Notably, the reform introduces a VAT Law that substitutes an
antiquated sales tax system, and brings significant changes to
income tax law adopted over 20 years ago in an attempt to
harmonise it with international standards and the debatable
recommendations of the OECD for a country such as Costa Rica
(e.g. hybrid mismatch arrangements).
Having said that, the VAT Law and modified Income Tax Law
include ambiguous or contradictory provisions, and certain
concepts are inadequately defined.
There are even some errors, with private education services
listed as VAT-exempt, even though it is still included in a
list of goods and services subject to a reduced rate of 2%. The
income tax changes are the result of a hurried compromise
rather than a complete overhaul based on the recommendations of
Replacement of the sales tax with a VAT system
Under the new VAT system, services will generally be
taxable, and only a certain amount of goods and services will
be exempt. The standard rate will be 13%. There are 35
exemptions, and 12 situations in which VAT does not apply.
These include exports, the purchase of goods and services
from free trade zone (FTZ) regime companies, interest and
commissions on loans, the transfer of real property and
registered movable property subject to a transfer tax. There
are also three reduced rates:
- 4% for private health services provided by authorised
health centres or health science professionals;
- 2% for pharmaceutical products or personal
insurance premiums; and
- 1% for sales, imports or the clearance of
agricultural items included in the list of basic foods.
To ensure the collection of VAT in cross-border digital
transactions regarding services, Costa Rican banks will be
required to act as VAT withholding agents. Importing
intangibles will also be subject to VAT.
Furthermore, input tax (VAT charged on goods and services
for business purposes) will be recoverable, with taxpayers
entitled for reimbursement via tax credits.
However, exports will be eligible to receive a tax credit,
even though they are exempt. Taxpayers with transactions
subject to a reduced tax rate will only be entitled to a tax
credit that is equal to the percentage of the reduced rate.
Lastly, VAT credits can be used for a total of four years.
If the taxpayer is not able to use their VAT credit in the next
three years, it can use it to offset other tax liabilities such
as corporate income tax (CIT), or just request a refund. The
latter is unlikely to occur in practice though.
New income tax law provisions
Income and capital gains made from a Costa Rican source will
now constitute a new category of taxable income, with the
capital gain to be subject to a new tax rate of 15%.
For the sale of goods or rights acquired before the tax
reform was enacted, taxpayers will be able to choose whether to
pay a reduced capital gains tax of 2.25% on the amount of the
sale. On the other hand, gains derived from assets or rights
connected with for-profit activities (or when they constitute
an ordinary activity) will be subject to the ordinary income
tax rate of 30% (on a net basis) and will not be eligible to
the 2:25% rate.
Additionally, capital gains derived from the sale of shares
that were not subject to taxation in situations where the
seller was not engaged in a habitual trade will now be
In the realm of currencies, exchange differences in assets
or liabilities that arise from the time the transaction is
carried out, the date the income is recognised (or liability
paid), or the close of the tax year, will be subject to income
tax and will constitute a taxable gain or deductible loss.
Carrying forward losses will be possible for a three-year
period and will continue being possible for five years in the
Interest deductions will be subject to 30% of earnings
before interest, tax, depreciation and amortisation (EBITDA),
and will decrease to 20% in five years. However, interest
derived from banking or any other type of local or foreign
regulated financial entity should not be subject to this
There are also new anti-low tax jurisdiction provisions.
Expenses paid to entities in non-cooperating jurisdictions
(where the CIT is less than 40% of the applicable Costa Rican
CIT rate of 30%, or jurisdictions that do not have a tax
information exchange agreement or double taxation treaty) will
not be deductible for CIT purposes. Expenses can nonetheless be
recognised if the tax authorities determine that the taxpayer
can prove that the expenses correspond to a transaction
Among all these changes, tax-free corporate reorganisation
rules are also introduced.
Rafael Sayagues (email@example.com) and Alexandre Barbellio
EY Central America, Panama and the Dominican