidelines to optimize and strengthen the collection and correct payment of taxes to the State coffers. Costa Rica is committed to implementing the OECD’s Base Erosion and Profit Shifting (BEPS) recommendations, including measures from the recent two-pillar solution to address tax challenges arising from the digitalization of the economy.

Costa Rica’s accession to the Organization for Economic Cooperation and Development (OECD) has had a significant impact on the country’s tax policies. Costa Rica has adopted the actions of the OECD’s BEPS Project, which aims to combat aggressive tax planning practices that erode the tax base and shift profits to low- or no-tax jurisdictions. This includes implementing measures such as transfer pricing documentation and adopting standards to avoid double taxation.

The OECD has promoted the strengthening of tax administration in Costa Rica, encouraging the modernization of processes and systems within the General Directorate of Taxation (DGT) to improve tax collection and control.

Yes, Costa Rica, having formally joined the OECD in 2021, broadly follows the OECD tax model. The country’s tax system includes various taxes that are levied on different manifestations of taxpayers’ economic power. However, there are specific challenges, particularly related to the application of the principle of territoriality, among other aspects. Here are the key elements of the tax system:

a) Business Profits: The corporate income tax rate in Costa Rica is based on a progressive scale, with the base rate at 30%. Exceptions and lower rates may apply depending on the level of annual gross income and specific circumstances.

b) Employment Income and Pensions: The Wage Income Tax is calculated on a progressive scale, starting with an exempt bracket and reaching a maximum rate of 25%. This applies to both employment income and pensions.

c) Value-Added Tax (VAT): VAT in Costa Rica is levied at a standard rate of 13%. There are certain exemptions and reduced rates for specific goods and services.

d) Savings Income and Royalties: While savings income is generally not taxed, royalties are subject to income tax. The withholding tax rate on royalties paid to non-residents is typically 15%.

e) Income from Land: Property tax, which is levied on the value of registered property, is set at 0.25% of the property’s value.

f) Capital Gains: Capital gains tax in Costa Rica is applied at a single and final rate of 15%. This rate applies to gains derived from the sale of assets, including real estate and securities.

g) Stamp and/or Capital Duties: Stamp duties in Costa Rica vary depending on the type of business or legal transaction being carried out. The minimum stamp duty to be paid is twenty colones, with higher rates applicable to specific transactions.

Costa Rica’s tax system aims to align with international standards while addressing the unique economic and legal context of the country. The authorities are actively working on ensuring compliance with international agreements, such as the Common Reporting Standard (CRS) for automatic exchange of financial account information, to enhance transparency and cooperation in tax matters.

Yes, in Costa Rica, business tax is generally levied on the revenue profits of a business as computed in accordance with accounting principles. The financial and accounting records form the basis for determining the taxable base that the taxpayer will declare to the Tax Administration.

Businesses can maintain their accounting and financial records using computer systems of their choice, provided that the accounting complies with the principles of registration and information established in the regulatory standards. In the absence of specific local standards, businesses must adhere to the International Financial Reporting Standards (IFRS) adopted by the College of Public Accountants of Costa Rica.

However, it is important to note that if there is any conflict between accounting principles and tax regulations, the provisions of the tax regulations will prevail for tax purposes. This ensures that the tax laws take precedence over accounting standards when determining taxable income.

In summary, while accounting principles and standards play a crucial role in the computation of revenue profits, tax regulations ultimately govern the determination of the taxable base in Costa Rica.

Yes, common business vehicles in Costa Rica, such as companies, partnerships, and trusts, are recognized as taxable entities. These vehicles are subject to the country’s tax obligations, meaning they must register, file tax returns, and pay taxes according to the applicable laws and regulations.

Costa Rica’s tax system is based on the principle of territoriality. This means that any service or good commercialized within the country’s territory is of Costa Rican source.

On August 7, 2023, a Special Commission of the Legislative Assembly approved amendments to the Income Tax Law to further clarify the territoriality principle. According to the new text, Costa Rican source income or benefits are those generated exclusively within the national territory, in line with the territorial space defined by the Political Constitution.

The new amendments also specify that, exceptionally, passive income derived from assets located or rights economically utilized outside the national territory will be considered Costa Rican source income if it is obtained by an entity that is part of a multinational group and lacks economic substance.

Yes, Costa Rica offers favorable taxation regimes, most notably through the “Free Trade Zone Regime Law.”.

This law provides a set of incentives and benefits to companies making new investments in the country, provided they meet the requirements and obligations established in the law and its regulations.

The Free Trade Zone (FTZ) is a designated area where goods can be stored, manufactured, or processed without being subject to customs duties. In Costa Rica, the FTZ is a delimited territory, meaning its perimeter and access points are supervised by customs authorities. Companies operating within the FTZ engage in industrial or commercial activities and receive specific tax benefits as part of an economic promotion strategy.

These benefits can include exemptions from customs duties, income tax, and other local taxes, making the FTZ an attractive option for foreign and local investors looking to expand their operations in Costa Rica. This regime aims to stimulate economic growth, attract foreign investment, and create jobs in the country.

