May 30, 2023
Costa Rican Executive Branch files comprehensive tax reform bills
On 18 May 2023, the Costa Rican Executive Branch filed several bills that seek to reform the current tax system. The bills include approving a new Income Tax Law, eliminating specific Value Added Tax (VAT) exemptions and granting greater control and inspection powers to the Tax Authority.
Income Tax Law bill, Bill No. 23.760
Personal Income Tax
The bill would establish a Personal Income Tax levied on the following Costa Rican-source income:
Individuals who have their tax residence in Costa Rica will be considered taxpayers. In most cases, tax residence is established if an individual's period of stay in the national territory is equal to or greater than 183 days during the tax period.
The Personal Income Tax follows a global income tax methodology. To determine the taxable amount, all of the individual's taxable income makes up in a single tax base that will include: (i) a general base, including income from salary, retirement and pensions, economic activity and real estate capital (i.e., income from rentals), and (ii) a special base, which combines capital income (i.e., dividends, interests, royalties) and capital gains.
To determine the tax base, taxpayers may deduct certain costs and expenses from their income. Additionally, the general tax base will be adjusted by a deduction of a vital minimum amount included in the law (approx. CRC 10,104,000 per year). This vital minimum amount will be updated periodically.
A progressive tax rate ranging from 10% to 30% will apply to the resulting adjusted general tax base and a 15% tax rate will apply to the special tax base.
The full tax amount will be calculated by adding the two amounts (i.e., (general tax rate x general tax base) + (special tax rate x special tax base)). This amount can be reduced by any partial tax payments made and withholdings, as well as deductions for double international legal taxation.
Corporate Income Tax
The bill would establish a Corporate Income Tax levied on Costa Rican-source income received by legal entities, including income derived from the performance of an economic activity, capital income and capital gains (including foreign-source passive income) and income from exchange differences.
The Corporate Income Tax will have a single taxable base, calculated as all the income the taxpayer obtained during the fiscal year reduced by deductible costs and expenses properly linked to the economic activity carried out by the taxpayer.
The tax rate will be 30% in general. This amount can be reduced by partial payments made and tax withholdings, as well as deductions for double international legal taxation.
The bill's main changes to the current Corporate Income Tax include:
Nonresident Income Tax
The bill would establish a tax on income that nonresidents obtain from Costa Rican sources. Costa Rican-source income includes income from salary, pensions, the exercise of economic activities with or without a permanent establishment, as well as capital income and capital gains.
If the income is obtained through a permanent establishment, taxpayers must be taxed under the Corporate Income Tax at the 30% general rate. If the income is obtained without a permanent establishment, a 15% withholding tax will apply.
Bill to strengthen tax control, Bill No. 23.759
The bill aims to provide greater tools to the Tax Authority for tax control. The reforms proposed to the Tax Code include:
Bill on eliminating specific tax exemptions, Bill No. 23.762
The bill proposes to modify the following current tax exemptions and reduced VAT rate by:
Bill of the property tax on vehicles, vessels and aircraft, Bill No. 23.761
The Bill seeks to modify the current property tax on vehicles, vessels and aircraft. The changes include changes to how the tax base is determined and new sections associated with valuing motor vehicles, motorcycles and other taxed assets.
Payment of the tax must be made between November 1 and December 31 of each year, by the means determined by the Ministry of Finance.
It is important to note that the provisions included in the bills may undergo changes during the parliamentary process, discussion, and approval in the Legislative Assembly.
Taxpayers and the general audience will want to closely follow the bills to determine their potential impact.
For additional information with respect to this Alert, please contact the following:
Ernst & Young, S.A., San José, Costa Rica
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor