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September 12, 2023

Costa Rican Congress approves bill to achieve exclusion from the European Union's list of non-cooperative jurisdictions in tax matters

  • The approved bill aims to introduce the necessary amendments to achieve Costa Rica's exclusion from the European Union's list of non-cooperative jurisdictions in tax matters.
  • Among other provisions, the bill includes a tax on certain foreign-source passive income obtained by entities that belong to a multinational group and lack adequate economic substance.
  • It is important to monitor the next steps of the bill closely.

On 7 September 2023, Costa Rica's Congress approved Bill No. 23.581 (the Bill) amending the Income Tax Law, Law N° 7092, to achieve Costa Rica's exclusion from the list of non-cooperative countries in tax matters of the European Union (EU), legislative record No. 23.581.


The Council of the European Union included Costa Rica on the EU list of non-cooperative jurisdictions for tax purposes on 14 February 2023 after the country failed its commitment to abolish or amend the harmful aspects of its foreign source income exemption regime (Criterion 2.1) by 31 December 2022. Among other things, the discrepancy between the provisions of the Income Tax Law and the administrative and judicial interpretation regarding the principle of territoriality was considered harmful.

The Bill

On 7 September 2023, the Congress approved in the second and final debate Bill No. 23.581, through which the necessary reforms to the Income Tax Law are introduced to achieve Costa Rica's exclusion from Annex I of the list of non-cooperative jurisdictions in tax matters of the EU.

Following is a summary of the main points contained in the Bill.

Territoriality principle

The Bill clarifies the scope of the territoriality principle contained in Article 1 of the Income Tax Law, indicating that income from Costa Rican sources is subject to the Income Tax and that Costa Rican sources are those within the national territory, in accordance with the geographical limits established in the Political Constitution.

However, it is important to note that this clarification of the scope of the territoriality principle applies from the effective date of the Bill, once it becomes law, and not for previous fiscal periods. In these cases, it should be considered that the wording of Article 1, on which the First Chamber and Constitutional Chamber of the Supreme Court of Justice have ruled, was amended by the Law Strengthening Public Finances, Law No. 9635, which came into effect in July 2019.

Also, it is important to mention that the Transitional II clause, which was included in previous versions of the Bill and aimed to clarify the application and scope of the territoriality principle for previous tax period, was removed from the final approved text.

Types of taxable foreign-source passive income

Under the Bill, the following foreign-source passive income will be considered taxable when obtained by an entity belonging to a multinational group that is also considered a non-qualified entity:

  • Dividends
  • Interest
  • Royalties
  • Capital gains
  • Immovable-property capital income
  • Other income from movable capital

When these categories of foreign-source passive income are obtained by a nonqualified entity, they must be taxed in accordance with the provisions of Chapter XI, Tax on Capital Income and Capital Gains and Losses, of the Income Tax Law.

Qualified entities

For the purposes of the Bill, a qualified entity is understood to be one that is a member of a multinational group and has adequate economic substance in Costa Rican territory during the fiscal period.

The Bill includes criteria for determining that an entity belongs to a multinational group, as well as the obligation to submit an annual informative return to accredit the qualified entity's status.

Adequate economic substance

In accordance with the Bill, an entity will be considered to have adequate economic substance when it meets all of the following conditions:

  • Employs human resources suitable in number, qualification and remuneration to manage investment assets and have adequate resources or infrastructure for the development of this activity in the national territory
  • Makes the necessary strategic decisions and bears risks in the national territory
  • Incurs expenses and costs related to the acquisition, holding or disposal of assets

The Bill allows for the possibility that the activities in subparagraphs (a) and (b) can be carried out by third parties (service providers) in the national territory. For these purposes, service providers must meet a series of requirements established in the Bill.

Likewise, the Bill contains specific assumptions for determining adequate economic substance of entities that have as their main activity the holding of equity interests in other entities (holding entities) or the acquisition, holding, or transfer, on a non-regular basis, of real estate.

Accreditation of taxes paid abroad

Taxpayers considered nonqualified entities that obtain foreign-source passive income covered by the law may credit the analogous tax withheld or paid abroad against the tax payable in the Costa Rican territory generated with respect to the same income.

Specific anti-abuse clause

The Bill establishes that the Tax Administration has the authority to reclassify the qualified-entity status of an entity when it determines, through a reasoned resolution, that there has been an abusive use of the foreign-source passive income exemption regime. In such cases, the Tax Administration must determine the tax liability according to the Income Tax Law.

Modification of the permanent establishment definition

The Bill includes a modification to the definition of a permanent establishment contained in Article 2 of the Income Tax Law so that it aligns with internationally accepted principles (Organisation for Economic Co-operation and Development (OECD) Model Convention).

The approved reform eliminates the term "essential" from the current definition of a permanent establishment, so that, under the new definition, a permanent establishment means any site or fixed place of business through which the activity of the non-domiciled person is wholly or partially carried on.

Effective date and regulation

The provisions of the Bill will enter into force once published in the Official Gazette. Further, the Executive Branch has a term of three months to regulate the provisions of the law.

Next steps

To become a law, the approved Bill must be signed by the President of the Republic and subsequently published in the Official Gazette.

If, on the other hand, the President vetoes the Bill, it must be sent back to the Legislative Assembly, which has the power to reseal it with 38 out of 57 votes in favor.


For additional information with respect to this Alert, please contact the following:

Ernst & Young, Costa Rica

Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor


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