The Costa Rican tax system is based on the principle of territoriality, according to which, only income received from a source within Costa Rican territory, or income that involves the use of the country’s infrastructure or resources, is taxed.
Several Bills of Law have been presented and are currently under discussion in Congress to be approved in 2023. These laws would most likely change the income tax system to a Reinforced Territoriality system, by which certain passive income generated abroad (e.g., interests, dividends, royalties) would be taxed in Costa Rica, and the deduction or tax credit would be recognized for any foreign taxes applied. This tax reform would be approved in order to comply with good tax governance standards from the European Union.
The value-added tax in Costa Rica has a rate of 13%, but reduced rates apply in particular cases.
The Social Security parafiscal contribution -or social security charges-, is one of the most important taxes in Costa Rica. This contribution is paid jointly by the employee, the employer and the Costa Rican State, according to the proportion established by law . Caja Costarricense del Seguro Social (CCSS) is the Social Security Authority that collects and manages this tax, which is the base for the social security and health system. It represents approximately 24% of our total tax load.
A Simplified Tax Regime applies to very small taxpayers, with simple businesses or economic activities. Taxpayers eligible for this regime pay a lower tax rate. Conversely, taxpayers with high income or large complex businesses are classified as “large taxpayers” or “large territorial companies.” These taxpayers typically pay a higher rate and must comply with additional formal obligations, as well as be subject to increased scrutiny from the Tax Administration.
Separate tax administrations handle ordinary taxpayers, Simplified Tax Regime taxpayers, and large taxpayers. Each geographic region also has its own tax administrations for each category of taxpayer. This organization was implemented to facilitate more efficient collections.
Costa Rica has few taxes and fees at the municipal level.
In this chapter
- Legal system
- Taxation authorities
- Business vehicles
- Funding a local subsidiary
- Corporate income tax
- Cross-border payments
- Payroll taxes
- Indirect taxes
- Other taxes
- Other formal tax related obligations
- Tax incentives
Legal system
The Costa Rican Tax Code of Standards and Procedures contains general rules, definitions and procedural regulations concerning national taxes, but it is also applicable to municipal taxes and other taxes, as well as tothe Social Security charges. The Tax Code’s penalty rules apply in municipal processes too. Additionally, there are special laws and bylaws, such as the Income Tax Law, the Value Added Tax Law, Municipal Tax Law and Social Security contribution, as well as their associated regulations.
Taxation authorities
The main authority on tax-related matters is the Ministry of Finance, which is divided into the General Customs Administration, the General Treasury Directorate, the Tax Control Police and the General Tax Administration. The latter is responsible for the collection of taxes, and it is further subdivided into several divisions, among which are the regional tax administrations.
The Social Security Authority (CCSS) is the tax administration for the Social Security parafiscal contribution. The tax is collected by this Authority and it is not included in the national budget.
Municipal taxes and fees are collected by each Municipal Tax Administration. Costa Rica has 82 municipal governments.
Business vehicles
Non-residents may choose to incorporate a Costa Rican business vehicle (legal entity) to conduct business in Costa Rica, or to operate directly through a foreign entity with or without setting up a permanent establishment locally. Costa Rican business vehicles are business partnerships, formed as either a limited liability company (SRL) or a corporation (SA). Although it is legally possible to set up a trust to conduct business in Costa Rica, the structure is rarely used due to its complexity.
The tax treatment of SAs and SRLs is essentially the same. From a tax standpoint, the only distinction is that interest on loans granted by shareholders of an SRL are not deductible to determine the taxable income, as they are deemed comparable to dividends. Therefore, interest payments on SRL shareholder loans are subject to a 15% withholding, whereas interest incurred by an SA on loans provided by its stockholders can be deductible, as long as they are properly justified from a transfer pricing standpoint, and they are necessary and directly related to the generation of Costa Rican-sourced taxable income.
In general, for income tax purposes, the relevant criterion is the location of the source of income.
Corporations (SA)
An SA can be owned by local or foreign persons (individuals or legal entities) and can be managed by local or foreign officers. If none of the directors are domiciled in Costa Rica, a resident agent must be appointed, who must be a licensed attorney residing in Costa Rica, properly authorized to receive all communications addressed to the directors.
It is necessary that the entity has a nominative capital stock represented by shares. The capital stock may be paid in cash, kind or letters of exchange, among other methods.
Limited liability corporations (SRL)
In the case of an SRL, there is a condition protecting current shareholders in the event a shareholder wishes to sell its shares, consisting of a right of first refusal for current shareholders to purchase the share being sold. A general shareholders meeting must be held in order to authorize the sale of the shares.
As previously mentioned, there are no major differences in the fiscal treatment of an SA or an SRL, with the exception of the treatment of loans granted to shareholders.
Foreign corporation (with or without a Costa Rican branch)
A foreign corporation that carries out business in Costa Rica is subject to taxes in respect of such income. Moreover, Costa Rican legislation provides that certain activities carried out by a non-resident constitute commercial activities subject to taxes in Costa Rica.
Should the foreign corporation be domiciled in a country that has entered into a double taxation treaty with Costa Rica, it may be exempted or granted reduced rates, with the exception of foreign corporations operating through a permanent establishment, in which case, income is generally subject to taxes in Costa Rica.
Costa Rican legislation taxes remittances abroad (to non-domiciled persons or entities) at rates that vary depending on the nature of the payment.
Funding a local subsidiary
Equity financing
Contributions for shares or shares of stock.
If an investment is made in a Costa Rican entity in exchange for shares, the amount of the investment is added to the entity’s “social capital” account. Subject to certain adjustments, a corporation’s social capital is generally the same as its paid-up capital for tax purposes.
Contributions without taking additional shares
When an equity contribution is made by a shareholder in an entity incorporated in Costa Rica, a general shareholders meeting must be held in order to document the decision of increasing the capital stock, either by modifying the value or the amount of existing shares. From a tax perspective, this is the best option.
The contribution could also be made as additional paid-up capital, which does not increase the capital stock but must be made for a short term.
Distribution of paid-up capital
A corporation is allowed to make refunds of its paid-up capital to a non-resident stockholder without incurring Costa Rican withholding tax, as long as such paid-up capital is properly reflected in the accounting and the corporate books.-This applies when the company does not have dividends to distribute.
Conversely, if the company has accumulated dividends, the company must distribute them prior to paying capital back to the shareholders.
Dividend distribution is subject to withholding tax, which must be paid on the distribution of profits that have not been converted into declared capital stock as well.
Debt financing
Withholding tax implications
Costa Rican corporations are allowed to borrow funds from related third parties, which must be very well-documented with a contract and a real guarantee. Should the lender be based abroad, interest will be subject to a 15% withholding tax, and if both parties are related, the interest rate charged must be arm’s length.
The remainder of the payment (amortization) is not subject to withholding.
The withholding tax rate can be reduced or eliminated based on an applicable double taxation treaty.
Thin capitalization
There are no thin capitalization rules in Costa Rica, although the Income Tax Law does provide for a 20% limit on the EBITDA for the deduction of non-banking financial interests. The limit on the deduction is related to the origin of the financing arrangement, meaning that such limitation applies to loans entered into with third parties (related or not) that are not financial entities or institutions supervised by the local regulator authority named CONASSIF (Consejo Nacional de Supervisión del Sistema Financiero).
Stamp tax
A stamp tax of 0.5% must be paid on most documents used in courts or public offices and for many private transactions, including deeds and mortgages, among others.
Education and cultural stamp is a tax that entities must pay on an annual basis, based on the amount of net capital reported in the income tax statement.
Corporate income tax
Costa Rica's income tax system is based on the territoriality principle. Therefore, only Costa Rican–sourced income is subject to income tax in Costa Rica, regardless of the taxpayer's nationality, domicile or place of incorporation.
Income from Costa Rican sources consists of income derived from services rendered, capital used and assets located within Costa Rica. Income tax rates are applied as set forth below.
Income tax rates
Income tax rates for both companies and individuals are calculated on a progressive scale depending on gross income. In case of legal entities, income tax ranges from 0% to 30%. For individuals, it ranges from 0% to 25%.
Corporations generating Costa Rican–sourced income are generally subject to a 30% income tax. Small companies have lower tax rates.
Deductions include all necessary expenses for the production of taxable income.
All entities will have a calendar-year fiscal period, from January 1 to December 31.
Capital gains
Capital gains are taxed at a 15% rate. Capital gains are defined as an equity increase derived from the disposition of assets (e.g., real property). In the case of taxpayers whose normal activity is the sale of assets (e.g., real property), those gains would be subject to regular income tax.
Corporate/legal entity tax
All legal entities must pay an annual tax on legal entities in January of each year. “Legal entities” include all of the following companies that are registered with the Registry of Legal Entities of the National Registry, or will be registered in the future:
- Mercantile companies
- Branches or representatives of foreign companies
- Limited individual companies of responsibility.
A new legal entity must pay taxes proportionally as of the filing of its deed of incorporation with the National Registry.
Tax rates range from 15% to 50% of a “base salary” (an amount statutorily determined by the government to calculate certain fines and penalties), depending on certain conditions of the entity and its income.
Income tax exemptions
Government, municipal and decentralized government entities, religious institutions, cooperatives and nonprofit organizations are exempt from paying income tax.
Some sources of income are also exempted from the payment of income tax, including capital contributions, income from assets or capital located outside Costa Rica, inheritances, lottery winnings and donations received by authorized entities.
Dividend tax (currently taxed by “Capital Gains tax”).
Dividends paid to local (when these companies do not have economic activity) and foreign companies and individuals are subject to a 15% withholding tax.
Cross-border payments
Transfer pricing
Costa Rica’s transfer pricing regulation sets forth the rules to be observed by economic groups (both national and international) in establishing the conditions under which their operations will be regulated. It creates an obligation for Costa Rican entities that are members of economic groups to file an informative declaration in which they report the structure of their group and the conditions or methods that were observed to determine the conditions of their operations.
This implies the need for the entities to have a transfer pricing study performed, which determines the methods used to set the conditions and the reasons for the prices agreed among the related entities for their transactions, which are different from those agreed upon with independent parties.
The regulation provides for the conditions that must be verified to confirm that an entity is part of an economic group and, therefore, its transactions with the other related entities must comply with the rules.
The framework principle of transfer pricing is also defined, which is the principle of free competition, according to which the terms and conditions of those transactions that take place between members of the same economic group must meet the same terms and conditions as transactions between independent parties.
Covered entities are required to perform a transfer pricing study to prove compliance with the principles of free competition in their transactions.
Tax on remittances abroad
Costa Rican–sourced income paid to beneficiaries domiciled abroad is subject to withholding tax in Costa Rica. Applicable tax rates depend on the type of income:
- Dividends: 15%
- Interest, commissions and other financial expenses: 15%
- Technical assistance: 25%
- Payments for the use of patents, supplies of formulas, trademarks, privileges, franchises and royalties: 15%.
Some types of Costa Rican– sourced income are considered "special cases." Examples include interest and commissions on loans invested or used in Costa Rica, and income generated by the export of goods.
Multilateral Instrument
Costa Rica ratified the MLI on April 16, 2020 and deposited its instruments of ratification on September 22, 2020. On January 1, 2021, the MLI entered into force and began to apply to some of Costa Rica’s tax treaties. Costa Rica has two treaties to be covered by the MLI (Spain and Mexico). A notable exclusion is Costa’s treaty with Germany.
Costa Rica has adopted most of the provisions of the MLI, with the exception of Articles 5, 17 and Part VI - Arbitration. The country has chosen to apply Article 6(3). Costa Rica applies Article 9(4) (capital gains) and Article 13 (Option A).
Costa Rica has signed Double Taxation Avoidance Agreements (DTAA) with Mexico, Germany and Spain. The DTAAs provide special treatment for income produced by Costa Rican taxpayers in the mentioned countries and vice versa.
International tax reform
On October 8, 2021, Costa Rica, along with 135 other countries, committed to a two-pillar plan for international corporate tax reform that supports the OECD Inclusive Framework’s “Tax Challenges Arising from Digitalisation” project.
Nonetheless, as of July 2023 Costa Rica has not yet released any legislative proposals to implement Pillar Two. Cost Rica is being cautious and is waiting for other countries to implement the rule first. Of particular concern is the country’s capital import neutrality position and the possible adverse effects to Foreign Direct Investment, on which the Costa Rican economy relies heavily. Therefore, there is no certainty on when or how any actions for implementing Pillar Two might occur in Costa Rica.
Payroll taxes
Employees' salaries and wages exceeding the amount set out by law are subject to income tax at rates ranging from 0% to 25%.
