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Brief summary of new Tax reform approved in Costa Rica beginning July 01st 2019.

On December 3rd, 2018, the Legislative Assembly approved the Bill entitled Tax Reform – Law of Strengthening of Public Finances.

The Bill includes two 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.

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 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 the basic food basket, veterinary products and raw material used to feed animals that serve 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:

  1. 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.
  2. Thin capitalization rules are introduced and would be applicable to financing from shareholders or related parties. In such cases, interest would be deductible up to 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 supervised in their country of origin.
  3. A new capital gains tax is introduced. The applicable tax rate would be 15%. Among other things, interest derived from investment certificates would be subject to the 15% tax, instead of the 8% tax applicable today.
  4. 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.
  5. Distributions of dividends between Costa Rican entities would remain nontaxable, as long as the shareholder is a taxpayer and carries out an economic activity.