Costa Rica Legislative Assembly re-approves tax law amendments on foreign-source passive income

Wednesday, 04 October 2023
The Costa Rica Legislative Assembly (the Legislative Assembly) has voted to re-approve Legislative Decree No. 10.381 (the Degree), despite president Rodrigo Chaves Robles partially vetoing it. The amendments aim to see the country removed from the EU list of non-cooperative jurisdictions for tax purposes.
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Costa Rica was included on the EU’s list for the first time when it was updated in 2023. The EU said that the inclusion was because Costa Rica had not fulfilled its commitment to abolish or amend the “harmful” aspects of its foreign-source income exemption regime.

The next revision of the EU list is due to take place this month (October 2023). Accordingly, the Costa Rican government has been working to resolve the issues cited by the EU with the aim of being removed from the list.

The result is the Decree, which makes amendments to the country’s income tax law. In particular, the Decree deals with the territoriality principle scope and creates new rules for the taxation of foreign-source passive income obtained by non-qualified entities. These entities include Costa Rican entities and permanent establishments.

To determine if an entity is qualified, it has to meet certain economic substance requirements. These are that it has a suitable number of employees in number, qualification and remuneration to manage investment assets in Costa Rica; makes strategic decisions and has a risk profile in Costa Rica; and has expenses and costs from the acquisition, holding or disposal of assets.

Under the Decree, foreign-source passive income obtained by an entity without economic substance would be considered Costa Rican-source and taxed as such. The income the Decree applies to includes capital gains, dividends, interest, real estate and royalties, among others.

The Decree includes an anti-abuse provision that would allow the tax authority to reclassify an entity as non-qualified if it is found to be non-compliant with the country’s foreign-source income exemption regime.

Congress had approved the Decree on September 7, 2023; however, on September 14, 2023, the president partially vetoed it citing reasons of convenience and opportunity. The Decree needed 38 members of the Legislative Assembly to override the veto: on September 26, 2023, these votes were achieved and the Decree was re-approved.

The Decree must now be published in the Official Gazette in order to enter into effect.

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