Tax Reform – Acceptance of the Bill Proposed by the Ministry of Treasury

The special commission created for the approval of the tax reform, Bill N° 20580 – Law for the Improvement of Public Finances (the Bill), accepted, with votes from PLN, PAC, and PUSC, the proposed bill by the Ministry of Treasury a few days ago.

The Bill includes three major amendments to the Costa Rican tax legislation. First, the Sales Tax Law would be completely changed, since it is intended to transform the actual Sales Tax into a Value Added Tax (VAT). The second change would introduce several changes to the Income Tax Law that includes the introduction of a capital gains tax. Finally, an amendment to the law that regulates the remunerations of the Public Administration is also included.

Regarding the Sales Tax Law, the main change would be the transformation of the tax into a VAT. This would imply that the totality of the sales of goods and services would be considered taxable, with the exceptions included in the law, such as the basic food basket and private education. The general rate will remain at 13%, however, reduced rates of 1%, 2%, and 4% are included. The rates of 1% and 2% are mainly for supplies, machinery and equipment, veterinary products and raw material used to feed animals, used for agricultural purposes. In addition, medicines and personal insurance premiums would be subject to a 2% rate. Private medical services and airfare tickets would be subject to a 4% tax.

The main changes that would be introduced to the Income Tax Law are the following:

  • The concept of global income is instituted. This means that Costa Rican-sourced income subject to a withholding tax would become part of the gross income of the taxpayer, and the withholding tax would be considered a payment on account of the Income Tax.


  • Thin capitalization rules are introduced and would be applicable to financing from shareholders or related parties. In such cases, interests would be deductible up to a 20% of the earnings before tax, depreciation, and amortization (EBDITA). The difference may be deducted in the following years until the expense is amortized. Thin capitalization rules would not apply to loans granted by local banks or non-domiciled financial entities considered as “first order” institutions by the Costa Rican Central Bank.


  • A new capital gains tax is introduced. The applicable tax rate would be 15%. Among other things, capital contributions made by shareholders would be considered taxable, as well as returns of capital when the company has retained earnings from previous years. Also, interests derived from investment certificates would be subject to the 15% tax, instead of the 8% tax applicable today.


  • Non-domiciled individuals or legal entities that own real estate in Costa Rica would be subject to a 2.5% withholding tax when selling the asset.


  • Distributions of dividends between Costa Rican entities would remain nontaxable, as long as the shareholder is a taxpayer and carries out an economic activity.


  • Assets and rights acquired before the law enters in force would be subject to a 2.25% capital gains tax on the first sale after the law has entered in force.


  • New revaluation rules to determine the acquisition value of the asset for purposes of calculating the taxable base, when the sale is subject to the capital gains tax, have been introduced.


  • Companies would be allowed to carry forward losses for 3 consecutive years; agricultural companies would be allowed to carry forward losses for up to 5 years.


  • Donations would only be deductible up to 10% of the taxpayer´s net income.


  • Fees paid abroad to related parties in jurisdictions where said income is not considered taxable would not be considered deductible for tax purposes.


  • Two new tax brackets are introduced for legal entities that do not generate more than C106.000.000 (approx. US$188,000) of gross income during the fiscal year. Accordingly, the tax rates for such taxpayer would increase in a progressive rate schedule from 5% up to 20% and would apply to the excess of income from the previous bracket.


  • Profits distributed by employees’ associations would be subject to a 10% withholding tax.


  • Two new tax brackets of 20% and 25% are introduced to the Salary Tax for salaries higher than C2.103.000 (approx. US$3700).

The Bill also introduces a tax amnesty for those taxpayers that owe any taxes administered by the Tax Authorities, Customs Authorities, Institute of Development and Municipal Advisory (IFAM), Rural Development Institute (INDER), or Joint Institute of Social Assistance (IMAS). Taxes owed would be paid without interest and the penalties would be reduced by 80% during the 3 months following the law’s entry into force.

The Bill must now continue the approval process of Congress. It needs to be voted in a first and second debate and must pass the constitutional test before the Constitutional Court. The Bill would enter in force 6 months after being published in the Official Newspaper of Costa Rica, La Gaceta.