Employers must act as withholding agents of this tax.
Indirect taxes
Value-added tax (VAT)
VAT is levied on the sale, import or transfer of goods and provision of all services (except specific exemptions, such as private education and public transportation).
The taxpayer is any individual or company who, on a regular basis, sells merchandise or provides services subject to sales tax. These include imports.
The VAT general rate is 13%, with reduced rates for certain goods and services. The tax is levied upon all merchandise sales and services. Certain products have a reduced rate, such as basic food items.
Selective consumption tax
Selective consumption tax applies at the commercialization stage, at the industrial level or upon importation entry into the country. In some cases, it is intended to reduce demand for articles whose consumption is considered non-essential or dispensable.
The tax applies only to a specific list of products, which includes, among others, beer, wine and liquors; paints and coatings; cigarettes; haircare products (e.g., shampoos and hair conditioners); deodorants and perfumes; detergents and soaps; pneumatic tires and engines; refrigerators and freezers; washers; automotive vehicles and motorcycles.
Real Property transfer tax
The real property transfer tax is equivalent to 1.5% of the highest of the transfer price or the property’s registered value. The taxpayer must declare and pay this tax within fifteen days after completing the transaction.
Tax on luxury residences
Luxury residential properties valued at more than CRC 121 million (approx. US$224,000) are subject to the Solidarity Tax for the Strengthening of Housing Programs, a progressive tax that ranges from 0.25% to a maximum tax rate of 0.55%. This tax is paid annually.
Other taxes
Property tax
Property tax is equivalent to 0.25% of the property’s registered value with the corresponding municipality. This tax is paid annually to the municipality in which the property is located.
Business license tax
Any lucrative activity that is exercised within any municipal territory, must have an operation permit or business license issued by the corresponding municipality, which is obtained by paying a business license tax. The tax normally is calculated upon gross income, or upon a combination of gross and net income of the licensee. Applicable tax rates vary by municipality. This tax must be paid for as long as the lucrative activity is carried out, or the license is held.
Other formal tax obligations
For 2023, a new tax informative tax return (form D195) has been made available for companies registered as "inactive for tax purposes"., which in many cases are just asset-holding companies not actively conducting a trade or business.
This "Informative Declaration of Inactive Companies for Tax Purposes" (form D-195) applies to any company incorporated and registered in Costa Rica, which falls into the category of an inactive company and entails the obligation to disclose information about such inactive company in Costa Rica.
In this form D195, the Tax Administration now requires a new disclosure of information of the inactive company such as:
- The reason for which the company is not exercising activity in Costa Rica;
- Indication if the inactive company owns trademarks, patents or registrable assets;
- Indication if the company owns non-registrable assets;
- Indication of whether the company owns real estate assets that have not been registered;
- Indication of whether the company has cash, bank accounts or accounts receivable in Costa Rica;
- Indication of whether the company has assets or rights abroad;
- Indication of whether the company has debts (credits) in the short/long term;
- Indication of the legal or natural persons who oversee the payment of expenses on behalf of the inactive company and the approximate amount of expenses they cover annually.
Tax incentives
Free trade zones
The Free Trade Zone Regime (RZF) is the pillar of Costa Rica’s export strategy and investment promotion. It consists of a series of incentives and benefits granted by the Costa Rican government to companies seeking to make new investments in the country. Incentives may include exemptions from certain taxes as high as 100%.
Companies that can apply to the Free Trade Zone Regime include the following:
- Service export companies
- Scientific research companies
- Strategic sectors or companies
- Significant suppliers
- Services or manufacturing projects.
- Human Health service companies that establish their operations outside the Metropolitan Area
- Companies that develop sustainable adventure parks outside of the Metropolitan Area
Tourism incentives law
This law grants incentives and benefits that promote the development of important tourism programs and projects, for services such as the following:
- Hotel services
- Air transport for domestic and international tourists
- Water transport for domestic and international tourists
- Receptive tourism of travel agencies that are exclusively dedicated to this activity
- Renting of vehicles to domestic and international tourists.
One benefit granted by this law is the exemption from all taxes and surcharges applied to the import or local purchase of articles necessary for installing or operating new companies, the offer of new services and the construction, expansion or renovation of real property. Motor vehicles and fuel are not eligible for this exemption.
