In brief

Costa Rica’s Executive Branch in mid-May presented a corporate income tax bill to the Costa Rica Congress for consideration. The Bill is part of a package of five proposed bills that also includes proposals to strengthen the tax audit function, amendments to VAT law, rules regarding vehicles tax, and proposed rules related to the management of public debt and other functions of the National Treasury. 

The Bill proposes to repeal the corporate income tax law as currently in force. In its place, new provisions would expand the definition of Costa Rican-source income to include certain passive items, such as capital income and capital gains earned by Costa Rican tax residents, regardless of the source location. If the bill is enacted and published by the end of 2023, it would enter into force on January 1, 2024.

Takeaway: This proposed change would constitute a significant deviation from the traditional territorial tax system that currently applies in Costa Rica. The change is intended to increase tax collection and align the Costa Rican tax system with the requirements imposed by the European Council in order to remove the country from the European Union List of Non-cooperative Jurisdictions for Tax Purposes. Multinational companies with operations/presence in Costa Rica should monitor the legislative process to assess whether changes to the current tax system could impact their structures.  

Proposed corporate income tax

Regarding the proposed corporate income tax, the Bill proposes a tax that would levy revenues obtained by legal entities and other vehicles that are tax residents in Costa Rica. The ‘revenues’ levied would include active and passive income. The Bill aims to expand the definition of Costa Rican-source income to include certain items of passive income/gains i.e., capital income, capital gains, and foreign exchange gains on transactions denominated in foreign currency -- regardless of the place where they are earned. 

This would be a departure from the current system, in which passive income from foreign sources is treated as extraterritorial income and therefore not subject to income tax. By expanding the definition of Costa Rican-source income, the Executive Branch seeks to increase tax collection; ensure that Costa Rica is not used as a jurisdiction for international tax avoidance strategies for double nontaxation or base erosion and profit shifting mechanisms; and align the Costa Rican tax system with the recommendations issued by the International Monetary Fund (IMF). 

Observation: These changes are designed to help Costa Rica comply with the requirements imposed by the European Union to remove Costa Rica from the list of non-cooperative jurisdictions. Given the expansion of the definition of Costa Rican-source income, the Bill also introduces the possibility of claiming foreign taxes paid on such items of passive income/gains as a foreign tax credit, capped at the amount of the Costa Rican tax paid on such income.  

The Bill preserves a tax year that matches the calendar year and proposes a unique corporate income tax rate of 30% on net revenues from all sources obtained during the relevant tax year, thus departing from the progressive rate system currently in force. 

Observation: Enactment of major tax reform in the Bill may be challenging given the broad scope of the proposed package of which the income tax reform is only one piece.