Currently, Costa Rica does not offer a special tax regime specifically for intellectual property, such as a patent box.

No, fiscal consolidation is not permitted in Costa Rica. The tax system does not allow for the consolidation of financial statements for tax purposes across a group of companies. Each company within a group is required to fulfill its tax obligations individually, without the ability to offset losses or gains across the group.

In Costa Rica, economic groups are recognized for certain regulatory and administrative purposes, but this recognition does not extend to tax consolidation. Instead, the tax system treats each entity as a separate taxpayer. Companies classified as “large taxpayers” are subject to specific criteria and may receive closer scrutiny from the tax authorities, but their tax compliance remains an individual responsibility.

Therefore, there is no group contribution system or mechanism to relieve losses across group companies in Costa Rica.

Yes, Costa Rica imposes various withholding taxes on different types of income. Some of the main types of withholdings include:

Income Tax Withholding: Employers are required to withhold a portion of their employees’ salaries and remit it to the Treasury. This also applies to fees, dividends, interest, and other types of income.

Withholding of Value Added Tax (VAT): In certain cases, buyers of goods and services must withhold VAT and remit it to the Tax Administration.

Non-Resident Withholdings: Payments made to non-resident persons or entities in Costa Rica may be subject to specific withholding taxes depending on the type of income, such as interest, royalties, and fees for technical services.

Municipal Tax Withholdings: Some municipalities may require withholding on certain payments related to business activities.

Yes, Costa Rica has implemented a green taxation approach, which includes various environmental taxes: Wildlife Tax revenue stamp, Forestry Law Tax, National Parks revenue stamp, Water Use fees, among others.

Additionally, Costa Rica has fiscal policies to encourage the use of clean energy. For instance, the Law for the Regulation of the Rational Use of Energy exempts certain energy-efficient goods, such as solar panels, solar water heaters, and efficient lighting fixtures, from import taxes and VAT. The Law for the Incentive and Promotion of Electric Transport (Law No. 9518) also provides tax benefits for electric vehicles.

There is also a single tax on fuels, a portion of which is allocated to the National Forestry Financing Fund. Moreover, there have been discussions about taxing products considered pollutants.

According to Sub-section IV, paragraph a), numeral 1 of Article 27 ter of the Income Tax Law, distributions of disposable income in the form of dividends, social participations, and the distribution of surpluses of cooperatives and solidarity associations, as well as all kinds of benefits assimilated to dividends, constitute income from movable capital.

A 15% withholding tax must be retained on the distribution of dividends, unless specific exemptions apply as outlined in Article 28 bis 3. Exemptions include cases where the partner is another capital company domiciled in Costa Rica, provided that it engages in economic activity and is subject to this tax, or when it is a controlling company of a financial group regulated by a superintendence attached to the National Council of Supervision of the Financial System (Conassif).

Advantages:

1. Political and Economic Stability: Costa Rica is renowned for its political and economic stability. The country has a long-standing tradition of democracy and peace, making it a safe and predictable environment for business operations.
2. Free Trade Zones and Tax Incentives: Costa Rica offers attractive tax incentives through its Free Trade Zone Regime, which provides benefits such as exemptions from customs duties, income tax, and other local taxes. These incentives are designed to attract foreign companies and encourage investment.
3. Highly Educated Workforce: The country boasts a high level of education and a well-skilled workforce, particularly in sectors such as technology, services, and advanced manufacturing.

Additionally, Many Costa Ricans are fluent in English, in addition to Spanish, which facilitates communication and operations for international companies.

1. Quality of Life: Costa Rica offers a high quality of life, with excellent healthcare, education, and environmental sustainability. This makes it an appealing destination for expatriates and international employees.
2. Strategic Location: Costa Rica’s geographical location provides easy access to both North and South American markets, as well as the Caribbean. This makes it an excellent candidate for nearshoring, where companies relocate closer to their main markets to reduce shipping times and costs.

Additionally, Costa Rica’s strong diplomatic and trade relationships align well with the principles of friendshoring, where businesses move operations to countries with similar political and economic values.

Disadvantages:

1. Bureaucracy: One of the main challenges for foreign companies looking to establish themselves in Costa Rica is navigating the bureaucratic processes. Regulatory requirements and administrative procedures can be time-consuming and complex.
2. High Average Costs: While Costa Rica offers many benefits, the cost of living and doing business can be relatively high compared to other countries in the region. This includes higher costs for labor, real estate, and utilities.
3. Limited Market Size: The domestic market in Costa Rica is relatively small, which may limit opportunities for businesses that rely heavily on local sales. Companies may need to focus on export-oriented strategies to fully leverage their operations.

Summary:

Costa Rica offers numerous advantages for international groups seeking to relocate, including political and economic stability, tax incentives, a highly educated workforce, a high quality of life, and strategic benefits for nearshoring and friendshoring.

However, companies must also consider challenges such as bureaucracy, high average costs, a limited domestic market. Overall, Costa Rica can be an attractive destination for relocation, especially for businesses in technology, services, and advanced manufacturing sectors.