Costa Rica Tax: Government presents major tax reform bill

Costa Rica’s Secretary of the Treasury formally presented a tax reform bill to the National Congress on 21 June 2021 that contains major and aggressive changes to the Income Tax Law and the Value Added Tax Law, with a view to collecting more than CRC 2 billion per year. The bill has been coined “Plan B” because it follows a bill proposed in January that failed to win the votes of the Congress.

The main proposals under the bill are as follows:

- A new general withholding tax rate of 15% would apply to dividends, interest and royalties paid to a nonresident company. However, payments made to a nonresident with respect to transportation, telecommunications and insurance premiums would be subject to a lower rate of 5.5%. The current rate for dividends, professional fees and interest, which is 15%, would remain unchanged (although the 0% rate applicable to certain types of interest would be abolished), but the current 25% rate on royalties and technical and management advice fees would benefit from the lower 15% rate.

- Capital gains derived by Costa Rican residents would be subject to a 15% tax if the gains do not arise from the disposal of assets used in a normal trade or business. The rate for nonresidents would be 3%. Under current law, capital gains are not subject to taxation unless the gains arise from “habitual” transactions or from the transfer of an asset subject to depreciation or amortization in the case of intangibles.

- Foreign exchange gains and losses would be considered taxable/deductible for income tax purposes in the fiscal year during which they are realized. Existing law is unclear as to whether such gains are taxable or nontaxable income, and several cases are pending before the national tax courts.

- Formal transfer pricing rules that follow the OECD guidelines would be introduced for the first time.

- Formal thin capitalization rules that include a 3:1 debt-to-equity ratio would be introduced. Costa Rica currently does not have any restrictions on interest deductions if interest rates on related party debt are in accordance with market standards.

- The tax on the transfer of immovable property would increase from 1.5% to 3%, and the rate on movable assets rate would increase from 2.5% to 3%.

- The double taxation relief rule would be abolished. The rule currently allows companies in certain countries (including Mexico and the U.S.) to obtain a 100% exemption from withholding tax on dividends, interest, royalties, commissions and insurance premiums.

- The free trade zone regime would remain unchanged.

- The standard rate of VAT would increase from 13% to 14% and the list of exempt products would be reduced from 900 to 233. The provision of services, with limited exceptions (i.e. certain cases of public transportation), would be brought within the scope of VAT.

Even though the government feels confident that Plan B will be discussed and approved by the National Congress during 2011, the bill is likely to be debated vigorously and may be subject to further changes.

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